closing the infrastructure gap: the role of public-private partnerships p r srinivas industry lead...

Closing the infrastructure gap:

The role of public-private partnershipsP R Srinivas

Industry Lead – THL

Deloitte Touche Tohmatsu India Private Limited

©2008 Deloitte Touche Tohmatsu India

Organization

• Introduction

• The Case for Public Private Partnerships

• PPP Market Maturity Curve

• Moving Up the Maturity Curve

• Conclusion on PPP

• Tourism and PPP


IntroductionThe Global infrastructure gap


IMPACT

Reduced Productivity

• More than 50% of the decline in labor productivity in US during 1970s & early 80s

• Driving on roads in need of repair costs U.S. motorists $54 B per year in extra vehicle repairs & operating costs - $ 275 per motorist.

Safety Problems

• Outdated & substandard road & bridge design, pavement conditions, & safety features are factors in 30 % of the fatal highway accidents each year.

Competitiveness

• Underinvestment can reduce a country’s competitiveness. • In Latin America, competitiveness of many regional companies reduced because inadequate transport infrastructure has increased logistics costs.

Traffic Congestion

• Imposes huge costs on the economy- unpredictable travel times, environmental damage, property damage, delays & lost production.

• Americans spend 3.5 billion hours a year stuck in traffic, costing the economy $67.5 billion annually.

IntroductionImpact of the infrastructure deficit


PUBLIC-PRIVATE PARTNERSHIPS

Introduction : Putting PPPs in ContextTraditional Funding vs. Public-Private Partnerships

• The public sector procures a service, not an asset, from the private sector

• The public sector requirements are defined in output terms as part of the procurement providing opportunity for innovation and risk transfer

• Private sector generally responsible for design, build, finance, operation and maintenance over long term contract period

• Payments linked with performance. Revenue earned through a mix of direct tolls, availability payments and/or performance payments.

• Significant levels of risk transfer to the private sector over life of contract. Risks are allocated to the party that is best able to manage them.


Conceptual Model

Sale / PrivatizationLicense / Franchise or

ConcessionPublic / Private PartnershipConventional Ownership

Governance / Ownership Structures

Privatization

Methods of Alternative Service Delivery

Licensing / Franchising PartnershipExternal Purchase of

ServiceSpecial Operating

AgencyDirect Delivery

LOW HIGHTransfer of Risk from Government to Partner

Capital Markets Financing

Methods of Financing

User Fees / Revenue SourcesDedicated Government

Financing

− Project-based financing

− Equity

− Debt

− Bank borrowing

− Securitization / monetization of assets

− Bonds

− Revenue stream

− Tolls

− Shadow tolls

− Availability payments

− Other like payments

− Government borrowing

− Government grants

− Government capital allocation

Traditional InnovativeMethods of Financing

Conceptual Model for Structure / Delivery Mechanisms and Financing Methods


• Properly structured PPPs enable governments to focus on outcomes, instead of inputs. Governments can focus leadership attention on the outcome-based public value they are trying to create.

• PPPs enable public sector to spread cost of infrastructure investment over the lifetime of the asset. Private sector has strong incentive to complete the project ASAP because they need the stream of revenues to repay the capital costs.

• Well-designed PPPs help maintain infrastructure by transferring maintenance requirements for a facility to the private partner.

• Shifting long-term operation & maintenance responsibilities to the private firm creates incentive to ensure long term construction quality as it is responsible for those costs many years down the road. Experience from several countries has demonstrated savings from PPPs during the construction phase of the contract.

• Private-sector infrastructure providers - rely on user fees from customers for revenue –thus have a strong incentive to provide superior customer service.

Bring Construction Forward

Ensuring that assets are properly maintained

Cost Savings

Strong Customer Service Orientation

Enables the Public Sector to Focus on Outcomes & Core Business

The case for PPPsBenefits of PPPs

• Payments are aligned to the delivery of project objectives- thus PPPs have a solid track record of on-time or early construction completion.

On-Time & On- Budget Delivery


The case for PPPs Example Funding Model and Risk Profiles

Traditional Funding Example

Cost overrun

Construction Phase

Estimated Capital Cost

Tim

e ov

erru

n Running costs overrun

Estimated running costs

Construction Phase

0 5 25 Years

$Public sector pays for services / assets as they are provided. Full costs of construction are paid in advance of operational commencement. Due to limited risk transfer, most cost overruns also become liabilities for the public sector.


The case for PPPsExample Funding Model and Risk Profiles

PPP Funding Example

No Payment

Construction Phase

Service payments and/ or direct charges to users

$

0 5 25 Years

Operating Phase

Direct charges to Users

Under PPP, the private sector generally does not receive income until the service / asset is available for use. Income is generated from direct charges to users and / or payments from the public sector. The public sector only pays as services are delivered. The private sector accepts significant level of risk transfer from public sector in lieu of opportunity to generate a financial return.


