PPP Presentation to Ogun State Executive Committee 2014


Executive Committee

Some useful knowledge to makes the difference between success and failure of a PPP program

Ogun 2014 Retreat 28 January 2014

John Davie

Chairman Altra Capital Limited

Visiting Professor Faculty of Business and Law, London Metropolitan University

Past Chairman UKTI PPP Sector Advisory Board


The standard PPP route map!!

http://www.forbes.com/sites/mikemyatt/2012/03/28/6-tips-for-making-better-decisions/


• A method of providing public services, not simply for buying infrastructures

• It should contain

• an expectation of service improvement

• a commitment to transparency

• the dismantling of monopolies and the reform of public services

• OWNERSHIP of projects belongs to the sponsoring MINISTRY, Department or Agency

What is PPP?


A fundamental principle behind the PPP

• PPP is intended to transform government departments from being owners and operators of assets into knowledgeable purchasers of services from the private sector

• This will ease Government cash flow if properly deployed


Indicators Cartegena

1994 2005

No of employees per 1,000 connections 15 2.3

Percentage of domestic metering 30% 99%

Unaccounted for water 60% 41%

Hours of service / day 7 24

Response to complaints (days) 6 0.5

Some successes

Source : Water Supply and Sanitation Sector Board of the World Bank


The single most important thing that government MUST do is

What is most important?

Which comes from using high quality experienced advisers

Provide high quality useable data and facts Prepare high quality project development work


Government’s advisors

• Success of the programme depends on the organisation of government and its ability to use advisory services

• Strong government team

• outside expertise for • identifying internal changes necessary to meet government

objectives • recommending best way to implement change • assisting in the implementation

• PPP specialist advisers can be broadly divided into 4 types: • financial • legal • technical • project management


• PPP is a contractual arrangement between a government entity and a private firm which incentivises the private firm to effectively and efficiently design, build, maintain and finance public infrastructure

• There are two main types:

• User-Pay PPP where the private firm takes revenue and/or demand risk

• User-Pay PPP is usually called a concession

• Annuity based PPP where the government retains those risks

• Annuity based PPP is usually called a DBFO

Two main types of PPP?


• 100+ countries doing / contemplating PPP programmes

• comparatively low proportion of these have actually succeeded

• all countries looking at doing PPP are in competition for a limited international pool of advisors, capital and operators

• international experience has shown that certain key factors need to be in place for a successful programme to take place

• most important factor in ensuring good quality projects, which benefit the country concerned, is proper training for government officials tasked with running these PPP projects

• the NAO in UK, S&P, EU and UN have all highlighted lack of government training as a major barrier to successful PPPs which often means the public sector gets a very poor deal

Global Competition


How important is using private sector finance?


A snapshot of investment needs

• The UK estimates that £320 billion of investment in social and economic infrastructure will be needed over the next five years

• 70% of which will have to be sourced from the private sector

• The IFC has indicated that the Middle East and Africa regions have the lowest amount of private infrastructure investment in the world

• IMF estimates Nigeria’s infrastructure will require $14.2 billion per year over the next decade, or about 12 percent of GDP


• Basle III effectively tripled the size of the capital reserves that the world’s banks must hold against losses

Why are banks not lending?

• Top 19 banks

• Risk-weighted assets are around $167,000,000,000,000

• Current Core Tier 1 = $3,340,000,000,000

• Basle III Core Tier 1 = $11,690,000,000,000

• An additional $8,350,000,000,000

• They do not trust each other!


• Contracts are sufficient for getting started in PPPs – only a strong contract between the parties is needed. Putting in place the overall legal, policy and institutional framework can wait

Some Misconceptions

• PPPs are all embracing universal remedy that can be implemented all at once irrespective of the competence, knowledge and skills on the part of governments

• PPPs provide a number of infrastructure assets, roads, bridges, power plants etc., to Governments either free or little cost and no risk

• PPPs are sophisticated technical financial transactions

• Using a PPP can bring private money into public coffers and be an additional source of payment for government departments


Equity

Equity

Fee to SPC for use of Facility

based on Performance/

Payment

Project Company (SPV)

Direct Agreement

Build/Renew/ Maintenance Costs

Construction & Maintenance

(Hard Services)

Operations (Soft Services)

Service/Operator Charge

Guarantees

Collateral or subvention

Senior Debt Loan

Agreement

Debt Repayment

Debt

Concession/ Project

Agreement

Sub-contractors Sub-contractors

Capital

Insurance Companies Debt

Insurance

Rating Agencies Debt Rating

Re-Payments

Equity and Loan Stock Post 2008 – 30% - 40% • Specialist Bank • Contractor • Operator

Equity and Loan Stock Repayment

Equity and Loan Stock Equity and

Loan Stock

Government (Awarding Authority)

They will have very competent

advisors You

need competent advisors

They have competent

advisors

Holding Company


Key issues for banks in PPP projects

Micro

• Well defined projects; clarity on output specification

• Strong, experienced contractors

• Credible completion undertakings

• Appropriate allocation of risk reflected in payment regime

• High quality predictable cash flows – low volatility

• Alternative service providers in the event of bank’s step-in

• Adequate termination protection

• Protection from other adverse events, change in law, force majeure, insurance etc.

Macro • Legal regime permitting taking of

security and enforcement of contractual rights

• Political commitment to PPP and to specific projects

• Competition amongst construction companies

• Availability of service providers

• Availability/capacity of long-term debt market

• Availability of project equity

• Established exit route for project equity

• Transparent procurement process.


Some lessons learnt

• Stable long term policy commitments if changes are to be made across markets

• Scrutinise the deliverability of a project before real engagement with the market

• Project Governance

• Programme delivery platforms

• Mix of mandatory procedures and support

• Proper attention paid early on to the operational phase of projects

• A view about what you want the market to look like in 5 -10 years’ time.


The financing tool-box

Mezzanine

Low risk Medium risk High risk

Equity >20%

15-20%

<10%

Return

Senior Debt


What is risk?


The single most important thing that government MUST do is

Reminder - what is most important?

Provide high quality useable data and facts Prepare high quality project development work

Using high quality experienced advisers


Thank You www.altracapital.com [email protected]

PPP Presentation to Ogun State Executive Committee 2014

Economy & Finance

Transcript of PPP Presentation to Ogun State Executive Committee 2014