understanding public private partnerships · tacoma narrows bridge (db) us 183 austin indiana toll...
TRANSCRIPT
12/17/2010
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Understanding Public Private
Partnerships
Colorado PPP Symposium
November 18, 2010
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What is a Public-Private Partnership (PPP)?
“A form of project delivery resulting in a contractual agreement between public and private sector partners that allows for more private sector
participation than is traditional.”
Pu
blic
Pri
vate
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Tacoma Narrows Bridge
(DB)US 183 Austin
(DB)
Indiana Toll Road(Concession)
Pocahontas Parkway
(Concession)
Northwest Parkway
(Concession)
I-635 Managed
Lanes
(DBFOM)
SH-130, Segments 5-6
(DBFOM)
North Tarrant Express
(DBFOM)
Port of Miami Tunnel
(DBFOM)I-595 Managed
Lanes
(DBFOM)
Capital Beltway HOT Lanes
(DBFOM)Chicago Skyway
(Concession)
SR 125(DBFOM)
Recent US PPP Projects
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Driving the need
Governments faced with several problems:
• Aging infrastructure
• Growing population in urban centers
• High level of services
• Construction costs increases
• Budgetary constraints:
o Slower revenue growth
o Resistance to tax increases
• Cost overruns and delays in traditional
procurements
What is Driving the Need for PPPs?
Meeting the Need
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Risk allocationLong term contracting
Performance based contracts
Innovation
Economies of scale
Whole life costing
CompetitionGreater
leveraging of public funds
Task integration and efficiencies
in delivery
Affordability and value for money
Common Characteristics of PPPs
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Design
Private
Sector
Government
ConstructFacilities
Maintenance
Finance
Project
Management
Design
Government
Construct Facilities
Maintenance
Finance
Users
Project
Management
Traditional Procurement Structure PPP Structure
Service
Service
Users
Direct Fee Revenues
Availability Payment
Direct Fee Revenues
Real Fee Structure
Availability Payment Structure
How are PPPs Structured?
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Simple Operating Contract
Accessing Private Sector Financing
Running the Service as a Stand Alone “Business”
PPP Business Models
The PPP model chosen will have a major impact and should reflect careful consideration of the project objectives and the level of risk transfer
appropriate for that particular project.
The risk sharing balance should determine the
type of P3 used
PRIVATE
SECTOR
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Risk Allocation Defines the PPP Business Model
Design Design Design Design ConstructionConstructionConstructionConstruction Operate Maintain Operate Maintain Operate Maintain Operate Maintain Financing Financing Financing Financing TrafficTrafficTrafficTraffic RevenueRevenueRevenueRevenue
Design Bid Build (Traditional)Design Bid Build (Traditional)Design Bid Build (Traditional)Design Bid Build (Traditional) ���� ���� ���� ���� ���� ����
Design Build Design Build Design Build Design Build ���� ���� ���� ���� ���� ����
Design Build Operate MaintainDesign Build Operate MaintainDesign Build Operate MaintainDesign Build Operate Maintain ���� ���� ���� ���� ���� ����
Design Build Finance Operate Design Build Finance Operate Design Build Finance Operate Design Build Finance Operate
MaintainMaintainMaintainMaintain
(Availability Payment)(Availability Payment)(Availability Payment)(Availability Payment)
���� ���� ���� ���� ���� ����
Design Build Finance Operate Design Build Finance Operate Design Build Finance Operate Design Build Finance Operate
MaintainMaintainMaintainMaintain
(Shadow User Fee)(Shadow User Fee)(Shadow User Fee)(Shadow User Fee)
���� ���� ���� ���� ���� ����
Design Build Finance Operate Design Build Finance Operate Design Build Finance Operate Design Build Finance Operate
MaintainMaintainMaintainMaintain
(Real User Fee)(Real User Fee)(Real User Fee)(Real User Fee)
���� ���� ���� ���� ���� ����
� − Risk retained by Public Sector
� − Risk transferred to Private Sector
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Design/Build
Designer and contractor hired under single contract
• Selection usually based on best value
Private partner takes majority of design and construction risk
• Introduces private sector innovation
• Greater cost and schedule certainty
Public sector has single point of contact
• Design and construction disputes typically remain between designer and contractor
Public sponsor retains obligation to fund
Public sector retains full operational and maintenance obligation
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Design/Build/Operate/Maintain
Similar attributes to Design/Build
Private partner has long term operational and maintenance responsibility
• Acts like an extended warranty
Transfers life-cycle costs to Private Partner
• Balances upfront capital costs v. long term maintenance costs
Public Sponsor responsible for revenue and financing
Maximum term of 15 years
• May be longer if Private Activity Bonds are used
Suited for facilities with specialized operational and/or maintenance requirements
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Design/Build/Finance/Operate/Maintain
Similar to DBOM
Private Partner is responsible for financing
Public Sponsor responsible for revenue stream