PPP projects require a careful management of risks during construction and operation

Cost to

PublicSector

Public Delivery

Retained Cost / Revenues

Risks

Raw Cost / Revenues

PPP Delivery

Retained Cost / Revenues

Raw Costs / Revenues

Retained Risk

Value for Money (value of risk transferred)

Sample high-level cost profile of delivery options

The PPP delivery approach may not have lower direct project costs. However, there are additional benefits that must be quantified in the Value for Money analysis.

The PPP delivery approach may not have lower direct project costs. However, there are additional benefits that must be quantified in the Value for Money analysis.

PPP Delivery includes profit, taxes and cost of capital

The case for PPPs


• Comparison between the public and private sector cost of capital should be appropriate. And the gap between private and public costs of capital has narrowed over the years.

• PPPs by allocating the risk efficiently lower costs and bring more value for money. Also private sector efficiency generates economies that outweigh higher costs of borrowing .

• Fee increases can be limited by contract to pre-determined rate and by using other mechanisms - availability fee, shadow tolling, subsidies, link to ability to pay etc.

• Private provider cannot take facility with it when it is unable to continue contract - govt. gets free facility

Higher Cost of Capital

Failure to Realize Value for Money

Customers of the Service Will End Up on the Short End of the Stick

Govt. is Forced to Bail Out PPP Projects When Demand Fails to Meet Projections

The case for PPPsAddressing objections to PPPs


PPP maturity model


PPP maturity model

Stage one:

• Establish policy & legislative framework

• Initiate central PPP policy unit to guide implementation

• Develop deal structures

• Get transactions right & develop public sector comparator model

• Begin to build marketplace

• Apply early lessons from transport to other sectors

Stage two:

• Establish dedicated PPP units in agencies

• Begin developing new hybrid deliveries models

• Leverage new sources of funds from capital markets

• Use PPPs to drive service innovation

• PPP market gains depth – use is expanded to multiple projects & sectors

Stage three:

• Refine new innovative models

• More creative, flexible approaches applied to roles of public & private sector

• Use of more sophisticated risk models

• Greater focus on total lifecycle of project

• Sophisticated infrastructure market with pensions funds & private equity funds

• Underutilized assets leveraged into financial assets

• Organizational & skill set changes in government implemented to support greater role of PPPs


Moving up the maturity curveCommon pitfalls to avoid

Common Pitfalls

Poor SetupInappropriate PPP model

applied to project

Too much focus on the Transaction

Failure to Realize Value for Money

Lack of Clarity on Project Objectives

Lack of Internal Capacity

Inadequate planning


Moving up the maturity curveLife-cycle perspective

• Governments need a full life-cycle approach (e.g., a clear framework) for partnerships that confer adequate attention to all phases of a PPP—from policy and planning, to the transaction phase, and then to managing the concession.


Moving up the maturity curveUse more innovative models


Moving up the maturity curveSelecting an appropriate model

Source: Building Flexibility: New Delivery Models for Public Infrastructure Projects, Deloitte Research, 2005.


Moving up the maturity curveUnlocking value from assets

• Governments are increasingly looking at their portfolio of assets to determine how to realise the maximum value from these assets by exchanging them for other assets or services that might serve more pressing needs.

• Public assets tend to be sited in prime locations; often have excess land or control of adjacent properties. The government can use these as equity to partner with the private sector to create new facilities and develop the existing assets. This not only unlocks value from these assets but also helps to meet critical infrastructure needs.


Conclusion on PPP

• The infrastructure challenge before governments today may seem overwhelming. Slowly governments are realizing that inaction is simply not an option.

• PPPs alone are not a panacea. Rather, they are one tool governments have at their disposal for infrastructure delivery—a tool that requires careful application. By making the best use of the full range of delivery models that are available and continuing to innovate, the public sector can maximize the likelihood of meeting its infrastructure objectives and take PPPs to the next stage of development.

• This development, in turn, will enable this relatively new delivery model to play a far larger role in closing the infrastructure gaps bedeviling governments across the world.

2nd Deloitte Central Europe PPP Training Seminar, Prague 12 & 13 April 2006

Tourism and PPP


Tourism Planning – some fundamentals

Long-term destination ‘vision’

5-year development strategy

Physical masterplan

Individual projects

Economic policy context

Identify core ‘values’

Identify core assets

Identify target markets

Sustainable framework

Regional cooperation

Competitive positioning


New paradigms in destination development and marketing


Visioning


What is a ‘vision?

• An inspired view of the long-term future

– a destination’s “place in the sun” at the end of the 21st century

• Aspirational

– Must appeal to aspirations and emotions of all stakeholders

A vision provides the inspiration that binds all stakeholders to a common purpose


Developing a vision

Stateeconomicobjectives

Stakeholderaspirations

ConsumerPerceptions

CompetitivePositioning

TourismAssets

TourismVision

ForMP

Extensive study of the State’s economic policy, tourism assets, consumers and consultation with all stakeholders is essential


Tourism and Economic Development


Tourism and economic development

• Today, tourism and economic development are inseparable and mutually supportive

• “the images that a nation has in tourism, inward investment and …export inevitably overlap and coalesce…Success will depend on handling this in a sophisticated and co-ordinated fashion…”

• “The creation of celebrity and emotional appeal through …(destination development and marketing)… opens the way for other economic development-oriented agencies to communicate to would-be investors...”


