Regional ConveRgenCe in PPP

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Mena PPP PRojeCts suCCess FRaMewoRk –

Regional PPP DeveloPMent stRategy

3rd Annual ME PPP – Qatar, February 2012

Loay Ghazaleh – Advisor - B. Sc. Civil Eng. , MBA

Presentation Index

MENA PPP Scio - Economic Outlook

MENA PPP Initiatives / Early Successes

PPP Global Adaptation / Learning

PPP Projets Success Framework

PPP Regional Deveopment Strategy

PPP Options & Projets Structure

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MENA PPP Socioeconomic Outlook

Cash Flow -Lifecycle Costs – needed for

repayments to prevent delays

due to cash shortages

Budget /

Affordability -Project

commitments framework to be reflected in the

budget

PPP Planning – must comply

to legislation, poli

cies and guidelines

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MENA Infrastructure Supply Side

• Relatively high infrastructure investment in recent years has succeeded in ensuring basic infrastructure access to the vast majority of MENA citizens, yet significant infrastructure investments are needs coupled with financial pressures on Government debts and budget deficits

• The connection rate to the electricity grid by households is around 90 percent; access to acceptable water and sanitation services is above 70 percent, however, connectivity for the most part utilizes old / inefficient systems and industrial connectivity is still way below needed capacity.

• The penetration of mobile telephony has reached the level witnessed in industrialized countries.

• Paved roads represent between 60 to 70 percent of the total road network.

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MENA Infrastructure Demand Forecast• There are some considerable challenges that MENA countries need to overcome in

order to move the infrastructure agenda forward .

• Good demand drivers exist like attractive investment alternatives, pension fund and insurance companies diversification into new asset class and poor historical Public output performance

• The installed generation capacity of the electricity sector is estimated to be 20 percent below the aggregate demand for electricity across countries in MENA.

• The prevalence of highly subsidized electricity & water tariffs induces wasteful use of electricity& water therefore increasing pressures for expansion of electricity generation capacity.

• Energy & Water subsidies cost the region the equivalent of 10 percent of its GDP in 2006, whereas reducing these subsidies could raise the region GDP by 3 - 4 percent.

• Urban congestion is growing and therefore increasing transaction costs for businesses or commuting times for workers (In Cairo, the average speed of vehicles is as low as 9 km/h )

• It is estimated that the total economic and social cost of congestion is about 5 percent of GDP. In Teheran, it is estimated that commuters spent around 4.5 million hours/day in traffic.

• The quality and reliability of Infrastructure services are a real challenge which constrains competitiveness, regional economic activity and growth prospects

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MENA Infrastructure Investment Forecast• Private investments in infrastructure in MENA have grown significantly since

1994, but at a lower rate than in other regions.

• MENA countries need to create 40 million new jobs in the next ten years to meet the fast growing labor force.

• This will require sustaining the economic growth at around 7 percent per year in the next ten years which cannot be achieved without significant investments in infrastructure.

• The annual volume of infrastructure projects financed in MENA is estimated to have grown from US$25 billion in 2007 to US$27 billion in 2008,before sharply declining by June 2009 to US$6 billion due the global financial crisis (Investments in PPP in the Middle East and North Africa almost tripled between 2000 and 2007)

• Middle Income Countries in MENA will need to invest the equivalent of 9.2 percentof their yearly GDP, in order to sustain their economic growth prospects. This represents a total investment effort between US$75 to 100 billion a year, of which 33 percent is earmarked for the maintenance of the existing stock of infrastructure.

• The Arab world invests about $60 billion a year in infrastructure, but to sustain current growth rates, it needs about $100 billion annually.

• To meet this $40 billion gap, a smart mix of public sector engagement in coordination with financing and expertise from the private sector is essential.

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Opportunities in GCC Power, Utilities and Infrastructure

• Long-standing problems like high unemployment, limited access to finance and weak regulatory frameworks are the forefronts in MENA Region.

• There are more live projects in the MENA region than anywhere else

• Qatar are planning projects worth $20 billion over 5 years• Saudi Arabia is planning to spend $400 billion in the same period• Oman is budgeting $2.43 billion for capital investments in 2010• Abu Dhabi is spending $68 billion in public transport schemes alone• Oman projecting a total government spending of $10 billion for the

construction industry in year 2012, an increase of 23 per cent over 2011.7

Opportunities in GCC Transport Sector

• The GCC Transport and Railways Conference held in Qatar, October, 2011 (Sponsored by Qatar Railways Company (RAIL) in association with the General Secretariat of the GCC, the Federation of GCC Chambers, the Qatar Chamber of Commerce and Industry, and others)

• Investments of more than US$ 200 Billion already allocated to the development of transport systems, with the rail networks and metro projects reaching US$ 100 Billion.

• The national GCC railway projects, a 2200 km network that will be carry passengers and goods at speeds of 200 km/h and 80-120 km/h, and will link the six Gulf countries at a total cost of more than US$ 15.4 billion. Commissioning of the entire network is expected by 2018 A.D.

• It’s forecasted that GCC GDP to reach around US$ 2 trillion and a total population of around 53 million in the year 2020 A.D.

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Opportunities in MENA Social Housing

• Affordable housing for the MENA region has an estimated shortfall of 3.5 million units -JLL Consultancy – 2012.

• Saudi Arabia has the largest shortfall in the Gulf of 500,000 plus homes followed by 40,000 homes in Bahrain, 20,000 in the UAE and 15,000 in Oman .

• KSA Construction Housing Pipeline Projects valued at US$ 29 billion for 2012.• Sharjah has a shortfall of 5,000 affordable homes. Sharjah ruler unveiled initiate

in 2012 for affordable housing.• Bahrain government signed early 2012 a record BD208m ($550m) with a local

developer to build more than 4,000 affordable homes.

• Saudi Arabia needs 1.65 million new homes by 2015 (275,000 units a year). Total commitment is $130bn on social projects with $67bn allocated for 500,000 new homes and $400 billion for infrastructure projects.

• Bahrain forecasts the need for about 350,000 new residential units to be added to existing stock by 2030 with $1.1bn to be spent every year up to 2020, and then $242m annually up to 2030, (EDB report).

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GCC PPP Activity Update (KFH 2010 report)

• With huge government surpluses, securing finance is not the overriding factor behind the PPP push in the GCC countries, rather, it is the goal to deliver projects more efficiently, grant the private sector a greater economic role and assist with the diversification of the local economy.

• Since 2010; over 50 PPP contracts were signed in the GCC region. These projects require investments of more than USD 60 billion.

• As of September 2010, the UAE had signed off an estimated USD20 billion worth of PPPs, with some USD7 billion accounted for by Abu Dhabi's utility sector.

• Kuwait government rolled out in mid-2010 through Partnerships Technical Bureau (PTB) – a PPP unit - PPP program comprising 32 projects and requiring investment of USD28 billion in various sectors -Transportation, real estate, healthcare, utility projects and recycling factories under B.O.T system with the largest being the estimated USD10 billion Kuwait national rail scheme.

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PPP Pipeline Projects – GCCMar-10 KSA Airport Cities PPPJul-10 KSA Airport Cities PPPAug-10 KSA High Speed Railway PPPSep-10 KSA - GCC Railway Network PPPApr-10 KSA - Jeddah Airport PPPAug-11 KSA - Mecca Mass Rail Transit PPPApr-10 KSA - Medina Airport PPPJul-10 KSA - Medina Medina International Airport PPP

Aug-10 Kuwait Metro Rail PPPSep-11 Kuwait Recycling factories PPP / B.O.T

Sep-10 Oman Railway Network PPPJul-11 Qatar - Doha Metro PPP

Oct-10 UAE Railway PPPDec-10 UAE Union Railway PPPAug-10 UAE - Abu Dhabi Mafraq-Ghweifat Highway PPPJul-11 UAE - Abu Dhabi Airport PPPOct-10 UAE - Dubai Water PPP 11

PPP Pipeline Projects – Rest of MENAOct-10 Egypt Rod el-Farag Highway PPPSep-11 Egypt Egyptian Refining Company

Sep-11 Egypt Suez 650 MW Steam Thermal Plant Sep-11 Egypt Taxi Replacement Scheme Jul-10 Egypt - Alexandria University Hospital PPPJul-11 Egypt - Alexandria Hospital PPPFeb-10 Egypt - Cairo Wastewater treatment plant PPP

Jul-10 Egypt - Cairo-Alexandria Cairo-Alexandria Freeway PPP

Sep-10 Jordan Rail Transit / Way PPPJul-10 Jordan - Amman Light Rail PPPJul-10 Jordan - Amman Ring Road Highway PPPSep-11 Morocco Railway Line Sep-11 Morocco - Casablanca Drinking Water Supply -Rabat

Sep-11 TunisiaHasdrubal Oil and Gas Field Development

Sep-11 Tunisia Road Project VI 12

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MENA PPP Initiatives / Successes

MENA PPP Environment

• There are some considerable challenges for MENA region in moving the infrastructure agenda forward.