Applicable to both revenue and non-revenue facilities
Also referred to as Availability Payment
• Private Partner required to have facility “available”
• Annual payment is a function of facilities “availability”
Suitability
• Where transfer of revenue risk may not be best value for money
• Transit projects
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Concession
Greatest degree of risk transfer to the private sector
• Design, Construction, Revenue, Finance, Operations, Maintenance, Capital Renewal
• Potentially includes capacity expansions
Public Sponsor retains least control
• Rate Setting
• Operational/Performance Standards
Payments to Public Sponsor
• Upfront payment
• Revenue Sharing
• Unplanned refinancing
• Excess revenue
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Payment Mechanisms
Payment Mechanism
Description Advantage(s) Disadvantage(s)
Real Tolls (Hard toll, HOT, Congestion pricing)
Developer collects tolls directly from the users of the facility
Developer takes risk related to usage, demand and collection of revenue
Established direct link between usage and compensation
Public acceptance of real tolls
Developer requires higher return because it retains usage and demand risk
Shadow Tolls Public authority pays the developer a user fee based on the usage of the facility
Developer takes risk related to usage
Revenue payments are usually capped
Public authority takes risk related to revenue
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Payment Mechanisms
Payment Mechanism
Description Advantage(s) Disadvantage(s)
Availability Payment
Public authority pays the developer a periodic unitary payment based on availability and performance of the facility
Availability payment is fixed subject to indexation
Deductions to payments for unavailability and poor performance
Developer requires lower return due to guaranteed payment stream (subject to deductions)
Creates budgetary certainty for public authority (payment does not increase based on usage)
Encourages developer to keep facility open and performing to standards
If usage does not meet forecast, then the public bears the risk of a redundant asset/loss of toll revenue
Does not incentivize developer to improve service – only operates to avoid payment deductions
Public authority must make commitment to long term payments (similar to debt service and O&M outlay)
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What is Risk?
• Time
• Schedule
• Project or Program Development
• Financing
• Design/Engineering/Construction
• Operations and Maintenance
• Revenue
• Changes in Law
• Termination
Risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on at least one project variable
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Risk Allocation Considerations
Individual project characteristics will drive risk allocation strategy
Risk should be allocated to party best suited to manage the risk
Risks are more often allocated to private sector due to
• strong project control
• ability to spread risk over time
• equity cushion
If neither better situated to manage risk, share it
Value for money is maximized by the optimal allocation of risk
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at bidding
Time in years
0 1 4 7 n
Risk falls at
financial close
Risk falls as
construction/
rehab risk
diminishes
Risk falls relatively quickly
in first few years of
operation as operational
and volume risk
diminishes
Risk gradually declines as
operational and volume risks
are fully understood and
managed before hand back
0%
2%
4%
6%
8%
10%
12%
14%
Conception Financialclose
At servicecommencement
Handback
Risk free
Operational risk premium
Regulatory/Unforeseeable risk
Construction / Refurbishment / Financing risk premium
Volume risk premium
Bid risk premium
Evolution of Project Risk Profile
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Value for Money:Assessing the value of private participation
Risks Retained by
Public Sector
Operations &
Maintenance
Costs
Financing Costs
Capital Costs
Risks Retained by Public Sector
Operations & Maintenance Costs
Financing Costs
Pro
ject
Co
sts
Capital Costs
Value for
Money
Public Delivery Private Delivery
Not to scale – illustrative only
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17
Concession Company
PPP Contract
Public Body
PPP Contract Structure
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PPP Contract
Operating and
Maintenance
Contract
Construction
Contract
Public Body
Concession Company
PPP Contract Structure
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Public Body
PPP Contract
Concession Company
Investors/Developers equity finance
Operating and
Maintenance
Contract
Construction
Contract
PPP Contract Structure
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Public Body
PPP Contract
Concession Company
Construction
Contract
equity finance Debt finance
PABS
TIFIA
Commercial
Debt
Investors/
Developers
Operating and
Maintenance
Contract
PPP Contract Structure
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Public Body
PPP Contract
Concession Company
Construction
Contract
equity finance Debt finance
PABS
Commercial
Debt
Investors/
Developers
Operating and
Maintenance
Contract
TIFIA
PPP Contract Structure
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Protecting the Public Interest
When and how could the “public interest” be at risk?When and how could the “public interest” be at risk?
