Case Study 1: Potential PPP Projects in Indonesia · PDF fileCase Study 1: Potential PPP...

Case Study 1: Potential PPP Projects in Indonesia Attachment 1 contains descriptions of the following potential PPP projects, drawn from the Government of Indonesia’s publication “Public Private Partnerships: Infrastructure Projects Plan in Indonesia – 2012”:

• Tanah Ampo Cruise Terminal, Karangasem, Bali

• Solid Waste Management Improvement Project – Bandung Municipal, West Java

• Medan – Binjai Toll Road, North Sumatera

• DKI Jakarta – Bekasi – Karawang Water Supply (Jatiluhur)

Questions for discussion

For each project, consider the following questions:

1. What functions or roles will the private sector contractor perform in this PPP?

2. What payment mechanisms might be possible for the project? (That is, what will be the source of the PPP contractor's revenue, and how might that revenue vary?)

3. Is the project a greenfield project or a brownfield project?

What implications might your answers to these questions have for government?

EMAIL [email protected] WEB www.fosterinfrastructure.com

© Foster Infrastructure Pty Ltd ABN 72 148 166 536.

Case Study 1: Potential PPP Projects in Indonesia August 2013

Attachment 1: Project details adapted from “Public Private Partnerships: Infrastructure Projects Plan in Indonesia – 2012”

Tanah Ampo Cruise Terminal, Karangasem, Bali

Project Description

An international-standard cruise ship terminal at Tanah Ampo will help to stimulate a significant increase in cruise ship calls. It will benefit East Bali region in terms of development and employment. The lack of such infrastructure will hold back ship calls and reduce tourism revenue. Tanah Ampo will be obsolete without terminal upgrading.

Scope of Works

Upgrading of existing cruise terminal to accommodate 2 large cruise ships simultaneously.

Scope of work, as follows:

a. Upgrade terminal building to international standards;

b. Expansion of jetty to accommodate cruise ship up to 300 m length;

c. Operation and maintenance of the cruise terminal.

Estimated project cost:

US$ 36.00 million

PPP Modality:

Design - Build - Operate and Transfer (DBOT)

Duration of contract: 25 years

of 5 Foster Infrastructure


Solid Waste Management Improvement Project – Bandung Municipal, West Java

Project Description

Bandung municipal suffers from insufficient capacity for solid waste disposal following the devastating land slides at the Leuwigajah Final Disposal site in 2005. It diverted the location of final disposal to Sarimukti which will have to be closed this year. In line with the population growth of Bandung municipal, solid waste production is increasing and demand for more advanced solid waste management is critical.

One of the strategies for managing solid waste disposal in Bandung municipal is the use of incineration technology. In the incineration process, heat is as a by-product produced that can be converted into energy or electricity.

Technical Overview

Demand Forecast : 1600 tons/day in 2011

Project Scope : Build and operate of waste to energy facility

Technical Specification

Incinerator to handle 700-1000 tons/day Municipal Solid Waste (MSW) and create energy (10-12 MW).

Estimated Project Cost:

US$ 100.00 million

PPP Modality:

BOT (Build – Operate – Transfer)

Duration of contract : 20 years



Medan – Binjai Toll Road, North Sumatera

Project Description

Considering the increased volume of traffic in the city of Medan and its surrounding areas, North Sumatera Provincial Government plans to construct a toll road connecting Medan to the city of Binjai. This toll road is expected to improve economic connections to the east coast of Sumatera, regional cooperation and the national transportation system. The existing national road Medan – Binjai is highly congested with commuters and long distance vehicles heading to Nanggroe Aceh Darussalam. It also serves trucks transporting oil and plantation produce from the vicinity of Binjai.

Technical Overview

Vehicles/day in 2011: 14,092

Scope of Works

Length : 16.80 km

Design Speed : 100.00 km/h

Number of Lane : 2x3 lanes

Lane of Width : 3.60 m

Outer Shoulder Width : 3.00 m

Inner Shoulder Width : 1.50 m

Median Width : 5.50 m

Right of Way : 40.00 m (minimum)

Estimated project cost:

Estimated Project Value : US$ 214 million

Land acquisition : US$ 28.40 million

PPP Modality:

Build - Operate - Transfer (BOT)

The concession period will be granted for 35 years.



DKI Jakarta – Bekasi – Karawang Water Supply (Jatiluhur)

Project Description

Most of the water supply to Jakarta, Bekasi and Karawang comes from the Jatiluhur reservoir,

operated by Perum Jasa Tirta II (PJT II), a state-owned enterprise. The water flows through an open channel - the West Tarum Canal (WTC) until it reaches the water treatment plant in the municipalities. The operators for clean water supply are PT Pam Lyonnaise Jaya (PALYJA) and Aetra in Jakarta, PDAM Bekasi and PDAM Karawang. The raw water from Jatiluhur is degrading due to contamination (domestic and industrial pollution). The objective of this project is to ensure the supply of treated water in DKI Jakarta, Bekasi City, Bekasi Regency and Karawang Regency, where demand is increasing.

The project consists of the construction of an upstream water treatment plant and the transmission of treated water through a closed-pipe system directly to the operators in Jakarta, Bekasi and Karawang (i.e. Aetra and PALYJA, PDAM Bekasi and PDAM Karawang). It involves a large Water Treatment Plant (15m3/s), big reservoir, and delivery of drinking water to Jakarta via a pumped long transmission main (1.8 m diameter pipes), supplying five water utilities along the route.

Technical Overview

Water demand in Jakarta, Bekasi and Karawang

Existing demand : 11 m3/sec

Forecast demand (2025) : 19 m3/sec

Scope of Works

Intake

Water Treatment Plant : 5,000 l/sec (phase I).

Treated water reservoir

Treated water transmission line 58 km.

Estimated project cost

US$ 189.00 million (phase I)

PPP Modality

BOT (Build – Operate – Transfer)


Case Study 2: The need for Consistency and Commitment in a PPP Program Attachment 1 contains edited extracts from media articles about the failure of the Mumbai Trans Harbour Link project to secure bids.

Questions for Discussion

1. What factors have influenced the level of bidding competition for this project?

2. How could the failure of this project to secure bids be remedied?



Case Study: Commitment and Consistency in PPP Programs August 2013

Attachment 1

1 August 2013 – No confidence? IRB scraps plans to bid for Mumbai Trans Harbour Link1

IRB Infrastructure, which had formed a consortium to bid for the Mumbai Trans Harbour Link project, a sea-link from the city to Navi Mumbai, has decided not to participate in the bidding process, citing lack of support from Maharashtra state’s coordinating agencies and shattered confidence in urban infra projects in the state.

“We had jointly with our consortium spent a huge amount of money, time and efforts for conducting technical and traffic studies, structured a viable financial model and were almost in a position to put our bid for the project. “But unfortunately, the experience we have had in one of the urban infrastructure projects in Kolhapur has shattered our confidence to invest in urban infrastructure projects especially in the state,” IRB said in a letter to the Mumbai Metropolitan Commissioner, informing about its decision to quit the project.