• PPP investments in MENA region Countries have essentially been contractual rather than being based on a larger legislative framework.

• Some ministries in some countries have developed expertise in structuring a very specific PPP category like telecommunications, roads or sanitary / water.

• The procurement process, dispute resolution and regulation / tariff setting arrangements have generally been subject to a contractual arrangement rather than independent laws, regulations and regulators.

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GCC PPP Activity in the Last 10 Years (Kuwait Finance House – KFH- 2010 report)

• GCC PPP contracts during the last ten years amounted to USD 628 billion with over 100 PPP-type agreements, of which half can be classified as management contracts.

• In terms of PPP deals concluded, Saudi Arabia has the highest number at 45 with power and desalination's share of the PPP market was near 90 percent of the total spent.

• Management contracts (Often seen as the first step towards privatizations) have been used extensively in used in regional seaport and airports projects.

• The UAE and Saudi Arabia represent the largest markets for PPP especially IWPP (energy and water projects).

• The first IPP in GCC (Al-Manah independent power project ) was signed in 1994 in Oman.

• In 1998 Abu Dhabi successfully launched the restructuring of the Abu Dhabi utility sector and formed Abu Dhabi Water Electricity Authority (ADWEA) on BOO basis.

• Oman re-launched its own utility privatization program in 1999 and was followed in 2000 by Qatar and in 2003 by both Bahrain and Saudi Arabia.

• In 2002, the region's first sewage treatment plant (STP) PPP was awarded at Sulaibiya in Kuwait (USD 400 million)

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Regional Infrastructure Regulatory Forum -December 2009

• Jordan’s Ministry of Planning and International Cooperation (MOPIC), and in collaboration with the Public-Private Partnerships Infrastructure Facility (PPIAF) and the International Finance Corporation (IFC) launched in Amman on December 7, 2009, the first Regional Conference on Infrastructure Reform and Regulation in the MENA region.

• The Conference adopted a final resolution to launch a process towards the establishment of the “Middle East and North Africa Infrastructure Regulatory Forum” of which the objectives will be to promote the cooperation among infrastructure regulators within and across countries in MENA.

• A working group was formed to work jointly with World Bank in bringing the process forward. The Membership of the Forum will be open to all relevant organizations responsible for regulation and that are based in the MENA states.

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Middle East and North Africa Infrastructure Regulatory Forum

• Cooperation among stakeholders , regulators dialogue and knowledge-sharing can serve to;

- Accelerate reform progress, - Promote best practice and - Enhance the harmonization of infrastructure networks.- promote the adoption of common rules, norms and standards,

• A multi-sector regional Forum of infrastructure Regulation can serve as a valuable platform for

- Experience and information sharing across borders and sectors, - Problem-solving, and the dissemination of best practices. - Knowledge sharing center providing capacity building services

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Arab Financing Facility for Infrastructure (AFFI)

• The World Bank Group (IFC), in cooperation with the Islamic Development Bank, set up a $1 billion facility (the public side of investments will be financed via an initial $200 million from the World Bank) to close the infrastructure gap in the Middle East and North Africa.

• This regional investment vehicle supports both conventional and Shariah-compliant investment in infrastructure which will attract untapped, alternative sources of financing.”

• The Facility focus is cross-border PPP infrastructure projects like electricity networks and rail, road and maritime networks and projects with regional impact like the plans for large-scale concentrated solar power production in Morocco to increase the regional integration and competitiveness.

• IFC supports cross-border projects that commercial banks would consider too risky without IFC’s involvement.

• World Bank lending to the MENA region for infrastructure, including electricity, transport and water, has exceeded $1 billion a year.

World Bank Group & Islamic Development Bank Infrastructure Facility

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ADB (African Development Bank) Investment Update

North African Countries : Algeria, Egypt, Libya, Mauritania, Morocco, and Tunisia.

• The Bank Group started operations in the North Africa sub region in 1968 – one year after the other sub regions.

• Loan and grant approvals for the sub region totaled UA 1.47 billion in 2010, which is a rise of 40.0 % above the 2009 level of UA 1.05 billion. ( ADB uses UA units of accounts which is SDR and is nearly equivalent to 1.5 USD)

• North Africa’s approvals represented 40 % of total Bank Group approvals, which makes it the main beneficiary sub region during the year.

The key projects approved for North Africa were:

• Suez 650 MW Steam Cycle Thermal Power Plant in Egypt;• Increasing capacity on Tangiers–Marrakech Railway Line in Morocco;• Road Project VI in Tunisia;• Drinking Water Supply in the Rabat Casablanca in Morocco;• Egyptian Refining Company Project in Egypt;• National Program for Taxi Replacement Scheme in Egypt;• Oil and Gas Field Development Project in Tunisia;• Public Administration Reform Support Program, Phase IV in Morocco.

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IFC-World Bank

IFC is currently active in both projects financing and advisory services in the MENA region ( GCC countries are excluded from the financing)

IFC mission is to foster sustainable economic growth in developing countries by financing private sector investment, mobilizing capital in the international financial markets, and providing advisory services to businesses and governments.

IFC has expanded its advisory services to improve the business enabling environment and encourage public-private partnerships for the development of infrastructure.

Reducing infrastructure bottlenecks—especially in transportation& power sector is a strategic priority for IFC to support the region’s sustained long term growth.

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IFC-World Bank Advisory - 2010

EGYPT

• Cairo-Alexandria Freeway• Alexandria University

Hospitals

JORDAN

• Amman Ring-Road• Amman Light Rail

PAKISTAN

• FAISALABAD ELECTRIC SUPPLY COMPANY (FESCO)

SAUDI ARABIA

• Airport cities• Madinah International

Airport

SYRIA

• First Independent Power Project

YEMEN

• First Independent Power Project

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MENA PPP Laws

• PPP draft law to be approved in Lebanon. - October 23, 2010

• Dubai´s PPP law will be approved in the first quarter of 2011- drafted by Roads and Transport Authority (TRA) but it is not specific to transport-January 13, 2011

• PPP law draft ready for private comments in Jordan (Privatization law was passed in Jordan in year 2000)- July 12, 2010

• PPP law for Egypt ( under process) - drafted by Finance Ministry's Public-Private Partnership (PPP) Central Unit - August 23, 2010

• In 2009 Kuwait announced its intention to pursue the private power route.

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MENA PPP Government Initiatives

Country Sectors Law PPP Unit

Jordan water, airport, ring road, , airport Privatization & PPP Yes

Lebanon Energy (IPP 435 MW) Privatization & PPP Yes

Egypt Rail, roads, water, STP, health, education Privatization & PPP Yes

Algeria Rail, roads Project wise Laws ?

Tunisia Solar, roads, oil & gas (production sharing) Project wise Laws Yes

Morocco Solar, railway, water transmission. Project wise Laws Yes

Bahrain Energy (IPP),STP, waste treat. , housing Mortgage - Housing Yes

Qatar Metro Sector Laws MoBaT

Kuwait STP, metro, railway, recycling factories. PPP PTB

UAE Energy (IWPP), water taxi, airport PPP RTA

Oman Energy (IPP) STP, railway, housing Mortgage - Housing ?

Saudi Arabia IWPP, STP, housing, airport Cities, GCC rail Mortgage - Housing ?

Yemen IPP (400 MW) Sector Law ?

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Jordan - Water Sector• Since 1997, the Government continually issued strategy, policies and investment

program:

• 2002 – 2011 Sector Plan and Investment Program

• Action Plan 2002 – 2006.

• Water Utility Policy

• Ground Water, Wastewater and Irrigation Policies

• New Water Strategy for Jordan for Water Demand Management (WDM) andPublic Private Partnership (PPP)

• Institutional responsibilities lies with Ministry of Water and Irrigation (MWI)

• Management Contract selected due to

• Improvement of Services with Reduced Risks to Government

• Results in Significant Improvement, in System Operation

• Improvement of Organizational Reform of Operations

•Good First Step Towards Significant PPP

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Egypt has led MENA Countries with 22 PPP Deals valued at $15.4bn achieving financial closure between 1990 and 2007

Performance-based contracts under concession (affordability or a hybrid of both).

