theory of ppp
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This excellent presentation covering all theory and concept of Public Private PartnershipTRANSCRIPT
Public Private Partnership
What is PPP
•PPP (Public Private Partnership) is a collective name
for various relationships between public bodies and
private companies.
•Traditionally the term is being used for those projects •Traditionally the term is being used for those projects
carried out jointly by the Government and a private
company.
When PPP
• Not every project is suitable for PPP outsourcing.
• Most appropriate when:
– The scale of project/ task is manageable– The scale of project/ task is manageable
– Projects/ tasks where the responsibility can be defined for a longer period
PPP is often seen as being a solution for a lack of governmental resources or for financing the governmental deficit
Why PPP
• Bringing Added Value of optimisation of services by a private service provider, allowing the government to keep hold of the reins while at the same time minimising its own involvement in the actual
execution of the work execution of the work
• Realising benefits from the projects earlier than would otherwise be possible within the current budgets, because they have been financed up front by a private party.
PPP - Benefits
• Long – term assurance about the cost. Most PPP contracts are long-term agreements with a term ranging from 20 to 30 years. Clients no longer need to provide advance financing, but the investment sum is spread out over the term of the project, offering long-term predictability of expenditure.
Financial Advantages
• Total project costs are lower due to the optimal coordination of design, construction, maintanance, operation and supporting services over the contract term (life cycle management)
• Risks are placed with the parties best able to control them, another cost-lowering factor.
PPP - Benefits
• The client is assured of a high-quality and sustainable project
• The client assumes only a general directive role, thus requiring only a small internal project organisation mainly limited to functional and performance specification and contract issues. Client spends significantly less time on
Qualitative and Operational Advantages
contract issues. Client spends significantly less time on technical specifications for the design and construction process.
• Timely delivery, Since the contractor effectively finances the investment in the construction asset and only receives payment when this is complete, this logically forms a serious incentive for completing the construction phase in time.
PPP - Benefits
• Risk allocation, both in terms of time and money, is agreed at an early stage between the parties. The client contracts out the services he requires according to clear and measurable performance criteria.
• If the quality of the services does not meet the agreed
Performance Advantages
• If the quality of the services does not meet the agreed performance requirement, the contractor is penalised by reductions to his periodic payment. Contractors will therefore make every effort to meet the agreed performance standards.
Public Private Partnership (PPP)
Models and StructuresModels and Structures
Design Build
Design Build Maintain
Design Build Operate
Design Build Operate Maintain
Build Own Operate Transfer
Build Own Operate
PPP Models
New Projects
Public Responsibility Private Responsibility
Service Contracts
Management Contracts
Lease Concessions Divestiture
Existing Services and Facilities
Factors deciding choice of PPP Model
Objective of
Outsourcing/
PPPResponsibility
for InvestmentOwnership of
Capital Assets
Choice of PPP Model
Duration of
Contract
Assumption of
Risks
PPP Options Service Contracts
Management Contracts
Lease Contract
BOT Concessions
Financing Investment
Public Sector Public Sector Public Sector Private Sector Private Sector
Financing Working Capital
Public Sector Public Sector Private Sector Private Sector Private Sector
Contractual Public Sector Private Sector Private Sector Private Sector Private Sector
Main Features of PPP Options
Contractual Relations with customers
Public Sector Private Sector on behalf of
Public Sector
Private Sector Private Sector Private Sector
Private Sector Responsibility & Autonomy
Low Low Low to Medium
High to Medium
High
Need for private capital
Low Low Low High High
Financial risk for private sector
Low Low Low to Medium
High High
Main Features of PPP OptionsPPP Options Service
ContractsManagement
ContractsLease
ContractBOT Concessions
Duration of Contract/ License
½ - 2 Years 3 – 5 Years 5 – 15 Years 15 – 30 Years 20 – 30 Years
Ownership Public Sector
Public Sector Private Sector Private then Public Sector
Public Sector
Management Mainly Public Sector
Private Sector Private Sector Private Sector Private Sector
Setting Prices Public Sector
Public Sector Contract or Regulator
Public Sector Contract or Regulator
Collecting Bills Public Sector
Private Sector Private Sector Public Sector Private Sector
Mode of Payment
Work Done/ Unit Price/
Lump sump
Cost Plus & Productivity
Bonus
Proportions of Tariff
Tariff Tariff
Main Objective of PPP
Improve Operating Efficiency
Improve Technical Efficiency
Improve Technical Efficiency
Mobilise Private Capital
and/ or expertise
Mobilise Private Capital
and / or expertise
InceptionFeasibility
StudyProcurement Construction Operation
Need for change
Project study and
public consultations
Project team of the
client is build
Engineering, design
and financial due
Edition and
publication of tender
documents
Selection of qualified
bidders
Prior to construction,
creation of the SPV
and financial close is
reached
Operation of the
facility
Maintenance public consultations
Identifications of
goals and priorities
and financial due
diligence
Rough risk analysis
bidders
Evaluation of the
bids and negotiations
Awarding of the
contract
Construction of the
infrastructure
Maintenance
End of contract
All Risk
Legal and Political
Risk
Demand RiskDemand –side
operation Risk
Government
Private partner
(government may
provide guarantee
to mitigate Risk
Types of Risk Risk in general most
efficiently borne by:
Commercial Risk
Supply Risk
Supply –side
operation Risk
Construction
Risk
to mitigate Risk
Private partner
Private partner
Project
Stakeholders
Project Stakeholders differ in their:
•Objectives
•Functions throughout the project life cycle
•Risk perception, willingness and capability
Project Life
Cycle
Risk
management
process
PPP
risk managementSub-processes differ in:
•Organisational and operational requirements
•The extend of available information and
data
•Applicability of reasonable methods and
techniques
Stage-specific risk profile at different project
stages:
•Amount of risk expense
•Capability to influence risk
•Consistency of revenue
Pre - Qualification
• Objectives & priorities; Defining of PPP Service
• Technical, Economic, Commercial, Financial, Environmental reviews;
• Pre-feasibility study & Project Information Memorandum;
• Bid evaluation criteria determined;
• Prequalification notice issued
Tendering
• Preparation of bid documents and contracts;
• Preparation for detailed Information Memorandum for lenders;
• Issue request for bids to Pre - qualifiers
Formation of SPC
• Detailed negotiations on concession, PPA, FSA, etc.;
• SPC formation and equity allocation;
• Approve licences, taxation regime, etc.