The IRB-Hyundai Engineering consortium was among the five shortlisted firms to develop the project…

“We have decided not to bid for the project. This decision has been taken mainly owing to the bitter experience we had in one of our toll BOT (build-operate-transfer) projects in Kolhapur where we did not receive the expected support from the government,” Virendra Mhaiskar, Chairman and Managing Director, IRB Infrastructure, told reporters on the sidelines of the 15th AGM on Wednesday…

The public had opposed toll collection on the 50-km 13-road project in Kolhapur, following which the state administration asked the company to stop collecting toll.

IRB Infra later approached the court seeking permission to collect the toll. “The court has asked the state to provide security at the toll plazas. We expect to start collecting toll in the next two to three weeks,” Mhaiskar said.

6 August 2013 – No bid for ambitious Mumbai TransHarbour Link2

In a major blow to attempts of Maharashtra government to improve infrastructure in the metropolis, none of the five shortlisted firms put in tender for the ambitious Mumbai TransHarbour Link (MTHL) project, the bids for which opened on Monday.

"We did not receive any bid from the private sector for the MTHL project," MMRDA Additional Metropolitan Commissioner Ashwini Bhide told PTI here.

…

The Mumbai Metropolitan Region Development Authority (MMRDA) is the implementing agency for the project, which seeks to connect Sewri in the northeastern fringe of the island city with Nhava on the mainland. It is to be developed on build-operate-transfer basis.

1 Edited extracts from “No confidence? IRB scraps plans to bid for Mumbai Trans Harbour Link”, FirstPost Business, 1 August 2013. 2 Edited extracts from “No bid for ambitious Mumbai TransHarbour Link”, The New Indian Express, 6 August 2013.

Page 2 of 3 Foster Infrastructure

Case Study: Commitment and Consistency in PPP Programs August 2013

"We had provided all necessary assistance to mitigate all the risks for the private sector. Right from clearances to assuring financial assistance, we had addressed most of their problems. Yet we did not get any response," Bhide said.

…

To address some of its financial risks, Union Finance Ministry, in January this year, sanctioned viability gap funding for the project.

Besides, the empowered committee of the department of economic affairs had approved 10 per cent shortfall loan to the MTHL concessionaire.

"The decision on shortfall loan was taken to make the project financially viable. This would ensure the bankers' debt service obligations are met with, should the projected traffic on the link falls below its 80 per cent mark," Bhide said.

…

Bhide said to further mitigate financial risk of the concessionaire, the State Government had proposed to take over the revenue risk. It was also ready to compensate the operator in case of toll collection falling below projection.

"We expected that these initiatives would encourage more developers to bid for the project. However, we have not been able to get any bidder."

"They never questioned the viability of the project. But we believe they had some issues with raising debt and are worried about negative cash flow in the first five to seven years of operations due to uncertainty over traffic flow," the MMRDA official said.

Asked about the Government's next step, Bhide said, "we will now assess the situation. We will work on an alternate plan and take the project ahead."

Maharashtra State Road Development Corp (MSRDC), which was earlier handling the project, had made attempts to invite the bids way back in 2004 on BOT basis and in 2008 on a design build contract basis.

In June 2008, bids submitted by the Ambani brothers was found to be unrealistic. Then, the Cabinet sub-committee on infrastructure at the Centre had suggested scrapping the public-private-partnership (PPP) model and executing the project on a cash contract basis. Though as many as 13 companies had showed interest, nobody submitted bids.

However, in 2009, it was decided to implement MTHL on a PPP basis under VGF (Viability Gap Funding) scheme of the Centre for which in-principle approval was given on in April 2009. The State Government later handed over the mandate of the project to the MMRDA.


Case Study 2: Footbridge PPPs in Manila and Calcutta Attached are extracts from media articles in relation to footbridge PPPs in Manila and Calcutta. By coincidence, these articles appeared on the same day.

When reading these articles, bear in mind that media reports do not necessarily provide a full picture of government processes and decision making.


1. What problems are these projects seeking to solve?

2. What are the elements of the solution in each of these projects? Consider:

a. The infrastructure and associated services required

b. Other changes or interventions required.

3. In developing business cases for these projects:

a. What options, other than the project described in the media article, might be considered in a business case as possible solutions to the identified problems?

b. What costs and revenues would be included when assessing the financial viability of the project?

c. What costs and benefits would be included when assessing the economic viability of the project?

d. What issues might be considered as part of the social impact assessment of the project?

e. What issues might be considered as part of the environmental impact assessment of the project?



Case Study 2: Footbridge PPPs in Manila and Calcutta August 2013

Attachment 1: Edited extract from “Coming soon: Safer, better footbridges” (Niña P. Calleja, Philippine Daily Inquirer, July 3rd, 2013)

Soon, footbridges will be offering washroom facilities, 24-hour security on top of protection from the elements.

In a statement, the Metropolitan Manila Development Authority (MMDA) said it would launch on Friday its “Adopt-A-Footbridge” program, the agency’s latest Public-Private Partnership (PPP) initiative with the private sector on the rehabilitation and beautification of existing footbridges in Metro Manila.

MMDA Chairman Francis Tolentino said the program would be greatly beneficial to pedestrians and more importantly, it would be implemented at zero cost to the government.

He will lead the program launching tomorrow at C-5 Libis, Eastwood, Quezon City, together with Mayor Herbert Bautista and representatives of AMSI Builders and Illuminate Dynamic Media, Inc. (IDMI).

Under the program, AMSI Builders and IDMI will finance the repair, rehabilitation and improvement of footbridges in Metro Manila.

They will construct covered walkways to protect pedestrians from extreme heat and rain and decorate it with ornamental plants which will also help fight air pollution.

Proper lighting and closed circuit television cameras will likewise be installed while a 24-hour roving security guard will be assigned to guard each footbridge.



Attachment 2: Edited extract from “Mystery of footbridge multiplier” (Kinsuk Basu, The Telegraph (Calcutta, India), July 3rd, 2013)

The Calcutta Municipal Corporation (CMC) has decided to build eight footbridges in this city of compulsive jaywalkers who find little use for the ones that already exist, some within a few hundred metres of the proposed sites.

The civic body has chosen to go the PPP (public-private partnership) way for the project, offering land to prospective private partners willing to bear the cost of construction.

But why would a private company want to spend money on a footbridge that pedestrians are likely to ignore? The alleged objective is not footfall but eyeballs.

The CMC and the police have planned the footbridges in some of Calcutta’s busiest thoroughfares, where a huge overhead iron structure across the road spells prime advertising space.

The lure for private companies building the structures is a 30-year lease, including the right to use them for advertising. The CMC, of course, would get a share of the spoils.

“If the government were really keen on making it easier for pedestrians to cross roads, it would have probably thought of other ways to do it because footbridges have been a big flop in Calcutta,” said an engineer in the transport department.

There are already 11 footbridges across the city and its adjoining areas. Barring the odd one, they have proved useless.

No pedestrian in this city wants to climb almost 18 feet up a flight of stairs to cross a road when they can hop across without fear of being caught and fined by the police. As for risk to life and limb, the onus is on vehicles to look out for pedestrians, not the other way round.