• Output is specified by Line Ministries while input is by the private sector

• Under the PPP contract the Government retains total strategic control

• Adoption and localisation of international successful PPP models (UK based) • Supportive legislative environment , new legal framework for PPP projects

(Draft under finalization for Submission to Cabinet and Parliament)

Standard PPP Contracts

• Standardization of procurementdocumentation and procedures

• Creation of regulatory bodies for post contract implementation

• Establishinga PPP Central Unit at Ministry of Finance as well as Satellite Units.

• PPP Pipeline Projects in Social Infrastructure (Education &HealthSectors), Wastewater Treatment Plants and Transportation Sector

Egypt – Full PPP Program

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PPP Global Adaptation / Learning

Countries PPP Knowledge Sources

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HM Treasury References

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WB PPP Knowledge Reference

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International PPP Center of Excellence Initiative

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Neighboring Countries PPP Actions

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PPPs Evolutionary Phases

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Stage One (Emerging)

•Define policy framework

•Test legal drafts

•Identify project pipeline

•Develop PPP concepts

•Apply lessons from earlier deals to other sectors

•Start to build the local marketplace

Stage Two (Establishment)

•Introduce legislative reform

•Publish policy and practice guidelines

•Establish dedicated PPP unit/s

• Refine PPP delivery models

•Continue to foster local / int’l marketplace

•Expand project pipeline

•Extend to new sectors

•Leverage new sources of funds

Stage Three (Maturity)

•Fully defined, comprehensive “system”

•Legal impediments removed

•PPP models refined and replicated

•Sophisticated risk allocation

•Committed, long-term deal flow

•Long-term political consensus

•Use of full-range funding sources including pension funds and private-equity

•Well-trained civil service applying lessons from PPP experience

START (Infancy)

•Introduce PPP concepts for Public discussions

•Explore PPP models

PPP Market Maturity Curve – UN Publications

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Governments & Institutions objectives in PPPs• Fiscal objectives (defers the cost of capital investments, reduce apparent

borrowing by government )

• Economic objectives: – expected efficiency gains – more reliable completion of projects on time and on budget– expected greater management skills / know how of private sector

• Political objectives– reduce role of the State / the Government– weaken influence of public sector trade unions

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Fiscal Objectives Economic Objectives Political Objectives

IMFLimits on government spending/borrowing

Efficiency Develop global market

EULimits on government borrowing, debt (stability pact)

Efficiency Develop internal market

National governments

Limits on government borrowing

Efficiency, reduced public spending

Reduce role of state, extend role of private sector, weaken unions

Local governments

Reduce local taxesEfficiency, reduced public spending

?

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PPP Program - Integrated Approach – Key Notes

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No perfect design for regulation and institutions

Changing market condition needs to be reflected in PPP framework by modifying and updating regulatory and institutional design

Competition & transparency principles need to be kept

Government’s proactive use of vision, policy & sustainability in market creation is important.

Taxpayers / users engagement in PPP dialogue

Supporting local financing institutions / local development funds is key.

In house skill within the government is of crucial importance to build capacity , to monitor and create PPP pipeline projects

Vision – Strong Political Will Accepted By The

Public / Users

(Empowered Public)

Institutional Framework – Building

Capacity, National Policy

Funding – Priority Funding

Strategies, Building Local Financial Supply

Side – Infrastructure Funds

Legal & Regulatory Framework – Clear &

Friendly Business Environment To PPP’S . Oversight Procedures -

Transparency, Competition, Monitoring

Viable / VFM PPP Projects Pipeline

POLICY AND LEGAL FRAMEWORKS & SUPPORT FUNCTIONS

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Comprehensive PPP Law – Investment , Funding & Technical (PPP Contract Type/s) and Legal Powers to contract out the services

Dispute Resolution Mechanisms – Independent Chamber Open & Transparent Public Procurement / Tender Law Clearly Defined Gov. / PPP Unit Role in – Budgeting Allocation / Oversight , Progress Monitoring & PPP

Projects Approvals and Contract Management – performance-linked payments/penalties.

Sector & Scope of Sector Law – Ex. How to own a pipeline in a public road? Private / Public Land Acquisition Law Easements / Way leaves / Permits , etc PPP Implementation Structures – Technical Public / Private Interface Offices.

Integration of PPP into Public Procurement w/ Multi Stage Financial & Scio-economic Appraisal Procedures (Rationale for use of PPP’s (Business Case) , Suitability & VFM Assessment) , Guidelines for PPP’s Pre-qualification , Tender And Bidder Selection.

Standardized PPP Bidding Documents

Unsolicited Bids Procedures.

Standardized PPP Contracts / Asset (Facility) Type or PPP Model / Structure

Information dissemination – data, networking, training

Guidance – model contracts, tools, case studies

Facilitating functions – political/advisory support, funding

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PPP Performance & Monitoring : World lessons National audit authorities need to be involved in assessing PPP VFM (UK NAO) Periodic reports for progress , learning and benchmarking are needed. Public and private sector may need to acquire new skills to commence a PPP

program. Sufficient ‘deal flow’ is critical to justify the high transaction costs and to

promote effective competition. Procurement programs need to be managed to minimize costs (e.g.

standardized documentation) and maximize competition (e.g. timing of contract notices).

National PPP Task Forces / PPP units can play key role in securing VFM in programs.

Globally , cost and time performance in major infrastructure generally good, performance in IT & Social PPP sectors generally weak.

Criteria's & Performance for PPPsCriteria for PPPs (PPP Project Test) Affordability for the Public Sector & Desired Gains Financially viable for the Private Sector Appropriate Risk and Reward Balance for Public and Private Sector Public Sector - value for money (VFM – True Cost) Verses traditional PSC

PPP Projects Value Drivers

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Less PPP Value Added Driver More

Unitary Fixed PaymentsPERFORMANCE-BASED PAYMENT MECHANISM: Above-par performance should give higher profitability, low performance should trigger penalties.

Performance Payments

Limited Incentive ContractsOUTPUT SPECIFICATIONS: Relates to the private sector's ability to deliver the services at lower costs, or to provide better quality at the same cost to the user.

Output Based Contracts

Wrong Risks AllocationINTELLIGENT RISK ALLOCATION: Risk to be allocated to the party that is best to manage , mitigate or absorb it. Wrong risks allocation reduces PPP value.

Optimal Risk Allocation

Multiple Project PhasesLIFECYCLE OPTIMIZATION: Integrating different components and phases increases the performance over the PPP lifecycle and reduces interface problems.

More project phases in one hand

Simple ContractsFORMAL CONTRACTING: Clear legal recourse in case of disputes increases clarity and reduces risk.

Complex Contracts

Limited CompetitionCOMPETITION / FUNCTIONING MARKET: Competition from adequate number of companies increases value-for-money. PPPs without competition are inefficient.

More competition

Public Financing PRIVATE FINANCING: Private financing results in strong oversight from debt and equity providers which increases project performance.

Private Financing

UNECE Guidelines On Governance In PPPs

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Coherent PPP Policy

PPP pilot project will start the processNo! , You need a policy framework with direction, responsibilities and goals.

Strong Enabling Institutions

PPP’s projects should focus on ring fencing

No! , capacity building within Government & setting up institutions are needed.

Legal FrameworkPPP’s have prescriptive rules and tight control

No! , Overall framework should be flexible.

Cooperative risk sharing

PPP’s provide assets to governments at no risk and no cost

No! , Governments must assume some risks and offer some subsidy.

Transparency in Partner selection

In PPP’s no tender required…No! , Competition allows selecting the best fit (partner /project)

Putting people First

In PPP’s its best to Keep people out:they do not understand the complexity

No! , People need to be put first.

Sustainable Development

In PPP’s one have to choose between profit and social & environment …

No! , Project can make profit and still achieve social and environmental goals.

Key to Successful PPP’s

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Alignment of proposed projects to strategic plans and mandates. Vertical alignment in terms of national and also provincial priorities to enhance “buy in”. Proper groundwork at inception with regards to option analysis: clear VFM Attracting private investors . Appointing good transaction advisors: well rounded experience, no conflict of interest. Clear contract terms and conditions to avoid contract re-negotiation.

PPP PRO’s PPP CON’sCompetitive Process Complex Structures & DocumentsIncreased Transparency Time-Consuming to Arrange / TenderOff Balance Sheet Consideration Higher Borrowing Costs Than Public FinancingPrivate Sector Efficiencies and Innovation No different than EPC ContractsCommercial Risk Sharing Difficult to Resolve When In DefaultAcceleration of Infrastructure Provision Project Choice ImportantFaster Implementation Skill Deficit for AdministrationReduced Whole Life Costs High Transaction CostsBetter Risk Allocation Structured RisksBetter Incentives to Perform Needs Legal FrameworkImproved Quality Of Service Can be achieved at High PriceGeneration of Additional Revenues Collection Issues & CostsEnhanced Public Management Public Perception and Political Reactions

PPP Units – A World Trend !