• Negotiate Government Undertakings
• Concessionaire negotiates loan agreements
Financial Closure
• Complete all necessary documentation and conditions precedent
Typical Timeline
Pre-
Qualification
Formation of
SPC2-3 Months 3-9 Months
Tendering
Negotiations
Financial
Closure
3-6 Months
3 Months
3-6Months
Total Time : 14 – 27 Months
PPP FinancingPPP Financing
PPP Financing Principles
• Private Investors apply their own funds only to a minor portion of the projects.
• Most of the funding would be provided by financiers –Commercial banks and international financial institutions.
• Projects’ Bankability – ability to attract funding is one of the key issues to be resolved by both the public and the private sectors.
• Non – Bankable projects are not PPP – feasible.
Bankable PPP Projects
Bankable
PPP
Certain
Cash
Flow
Public
Guarantees
PPPProjects
SecurityStep-in
Provisions
Service
Output
Specification
Service
Delivery
Performance
Monitoring
Payment
Mechanism
PPP Financing Approaches
• Resource (Corporate) Financing: Lenders look to existing corporate cash flow and a corporate guarantee of the borrower’s obligations
• Non-Resource (Project) Financing: Lenders rely exclusively on a project’s cashflow and assets to obtain repayment of loans; not on project’s cashflow and assets to obtain repayment of loans; not on the corporate balance sheet and profits
• Limited Resource (Project) Financing: Lenders look initially to a project’s cash flow and assets to obtain repayment of loans
Pros/ Cons of Project Finance
Advantages• Protects and attract sponsors
• Efficiently and comprehensively
allocates project risks
• Lessens political risks
• Improves creditworthiness of
Disadvantages• Inherently complex
• Higher development cost (time
and money) for government
• Likewise, very significant bidding
costs for sponsors• Improves creditworthiness of
project and chances of fundings
costs for sponsors
• Committed equity required
Funding Options
Bankable
PPP
EquityDebt
PPPProjects
Grants Subsidies
Guarantees
Factors Impacting Project Financial Structure
PPP
Project
Capital Requirements and cash flows vary depending on the stage of project development. The initial capital structure (high equity or costly debt) can be refinanced through cheaper debt once construction risk is over.
Taxes can impact cost of capital and earnings. Interest on debt if tax deductible can significantly reduce the cost of debt capital and hence there is an incentive for the sponsor to use debt instead of equity.
Project Cycle
& Cash Flows
TaxesProject
FinancialStructure
the sponsor to use debt instead of equity.
Too much of debt in a project with fluctuating cash flows may have problems of meeting debt covenants. Also some flexibility ought to be maintained in case unforeseen situations demanding additional funding.
Actual cost of capital is also factored into decision making process. Though cost of debt is generally lower than equity, it depends on risk & recourse and timing.
Financial Risk
& Flexibility
Cost of Capital
PPP Project Financial Structuring
•Capital Investment
•Capital Structure
•Operating Cost
•Revenue Stream
Developing
Cash Flow
Model
•DSCR
•Capital Cost Estimation
•Assumptions
+ Ve : Proceed to Analysis of Financial Indicators
- Ve : Change Assumptions
Analysis of
Financial
Indicators
Sensitivity
Analysis
•DSCR
•NPV, IRR & Pay Back
•ROE
•Ratio Analysis
•Concessional Life
•Length of construction period
•Structure and cost of capital
•Facility Usage Projections
•Inflation Rates
•Interest Rates
Acceptable : Proceed to Sensitivity Analysis
Not Acceptable : Change Assumptions
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