In many of the places where footbridges exist, the approach to the stairs is blocked by hawkers and beggars. After dusk, out come the pot smokers.

“Near NRS Medical College, the passage leading to the flight of stairs steps is congested and dark. One has to go through a crowd of hawkers encroaching on the footpath. Pedestrians find it easier to walk across the road,” said an officer of the Sealdah Traffic Guard.

The footbridge in Rajabazar is at a distance from the spot from where pedestrians usually cross the intersection on APC Road. On CIT Road, it is a drug addicts’ den. In Gariahat, it is seemingly there only for show.

None of the interested parties is allegedly even considering who might find the eight new footbridges useful.

“Two of those have been planned in the vicinity of South City Mall and another one at Deshapriya Park or in front of Gariahat Pantaloons. A footbridge in each of these sites will eat into the little that remains of the pavements and force more people onto roads, like in Gariahat,” an engineer warned.

Town planners who did not wish to be named wondered why the CMC would want to build a footbridge in Rajabazar when another one was lying unused barely 300 metres from the



proposed site. The logic behind building a footbridge in Moulali is also questionable, they said.

“In most cases, the planning that has gone into building the existing footbridges appears to be faulty,” said Bhargab Maitra of IIT Kharagpur, whose research interests include transportation planning. “In traffic engineering, it is essential to quantify the chances of a pedestrian actually using a facility. What calculations have gone into arriving at the decision to build these footbridges is not quite clear.”

Maitra would like the CMC to consider better pedestrian management instead. “We must consider using traffic signals intelligently, allowing time for pedestrians to cross just as vehicles are allowed their own time.”

A senior engineer of the Calcutta Metropolitan Development Authority felt that more footbridges would end up cluttering the city. “They will make the city uglier still, just like the illegal gates that come up during Durga Puja, one after the other along the length of a road.”

But don’t footbridges exist in cities across the world? “A subway is perhaps what a busy Calcutta road needs — for the elderly, children and flabby people like myself who find it difficult to climb footbridges. These three categories of people are the most vulnerable as they cannot run across busy streets and often become victims in accidents,” said Debasis Bose, urban historian and activist.

“There are only two categories of people who appreciate footbridges. First, journalists and photographers for whom these are the best perches possible. The second are contractors and architects.”

But the civic brass is sticking to its plans. “We will be inviting bids for the construction of footbridges shortly. Unlike the existing ones, these will have escalators on one side. Consulting agency RITES has cleared it,” said Atin Ghosh, mayor-in-council for engineering in the CMC.

“Traffic police will ensure that pedestrians take the footbridge route to avoid fatal accidents, particularly at busy intersections,” he added.

Experts said the only way to force pedestrians to use footbridges was through channels on pavements. The footbridge connecting Lake Town and Salt Lake is one where the pavement guardrails lead people to the stairway. Even bicycles can take the footbridge.


Case Study 3: The Hypothetical Drive Project1

Background

The Hypothetical Drive Project requires the construction of a new road, to include 10 kilometres of four lane freeway and grade separated interchanges, estimated to cost $110 million. The aim of the project is to ease traffic congestion, improve safety and reduce travel times between Bigtown and Neartown. The project is one of the single largest projects in the Bigtown region and is the region’s largest ever road and bridge project.

The Bigtown Regional Roads Authority does not have experience delivering road projects of this scale and complexity.

The landscape between Bigtown and Neartown is extremely hilly, hence the project will require a range of deep cuttings and bridge structures. Ground conditions are expected to be difficult. The local geology features granite masses intruding into crumbling shale and limestone.

The existing road between Bigtown and Neartown takes an indirect route, winding through the hills for 14 kilometres. It is primarily two lanes, with some overtaking lanes on steep uphill sections.

Project Objectives

The objectives of the Hypothetical Road project are to:

• Improve connectivity between Bigtown and Neartown

• Reduce congestion between Bigtown and Neartown

• Improve road safety by reducing traffic on the existing road between Bigtown and Neartown.

There are currently 24,000 vehicles travelling between Bigtown and Neartown each day. Due to significant economic growth in the Bigtown region, 48,000 vehicles are predicted to be travelling the same route in 2031.

1 Case Study developed by Foster Infrastructure.



Case Study 4: The National Highways Authority of India’s Standard PPP Contracts Attachment 1 sets out the Table of Contents from the National Highways Authority of India Standard Toll Road Contract.

Attachment 2 sets out the Table of Contents from the National Highways Authority of India Standard Annuity Road Contract (this contract is used for PPP road projects where the project company’s revenue consists of government payments).


1. How does the general content of these contracts differ from a traditional construction contract?

2. How does the general content of the toll road contract differ from the general content of the annuity road contract?



Case Study 4: NHAI’s Standard PPP Contracts August 2013

Attachment 1 – Table of Contents: National Highways Authority of India Standard Toll Road Contract1

1 NHAI Concession Agreement for projects Rs.100 Crores and above: Updated version as on 23.03.2000, Available at http://www.nhai.org/fvb.pdf.



Attachment 2 – Table of Contents: National Highways Authority of India Standard Annuity Road Contract2

2 NHAI Model Concession Agreement For Annuity Based Project - developed as a sample for Panagarh - Palsit project, Available at http://www.nhai.org/annuity.pdf.


Case Study 5: Evaluation Criteria for the New Royal Children’s Hospital PPP (Victoria, Australia) Attached are the evaluation criteria used to evaluate bids for the New Royal Children’s Hospital PPP in the State of Victoria, Australia.


For each criterion, consider the following questions:

1. What issue or risk is this criterion seeking to address?

2. How would government evaluate compliance with the criterion?

3. Could such a criterion be used in evaluating bids for PPPs in your own country under the prevailing procurement policies and practices?

4. In what other ways could the relevant issue or risk be addressed during the tender process?



Case Study 5: Evaluation Criteria for the New Royal Children’s Hospital PPP August 2013

Attachment 1: Evaluation Criteria for the New Royal Children’s Hospital PPP (Victoria, Australia)

Criterion A - Interface Management

The State will evaluate the extent to which it is evident that the Proponent has fully considered and understood the importance of the interface between the State and the proposed project company. Specifically the:

• resourcing and staffing structure and experience of proposed project company personnel;

• demonstration and commitment to a partnership approach; • proposed stakeholder management framework and approach; • proposed intra-consortium relationship management framework and approach; and • appropriateness of the proposed communications strategy.

Criterion B - Commercial

The State will evaluate:

• the Proponent’s commercial solution including the legal and commercial relationships between the:

o the Project sponsors, equity and debt providers; and o the proposed project company, the Builder, the Facility Management

Subcontractor, the main Services subcontractors (i.e. maintenance, security, and carparking) and any other contractors (as appropriate).

• the nature and extent of the proposed commercial departures.

Criterion C(i) - Financial

The State will evaluate the:

• appropriateness, competitiveness and flexibility of the funding structure; • financial strength of the party(s) that would contract with the State (or party(s)

providing financial support for the party that would contract with the State) for the Project;

• certainty of the funding structure; and • robustness of the financial assumptions.