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MoF – Policy Formulation & Fiscal / Budgetary Control

• There are no single design of PPP unit, design to fit local the context• PPP unit is not a prerequisite nor a guarantee for successful PPP• PPP unit need to demonstrate leaderships and specialties

• Line ministries which have a long experience in traditional procurement may not want to cooperate with new agency

• Most countries commence PPP programs in Transport, Energy, Water, Wastewater and later migrate to other sectors like – Health, Education, Energy, Water, Waste Treatment.

• Rate of ‘migration’ to other sectors reflects both national priorities and existing legal frameworks.

• Tendency for project to cascade from central to local government / municipalities.

Line ministries/ local Gov’tProject Implementation

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PPP Units Design Notes – Function Wise

• Design factors for PPP units include size and type of government ( Federal / non Federal) , decentralizing from central government to local / state governments, where within government infrastructure delivery "sits" and the size and growth of the PPP program (measured as the ratio of PFI/PPP investment to the total investment in public services).

• It is highly desirable that the roles of PPP Policy Development (Institutional Framework and development of top line guidance like value for money) and PPP Projects Approvals are not within the scope of the same PPP unit that serves as centre of best practice and expertise (Project Development) or coordination unit.

• To be effective, a PPP unit needs to be able to build up experience and retain institutional memory project and lessons leant wise. This can be a challenge of sitting within the public sector. In all cases the public sector needs to have experience of managing financial, legal and technical advisory roles if these functions are sourced out.

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• In a Federal system (like India, Australia, UAE and USA), the relationship between Federal and State Units depends on the responsibilities of the different levels of government with the federal government role as Project Developer is less significant, however, the financing / guarantees role of the Federal still exists.

• In non federal, centralized system the role of the PPP unit needs to fit with the existing structures of government considering the extent to which levels of government / Line ministries have control over their own budgetary resources or have private finance units or are permitted to generate own revenues . At the early stage of PPP development, it is usual to start with a central PPP unit, however, as the program grows; the need to avoid excessive deficiencies stemming from centralization needs to be addressed.

• In Constitutional democracies with strong parliamentary processes, PPP units are preferably located in the Ministry of Finance to exercise fiscal and budgetary control with Ministry of Planning or Mega Projects being also other preferred locations.

PPP Units Design Notes – Government System Wise

PPP Units functions need to

accommodate Governments failures

PPP Units Should Also Resolve Government Failures!

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PPP Units Functions

Marketing & Promotion

Policy Formulation & CoordinationInformation and Guidance - Standardization

Project Advise – Technical Assistance

Project Development

Funding Preparation

Contract Monitoring & Control

Approval Power

Government Failures

Policy & Strategy undefined , not clearPoor Procurement IncentivesPoor information dissemination

Poor Contract Management

Lack of Coordinationamong stakeholders

Lack of complex projects skills & analysis

Poor Transaction Management & High Costs

Lack of Information

PPP Units associated with Successful PPP Programs;

Partnership UK (PUK)Partnership VictoriaSouth Africa PPP Unit

Ministry of Finance /

Treasury or Economic Unit

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Ministry of Finance /

Treasury or Economic Unit

PPP Unit

Ministry

(Authority) of Planning / Ministry of

Mega Projects

PPP Unit

PPP Unit

Policy Setting / Fiscal Control

Monitoring / Budget Control

Collaboration / Coordination

Investment Promotion

Ministry of Business &

Trade , Ministry of

Industry

PPP Unit

Examples of Location & Roles of PPP Units

Examples of Roles , Location & Funding of PPP Units

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Victoria, Aus.

BC, CA Ireland ItalyNether-

landsPhilip. SA UK

Guidance Project Advise PPP Development

Funding Preparation

Monitoring Approval Power

Multitier PPP units exist in countries where project development , financing and approvals are bundled together. Example in UK , the Treasury Task force ( located in MoF is the approval authority) while PUK ( Partnership UK , a semi private unit) does the Project Development in line with satellite units from line Ministries.

Inside the Government (All are funded by the Government)

PV, AustraliaPBC, CanadaUK Treasury Task Force

Outside the government (Private) PIMAC, KoreaPublic / Private (Generates Revenue - Advisory Services) PUK, UK

PPP Other Sources - International Law

UNCITRAL – UN Commission for International Trade Law, website – http://www.uncitral.org.

• Significant work toward the harmonization of private international law.

• Numerous translations of documents (French, Spanish, Arabic, Chinese, and Russian).

UNIDROIT – Int’l Institute for the Unification of Private Law , website – http://www.unidroit.org.

• Best-known accomplishment = UNIDROIT Principles of International Commercial Contracts.

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PPP Other Sources - Arbitral Institutions

Permanent Court of Arbitration –

http://www.pca-cpa.org.

Int’l Center for the Settlement of Investment Disputes –http://www.worldbank.org/icsid/.

International Chamber of Commerce (ICC) –http://www.iccwbo.org/index_court.asp.

London Court of International Arbitration (LCIA) –

http://www.lcia-arbitration.com/lcia/lcia/index.htm.

American Arbitration Association (AAA) –http://www.adr.org/index2.1.jsp.

WWW Virtual Library Arbitration –

http://www.interarb.com/vl/pages/.

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Toll Roads Airports Seaports, Water Transport Rail ( Railway, monorails, etc) Underground TransportTransportation

Regulated Utilities

Electricity Gas Water

Social Infrastructure

Hospitals Schools Prisons Social Housing

Communications

Broadcast Networks Mobile Telephony Satellites Cables Terrestrial / Submarine Cable

PPP Options & Projets Structures

Generic - Risk Scales & Durations for PPP’s• Privatization & Divestiture (Highest Private risk)• DBFO & BO Concession contract - Revenue or off- take - (25 -30 yrs) • DBOT, BOT (25 yrs) • Lease / Afterimage contracts (5 – 10 yrs)• JV, Partnerships ( varies but has a life time with dissolving mechanisms)• Sale & lease back (8 – 15 yrs)• Operation & Management ( O&M) Contracts (3-5 yrs)• Service Contracts (1- 3 yrs w/ renewals)• Technical assistance – discrete tasks - (Lowest Private risk)

51

52

SchemePPP Type

PPP Examples

Aggregate Risk

% ( + / -)

Approx. Duration

Years

Operators Revenue

Construction, Rehabilitation

Risk

Demand Risk

Env. RiskOperational & Technical

Risk

Privatization & Divestiture

Non PPP

Telecomm.

Nearly 100%

Private Risk

Lifetime

Service Sale ( regulated) , Facility / License re-sale

Private, if needed

Private Private Private

Full Concessions

(BOO) / Design

Finance Build Operate (DFBO)

PPPHighways, IPP, IWPP, Hospitals

90% Private /

10% Public

25 - 30

User's charges ( Direct or shadow payments) / Based on Performance (Availability/ Delivery)

Private

Volume Caps and / or Off take by

the Public

Private / Public

Private

DBOT,BOOT, BOT (turkey

delivery)PPP

STP's , Water Production, Social Housing, Education facilities, Prisons,

70% Private /

30% Public

20 - 25User's charges / Off take Agreement

PrivateJoint

Public / Private

Private / Public

Private

Lease / Afterimage

(not the same!)

Contracts

PPP

Sewer, Transmission lines. Electricity Distribution

60% Private /

40% Public

5 - 10, w/ Renewal

Provisions

Fee based on collected revenues

Public ( for the needed

facilities)Private Public

More on Private side

Comparisons ! – More Common PPP’s

53

SchemePPP Type

PPP Examples

Aggregate Risk

% ( + / -)

Approx. Duration

Years

Operators Revenue

Construction, Rehabilitation

Risk

Demand Risk

Env. RiskOperational & Technical

RiskJV , Partnerships

( usually high tech with environmental

impact or Production sharing -oil & gas)

PPP

Solar Generation, Waste to Energy,

Nearly balanced

(50% / 50%)

Lifetime w/

dissolving mechanis

ms

User's charges / Off take Agreement

Joint Joint Joint Joint

Sale / Lease back Contracts ( Asset is leased back to the

Public)

PPP

Common in Airlines, Government Building , Sports venues

20% Private / 80% Public

8 - 15Direct - Capital / Operational Lease agreement

Public ( for the needed facilities)

Public Public Negotiated

Operation & Management (O & M)

Contracts PPP

Airports & Seaports, land fills

10% Private / 90% Public

3 - 5Contractual (lump sum)

N/A

Public, Minimum volume

guarantees by Public

Private / Public

Private / Public

Service / Maintenance Contracts, Technical

Assistance (Government

Procurement - Design - Build or EPC)

Non PPP

The usual outsourcing PSC.

