SADC PPP Network

Structuring a Bankable PPP Project

Kogan PillayHeadSADC PPP Network 7 March 2014

Presentation will cover:

» What do we mean by bankability?

» Feasibility Study

» Public Private Dialogue’s

» Procurement Process

What is Bankability?

A bankable PPP has an agreed upon definition (This is crucial!)

• A contract between government institution and private party

• Private party performs an institutional function and/or usesstate property in terms of output specifications

• Substantial project risk (financial, technical, operational)transferred to the private party

• Private party benefits through: unitary payments fromgovernment budget and/or user fees

What is Bankability?

The project is part of a National Development Plan

It has strategic value for the country

The Ministry of Finance is aware of the project and supports it!

Local banks have an appetite for long term lending (project finance)

The private sector is informed of the project and understands it

Government has the best advisors!

What is Bankability?

All the risks for the project are properly identified

The risks are costed and allocated in a matrix (key)

No unallocated risks remain

Development Finance Institutions will fund part of the project

Government has some public capital for the project

Draft PPP Agreements are market friendly

What is Bankability?

Where revenue is generated must be financially viable

If government pays unitary payments must be ring-fenced

Government must have a strong Treasury (tax base)

Are Sovereign Debt Guarantees available to lenders

Proper financial model (Public Sector Comparator) is completed

What is Bankability?

Must show Value for Money (VfM) for government

Must show market related profits for private sector

Refinancing risks are shared

Foreign debt exchange rate risks are shared

Continuity of contract from one government to the next

Feasibility Study

Contents

Stage 1 – Needs Analysis

Stage 2 – Solutions Options Analysis

Stage 3 – Project Due Diligence

Stage 4 – Value Assessment

▫ Developing PSC, Risk-adjusted PSC and PPP Reference

▫ Demonstrating affordability

▫ Demonstrating value for money

Stage 5 – Economic Valuation

Stage 6 – Procurement Plan

Stage 7 – Contents of the Feasibility Study Report

Stage 8 – Revisiting the Feasibility Study

Feasibility Study Framework

Legal

Socio-Economic

Site

STAGE 1 Needs

Analysis

STAGE 2Options Analysis

STAGE 3Project Due

Diligence

STAGE 4Value

Assessment

STAGE 5Economic

Assessment

Base PSC

PPP Reference

Risk-Adjusted PSC

Risk-Adjusted PPP

Affordability

Sensitivity Analysis

Value for Money (VfM)

Info Verification

Procurement Choice

Strategic Objectives

Budget

Budget

Institutional Environment

Project Definition

Options Analysis

Options Selection

STAGE 6Procurement

Plan

STAGE 7Submit Feasibility

Study for TA1

STAGE 8Review at TAIII to PPP Contract Term

Stage 4 – Value Assessment

• This is the pivotal stage of the feasibility study

• This stage puts three key questions to thetest:▫ Is it affordable?▫ Does it appropriately transfer risk from the

institution to the private party?▫ Does it provide value for money?

The PSC for an Accommodation Project

• What is a PSC?

▫ Costing the construction of the facilities as if built on a traditional Public Works contract

• Cost the life cycle of the facilities, equipment and service outcomes using existing data where possible

▫ Use an equivalent recent government accommodation project as the data source

▫ Life cycle could mean for 20+ years

▫ Must cost according to the output specifications in order to get a basis for comparison

Affordability and Value for Money (VfM)

NominalAffordabilit

y

Preliminary VfM (Value for

Money)

TA : I

Value for MoneyTA : III

RetainedRisk

Determined Affordability LimitRand

PSCPublic Sector

Comparator

Risk Adjusted

PSC

PPP Reference

Private Sector

Proposal

PreliminaryAffordability

Construct the Base PSC Model

• Provide a technical definition of the project

• Calculate direct costs

• Calculate indirect costs

• Calculate any revenue

• Explain all assumptions used in the constructionof the model (e.g.. inflation rate, discount rate,depreciation, budget(s), MTEF)

• Construct the base PSC model and describe itsresults

Formula for the Risk-Adjusted PSC Model

NominalAffordabilit

y

Preliminary VfM (Value for

Money)