Criterion C(ii) - Risk Adjusted Cost

The State will evaluate the whole of life, risk-adjusted cost of the Proposals by taking into account the financial and risk consequences of the Proponent’s Proposal.

Criterion D - Commercial Opportunities

The State will evaluate the Commercial Opportunities with regard to the:

• synergistic and/or complementary nature of the proposed Commercial Opportunities; • compliance with the Retail Principles and commercial terms; • legal and commercial relationships including the extent to which the Services are

protected from non-performance of the Commercial Opportunities; and • value provided by the Commercial Opportunities Proposal.



Criterion E - Master Plan


• proposed vision and integration of the master plan; • Site circulation and provision of appropriate traffic management; • urban architectural form and fit and relationship to the built and natural environment;

and • the quality and layout of the Site.

Criterion F - Design


• extent to which the Proposal reflects the Design Principles; • functionality and operational efficiency of the proposed design; • contribution of the proposed design towards an efficient whole life cost for the

Facility; • architectural quality of the proposed design; • process for Equipment selection and appropriateness and quality of the selected

Equipment; • flexibility and expansion capability of the Facility; • appropriateness and quality of the engineering and building infrastructure services; • ecological sustainability of the design; • extent to which the Proposals demonstrate innovation; • design of any Commercial Opportunities; • extent to which Proposals consider and respond to the planning framework; and • extent of Departures from the requirements of the Design Brief.

Criterion G - Project Management


• Proponent’s approach to the Design Development Process, including the co-ordination and management of User Groups and the design team;

• proposed timelines and program; • construction methodology and management processes; • appropriateness of the proposed Completion methodology; • strategies for working with the State and RCH to ensure a seamless transition into

the new Facility; • appropriateness of the demolition and reinstatement methodology; and • proposed methodologies, and approach to minimising any impact on the business

continuity of the Hospital Functions and surrounding community.

Criterion H - Service Delivery

The State will evaluate the ability of the Proponent to support and enhance the delivery of the Hospital Functions through the provision of the Services including the:

• proposed management structure and solution for Services delivery; • service specific solutions (excluding Building Management Services) including

proposed procedures, flexibility and certainty of quality; and



• proposed Building Management Services solution including asset management

strategy for maintenance, lifecycle and sustainability management plans.

Other Issues

• Past Behavior: The State may consider past conduct, behavior and corporate history of any consortium member.

• Conformity with the Project Brief: The State will consider the extent to which the Proponents have submitted complete Proposals and the extent to which each Proposal complies with the requirements of the Project Brief.

• Compliance with the VIPP: The Victorian Industry Participation Policy Statement completed by each Proponent will be assessed and used in accordance with the guidelines issued under this policy.

• Probity Investigations: The State reserves the right to evaluate any matters revealed as a result of its probity and security investigations in evaluating Proposals.

• Conflict of Interest: The State will consider the nature of any actual or perceived conflicts of interest and the way in which the Proponent proposes to manage.


Case Study 6: Design Development in Australian PPPs1 In social infrastructure PPPs in Australia, the PPP contract provides for a design development process to occur following financial close. The key features of this process are as follows2:

• The PPP contractor must give government’s project director drafts of its detailed design documentation.

• The project director may, but need not, review these drafts and provide comments and recommendations to the PPP contractor. Those comments must only relate to compliance of the draft designs with the PPP contract, and must be provided within 20 days of receiving the drafts.

• The PPP contractor must amend the draft designs to reflect the project director’s comments and recommendations, and resubmit the designs.

• The contract protects government against the possibility that, by commenting on the designs, it takes back risk – the PPP contractor remains solely liable for ensuring that its designs comply with the PPP contract.

The design documentation is not reviewed by the project director alone – typically the project director seeks input from a range of experienced “client representatives” within government. For large and complex projects, particularly where the infrastructure will be operated by government, this design review process is, in itself, a major undertaking. For example, in a major hospital PPP in Australia, the process required3:

• Up to 80 individual groups

1 This case study is based on desktop research conducted by Foster Infrastructure for the Asia-Pacific Infrastructure Partnership and funded by the APEC (Asia-Pacific Economic Cooperation) Business Advisory Council. 2 See, for example, New South Wales Department of Education and Training, “New Schools 2 Public Private Partnership Project –Summary of Contracts” (6 July 2006), page 19. (Available at: https://www.det.nsw.edu.au/detresources/ppp2summary_diWKmKHbAQ.pdf.) 3 Government of South Australia, “The new Royal Adelaide Hospital Project – Next Steps – Design and Development” (May 2011). (Available at: http://www.sahealth.sa.gov.au/wps/wcm/connect/491f380047541cd38724ff2e504170d4/NRAHOverviewPresentation-SSS-MPO-1105v2.pdf?MOD=AJPERES&CACHEID=491f380047541cd38724ff2e504170d4.)



Case Study 6: Design Development in Australian PPPs August 2013

• Planning group members committing to attend design review meetings, as difficulties

were identified with having proxies attend

• Investigation of web based communication to facilitate the flow of design information.

Similarly, another major hospital PPP in Australia involved4:

… input from staff in the design process through the 74 user groups and 15 reference groups… [The builder] met with these groups in excess of 1,500 times to ensure the clinical objectives were met.

4 Lend Lease, “Delivering a World Class Facility to Meet Australia’s Future Healthcare Needs” (30 April 2012). (Available at: http://www.hospitalhealth.com.au/index.php?option=com_k2&view=item&id=817:delivering-a-world-class-facility-to-meet-australias-future-healthcare-needs&Itemid=238&tmpl=component&print=1.)


Case Study 7: Cost overruns and delays in the Victorian Desalination Project and Ararat Prison Project Attachment 1 contains edited extracts from media articles about difficulties encountered during construction of the Ararat Prison PPP Project in the State of Victoria, Australia. Attachment 2 contains an edited extract from a media article about difficulties encountered during construction of the Victorian Desalination Project in the same State at much the same time.


1. How has the PPP contract protected the government in each of these projects?

2. In the Ararat Prison project, why would the banks have decided to refinance the project?

3. Why is there no mention of government seeking liquidated damages in either project? Has this strengthened or weakened government’s position?



Case Study 7: Cost Overruns and Delays August 2013

Attachment 1 – The Ararat Prison Project

31 July 2012 – The cloud over Ararat1

ON THURSDAY night last week, the Ararat Hotel needed just one staff member to serve the small group of drinkers in its front bar. Three months ago four bar staff were required to cater for the throng of thirsty workers, most of whom were working at the $394 million Ararat prison redevelopment.

Such can be the knock-on economic benefits of a substantial piece of government infrastructure being built in your town.

So, like the old Main Street pub that bears its name, the gold rush town two hours north-west of Melbourne was rocked by the May collapse of the prison project and the sudden exodus of hundreds of workers. Local investments made on the back of the prison project now hang in the balance, as do the livelihoods of 45 subcontractors still owed up to $25 million.

Local councillor Gwenda Allgood says that before work began in 2010, representatives of the companies building the prison embraced the town, encouraging local involvement. They promised to pay well and on time and provide big benefits for the community.

