EuropeanInvestmentBank
Basic concepts Jaime BarraganJaime Barragan
EIB – European Investment BankEIB – European Investment Bank
IADB, 8-9 December 2005IADB, 8-9 December 2005
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CostsCosts
Dividends
Capex
Opex
Debt Debt serviceservice
Public sector body
Private Special
Purpose Co.Ris
k a
pp
eti
te
plus
RevenuesRevenuesSenior
lenders
Subordinated
lendersFinancial
equityinvestors
minus
Paying users
Dividends
What is a PPP?A Complex Web of Contracts & Cash Flow
Construction Co.
Operating Co.
SponsorSponsorSponsor
ShareholdersShareholders
AgreementAgreement
EPCEPC
ContractContract
O&M O&M
ContractContract
CustomerCustomer
ContractContract
ConcessionConcession
AgreementAgreement
LoanLoan
ContractContract
DirectDirect
AgreementAgreement
70 to 95% Debt70 to 95% Debt3
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PPP
Definitions
The term public-private partnership is not defined at Community level. In general, the term refers to forms of cooperation between public authorities and the world of business, which aim to ensure funding, construction, renovation, management or maintenance of an infrastructure or the provision of a service.
EC, Green Paper on PPPs
Many definitions & interpretations across Europe
Ingredients: Public service responsibilities Private sector expertise Bundling of operation &
construction Incentives for innovation &
performance
Risk sharing Private finance Long term contracts
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Key Characteristics
Cashflow (un)certainty Credit intensive. Long Term Highly structural Large Low Margins Mature in some markets, innovative in other
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Process
Assesment of the market. Need for the project. Technical feasibility Financial Feasibility Support/commitment Letter. Award. Due diligence Mandate/syndication Docummentation Financial closing Administration
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Main Risks
Cashflow. Construction Risk. Operating Risk Participant Risk Supply Risk Market Risk Infrastructure Risk Environmental Risk
Political Risk Force Majeur Foreign Exchange
Risk Engineering Risk Syndication Risk Funding Risk Legal Risk
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Forms of private participation
commercializedpublic enterprise
• Continuous spectrum of partnerships, with private sector taking variable degrees of risk
• Other Hybrid or intermediate forms possible• Differ in duration, financing & risk transfer
Private O&M + financing Private O&M
BOO divestiture
concession BOT/DBFO
lease managt.
contractsservice
contracts
PPP
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Choosing the right structureKey questions
Is legal/institutional/economic framework ready? Who decides (local v central authorities)? Is there robust political support for PPP? Is project revenue generating/cost recovery? Is purpose to delegate service to consumers or just to
build & operate a large new asset? What risks will private sector take? Is PPP timetable compatible with other constraints?
PPP is a policy choice NOT a quick fix
EuropeanInvestmentBank
Economics
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PPP Investment Rationale
Conventional model:Definition of inputsProcurement of assets
PPP model:Definition of outputsProcurement of service
Encouraging the private sector to:apply expertise for better service delivery innovate in finding new technical solutionsoptimise the capital component of projectsenter contracts with appropriate risk sharing
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Sources of Value-for-Money
Bundling Life-cycle approach
Risk sharing Better risk management
Private asset ownership Control over asset and adoption of
cost saving innovation & efficient contracting
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Is the legal and institutional framework right? High quality capital planning is essential
How is risk to be transferred and to whom? Just substituting private for public capital won’t give value for
money. Is risk sharing realistic?
Is the scope of procurement correct? Is there private sector expertise? Will there be competition?
Is public sector team skilled & experienced? Will evaluation be robust? Can deal be closed?
Is there a credible public sector comparator? The test for the value of risk transfer
Tests of value for money
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PPP is not a “free lunch”
Transaction costsBidding, negotiation, monitoringRenegotiation over life-cycle
Pursuit of cost efficiency may impact service quality
Institutional and administrative capacity requirements
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PPPs and the macroeconomy
Accounting rules affect incentives They may bias the public sector for PPPs
No macroeconomic case for or against PPPs No automatic link between cost efficiency and
aggregate growth
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Economics Summary
PPPs can boost cost efficiency at the project level.
Need to be mindful about service quality, transaction costs, and institutional requirements.
No macroeconomic case for or against PPPs, but they must be accounted for appropriately.
Life-cycle transaction costs, benefits & value-for-money are key to public policy decision.
EuropeanInvestmentBank
Experiences
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EU15 Experience - PPPs mainly in transport and buildings
51%
6%
11%
7%
3%
9%
13%
0%
Rail (LU & CTRL)
Roads, brigdes, etc.
Health
Education
Police & prisons
Defence
Airports
Other83%
5%
5%7%
UK Non-UK
Sector split of signed PPP contracts in EU by value
Source:ProjectWare, HM Treasury
EuropeanInvestmentBank
Successful procurement
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Requirements for successful PPP Preparation
Employ Good Advisors – Spend to Save
Don’t Rush – Political Deadlines Weaken Negotiating Position
Research and Choose Appropriate PPP Model – To Suit Local Market & Law
Maintain Competition – Avoid Tempting Single Bidder Offers, Minimum Two BAFOs
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Requirements for successful PPP Implementation
Simple Payment Mechanisms – Significant Performance Element But Not Too Many Parameters
Equity Level Appropriate to Risk – Returns Not Taken Too Early
Independent Supervision and Good Quality Reporting – Early Warnings, Prompt Remedial Actions (covered in agreement)
Minimise Third Party Involvement – Provides Excuses for Poor Performance
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Value-for-Money
Early review based on sector experience Build into bid evaluation process Flexible use of Public Sector Comparator Allow for optimism bias Adjust for risk transfer Allow alternative bids & innovation
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Sustaining the partnerships
Budget for adequate monitoring Transparent reporting to maintain public
confidence Early warning systems for essential public
services Financial “health“ monitoring of major
contractors Independent audit reports to “learn lessons”
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