Nearly 100% Public

Risk1 - 3

Contractual / On call / job card fee ( Discrete Tasks)

N/A Public Public Public

Comparisons ! – Less Common PPP’s

Comparisons ! - PPP Versus Privatizations

54

Public-Private Partnerships Privatizations / JV’s

Water, Wastewater Treatment, Electricity Generation Telecommunications , Some Water Services

Hospitals , Hotels, Sports Venues Electricity generating , Transmission / Delivery Networks

Roads, Bridges, Rails Production of Oil and Natural Resources (sharing)

Social Housing, Schools, Prisons ( Social infrastructure) Poorly Managed Large Assets.

A new special purpose vehicle (SPV) is formed - Project Company , owned by the private sector

Existing state-owned assets are sold directly to a private sector entity, often after an international / local tender

The SPV develops, finances and completes the infrastructure necessary to deliver the project

Title to the assets is transferred to the private sector entity

Full operational control is transferred to the public sector at the end of the agreed “concessionary” period , while the title to the asset remains with the public sector in BOTand most utilities

Private sector entity owns the assets and can dispose of them after contractually imposed deadlines and benchmarks (lock in period)

The SPV delivers the service and receives agreed-upon compensation . Compensation to the private sector can be in the form of tariffs paid by service users or directly by the government, or a combination

Because the asset has been permanently transferred to the private sector, the public sector benefits are gained through receiving the acquisition price, improved efficiency , tax and royalty payments

Comparisons ! - Risk Areas of Private ,PPP & EPC Public Projects

55

No Public Influence

No Public Influence

No Public Influence

Private Investor

Private Investor

Benefit From Property Sale

Public side has good influence

Public Side has good Influence

Guarantees of Private Investor

Fair Risk Sharing

Private Investor

Sustainable Benefits

Public Side has total Control

Public Side has total Control

Contractor Guarantees

Public Side

Public Side

Sustainable Benefits

Urban Planning

Execution Speed

Guarantees

Market Risks

Project Financing

Economical Benefits - Public Side

Private Project Development

Traditional EPC Procurement

Public Private Partnership (PPP)

Comparisons ! - Tax-Exempt Financing Versus PPP – Government Perspective

Tax-Exempt Financing

• Strengths– Tax-exempt interest (deductable)– Tax credit– Existing relationships with insurers– Retains operational control of assets

• Challenges– Market access issues– Future financial viability of bond insurers– Full retention of operating risk– Revenue shortfalls, unprotected.

Public-Private Partnerships

Strengths Strength of private equity credits Addition of equity cushion Market demand for infrastructure projects Transfer of operating risk Ability to continue oversight

Challenges Shift to executive oversight Equity partners belief in future growth Public policy implications/transfer of

revenue stream

56

PPP Risks - The More Familiar

57

Risk Type Risk Mitigation

Environment and Safety Risks

Environmental and safety constraints defined in the Concession Agreement

EIA before and after, Both parties to agree on the Environmental impact.

Construction RisksTime delays & cost overrun risks, geotechnical risks

Risk to be borne by Concessionaire. Acquisition of land risk by Government before construction start. Tools;- Fixed price turnkey contracts-Warranties (bonds), - Liquidated damages clauses.-Clear input or output or performance specifications.

Technical Operation Risks

Performance based risks, operating costs, management failure.

Tools include;- Equipment Suppliers guarantees- Proven technologies- Performance guarantees.- Raw materials / feedstock agreements- Public Authority involvement

Revenue Risk in existing facilities / infrastructure

Minor risk in existing facilities unless forecasts after improvements are exaggerated.

Often acceptable risk level is borne by Concessionaire (adequate provision on tariff in Concession Agreement).

Revenue Risk in newly-built facilities / infrastructure

Major risk in newly-built facilities like traffic volume, tariff setting.

Often not possible for Concessionaire to bear all the risk. Tools include;- Off take agreement- Caps ( floors / ceiling) - Revenue build up period

PPP Risks - The Less Familiar

58

Risk Type Risk Mitigation

Financing Risks

- Structure ( Debt / Equity)- IRR / NPV-Debt Service Cover Ratio- Tax Status / Benefits- Others - Exchange Risks, Sovereign Credit Ratings, etc.- Refinancing

- Optimal Equity 30 – 10%- IRR (15 % -25%)- 1.5 ( can be as low as 1.1 with string off take agreements)- Translates into tax account treatment- Financial derivatives hedging.- Syndication

Legal Risks Regulatory framework, concession / sector laws.

Experienced (high priced) Lawyers. Clear documents. International Arbitration set.

Political Risks /Government Performance Risks

Compliance to contractual terms in a Concession Agreement. [Currency Inconvertibility, Confiscation, Expropriation, Nationalization, Civil Strife, War, etc.]. Force majeure can be included

Mitigation through Risk Guarantee (IBRD and MIGA). Transferred Risk can be insured –Political risk insurance. World Bank provides Partial Risk Guarantees. Remaining risks can be borne by Lenders.

Risks Perspectives

59

Development Speed

Best Value for Money

Payment SourceAccess To

Private Capital

Government

Incentives to

Transfer Risk

Acceptable Financial Return

Access to PPP Contracts Pipeline

Minimize /

Re-use Capital

Access To

Revenue Stream

Concessionaire

Risk Mitigation

& Control

Risk Identification

Risk Analysis

Risk Allocation

Risk Monitoring

60

Understanding Political Economic Connection

61

Political Risk Agencies - (Social-Political-Economic) Financial Risk Agencies / RatingsBERI , PRS , Prince, ICRG S & P , Moody’s, Milken Index , Fitch IBCAHybrid Risk Models / Rating Agencies - (Financial Focus and Political Causes)

Economist (Magazine) Chase Manhattan Bank Euro money Institutional Investor

POLITICAL RISK FACTORS ECONOMIC & FINANCIAL RISKs

Ethnic Social Tensions Domestic Economic ProblemsStrife, Armed Insurrection International Economic ProblemsUrbanization Low Wages / Labor Cost / High ProductivityDecentralization Good Infrastructure / TelecommunicationBad Neighbors Restricted Import / ExportCommodity Dependence High Commodity PricesInternational Trade Agreements Expedient FDI Screening / ApprovalsRegional Trade Agreements Favorable Taxation / Tax HolidayCorruption Third Party Cost / Biding CostStaleness / Illegitimacy Debt in Default / Rescheduled / Non PaymentDemocracy /Opposition Tolerance Reasonable Gov. Bonds Risk PremiumLiberties / Unrestricted Internet Service Oriented / Competitive MarketPowerful Private Interests Limited CreditworthinessState Owned Enterprises Restrictions on PrivatizationCompetent Local Management Partners Access to Bank FinanceForeign Control / Foreign Equity Ownership allowed Liberal Labor Laws / Modest Termination BenefitsNon-Repatriation/Non-Payments Fiscal Monetary Expansion / Capital FlightCreeping Appropriation Exchange Controls/ConvertibilityMIGA Membership / OPIC Insurance Available Liquid / Transparent Stock MarketStable Regulation & Law Enforceability Access to Capital Markets

62

PPP Projets Success Framework

PPP Projects Success Framework – EPEC Adopted

1. Choice of Project - Only sustainable projects should be launched

2. Choice of Funding & Risk Sharing - Fit with Project structure

3. Choice of Procurement Procedure – In line with Project complexity4. Choice of Financial Structure - Balancing spreads and risks

5. Whole Contract Life Management - Renegotiations to the benefit of all parties.

The main driver of the PPP contract duration should remain technical (life-cycle and obsolescence considerations), rather than financial!

The legal framework of PPP’s should remain flexible enough to meet the conditionsof success.

Guarantees should be given more systematically to private operators, in order to have the best possible use of public funds.

Resorting to guarantees to secure private financing can expose the government to hidden and often higher costs than traditional public financing

63

1. Project Choice - Sustainable Projects Decision makers must choose the projects that are desirable from the socio-

economic point of view and respond to real demand and needs. e.g.:

Which will enable the economic development of a market or a region;

Which will save time and increase safety, in the case of a road;

Which will save lives, in the case of a hospital, etc.

A desirable project means a high socio-economic IRR (Internal Rate of Return)

A high socio-economic utility makes the payment of a tax or a toll politically more

acceptable.