Since the suspension of works, says Allgood, the consortium has disappeared from public view, leaving locals to count the cost.

''I think its criminal, what they've done,'' she says. They've (the companies) just evaporated.''

…

… What went wrong at Ararat?

In early 2008, the government announced its intention to refurbish the 45-year-old Ararat prison and add to it a new 358-bed facility. While such a proposal would horrify many communities - who wants a prison next door after all? - it was welcomed in a town long accustomed to correction facilities and eager for new investment.

After a long tendering process, contracts for a PPP were signed in mid-2010 with the Aegis consortium led by the Commonwealth Bank and project managers Bilfinger Berger. The consortium's builders would be a joint venture of mid-sized companies little known in Victoria: St Hilliers from NSW, and the New Zealand-based Hawkins.

Hundreds of building and associated workers would be employed on work scheduled for completion at the end of 2012. Once finished, the physical operation and maintenance of the prison was to be overseen by the consortium until 2037 as part of a total construction and management deal valued at $394 million in 2010 dollars.

Within months of work starting, the project was in trouble. Located on low-lying ground, the prison site was swamped when rain returned to Victoria after one of the state's most punishing droughts.

1 Edited extracts from Royce Millar and Reid Sexton, “The Cloud over Ararat”, The Age, 31 July 2012.



Subcontractors on the job insist that a lack of clear and comprehensive plans dogged the project, with the Department of Justice contributing to mounting mayhem through design changes2.

Workers, union officials and contractors paint a picture of an anarchic building site, with windows and doors ordered that did not fit, downpipes erected but then removed for fear that prisoners would use them to climb to the prison roof, and a concrete slab set too deep so that underground water would be a permanent problem.

Building company managers dismiss some of the workers' more colourful stories, but agree that the Ararat job became a logistical nightmare with a key problem being the integration of a new prison with an existing facility and the security problems that presented.

By September-October last year the builders knew the project was in serious trouble and were pleading for help from their own financiers, and from government. A December deal was struck under which the government extended the January deadline for the first stage of the project and deferred penalty payments. In return, the consortium would redesign the scheme and deliver more prison beds.

However, the project could not be salvaged before builders St Hilliers and Hawkins ran into significant money trouble and work ground to a halt in May.

St Hilliers is now under administration and the company and its administrators refuse to discuss the project's history with The Age.

3 August 2012 – Ararat Subcontractors to get their Money3

Subcontractors caught in Victoria's Ararat prison debacle are expected to have their claims assessed within weeks by banks refinancing the project within weeks.

But the construction union fears the deal still gives no guarantee to subcontractors owed hundreds of thousands of dollars that they will be paid all they are owed.

The $400 million jail upgrade has been in limbo since May when St Hilliers Construction went into voluntary administration. The consortium overseeing the project went into voluntary administration in June, followed by the other builder, Hawkins Ararat, last month.

The unfinished buildings have started to deteriorate and local subcontractors have been forced to lay off workers as they wait to be paid.

On Friday the government said it had struck a deal with the Commonwealth Bank and Bendigo and Adelaide Bank to back the project.

It is now up to the banks to find a suitable builder and assess subcontractors' outstanding claims.

One of several precast concrete suppliers for the project, Justin Dinale, said he was pleased with the refinancing deal.

He is owed about $750,000 and had to lay off about 30 workers.

2 This claim should be treated with caution – Sub-contractors do not necessarily have an understanding of the PPP contract or the interaction between the government and the project company. 3 Edited extracts from Sky News, “Ararat Subcontractors to get their Money”, 3 August 2012.



'We really feel like we've dodged a bullet here,' Mr Dinale said.

'Under the circumstances with the financial pressure I had to really buckle down and reduce down to 12 men.

'Now I can confidently start chasing other work and get them back on board and get things going again.'

Treasury had advised that the deal would have no major impact on net debt or the state's surplus.



Attachment 2 – The Victorian Desalination Project

10 October 2012 – Desal plant hits target - a year late4

[The Victorian] desalination… project yesterday reached a contractual target almost a year after it was supposed to be met.

Leighton, owner of plant builder Thiess, trumpeted it had reached ''preliminary commercial acceptance'' on the project after it was able to produce desalinated water at one-third capacity for seven days. It was meant to reach this target last November. Its two key deadlines for being able to produce water at full capacity have already been missed.

Leighton chief executive Hamish Tyrwhitt said it had met the ''stringent'' requirements of the state government. "The result showcases Thiess' capacity to construct and commission a world-class piece of infrastructure for the people of Victoria,'' he said.

The project has been a financial disaster for Leighton, which expects to lose about $500 million on it. Its joint venture builder, French company Degremont, also forecasts heavy losses. …

Water Minister Peter Walsh confirmed the builders had met the target and that some payments would start. ''The final cost will depend on the amount of water produced during commissioning and the length of time needed to achieve the next two contractual milestones.''

The plant has three ''streams'' producing water and one is now operating. Leighton aims to have all three operating by the end of the year.

Meanwhile, the builders are pushing ahead with their $1 billion claim against Victorian taxpayers.

Suez Environment chief executive Jean-Louis Chaussade said the builders, which include the Suez-owned Degremont, received a frosty response from the Baillieu government to its claim.

''The state of Victoria tells us that our claims aren't worth the paper they were written on,'' he said in August. ''Of course. Nothing out of the ordinary, of course. At this point, I cannot tell you the time frame in which the claims will be settled.

''It's pretty complex, to tell you the truth. We are making every effort to find the best option between claims that are valuable to us and that we consider as highly valid and a solution that would be as expedient as possible to settle all this once and for all.''

The $1 billion claim has also been met with much scepticism from industry players and unions. But Mr Chaussade has said they were ''convinced'' of the robustness of the claim, which was based on wet weather and industrial relations problems.

The Wonthaggi desal project… was meant to produce at full capacity by June 30 this year.

4 Edited extract from Ben Schneiders, “Desal plant hits target - a year late”, The Age, 10 October 2012.


Case Study 8: Mechanisms to ensure variation costs represent value for money1 The various approaches adopted to ensure that variation costs represent value for money for government utilise a number of concepts:

• Open book pricing, under which the private party must provide government with full details of the costs it will incur in implementing the variation

Open book pricing provides transparency of the private party’s costs but does not provide an indication of the reasonableness of the costs and whether they reflect market prices. Consequently, PPP Frameworks generally require another process such as benchmarking, market testing or independent expert determination to verify whether government is receiving value for money for larger variations.

• Schedules of rates, which provide pre-agreed standard prices for specific cost components

A schedule of rates is an efficient way of ensuring costs are reasonable for small and common variations, but its effectiveness depends on the extent to which the schedule can be validated at the point of its creation and reviewed regularly through the life of the contract2. A schedule of rates can only anticipate the most common variations, and where variations are not included in the schedule, government must use other means of checking costs3.

• Regulation of the margin that the private party can add to the variation costs

The private party often sub-contracts the work required to deliver a variation. Government faces a risk that the private party will add an excessive margin to the sub-contractor costs in order to derive additional revenue. To mitigate this risk, some PPP Frameworks recommend specifying in the PPP contract a fixed (or zero) margin for small and medium sized variations.