Core values and assets


“The cultural aspect of national image is irreplacable and uncopiable because it is uniquely linked to the country itself; it is reassuring because it links the country’s past with its present; it is enriching

because it deals with non-commercial activities; and it is dignifying because it shows the spiritual and intellectual qualities of the

country’s people and institutions.”

Destination ‘values’

• Tourism development must capture a destination’s “values”

– the very essence or spirit of the destination

– its ‘identity’

– its people – their spirit, their purpose, their values, their beliefs

– its culture

– its intellect

Extensive consumer research is required to identify a destination’s core values


• Singapore

• Hong Kong product pillars

– Shopping

– Dining

– City-Harbour-Green

– Heritage & festivals

• Kerala focus areas

– Backwaters

– Eco-tourism

– Ayurveda

“Moving through Asia…you find city after city of ‘look-alikes’…As these cities evolve, they increasingly resemble each other…”

Focus on unique assets

• Focus on principal ‘products’ that are truly unique in the world


“One such destination… campaign which transcended the commodity nature of product and which promised a unique (yet credible) experience was the ‘India Changes You’ campaign…

It’s breathtaking.”

But what is today’s tourism product?

• Facilities and attractive urban environments, while necessary, are no longer differentiators

• Today’s destination winners are:

– ‘experiences’ that meet aesthetic needs

– rich in emotional meaning– ‘how do we want to feel on our holiday’

– provide symbolic and self-expressive benefits:– ‘who can we be on holiday’– lifestyle indicator


Identification of target markets

• Target markets not based on regions or countries

• Extensive and ongoing consumer research

– perceptions, image, experience, satisfaction, competition

• Today’s target markets are prioritised by sub-segments:

– purpose of visit

– geographic sub-regions

– demographics and life stage

– behaviour and psychographics

• Example - Life Stage segments as target markets:

– Young Couples, age 26-35yrs, no kids

– Mid-Career Married With Kids, 31-45yrs

– Achievers Married With Kids, 46-60yrs


Successful destinations create points of parity where competitors are seeking an advantage, and amplify points of difference in other areas to achieve competitive advantage

Competitive positioning

• Today’s tourism strategies are all about beating the competition and stealing market share

• Competition has been re-defined

– experiences

– ‘clusters’

• Competitive assessment

– sophisticated, research-based– performance within target markets– strategies, plans, NTO capabilities– consumer / trade perceptions


• “Together in Asia”

– TAT, STB,. HKTB

• Asean Tourism Forum

Regional cooperation

• Cooperation, even with competitors, is becoming crucial for survival


Tourism Strategy


Strategy - elements

Marketing Product Development Policy Framework Destination Management

Image and positioning Product enhancement Government-industry partnerships Industry partnerships

Branding Product additions Investment environment Visitor experience

Promotions and campaigns Infrastructure Facilitation Service excellence

Market focus by regions Competitive benchmarking Regional issues Host community issues

Market focus by segments Human resource development

Visitor arrivals Reduction of transaction costs

Visitor expenditure International access

Visitor experience

PR and communications

Pricing

Overall (master) strategy

Identify elements of strategy*

Analyse specific strategic issues under each strategy element (examples below)

Vision


The Master Planning Approach

Master Plans and Projects


Applicability

• State, regional, or local level

• Macro to micro

• Physical and institutional elements


Overall approach

• Regional, competitive perspective

• Phased development

– Long term vision

– Short term implementation

• Intensive research

– Destinations and attractions

– Market

• Impact Scoping

– Environmental

– Economic

• Implementation oriented

– Investment / project / site specific

– Private sector participation


Paramount objective

• Enhance economic benefits in a sustainable model:

– Increase visitation

– Increase length of stay

– Increase expenditure

• Increase investment (private) in tourism projects


Regional and destination level planning


Centres for development

• Regional development strategy:

– Destination hubs for development

– Attractions for development

– Attractions for improvement

– Bankable projects


Site and micro level planning for bankable projects


Site development micro plans

• Conceptual Plans

• Development Briefs

• Project Profiles

• Feasibility Studies

• Implementation Frameworks


Way forward to implementation


Private sector participation

• Identification and availability of sites and projects

• Concepts, Feasibility Studies, Project Profiles

• Recommendations on ideal public-private partnership structure, per project

• Valuation, public-private partnership financial terms

• Terms of reference


Other micro plans

• Economic and Financial Analysis

• Environmental Scoping

• Marketing Plan


Strategy recommendations

• Infrastructure and Transport

• Other New Projects

• Investment and Financing

• Policy, Organisation, Institutions

• Human Resources and Training

• Linkages with other Sectors of Economy

• Conservation

• Environmental enhancements

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closing the infrastructure gap: the role of public-private partnerships p r srinivas industry lead...

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risk transfer private

public sector requirements

ppp slide

infrastructure deficit

role of public

public value

huge costs