Setting and controlling fares/tolls?
Policing excessive returns?
Responding to poor service delivery?
Insolvency of private partners?
Termination of the concession?
Expiry: What happens to the assets?
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Protecting the Public Interest
Setting and controlling fares/tolls
• Demand risk with public or private sector?
• Availability payment structures
• With demand risk, balance various factors:• degree of freedom to set tariffs
• policy considerations
• "value" of the concession to the private sector
• Contractual formula or independent regulation
• Certainty and scope for political manipulation
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Policing excessive returns?
• “Super-profits"• deal priced in competitive environment
• should upside be capped?
• Refinancing gain• reduced risk profile after construction
• reduced risk profile of maturing market
• public sector share in any gain?
• Equity disposals
Protecting the Public Interest
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Responding to poor service delivery
• Calibration and operation of payment tools
• Performance monitoring regime
• Escalation of remedies:• warning
• direct specific action
• termination
• Step-in and self-help remedies
• Responding to emergency situations
Protecting the Public Interest
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Insolvency of private partners
• Concession company:• visibility and time to plan
• commercial debt incentivised to assist
• ultimate control of assets
• take in-house or hand to replacement contractor
• "work-out" most likely in practice
• Sub-contractor:• private partner incentivised to manage
• control over unsuitable replacement
• Provider of finance
Protecting the Public Interest
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Termination of the concession
• Ultimate right if service is not acceptable• long term inadequate service
• one-off "material" failure
• Ability to control ownership of assets
• Public sector windfall?
• Compensation to private financiers• bankability and cost of capital
• basis of calculation
Protecting the Public Interest
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Expiry: What happens to the assets?
• Public sector direction• decided at the outset
• option close to expiry
• Main options• revert to public ownership
• private sector retain decommissioning risk/residual value risk
• Asset condition at expiry• requirement for specified condition?
• retentions/reserves in final years of concession
Protecting the Public Interest
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How the Public Sector Can Facilitate Success
Create institutional certainty
Educate the public about PPP’s
Prioritize and screen projects
Appoint senior government “champions”
Create a clear decision making hierarchy
Be an effective counterparty with sufficient resources and experienced external advisors
Adopt standardized procurement practices
Clear accountability and transparency of the procurement process
Be prepared to provide credit support to projects
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What PPPs Are Not: Dispelling The Myths
• PPPs = PrivatizationMyth #1
• PPPs generate large upfront payments to the governmentMyth #2
• PPPs cost more to the publicMyth #3
• Private sector participation comes at the expense of serviceMyth #4
• Facilities suffer under PPP projects Myth #5
• PPPs are less transparentMyth #6
• PPPs lead to public sector job lossesMyth #7
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Contact Information
Andrew Garbutt
Principal
KPMG LLPOne Congress Plaza, 111 Congress Ave
Austin, TX 78701
Phone: 512-501-5329Email: [email protected]
Lisa Fenner
Senior Director
KPMG LLPOne Congress Plaza, 111 Congress Ave
Austin, TX 78701
Phone: 512-320-5169Email: [email protected]
Michael Matteou
Partner
Hogan Lovells International LLPAtlantic House, Holborn Viaduct
London EC1A 2FG
Phone: +44 20 7296 5215Email: [email protected]
Andrew Briggs
Partner
Hogan Lovells International LLPAtlantic House, Holborn Viaduct
London EC1A 2FG
Phone: +44 20 7296 2484Email: [email protected]
Helen Atkeson
Partner
Hogan Lovells US LLP1200 17th Street, Suite 1500
Denver, Colorado 80202
Phone: 303-899-7311Email: [email protected]