1 This case study is based on desktop research conducted by Foster Infrastructure for the Asia-Pacific Infrastructure Partnership and funded by the APEC (Asia-Pacific Economic Cooperation) Business Advisory Council. 2 National Audit Office, “Making Changes in Operational PFI Projects” (17 January 2008), page 15. (Available at http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx.) 3 National Audit Office, “Making Changes in Operational PFI Projects” (17 January 2008), page 16. (Available at http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx.)



Case Study 8: Mechanisms to ensure variation costs are value for money August 2013

• Benchmarking of prices, under which costs are compared with market rates

Benchmarking provides a means of testing whether costs reflect market rates, without the added costs and potential delays that might occur if the variation works are put out to competitive tender by the private party. Benchmarking is particularly applicable during the construction phase of a project, as there is already a construction sub-contractor on site, hence competitively tendering the variation works would be inefficient and potentially risky due to the possibility of introducing a second construction contractor onto the site.

• Competitive tendering, under which the private party is required to put the variation works out to tender in order ensure competitive pricing of the variation

Requiring the private party to put the variation works out to tender uses competitive pressures to obtain a value for money outcome for government. However, as the tender process results in additional tendering costs and may delay implementation of the variation, it is generally only suitable for variations that require significant construction activity. Competitive tendering is generally inappropriate for variations during the construction phase (as noted above, there is already a construction sub-contractor on site) or for smaller variations during the operations stage of the project, which can be undertaken more efficiently by the private party’s maintenance sub-contractor.

• Independent expert determination, under which the parties accept an independent expert’s calculation of the costs of the variation.

Many PPP Frameworks provide for an independent expert to determine the cost of variations, either following estimation of the costs by the private party or in circumstances where government and the private party disagree as to the costs. In practice, an independent expert will rely on other techniques such as benchmarking to determine the costs. Use of an independent expert is therefore best regarded as a means of avoiding or resolving disputes in relation to costs, rather than a measure of value for money.

Mechanisms used in Australian and Indian Toll Road Contracts

Australia India • Variations must be priced on an open

book basis. If the parties do not agree upon the cost of the variation, it may be determined by an independent expert (section 17.1).

• During the operations stage, government may require the private party to price a modification through a tender process (section 18.3.1(c)).

• The private party’s margins for variations are fixed in the contract (section 18.6(a)).

• Variations are priced through negotiation based on the National Highway Authority of India’s current schedule of rates (clause 17.2(c)), with resort to a dispute resolution process if necessary (clause 17.3).


Case Study 8: Mechanisms to ensure variation costs are value for money August 2013


1. How have governments in Australia and India sought to bring certainty into their legal documentation with respect to the pricing of variations?

2. What reasons might there be for differences between the mechanisms in the Australian and Indian PPP contracts?


Case Study 9: Managing the Implementation of Variations1 Although PPP contracts allow flexibility for changes in the physical infrastructure or the services, this flexibility is only effective if government appropriately manages the variation process.

Key principles applicable to managing variations (and PPP contract management more generally) include2:

• Understand the contract: Government’s contract management team should ensure that they understand the PPP contract. This is essential not only to ensure that rights and obligations in relation to variations are being honoured, but also to verify that a variation request is actually a change and not covered under the existing agreement and pricing structures.

• Adopt a strategic approach to variations: Government should adopt a strategic approach to variations and control the flow of variations to avoid overstretching resources on either the government side or private party side of the contract. For example, government can consider bundling similar variations together to reduce costs, or planning a variation programme based on anticipated needs.

• Ensure variation requests are clear and comprehensive: Government should provide its private sector partners with proper briefs to make it clear what government wants done. This is especially important for larger, more complex variations. For complex variations, government should consider initially having informal non-binding discussions with the private party in order to better understand the private party’s ability to implement the variation, prior to issuing a formal variation request. These informal discussions can enable government to then prepare a formal variation request that gives the private party the information it needs to enable it to fully evaluate the variation and provide a detailed plan for its implementation.

• Establish clear and appropriate roles and responsibilities for requesting and assessing variations: Government should ensure that appropriate staff have the

1 This case study is based on desktop research conducted by Foster Infrastructure for the Asia-Pacific Infrastructure Partnership and funded by the APEC (Asia-Pacific Economic Cooperation) Business Advisory Council. 2 See generally Infrastructure Australia, “National PPP Guidelines: Volume 2 – Practitioners’ Guide” (April 2011), section 7 and appendix H. (Available at http://www.infrastructureaustralia.gov.au/public_private/files/Vol_2_Practioners_Guide_Mar_2011.pdf); National Audit Office, “Making Changes in Operational PFI Projects” (17 January 2008), pages 20-21. (Available at http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx.)



Case Study 9: Managing the Implementation of Variations August 2013

authority to request and authorise variations, and that staff who do not themselves have the authority to request variations understand this. Potential variations should be assessed thoroughly by suitably experienced personnel, who should consult with relevant stakeholders.

• Maintain good record keeping practices: Government should keep good records of the variations and payments made, and ensure that agreed variations are clearly documented with the private party.

• Maintain a spirit of partnership: Both government and the private party should comply with their obligations under the PPP contract, but in doing so they can achieve better outcomes by maintaining a spirit of partnership:

We found examples of a genuine partnership ethos displayed by private sector contractors in relation to change requests. A simple example is the practice of not charging for every change request. Some [private parties] were willing to waive fees for small changes where they felt the request was minimal and a normal part of the day-to-day operation of the building.3


1. What skills are required within government to manage variations? What consequences does this have for resourcing of contract management within government?

2. What skills are required within the private party to manage variations? What consequences does this have for resourcing of contract management within the private sector?

3 National Audit Office, “Making Changes in Operational PFI Projects” (17 January 2008), page 24. (Available at http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx.)


Case Study 10: Force Majeure in PPPs1

Background

Force majeure provisions deal with circumstances which are beyond the control of the contracting parties and make it impossible for the affected party to fulfil its contractual obligations. Their aim is to provide relief to the affected party. In a PPP, the occurrence of a force majeure event will raise two important issues: the extent to which the project company is compensated during force majeure events and whether the PPP contract should be terminated if a force majeure event persists for a significant period of time.

Common PPP Practice

Even in jurisdictions where force majeure or force majeure-style concepts exist in general or case law, specific force majeure provisions are included in PPP contracts to avoid uncertainties or delays when relying on the general legal framework. In these cases, there are generally two main approaches taken:

• force majeure is given a broad definition, such as in France, where case law defines it as any event that is unforeseeable, beyond the control of the parties and makes it impossible for either party to perform its obligations under the contract; and

• force majeure is defined through an itemised list of events. The typical provisions include natural as well as political events such as war, acts of terrorism, nuclear explosions, natural disasters (e.g. earthquakes, landslides, floods), strikes and protests.

In practice, the two approaches often do not differ significantly as itemised lists are often not exhaustive (with some exceptions such as in Belgium and Australia) and contain ‘catch-all’ provisions.