Experience shows , if contracts do not meet the condition of a high socio-economic

IRR, problems necessarily arise:

Bankruptcy of operator (in case of traffic risk)

Skyrocketing public debt (if large grants are needed)

Political legitimacy problems with regards to final users and tax payers

And in the end: reputation problems for all partners64

PPP Projects According to RevenueUsers Pay (Termed as Concessions when users pay)

• Traditional BOT model• Revenues collected from users usually by the private partner (e.g. tolls paid on a highway or

bridge)

• Project is “off the Government budget” as revenues flow directly to private sector• Used only where there are substantial revenues that can be directly charged to users

• It is estimated that about 10% of receipts relate to toll collecting (without automated systems).

Everybody Pay (Termed as PFI when the Public makes regular payments)

• Annuity scheme or availability model• Revenue collected can be either from users directly to private partner or may stay with

government and Government opts to make regular payments for making the service available (availability / shadow payments)

• Project is often “on the Government budget” as revenues flow through Government

• Can be used widely for services paid by known users, or for those paid through taxes or in countries where tolling is not socially acceptable.

• There is no expenditure for toll collecting

General tendency to move from toll to availability based payments in road projects. Also Innovative use of payment mechanisms to focus on public sector objectives are becoming trend. Examples from the road sector ; User tolls – to pass costs to users; Availability payments – to reduce congestion; Accident rate premium – to improve safety.

65

PPP Transactions – Economic PartneringHighways (Concessions – BOO, BOT, BTO) & Rails (BTO)

• Direct tolled – i.e. users pay full cost or partial cost (Government Subsidy) – compete on costs – e.g. Malaysia, Australia.

• Shadow tolled – users don’t pay directly but all pay indirectly via tax & fuel surcharge etc – compete on subsidy amount – e.g. India

Airports /Sea Ports (usually Management Contracts)

• Long term management contracts that may include capital works – e.g. Australia, Srilanka, Cambodia, KSA, Jordan

• Government may agree to minimum thru-put and provides core custom & immigration functions

Water & Power -IPP, IWPP- (Concessions – BOO, BOOT)

• Government agree on minimum uptake (usually 80 -90% the rest sold in open market – e.g. Indonesia, Malaysia, GCC (IWPP) , Egypt, Jordan, Lebanon, Yemen.

• Government may agree to pass-thru cost on fuel.

Power -Solar (Concessions)

• Similar to power – e.g. Morocco, Tunisia 66

PPP Transactions – Environmental PartneringLandfills (usually outsourcing – O & M Contracts)

• Private Partner to takeover waste treatment and landfill management , may include methane extraction – e.g. Malaysia , Indonesia

• Governments agrees to management fees and • Governments usually approves combustion power plant on site for internal use as

well as sale to power grid

Waste to Energy (recycling of solid waste / used tires) (usually JV’s)

• Reduces excessive gas emissions while stimulating private sector demand.• Private Partner to takeover waste conversion to energy – e.g. Bahrain.• Governments agrees on energy sale to power grid

Sewerage Treatment Plants (STP) – ( usually BOO / BOT, transmissions usually BOOT)

• Population and business levels increase leading to increased waste generation• Private Partner to takeover sewerage treatment• Government agree on off take (usually distribution to farms is by the

Government) – e.g. GCC ( Bahrain)

67

PPP Transactions – Social PartneringHospitals (usually DBOF) / Prisons (usually BOT)

• Private Partner to build the facility , manage it for a set time and operate noncore service like catering, parking etc

• Government provides the doctors, nurse ,wardens etc and operates the core services – e.g. Lesotho, Australia

Schools/ Sports Venue / Shopping Malls (usually DBOF)

• Private Partner bids on cost, design and facility management for a set time & run noncore services – e.g. Australia, Egypt.

• Government runs core services of teaching / tutoring or agrees to use the facility for an agreed period

Public / Government / Affordable housing (usually BOOT)

• Private Partner to build, lease and maintain for a set period – e.g. Malaysia, GCC ( KSA, Oman, Bahrain)

• Government agrees to minimum lease for a set period / off take and / or allows co-developments on site

68

69

Achieving optimal allocation of risk is the most important factor in structuring a PPP

- Does the private sector’s price for taking project risks represent good value for money?- Is the private sector’s return on capital appropriate to the level of risk being taken?

Facilitating and making incentives on time and on project budget implementation:

– No service / no pay.– Incentives to cost control.

Optimization of capital & maintenance expenditure over project life. Innovation in design and financing structures. Improving management of operational risks.

PPPs and Value for Money (VFM)

Optimal risk allocation reduced cost of riskReduced cost of risk better Value for Money

No presumption that PPP’s will always prove better Value for Money than conventional Public Sector Contracts (PSC / EPC)

(VFM) Higher Than Forecasts Costs in EPC /PPPs

70

Evidence on construction projects from the UK’s National Audit Office

Conventional procurement (PSC) PPP procurement

Cost overruns for the public sector 73% 22%

Delay in project delivery 70% 24%

71

2. Funding & Risk Sharing - Fit with Project

Funding translates into;

Who should bear the demand risk?

Who will pay for the infrastructure/service?

Payment by users - when the principal source of revenue for the private operator is by users , the operator bears the demand risk.

Payment by taxpayers (i.e. public budget) means that the demand risk is

not transferred to the operator.

The choice of funding must be based on a trade-off between:

The marginal cost of public funds collection.

The willingness not to exclude users from the infrastructure (problem associated with the payment by users).

72

PPP Major Funding Sources

73

Equity LoansLoan

Guarantees

Credit Guarantees/Insurance

Political Risk

InsuranceSponsor PrivateCommercial Banks Capital Markets Insurance Cos. Private Equity Funds

PublicMultilateralIBRD IFC MIGA

OPIC Development Banks (IADB, EIB, EBRD, CAF, BNDES, ASD, AFDB)

Export Credit Agencies (Ex-Im Bank-US,ECGD -UK,EDC - Canada, HERMES -Germany, COFACE - France)

Managing Fiscal Risks in PPP’s• PPP’s create fiscal obligations that are long term and binding future generations

and tax payers.

• Accurate design of PPP’s requires that the fiscal cost and risk of the major contractual obligations be identified, quantified and mitigated.

Direct, debt-like obligations

• Availability payment for the use of facilities • For PPP hospitals, schools, prisons and a like, PPP deal also requires government to

allocate funds for government doctors, nurses, and teachers, guards who will run the facilities built, maintained & operated by the private sector.

Explicit contingent obligations

• Government guarantees to repay investors cost and agreed returns • Revenues and exchange rate guarantees.• Shadow payments for assets provided by private sector.

Implicit contingent obligations

• Taking over private debt if developer becomes financially distressed • Implicit use guarantees in PPA – Power Purchase Agreements, off take agreements.

74

3. Procurement Choice – In line with Complexity

Classical competitive bidding aiming at minimizing financial costs fits well with simple contracts, whereas negotiated procedures (e.g. through competitive

dialogue / with a set of criteria’s) fit better with complex contracts

In terms of incentives, complex contracts fit better with Cost Plus schemes and simple contracts fit better with fixed price regulation schemes.

Procurement procedures should be adapted to the project type, in order to

prevent opportunistic behavior, and should also favor strict prequalification and

additional award criteria. Unsustainable offers should be legally excluded.

Classical procurement procedures are not a guarantee for fair competition:

bid rigging, first mover advantage (incumbent's renewal), etc.

Renegotiation & opportunism costs need to be guarded against! ( for example, lengthy post negotiation can jeopardize the project)

75

PPP Procurement Process Planning process

- Planning requires time and money - worth the investment- Fund supporting project development – needed.- Cross sector dialogue including Treasury - required- Check and balance – are key

Market testing

- Testing the interest of market is crucial- The market condition can impact risk sharing- Transparency should be kept

Procurement method - Prioritization

- Solicited or unsolicited proposal- Prequalification, 2 envelope bidding- Award criteria (VFM , PPP Versus PSC )- Time management

76

Unsolicited Proposals in PPP

• Can be useful in early stage of PPP program especially at local governments level , however, often the Public Sector then lacks the fiscal and knowledge capacity to analyze projects

• Attract private sector investors ( Proponents) by giving initiatives and incentives

• Priority set for proposals without asking government support

• Genuine unsolicited proposals can wash out network effect of entrenched infrastructure development

• More scrutiny is required , additional requirement for value for money tests are needed.

