Cooperation between public and private players in the Swedish public real estate sector: motives and contract types

ERES Conference 2009, Session 5-K PPP

Linda Andersson, +46 8 520 593 20, +46 70 318 93 20linda.m.andersson@se.ey.com

2

Agenda

2 The concept and definition of PPP

3 PPP models and examples

1 Background

4 Q & A:s

3

INFRASTRUCTURE CATEGORIES

EconomicsSocial

Transport Energy and Utilities Communications

Roads

Bridges

Tunnels

Airports

Rail Systems

Seaports and Shipping

Cargo and Logistics Centers

Urban Mass Transit

Gas Storage and Distribution

Electricity Distribution and Generation

Water Supply and Wastewater Treatment

Renewable Energy

Cable Networks

Cell Towers

WiFi

Satellite, TV, Radio and other systems

Universities

Schools

Hospitals

Prisons

Sports Stadiums and Facilities

Convention Centers

Public Housing

Community Facilities

Infrastructure is the definition of our common owned public assets and utilities

4

Swedish Public Sector is a large producer of welfare services

► Public sector consumption of core services (education, healthcare etc) is about 700 billion Skr (70 billion Euro)

► Public real estate sector owns a lot of property assets; 90 million sqm that cost about 90 billion Skr per year to manage and own. Big impacts…

► How optimize property owning, that is to offer right amount of premises, to the right level of quality and to the right price? How do we transfer capital to the core business so that the quality within education and healthcare increases while the costs for FM and property management decreases? More for less?

► How does facility services as logistics, a sufficient indoor environment and beautiful premises support the core business and still be a driver considering the questions above?

► Cooperation with private companies in order o stimulate the development towards efficient solutions!

5

Agenda

2 The concept and definition of PPP

3 PPP models and examples

1 Background

4 Q & A:s

6

Public Private Partnership (PPP) is about to reach a break through

The concept of PPP

The concept of PPP

Main issueMain issue

The development

of PPP

The development

of PPP

► Collaboration in building and finance of property and/or functions within the property.► Whole chain; initiation, planning, design, building, finance, operations and maintenance of

building and or/the core business, delivery of Facilities Management

► How do we integrate democratic tax-financed works and goals with the business of private companies (of course with profit interests)?

► In Sweden: ”Third sector” is the driver, experiences of solutions within infrastructure, culture and recreations and sport facilities.► International: UK and several other countries in Europe are ahead. Thatcher initiated the process.

► That party that is competent to bear a risk, do that in the best possible way at the same time as incentives are created to improve (measured by quality and costs) the processes. Win-win situations!► The idea is that the private company bears the financial risk and the operational risks related to operations,

maintenance and construction. The public organization bears the risk for planning and for permissions needed being granted within reasonable time-horizons.

► The theoretical framework is general principal/agent theory and contract theory.

Risk allocation

Risk allocation

A comparison between a conventional project…

Public Sector

State

County Councils and Regions

Municipalities

Contractor Contractor

Contract (construction)

Contract (operations)

Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008))

…and a PPP-project.

Public Sector

State

County Councils and Regions

Municipalities

Contractor Contractor

Contract (construction) Contract (operations)

Private sector

Construction company, FM-company,, Private

Equity-bolag

Financier

Banks

Investment banksSPV

Steg 2: Conduct-ing contract

Step 1: Owning

Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008))

9

Legal definition EU and its condition in Sweden 1 (2)

► Institutional PPP► Companies etc.