Different approaches are taken in respect of the payments due during the period when force majeure is frustrating performance under the PPP contract. For example, in Bulgaria government is not obliged to continue to pay the project company during this period, while in the Czech Republic the project company has to be paid as if it were performing. In the

1 Sources: European PPP Expertise Centre, “Termination and Force Majeure Provision in PPP Contracts: Review of current European practice and guidance” (March 2013); Foster Infrastructure.



Case Study 10: Force Majeure in PPPs August 2013

Netherlands and Australia, an ‘adjusted’ amount is paid to the Private Party, covering its debt service costs but not the operation and maintenance cost savings that may arise.

There is typically a defined period of time before a prolonged force majeure event can lead to termination of the PPP contract. This period is typically defined as lasting between six and 12 months.

Guidance

When addressing force majeure provisions, government should take into account the following points:

• Reducing uncertainties – Investors and lenders will be concerned with the extent of coverage they obtain from force majeure provisions. They will seek protection for all unforeseeable events that are beyond the control of the project company. They will have a preference for defining/spelling out force majeure events (e.g. itemised list) and including catch-all provisions. Clear and detailed provisions will therefore help to attract investors and lenders to PPP projects;

• Reviewing the legal framework – Government should verify the extent to which the applicable legal framework (e.g. the relevant PPP laws if any) caters for force majeure and assess whether the provisions are sufficiently clear and workable. Any gap should be addressed insofar as possible in the PPP contract;

• Force majeure relief and mitigation – Force majeure relief should only be granted to the project company if the relevant event makes it impossible to comply with all or a material part of the contractual obligations. The project company should be responsible for mitigating the effect of the force majeure event wherever possible;

• Payments during force majeure events – As a result of a force majeure event (and while it lasts), the project company may not receive revenues and yet still incur fixed costs (e.g. debt service), which may affect its financial standing. Government should assess the extent to which it is prepared to pay compensation to the project company to prevent a default under its project or financing agreements;

• Insurance – The relationship between force majeure relief and insurance coverage should be considered with care; and

• Prolonged force majeure – The PPP contract should provide for termination rights following a lasting force majeure. Both contracting parties should be given the opportunity to terminate the contract after a certain period if it is unlikely that the project circumstances will return to normal.


1. What is the relationship between insurance and force majeure, and why should it be considered with care?

2. In some countries, the definition of force majeure is limited to events on an itemised list, rather than any event beyond the control of the parties that makes it impossible for either party to perform its obligations. How would this narrower definition affect pricing by bidders for the PPP? How can this position be justified by government?


Case Study 11: Financiers’ Step-in and Cure Rights1

Step-in

In the case of termination of the PPP contract, the lenders will have security over the project assets. However, the project assets are likely not to be worth the value of the outstanding debt. Therefore, the lenders often require some form of right to take over the project where the project company has failed in its obligations and the government intends to terminate the PPP contract. Step‑in provisions give the lenders the right to step in to the project company's rights and obligations under the project documents. The lenders will want to ensure that the government is in a position to continue with the project after step‑in. However, the lenders themselves will not want to be involved in the actual step‑in. They will generally mandate a "substitute entity" to step in for them.

The step‑in regime is usually included in direct agreements between the lenders, the government and the project participants. It can involve three different levels of lender intervention in the project: cure rights, step‑in rights and novation or substitution. As noted above, step‑in rights like security rights in project financing are generally considered to play a defensive, rather than an offensive, role.

Cure rights

Cure rights allow the lenders to cure a breach of an obligation by the project company under one of the project documents, including in particular the PPP contract. Each of the project participants will be required to inform the lenders of a relevant breach and allow the lenders to cure that breach. Where the lenders do not exercise their right to cure within an established cure period, the relevant project participant may proceed under its contractual remedies. Lenders will generally be hesitant to involve themselves in the cure of a project company breach unless the cure is limited to the payment of amounts due. The lenders may want the opportunity to cure before having to decide whether to step in, for example the default may simply require the payment of monies, but otherwise the project company is performing well.

1 Sources: PPP in Infrastructure Resource Centre - http://ppp.worldbank.org/public-private-partnership/ , Foster Infrastructure.



Case Study 11: Financiers’ Step-In and Cure Rights August 2013

Step‑in rights

Step‑in rights arise where the project company breaches one of the project documents and the relevant project participant chooses to terminate. The lenders are given a chance to step in with the project company, cure the relevant breach and put the project back on track. The other project participants will be required to continue their contractual relationships with the substitute entity in lieu of the project company, although the project company will not be released from its obligations under the project documents. The lenders will also be permitted to step out where they choose to do so, without incurring any continuing liabilities. The project company would remain liable both during step‑in and after step‑out. Step‑in rights will also be available for each of the project documents.

Novation

A third level of step‑in involves novation of all of the project company's rights and obligations to a substitute entity, in which case the substitute entity, for the purposes of the project, takes over the project company's role and the project company is removed from the project. The concession agreement, each of the other project documents and any licences or permits will need to provide for novation or be renegotiated before the lenders can successfully novate the project to the substitute entity. The various project participants may require the right to approve the substitute entity, although they should not be permitted to delay or withhold such approval unreasonably.


1. If the project company is in default under the PPP contract and the lenders appoint a “substitute entity” to step in on their behalf and cure the default, what risks does that substitute entity take on? What legal documentation might be required to protect the substitute entity from those risks?


Case Study 12: South Korea’s Minimum Revenue Guarantee Mechanism1 From January 1999 to October 2009, the government of South Korea offered guarantees to PPP toll road contractors, under which government would, in various circumstances, make payments to the contractors if toll revenue fell below certain levels.

The guarantees provided varied with respect to such matters as:

• The period for which the guarantee was provided

• The proportion of the projected revenue that was guaranteed

• The conditions attached to the guarantee

• The application of the mechanism to unsolicited projects (that is, projects initiated by a private sector company putting an unsolicited proposal to government) as compared to solicited projects (that is, projects initiated by government and put out to tender).

Attachment A summarises these features of the minimum revenue guarantee mechanism, and how they changed over time.


1. How does government’s risk profile under the various minimum revenue guarantee mechanisms differ from its risk profile under a toll road PPP contract without such a guarantee?

2. How does the operator’s risk profile under the various minimum revenue guarantee mechanisms differ from its risk profile under a toll road PPP contract without such a guarantee?

3. How does the financiers’ risk profile under the various minimum revenue guarantee mechanisms differ from their risk profile under a toll road PPP contract without such a guarantee?

4. What might be the reasons for the changes in the minimum revenue guarantee mechanism over time?

1 Case Study developed by Foster Infrastructure. Source information: Hyeon Park, “Government Support for PPP Projects in Korea”, Korea Development Institute (November 2012).



Case Study 12: South Korea’s Minimum Revenue Guarantee Mechanism August 2013

Attachment A: Minimum Guarantee Periods, Guarantee Levels and Conditions over Time

January 1999

May 2003 January 2006

October 2009 Solicited Unsolicited Solicited Unsolicited

Period Entire operating period 15 Years 10 Years

Abolished Abolished

Guarantee Level (Max)

90% of projected revenue

80% of projected revenue

First 5 Years 90% Next 5 Years 80% Last 5 Years 70%

First 5 Years 75% Next 5 Years 65%

Conditions None

If Actual Revenue is less than 50%

of Forecast Revenue, no payment is

made.