• Competition is key , opportunity for counter proposals should be given thus providing level playing field

• Common is some countries like Chile, Argentina, South Korea, South Africa< India, Italy and Malaysia

77

What are the steps?Project Preparation –Funding Approval

Service Provider Selection – Technical RFP & Bid

Contract Management -Financial

1. Service NeedOutput specifications

2. Option AppraisalReport on EPC / PPP

options, VFM

3. Business CaseAffordably/public interest

4. Project Dev.Team, Governance,

Timeline, execution plan

5. Bid PreparationEOI/ Short listing, RFP

6. Bid EvaluationPreferred bidder selection

7. Final NegotiationSigning contract, financial

close

8. Contract Mgmt.Construction, monitoring,

Dispute settlement,

communications and finally commissioning

Project/ Funding

Approval

Bid Doc Approval

Project Finalization

Review

Steps in PPPs Procurement - PPP Project Life Cycle

1. Prioritise Key Project Objectives

2. Agree Project Concept3. Obtain Stakeholder Approval

10. Turn OverUpon expiry of the

concession agreement

9. RenegotiationsDue to changing

conditions

78

4. Financial Structure Choice - Balancing

The financial structure of a project is usually composed of loans (banks or

bonds), shareholder loans, equity and grants.

The continuing financial crisis has shown that there should be a systematic follow-up

of the main events occurring during the life of a contract, in order to balance spreads and risks:

During the crisis: spreads have skyrocketed - projects became unfeasible.

In the crisis: spreads have gone back but not to normal levels. If spreads are too

low, banks cannot pay for their risk.

One should also take into account the asymmetry regarding the way public entities

and private operators absorb risks. The allocation of risks must take into account this asymmetry. Grants and/or guarantees should be adjusted accordingly.

Due to the financial crisis, loan maturity has been shortened. State support may be

needed.

79

Input ContractsGuaranteed long term supply of inputs / feedstock

SPV / Project Company (Borrower) .Made up of Project Sponsors -Equity Investors.

Off TakerGuaranteed revenue stream to project. Can be the Public Contracting Authority or MoF

Contractor(s) ,EPC - Risk transfer –Turnkey Contract , penalties , bonds.

O&M Contractor(s)Pass down of penalties for availability payments , performance, etc.

Host Government / Public AuthorityLegal /regulatory framework & support functions

PPP Stakeholders & Risk Transfer

Banks Syndicate

Equity Investors

Interface Contract

Advisors – Legal , Technical & Financial

Risk Transfer

3 – 5 Years 25 - 30 Years ( Risk by Project Company)Risk Duration

Equipment SupplierWarranties & Supply Agents Agreements. Can be bundled in EPC

Arranging Bank

Hedge ProvidersCurrency & Interest Rate, Multilaterals, Political Risk Insurers

Contracting PPP Authority (is)

80

Corporate & Project Finance

81

Equity provided by sponsors

Mezzanine Funds

Debt

Project Financing provided by banks / IFIs

100

Structuring Project Finance

82

Project Long Term FinancingProject cash flows must be sufficient to service (interest and principal)

All risks to lenders must be eliminated

• Construction ,Market ,Consumption ,Operating ,Inflation & Credit risk• Other risks as applicable –Refinancing, Interest rate, Exchange rate

Advantages

• Enables high debt to equity ratio , Releases Investors equity• Enables equity risk sharing in projects • Funds can invest into SPV• Avoids refinancing risk

Disadvantages

• More restrictions in use of funds• Restrictive covenants (debt service cover ratios etc)• More complex documentation (risk mitigation)• Less flexible administration (most changes require lenders' consent)

83

5. Management – Allow Renegotiations All contingencies cannot be anticipated (changes in the legal environment, force

majeure, innovation, changes in demand, environmental and technical constraints.

Contract will necessarily evolve over time/be renegotiated. Renegotiation clauses

, conditions of execution , adjustment should be specified in the contract.

Renegotiation should be viewed to the advantages of 3 parties (Public

entity, Users, Private operator). Fair and transparent renegotiation is the essence of

the contract.

Necessary conditions for a good management of the life of the contract:

Fair behavior of both parties Technical skills Experience and capacity building Flexibility and adaptation to local customs The threat of sanction (must be credible) to enable self enforced good practices. Non written aspects of the contractual relationship (trust, reputation, etc.) are key

elements for success. 84

Typical PPP Project Administration & Risks

85

SPV -Project

Company

Shareholders –Equity Investors

Lead / Syndicate Banks& Bond Holders

Operator -Delivery

Construction Contractor(s)

Granting PSAuthority

Services Purchaser /Off Taker

Raw Material / FeedstockSupplier

Shareholder’s Agreement

Concession Agreement

Purchase / Off Take Agreement

Supply / Feedstock Agreement

Construction Contracts

Operation & Maintenance Agreement(s) (O&M)

Regulatory Risks

Regulatory and Performance

Risks

Completion Risks

Performance Risks

FX Risks and Refinancing Risks

Political and Macroeconomic

Risks

Interface Agreement

RegulatoryAuthority

Operator -Production

Guarantees

PPP Example Structures

86

87

PPP Regional Strategy & Readiness

Actions?

Diagnosis?

MENA PPP Investments Comparisons PPI Data Base – Data Source

• The PPI (Private Participation in Infrastructure) database is a multi-donor-funded facility and is maintained by PPIAF (Public Private Partnership Advisory Facility).

• The database is the most sophisticated attempt so far to create a global database of PPI / PPP projects which helps to understand the pattern and scale of PPP deals in world regions.

• The PPI database does not cover social infrastructure / PFI-model PPPs. It does cover Energy (electricity and naturalgas), Telecommunications, Transport

• (airports, seaports, railways, toll roads), and Water and Sewerage (treatment plants and utilities).

• The PPIAF PPI database identifies four types of project: Management and Lease contracts; Concessions, Greenfield projects, and Divestitures / Privatization. Divestitures (either full or partial) are not considered PPPs.

88

World Regions by Sector (1990 – 2010 , Total Count & Investment – million USD)

Sector Project Count Total Investment (US$ million)

Telecom 798 761,394Energy (Example Next) 1,952 548,279Transport 1,291 275,597Water and sewerage 731 62,543Grand Total 4772 1,647,813

0200,000400,000600,000800,000

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01,0002,0003,0004,0005,0006,000

Lati

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89

Example From the Energy Sector (1990 – 2010) Number of PPP Projects & Investment

Number of PPP Projects by RegionRegion Concession Divestiture Greenfield Management Total No. Projects

East Asia and Pacific 61 92 454 2 609Europe and Central Asia 26 173 66 12 277Latin America and the Caribbean 86 97 449 3 635Middle East and North Africa 5 3 25 0 33South Asia 1 22 266 1 290Sub-Saharan Africa 17 8 65 18 108Grand Total 196 395 1,325 36 1,952

31%

14%32%

2%

15%

6% Total No. Projects

East Asia and Pacific

Europe and Central Asia

Latin America and the Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa

90

Example From the Energy Sector (1990 – 2010) Investments of PPP Projects - US$ million

US$ million Investment in PPP by RegionRegion Concession Divestiture Greenfield Management Total Investment

East Asia and Pacific 5,479 24,297 95,212 0 124,987Europe and Central Asia 7,599 45,802 27,846 12 81,258

Latin America and the Caribbean 70,352 29,103 92,991 210 192,656Middle East and North Africa 6,607 224 10,902 0 17,733South Asia 22 10,692 110,617 144 121,475Sub-Saharan Africa 1,899 1,310 6,955 5 10,170Grand Total 91,958 111,428 344,523 371 548,279

23%

15%

35%

3%

22%

2% Total Investment million USD

East Asia and Pacific

Europe and Central Asia

Latin America and the Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa91

MENA PPP Commitment in Mil USD - 2011 ( 81 Billion USD Total)

World Bank and PPIAF, PPI Project Database. (http://ppi.worldbank.org) Date: 10/07/2011

Energy Telecom Transport Water and sewerage

010,00020,00030,00040,00050,00060,000

MENA PPP Total Investment Commitments in US$ millions - 2011

2008 - Investment commitments to infrastructure projects amounted to US$155 b (Peak).2008 - Investment commitments in South Asia reached US$30 billion.2008 - Investment commitments in MENA reached US$12 billion.2008 - Investment commitments in Latin America and Caribbean amounted to US$40 billion.2008 - Investment commitments in Europe and Central Asia at US$45 billion.

92

Snap of MENA Region History in PPP’s

93

94

World Cycle in PPP’s – MENA Region Challenge !

There seems to be an 8 Years cycle for PPP’s inDeveloping Countries (which can be extrapolated withcaution to other World Regions). The world investmentsin PPP peaked in Year 2008 , thus , we could in 2012 beat the cycle bottom with the next 4-5 exhibiting a strongdrive towards PPP investments.

95

Advantages to Regional PPPs Approach in MENA

• Promoting standardization of national legal and institutional frameworks which can help mega cross-border projects progress more smoothly.