TA : I

Value for MoneyTA : III

RetainedRisk

Rand

PSCPublic Sector

Comparator

Risk Adjusted

PSC

PPP Reference

Private Sector

Proposal

PreliminaryAffordability

Risk-adjusted PSC = Base PSC + Risk

The PPP Reference Model

• The PPP reference is ideally a ‘virtual bid’constructed by the transaction advisors (experience necessary)

• The risk-inclusive costing of the PPP reference must be based on the same outputs as used in the PSC (‘apples with apples’)

• Needs its own risk assessment using same risks (identified in the PSC) but with a different costing –do market testing

• Remember that not all risk is transferred to the private party – some is retained and must be accounted for in the PPP reference model

Construct the Risk-Adjusted PPP Reference Model

• Because of the private sector’s better capacity tomanage risk, risk is incorporated into the costingof the project and should be reflected as:

▫ specific line items in the model dealing with directrisk-related costs (eg. insurance or guarantee costs)

▫ subcontractor costs▫ increased required return on equity▫ increased cost of debt

• The PPP reference model must reflect, as specificadd-on costs, the risk retained by the institution

Formula for the Risk-Adjusted PPP Reference Model

NominalAffordabilit

y

Preliminary VfM (Value for

Money)

TA : I

Value for MoneyTA : III

RetainedRisk

Rand

PSCPublic Sector

Comparator

Risk Adjusted

PSC

PPP Reference

Private Sector

Proposal

PreliminaryAffordability

Risk-adjusted PPP Reference Model = PPP Reference

Model + Retained Risk

The PPP reference model

cost is thus an ‘all-in’ cost

to the institution for

undertaking the project

through a PPP

Public Private Dialogues

PPD’s

Private Sector must know about the project from inception

At each stage of the feasibility information must be disbursed

Forums are created to discuss feasibility findings

Funding issues are openly discussed with Private Banks and DFI’s

Inputs from private sector are invited and incorporated if necessary

PPD’s

Timeframes for procurement are clearly delineated

Information provided must be publicly available

Sector specialists must be made available by the private sector

Private sector should provide some project development costs

Government must ensure full transparency during feasibility study

Procurement Phase of the PPP

Contents of the RFP

1. General information to bidders

2.Essential minimum requirements

3.Service specifications

4.Standard specifications

5.Payment mechanism and penalty

regime

6.Legal requirements and draft PPP

agreement

7. Commitments required from bidders

8.Evaluation criteria

9.Bid formalities

Commitments Required from Bidders

• More and better quality informationgiven by the institution in the RFPresults in higher quality proposals frombidders

• This section is the crux of the RFP andsets out what information is requiredfrom bidders on all aspects of the bidincluding legal, technical, financial andBEE

Stages of PPP Procurement

• RFQ – Pre-qualification

• Request for Proposals (RFP)

• Best and Final Offer (BAFO), where appropriate

• Negotiations

• Financial closure

Get TA:IIB

• The institution's accountingofficer/authority must submit thevalue-for-money report to the relevanttreasury

• Only when this approval has beenreceived may the preferred and reservebidders be announced and negotiationscommence with the preferred bidder

Negotiations

• Successful negotiations culminate inawarding the contract, concluding theprocurement phase and startingimplementation

• The output of the negotiations must bea PPP agreement with all ancillaryagreements containing the service levelagreements and payment mechanism

The Close Out Report and Case Study

• The close-out report: provides acomprehensively summarisedinstitutional record, with all projectdocumentation, including details oftransaction and all confidentialnegotiated, contracted and financingmatters

• The case study is to build a publiclibrary of PPP experience

Successes and Challenges

Success Factors• Political commitment• Clear PPP law, robust project cycle• Strong feasibility study standards• Clear terms for PPP agreements• Early good projects, training, communication• Strong financial markets, competitive private

sector

Challenges• Increase deal flow• Build public sector capacity• Build private sector capacity• Delegate treasury approvals to provinces• Grow municipal PPPs• Develop sector-specific toolkits

Thank you

Kogan Pillay

Email: kpillay@sadc-dfrc.org

T: +267 319 1146 F: +267 319 1147

Or visit us on the web:

www.sadcpppnetwork.org