► Contractual PPP► Concessions► PFI (Private Finance Initiative)

Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008)) and Arnek M et al 2007

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► The following sections of the Swedish law has to be thoroughly analyzed when conducting a PPP-project:

1. Kommunallagen (The Swedish Local Government Act)

2. Offentlig upphandling (Law on Public Procurement)

3. Konkurrenslagstiftningen (Law on Competition)

4. Immaterialrätten (Law on Intellectual Property Rights)

5. EG:s statsstödsregler (EU legislation on state support)► It is common to procure a PPP-project with negotiated procurement procedure together with

concession (according to LOU) ► ”Competitive dialogue ” may be used in certain occasions

Legal definition EU and its condition in Sweden 2 (2)

A PPP-model is characterized by four features…

Lo

ng

co

ntr

acts

Private financingThe role of the economic operators

Risk allocation

Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008))

A proposed definition of PPP

Källa: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008))

► Public Private Partnership, PPP, is a model for combining the resources and skills of the public and private sectors with an emphasis on value for money and delivering quality public services. The model embraces identification and valuation of all project related risks and stipulates a transfer of operational and financial life cycle risks from the public party to the private party.

► PPP suggests solutions to questions of investments in infrastructure, ownership and procurement of public services and infrastructure and conducting construction, operational and facilities management contracts.

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Risk- and responsibility differs between a PPP-project and a more conventional project

Financing

Planning

Permissions

Opinion

Organisation

Building

Oper./mainten.

Financing

Planning

Permissions

Opinion

Organisation

Building

Oper./maint

Risk Public Party Risk SPVRisk Public Party Risk Contractor

Conventional project PPP-Project

Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008))

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Cash-flow differs between a PPP-project and a more conventional project

Comparison of cash-flows with different methods of procurements

Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008))

Cashflow in a traditional project

Cashflow in a PPP-project (incl cost of financing)

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PPP is a complement that evolves and educates the construction sector

► Higher efficiency and quality in public services- save tax resources and get a suitable product. ► 5-17% average net present cost savings and 5-10% savings in construction costs► Up to 45% faster construction► Better, faster and cheaper implementation, i.e. more value for money

► Low life cycle cost (LCC)► Effective and reliable project delivery measured by time and money. Private financing

more or less guarantee incentives for a higher level of quality.► Low and known operations and maintenance costs. ► Optimal risk and- responsibility allocation

16

Agenda

2 The concept of PPP

3 PPP models and examples

1 Background

4 Q & A:s

17

► Surplus value public sector (from Great Britain):

► Long-time contract gives alternative ways of conducting and an optimization of life cycle costs.

► The main part of the savings is related to the risk transfer to the private company (average 17 %)

► BUT other kinds of incentive contracts also creates lower net costs.

► An early commitment by private companies increases creativity and innovation.

► Most common in health care, education and transport infrastructure.

Experiences from UK

18

PresentPresent

► Transport infrastructure► Arlandabanan

► Social Infrastructure:► 49 municipalities and 6 regions claim

having experience from PPP-projects or similar models.

► Examples► Sundsvall - arena► Västerås – concert hall► Nacka - ”Dieselverkstaden”► Umeå – Home for elderly

► Most common with project within the area for culture and recreation

► The definition of PPP is somewhat blurred

► Transport infrastructure► Arlandabanan

► Social Infrastructure:► 49 municipalities and 6 regions claim

having experience from PPP-projects or similar models.

► Examples► Sundsvall - arena► Västerås – concert hall► Nacka - ”Dieselverkstaden”► Umeå – Home for elderly

► Most common with project within the area for culture and recreation

► The definition of PPP is somewhat blurred

► What are the drivers?

► How to formulate the contracts? Leasing contracts?

► How to procure a PPP-project?

► What “praxis” shoul we follow? The Anglo-Saxon or the Norwegian/Italian?

► What are the drivers?

► How to formulate the contracts? Leasing contracts?

► How to procure a PPP-project?

► What “praxis” shoul we follow? The Anglo-Saxon or the Norwegian/Italian?

Experiences from Sweden

ChallengesChallenges

19

Agenda

2 The concept of PPP

3 PPP models and examples

1 Background

4 Q & A:s

20

► How does PPP- and BOT-solutions creates ”win-win” situations?► How should the contracts be formulated?► How should the risks be allocated?► What about the purchaser competence?► Is there a market of private companies that can manage these projects? How

many?► Pricing models? Payment mechanisms?

► What does the law say? National regulations? EU?► What about “competitive dialogue”? ► EU´s green book

Strategic questions

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