• Sharing knowledge amongst countries will help standardize national PPP enabling frameworks and procedures around established good practice which will stimulate intra-regional investment flows as smaller PPPs can be better handled by the region sponsors / developers and financiers.

• Small and medium scale PPP projects replicate relatively easily across and within across national borders. They are less complex; have a shorter implementation timeline and can lay successful replicable track record across the region.

• Investment into PPP projects will be stimulated by a strong regional approach. International investors will be encouraged by upgrading of PPP enabling frameworks around global good practice.

96

Advantages of Small / Medium Size PPP Projects in MENA Region

• Smaller projects have great potential as they are more “doable” because of lower costs and less complexity and can benefit greatly from a central coordination and knowledge consolidation structures since smaller PPPs projects replication depends upon the designs being consolidated and disseminated.

• Small scale projects, once designed, can be replicated and adopted in other countries like in the affordable housing sector thus the costs of project preparation are reduced . Also these projects offer innovative opportunities to serve previously un- or underserved communities, or to combine services for subsidized and unsubsidized users (e.g. rural telecoms and hospitals)

• Municipal authorities, which have smaller budgets and limited fund-raising powers can benefit from this approach as in small scale power generation / environmental / waste treatment Projects. Other creative in the use of PPPs include private provision of street lighting or other services linked with advertising rights. Also micro-franchising for water distribution, can be another applications.

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• Being a center of cross-cutting technical, project management and financial expertise;

• Promoting / Funding small scale replicable PPP Projects;

• Gathering and disseminating database information and performance indicators; (institutional memory)

• Designing and rolling out training to line ministries and sub-national governments as necessary, and so on.

• Linking together different agencies, government units involved in cross border PPP infrastructure projects.

• Governments, Politician, consumer, other stakeholder awareness and media center for PPP.

• A regional Community of Practice (CoP) to share knowledge and experience on PPPs in different infrastructure sectors; and initiate practical capacity building on a series of smaller-scale sub-sectors can dramatically push the PPP agenda in the MENA / GCC Members Countries.

There are many advantages to pooling general expertise on PPPs in a Regional Central PPP Unit, Key functions of a PPP Unit include:

MENA / GCC – PPP Expertise Center

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MENA / GCC – Affordable Housing Expertise Center

• It is intrinsically different from other types of PPP as mortgage laws , government guarantees to developers and land ownership issues are still evolving in the region and are subject to various considerations and are uncertain if clarity can be established once the regulations are passed.

• The relatively weak financial and construction local markets to undertake such projects whereas earlier lessons from the property development boom in the region demonstrated structural problems in the approach that can not be entirely pinned on the market down turn. It is therefore, unrealistic to assume that the regional Developers / Contractors can bundle JV ‘s / long alliances in areas of financing, facility management and assume the usual risks in PPP’s.

• Speedy delivery of Mega Projects are needed to accommodate the severe shortages in the region that are linked to socioeconomic stability. The luxury of a long drawn PPP bidding process simply is not there. Thus a need exists to explore other variations of PPP Models that considers the time frame, the Developers / Contractors strengths in the region and the local condition of the financial markets.

There are many advantages to approaching the Affordable Housing Sector in a separate regional MENA /GCC context for the following reasons;

One model that can explored for the region in the Affordable Housing Sector is the German Forfeit Model in which the Developer / Contractor pre-agrees with the Government Unit / Contracting Party to transfer / sell his rights in the Project once completed to the financing institution, thus the relationship becomes between the Government Unit and the Financers and the Developer / Contractor is released 99

Initial Situation - Problem Tree (UNDA Adapoted)

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Limited number of PPP projects and questionable efficiency of PPP projects

Problems in regulating PPP projects andStrategic management of PPP programme

Lack of interest in PPP projectsDifficulties in PPP project

implementation

Deficiencies in operating environment andlack of capacity in Governments to promote,Develop, operate and manage PPP projects

Unassessed state

Of PPP readiness

Lack of knowledgeconcerning specific

requirements(legal, financial,regulatory, etc.)

Lack of cooperationbetween agencies

involved inimplementing PPP

projects

Lack of cooperationbetween

governmentagencies and

training institutions

Suitable capacity Building materials and

other training materials are not readily available

Effects

Causes

Lack of awareness at the policy Making level concerning PPP

Lack of institutional mechanism for capacity building, information sharing

And Project development facility

Lack of easily accessible relevant Information and knowledge on PPPs

Initial Situation - Object Tree (UNDA Adapoted)

Increased number and investments, in and efficiency of PPP projects

Improved operating environment and enhancedcapacity of Governments to promote, develop

operate and manage PPP projects/programmes

capacity development through networking of PPP units and the private sector

PPP Global Alliancethrough an inter-regional meetings

End

Means

PPP regional Alliancethrough an regional meeting

PPP National meetings and capacity-building workshops

PPP-readiness assessment

System installation

Strategies designed and legal And regulatory regime established to create conducive environment

Establishment of a regularPPP programme

Improved project implementation process

National awareness in creating conducive environment for PPP

development

On-line PPP capacity-building Facility resources and

relevant project informationaccessible to all parties

National programmesAction plans

Internet-based system development

National training institutions

PPP-readiness assessment

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PPP Resource Base Model (UNDA Adapoted)Human

ResourcesFinancial

ResourcesPhysical

InfrastructureNatural

ResourcesSources of Technology

Institutions Gov`t Policies

Employed Residents

Banks Transportation AirUniversities and colleges

Education/ Training

Regulation Policy

+Skilled Public finance +RoadsGround water and rivers

Federal labsEconomic development

+Zoning

+UnskilledInformal investors

+AirSeashore and forests

Private research institutions

Social service +Permitting

+Under-employed

Non-profit loan funds

+RailPlants and animals

Corporate research centers

Community based

+Environmental

Unemployed Venture capital +WaterRenewable stocks

Religious Taxes

Not in labor force

Other lenders Public utilitiesNon-renewable stocks

Cultural Services

+Retired persons

+Water Environmental +Police

+Youth +Sewerage Unions +Fire

+Homemakers Private utilities +Solid waste

Entrepreneurs +Gas

+Electric

+Telephone

Real estate 102

WBG - Financial Support for PPP’s

Hard Currency:

Loans (Investment & Policy, IBRD, IDA) On-lending facilities Co-financing schemes (A/B Loans, IFC) Guarantees (IBRD, IDA, IFC, MIGA) Insurance (MIGA) Equity and related products (IFC)

Local Currency:

Currency Conversion Option (FSL) Currency swap Guarantees

Institutional Building Capacity:

PPIAF WSP BNPP (Bank & Netherlands Partner) TAF (PIDG) FIAS

Project (transaction) Execution:

DEVCO (IFC Advisory Services) GPOBA Cities Alliance PIDG (EAIF, Guarantco, Infraco – also

includes financing products)

Financial Products Advisory Services

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European Investment Bank PPP Financing

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EIB Financing Principles : Key lessons

Competitive tendering. Sector focus in PPP programs.

Non-exclusivity - support of all bidders through bidding stage.

Investment Grade Risks on strategic public services.

EIB Complementary with and leveragingof banks and capital markets.

EIB benefits passed to end-users/taxpayer.

Utility Risk and Utility Reward.

Evidence of project performance.

Effective payment mechanisms.

EIB was created by the Treaty of Rome in 1958, to provide long-term finance for projects promoting European integration.

Subscribed capital EUR 163.7bn, 25 Member States of the European Union.

TransEuropean Networks / links to New Neighborhood Countries.

Outside the EU, EIB operates on special mandates from the European Union.

Building Regional PPP Capacity

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Proposed Regional PPP Development Strategy

SUPPORT TO LOCALENTERPRISES & LOCAL

FINANCIAL INSTITUTIONS –INCENTIVES & GUARANTEES

REGIONAL EXPERTISE CAPACITY BUILDING – REGIONAL

KNOWLEDGE, ARBITRATION CENTER , ETC.

INCREASE ATTRACTIVITY OF CROSS BORDER PPP –

RETAIN POLITICAL & MARKET RISK , PPP / JV SETUPS

DEVELOPMENT OF MEDUIM SIZE REPLICABLE PPP‘S IN

INFRASTRUCTURE & SOCIAL PPP‘S -HOUSING, EDUCATION

Action

Plans

Conduct PPP Diagnosis & Readiness Self

Assessment – Country Wise - Establish

Perceptions of the PPP Environment &

Reconcile Areas of Concern

106Source; UN Publications

loayg@works.gov.bh; loay.ghz@gmail.com

00973-36711547

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