If Actual Revenue is less than 50%

of Forecast Revenue, no payment is

made.


Case Study 13: Chile’s “Least Present Value of Revenues” Toll Road Model1

Road PPPs in Chile

In the early 1990s Chile introduced private capital into the transport infrastructure sector through a form of PPP known in Chile as BOT concessions. The concessionaire was to recover its investment from tolls paid by users, in some cases supplemented with a subsidy from the government.

Two features distinguish road PPPs in Chile from those in many other countries. First, most of the projects are substantial upgrades to existing roads, rather than construction of new roads. Second, most toll roads in Chile do not have free parallel roads competing with them, since Chile is roughly 5,000 kilometres long but only 100 kilometres wide, and has a low population density.

The “Least Present Value of the Revenues” Mechanism

The Least Present Value of the Revenues (LPVR) mechanism was developed in response to a proposal from an official in the Chilean Ministry of Public Works. The contract is awarded to the bidder who offers the least present value of the accumulated revenues (that is, the lowest amount of toll revenue that will be collected by the contractor), discounted according to a discount rate pre-fixed in the contract. The contract ends when that LPVR had been reached (that is, when the pre-agreed amount of toll revenue has been collected). Consequently, if real traffic is ultimately higher than expected, the contract will finish earlier, whereas if it is lower the contract will finish later. (See the diagram on the following page.)

Under this mechanism, the revenues are discounted according to a discount rate that reflects the weighted average cost of capital of the project. The LPVR requested by the bidders becomes the key financial variable in selecting the bidder that will win the tender. Beyond the risk mitigation effect, LPVR provides the government with a price to buy out the contract, a feature thought to discourage the contractor from renegotiation since the government can opt to buy out the contract at the established price.

1 Case Study developed by Foster Infrastructure. Source information: Jose´ M. Vassallo, “Traffic Risk Mitigation in Highway Concession Projects: The Experience of Chile”, Journal of Transport Economics and Policy, Volume 40, Part 3, September 2006, pp. 359–381.



Case Study 13: Chile’s “Least Present Value of Revenues” Toll Road Model August 2013

LPVR was not only designed as a mechanism to mitigate traffic risk, but also as a procurement mechanism regulating the amount of toll revenue raised over the life of the PPP contract. Figure 1: Concession Termination for different traffic scenarios under the LPVR mechanism


1. How does government’s risk profile under the LPVR mechanism differ from its risk profile under a fixed term toll road PPP contract?

2. How does the position of road users under the LPVR mechanism differ from their position under a fixed term toll road PPP contract?

3. How does the operator’s risk profile under the LPVR mechanism differ from its risk profile under a fixed term toll road PPP contract?

4. How does the financiers’ risk profile under the LPVR mechanism differ from their risk profile under a fixed term toll road PPP contract?


Case Study 14: Road PPP Payment Mechanisms in the United Kingdom1 The United Kingdom’s Highways Agency has developed several payment mechanisms to meet Government policy objectives for the trunk road network and Private Finance Initiative (PFI) requirements. These payment mechanisms incorporate payment based on:

• usage/demand (the “Shadow Toll” mechanism); • availability of service (the “Availability Payment” mechanism); and • performance (the “Active Management Payment” mechanism).

Shadow toll payment mechanism

Under this model, government pays the PPP contractor an amount based on the number and type of vehicles using the road, with adjustments made for lane closure and safety performance. These are known as shadow tolls, as opposed to real tolls, as it is government rather than the road user who pays for the usage.

Shadow toll payments are made per vehicle using a kilometre of the project road, in accordance with the tolling structure, and increase over time in accordance with an indexation formula. Different payments are due for traffic within different traffic bands and dependent on the length of the vehicle.

A deduction is made from the toll payment when lanes are closed. The size of the deduction is dependent upon the number of lanes closed, the duration of the closure, and the expected traffic at the time of the closure. Lane closure charges are only made for closures within the control of the PPP contractor.

Safety performance payments are also made to provide incentives for improving safety on the road. The PPP contractor has the right to propose safety improvement schemes. If these are approved by government, the contractor undertakes any necessary construction and constructs and pays for the scheme. The contractor is recompensed by receiving 25% of the economic cost of each personal injury accident avoided in the following five year period.

1 Case Study developed by Foster Infrastructure. Source information: United Kingdom Highways Agency, “Design, Build, Finance and Operate Contract Payment Mechanisms”, available at: www.highways.gov.uk.



Case Study 14: Road PPP Payment Mechanisms in the United Kingdom August 2013

Availability payment mechanism

Under this mechanism payments are based on:

• lane availability • HGV/Bus shadow tolls • safety payment mechanism • bus journey time reliability

Payments take account of the number of available carriageway lanes and the time of the day. Payments for keeping the road available during peak hours are higher than the payments for off-peak hours.

There are also separate payments for footway and cycleway availability.

“Shadow” tolls for heavy goods vehicles and public transport give priority to effectively managing HGVs and public transport while providing no incentive to increase car commuting.

Active management payment mechanism

The active management payment mechanism comprises two elements:

• Congestion management • Safety performance adjustment

Congestion management encourages the PPP contractor to actively manage the project road to reduce congestion and increase the reliability of road user journey times. This is achieved by reducing payments whenever congestion is experienced on the project road, encouraging the PPP contractor to effectively manage the causes of congestion. However the mechanism does take into account that the PPP contractor will have limited control over recurrent congestion caused by sheer volume of traffic demand approaching the nominal capacity of the road, and makes allowance for this.

Payments are made as follows:

• Full payment will be made if speeds are above the target speed. • If speeds fall below the target speed, the payment will be reduced. • However full payment will be made if traffic exceeds the deemed capacity of the road

section, even if the speed falls below the target speed. • There will be graduation of the level of deduction for both speeds between minimum

and target speed and between 80 and 100% of capacity. • A bonus will be paid if flow exceeds 110% and speeds exceed the minimum speed. • The maximum bonus that can be earned is 20% of the payment for the hour and

road section, if flow exceeds 120% of capacity and speed exceeds the target speed.

A safety performance adjustment is then made to the PPP contractor’s payment based on the number of personal injury accidents that occur on the project road when compared with a benchmark determined from the accident records of a comparator set of roads.


Case Study 14: Road PPP Payment Mechanisms in the United Kingdom August 2013


1. To what extent does government face demand risk under each of the UK road PPP payment mechanisms?

2. To what extent does the private party face demand risk under each of the UK road PPP payment mechanisms?

3. How might these mechanisms affect the willingness of the private party to upgrade or modify the road over the life of the PPP contract?


Case Study 1: Potential PPP Projects in Indonesia · PDF fileCase Study 1: Potential PPP...

Documents

Transcript of Case Study 1: Potential PPP Projects in Indonesia · PDF fileCase Study 1: Potential PPP...