an introduction to smart investment solutions: the case of ppp

An introduction to smart investment solutions: the

case of PPP

Twinning project Public Agency for RailTransport of Republic Slovenia

Daniel Loschacoff18 January 2005

Content

1. Personal introduction2. Public Private Partnerships?3. Evolution of thinking about private sector

involvement4. The first Dutch PPP: HSL-South Infrastructure

Provider5. Coffee break6. Who were involved?7. What does this imply for the Public sector

Please ask for clarifications !!!

Main message

Always consider for the realisation of future large rail investments if the

benefits of a PPP approach outweigh the inherent problems

What is a Public Private Partnership

?

Characteristics of a PPP:

A. Public control and policy through private execution

B. Integration of Design, Build, Finance and Operate/Maintain.

C. Allocation of risk to the party that can best manage it.

D. The public sector receives a service not a product.

E. LT (investment life-cycle) relation.

Evolution of thinking

In earlier centuries most infrastructure was in private hands (Michael Klein)

The nationalisation periodMargaret Thatcher in the UK (80’s)Private Finance (budget restrictions)Demand risk to the private sectorValue for money – availability contracts

Why do we do this ?

Lack of capital ? Private Sector is always better ? Private competition against a public

benchmark!

But also: Project life cycle approach (service approach) Use of private sector capabilities (innovations,

incentives, economies of scale) Public sector reform ?

The High Speed rail Line

What is HSL-South?

LondonParis

AmsterdamSchiphol

Rotterdam

Antwerp

Brussels

Breda

Facts and Figures

• 15 million passengers

50% national / 50% international

• Ready 2006/7

contract award civils: 2000

contract award IP: 2001

• Infra: 96 km new track

• State of the art technology

PPP contract characteristics

• Scope: design and build new systems operate and maintain al new infra

• Terms: 5+25 years• Size: over 1 billion Euro• Type: DBFM• Interfaces: civils works, existing rail

infra, train operations• Payments are based on availability

Private financePrivate finance

InfraproviderInfraprovider Civil worksCivil works

GovernmentGovernment

TransportTransportCompaniesCompanies

Payment during constr. phaseTransferPayment during operations

Availability is key concept

• IP paid on availability of the service; no payments for products.

• IP receives no payments during construction.

• Hence: the State procures a service rather than a product.

Outcomes

HSL will have a 99% availability (output indicator)

Private investment of > 1 bn.More budget certainty.Through innovations and contracting

less expensive than the traditional alternative

Coffee break

What parties were involved?

A. The State

B. Private parties

C. Advisors

The State = Client (1)

Public service (which needs an initial investment)

Extensive decision making process Focus on annual budget and less on

Value for Money through PPPAverse to risks and responsibilitiesConditionality of scope remains through

out the process

The State = Client (2)

Conditions for success:

Good preparation, know what you want Be a reliable and stable partner Have upfront public-public agreements Understand where the private sector is

coming from Good contracting skills

Contractor/ Maintenance company

• Contractor is responsible for the Design and Build (subcontract) to completion

• After that the Operate and Maintenance company takes over for the whole contract duration

→Who is for the procurement the most important?

Contractor versus other financiers (2)

• The contractor (industrial sponsor) is sometimes willing to accept lowing revenues and a higher risk in order to get the project

• The other investors look for a low risk and stable high long term revenues

The role of the banks (1)

• Major involvement in bidding process

• Technical, legal and financial due diligence

• Interest is depending on the cash flows of the project (project finance)

• Tight financial conditions (ratio’s)

The banks as debt providers (2)

Banks don’t like risk !!!

No more than 4% of all projects may go wrong.→ All risks have to be well allocated (back to back)

The advisors

Technical, legal and financial advisors are necessary !!!

→ Please note: both the Client and the bidders have their own advisors

What does this imply for the public sector?

Public sector implications (as a condition for success):

More focus on the delivery of policies and less on specifying technical details

Able to understand private sector objectives and incentives

Be a reliable partnerEnhance PPP and contracting skills???

Should you consider PPP with the upcoming Slovenian rail

projects?