Public Private Partnerships, The Rules

OranjestadFebruary 18, 2011

Paul Swanenvleugel

PwC

Member of the PwC PPP expert group

Relevant project experience

• Rail Dutch High Speed Rail PPP

• Ports Port extension Rotterdam, Maasvlakte 2

• Roads Highway PPPs

• Airports Amsterdam Schiphol Airport

February 18, 2011PPP, The Rules

Slide 2

Paul Swanenvleugel

PricewaterhouseCoopers Advisory N.V.

P.O.Box 9616 | 1006 GC | Amsterdam

The Netherlands

Ph: +31 88 792 32 19

paul.swanenvleugel@nl.pwc.com

Director

PwC

Agenda

1. Public Private Partnerships

2. Structuring your project

3. Project Finance

4. PPP procurement process

5. Case study

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February 18, 2011PPP, The Rules

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Public Private Partnerships

Working together towards a common goal

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February 18, 2011PPP, The Rules

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PPPs - Generic Definition

Any transaction structure involving both private & public parties working together towards a common goal

1 - Introduction

PUBLIC

PRIVATE

PARTNERSHIP

owns assets, public service

skills, efficiencies and finance

co-operation and risk sharing

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February 18, 2011PPP, The Rules

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Benefits of Partnership

• Ongoing, long term relationship

• not a one-off transaction

• both sides work together

• common aim

• co-operative, not confrontational

1 - Introduction

A change in approach to procurement

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February 18, 2011PPP, The Rules

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The Concept - PPP Model

1 - Introduction

PRIVATE SECTOR Builds infrastructure Provides services

expertise skills

servicespayments forperformance

expertise

ROADUSERS

PUBLIC SECTOR Specifies requirements

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Structuring your project

some issues to consider

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February 18, 2011PPP, The Rules

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Typical Consortium Structure

Public Authority

SPV

Builder Banks

EquityProviders

Maintenance Services

Services Payment

Funds

Dividends

Interest & Payment

Lend

Build

Services

Payment Payment

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What Drive Consortium Bids?

• Broad knowledge and skill area expertise

• More enlightened attitude to risk through expertise and ability to share

• Enables smaller providers to participate in PPP

• Ability to penetrate foreign markets – investing outside of one’s home market

• Cost effectiveness – share the bid costs

8 - Consortium Structures and Funding

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February 18, 2011PPP, The Rules

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Invest

Contractors Interests

Build• Profits from construction works• Today PPP is common in

procurements 1

Operate• Operating roles stabilises long

term cash flows• Profits from maintenance works

3

• 10% of finance going in as equity at returns 10%-15% IRR

• Analysts starting to recognise concession value in share price

• Need equity to make and carry investment

2

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February 18, 2011PPP, The Rules

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Some contractors just doing developer/equity role

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February 18, 2011PPP, The Rules

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Business issues to consider for your consortium

• Exclusivity and admission of new consortium members

• Governance rights among the consortium members –including board representation and voting/veto rights

• Legal documents – consortium agreements

• Selecting advisors – technical, legal, financial, insurance

• Bidding strategy – common vision and philosophy, agreed approach on bidding tactics

• Control of the bidding process – role(s) of each member

• Allocation of bid expenses

• Financing structure

February 18, 2011PPP, The Rules

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8 - Consortium Structures and Funding

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Project Finance

If you want to attract good financiers, you must have a bankable project, aligned to your objectives, and well structured.

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February 18, 2011PPP, The Rules

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What is PPP Project Finance?

It is Cashflow Based Finance

• Project financing is used typically in long term projects

• Procurement of an asset or “service”

• Security of future cashflows of the project rather than any direct security over assets

• Cost is a factor of project risk and contractual framework

• Long term - typically 20-30 years

February 18, 2011PPP, The Rules

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8 - Consortium Structures and Funding

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Payment Profiles

1 - Introduction

Payment based on

availability

Traditional Government Procurement

Payment profile - traditional Payment profile for the public sector

PPP Procurement

Constructionphase

Operation and

maintenance phase

Running cost overruns

5 10 15 20Years

Estimated

Capital

Cost

Estimated running costs

Tim

e o

verr

uns

Cost

Overruns

Constructionphase

Operation and

maintenance phase

5 10 15 20Years

Nopayments

until

infrastructure

ready

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February 18, 2011PPP, The Rules

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8 - Consortium Structures and Funding

Funding Example -$100 Million Road

Pure Equity - $1m

Subordinated Debt - $9m(Return approx 12-14%)

Senior Debt - $90m(Return approx 4%-6%,plus margins of 2%+)

90%1%

9%

Blended Equity - $10mProvided by consortium or third partyBlended return approx 12-15%

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PPP procurement process

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February 18, 2011PPP, The Rules

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Infrastructure Procurement in Aruba

Typical process involves expression of interest,

request for proposal during tender stage and

preferred bidder appointment before a contract is

signed and financial close is reached.

Januar 2011

Slide 19

Expression of Interest

Tender Phase

Preferred bidderappointment,

Contract Close, Financial Close

PwC

Recognise the need to

• Understand Public Authority’s requirements

• Develop ideas

• Explore options

• Discuss solutions

• Agree about risk allocation

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February 18, 2011PPP, The Rules

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Risks should be allocated to the party best able to manage them

4 - Risk

• Planning permission

• Changes to requirements

• Design

• Construction

• Operating and maintenance costs

• Operating performance

• Technology obsolescence

• Project financing

• Latent defects

• Force majeure

• Inflation

• Regulatory

• Taxation

Public PrivateShared

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February 18, 2011PPP, The Rules

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Case study

PPP Highway A15 – The Netherlands

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February 18, 2011PPP, The Rules

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Case Study: PPP Highway A15 – The NetherlandsAnd the importance of partnerships

Project Facts:

Location Rotterdam (Netherlands)

Length 39 km

Size EUR 1.5 billion

Close Date 14 December 2010

Sponsors John Laing, Ballast Nedam,

Strabag, Strukton

Banks ABN AMRO Bank,

BNP Paribas, NIBC Bank,

Société Generale, UniCredit,

European Investment Bank

Key contractual Features:

• Term of 25 years (of which 20yrs operate)

• Challenging performance regime that should minimise inconvenience for road users during construction and operation.

• Constructors’ challenges include life traffic and industrial pipeline areas with limited space available for construction activities.

• Challenges to designers include one of the largest moveable bridges in the world.

The single largest infrastructure project that has ever been awarded by the Dutch Ministry of Infrastructure and Environment

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February 18, 2011PPP, The Rules

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Consortium Structure

Public Authority

SPV

Builders Banks

EquityProviders

Maintenance Services

Slide 24

Architects

Technical advisors

Legal Advisors

Financial advisors

Subcontractors

The structures chosen may make or break a project. Be prepared!

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