Patricio Mansilla - Key PPP Precepts

Key PPP Precepts

Drawn from International

Experience

Patricio Mansilla

Infrastructure Director

Chemonics International

IDEAS AND CONCEPTS BEHIND SUCCESSFUL

PPP PROGRAMS

PPP INFRASTRUCTURE PRECEPTS

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Chemonics PPP Infrastructure

Precepts:

• Approach PPP infrastructure development as a Program rather

than ad-hoc transactions;

• Provide specialized Technical Assistance through the entire project preparation-cycle (Alpha to Omega);

• Do not “short-change” project preparation costs;

• Promote vigorous, open, and transparent competition;

• Look for opportunities to leverage public sector funding;

• Strengthen the PPP legal/institutional regulatory framework over time.

CHEMONICS PPP PRECEPTS

Approach PPP infrastructure development as a

program rather than ad-hoc, one of a kind

transactions.

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Chemonics PPP Precepts

Why?

• Multiple projects support and drive PPP institutional

development;

• PPP transaction design and structuring is expensive; need to

seek economies of scale;

• Economical use of professional staff;

• Need for a PPP institutional home: An in-country base for PPP

knowledge and experience of what works and what does not

work;

Examples: PPP Unit / South Africa National Treasury;

ProInversion / Peru;

Philippines / Ministry of Finance PPP Unit 5

CHEMONICS PPP PRECEPTS

Provide specialized Technical Assistance through

the entire project preparation process:

Alpha to Omega (A-Z)

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Chemonics PPP Precepts

Why?

• The “Design Phase” of a PPP transaction is the easy part, the

more difficult and important part is the “Transaction

Implementation Phase”.

End Objective

• Build stakeholder consensus, political commitment, and public

support, as well as, ensure essential private investment.

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Consultation with key stakeholders: Build consensus, political commitment, and public support

Due Diligence / Technical Project Design

Financial Structuring

Risk Allocation & Mitigation

Tech/Fin/legal Transaction Design

Define Objectives/ Select PPP option

Shadow Rating/Credit Enhancement

Asses investor interest

Transaction Design

Transaction Implementation

Local/International Promotion

Draft bidding documents/contracts

Pre-qualification

Bidder due-diligence

Interaction with Bidders “negotiation”

PPP Contracts/Procurement Process

Contract Award / Financial Closure

CHEMONICS PPP PRECEPTS

Do not “short change” project preparation costs.

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Chemonics PPP Precepts

Why?

“A dollar saved is not necessarily a dollar earned.”

• Most PPPs are capitol intensive and the private sector (both

international and domestic) is being asked to assume

substantial risk as they make the crucial decision to invest or

not.

• Sound project preparation is the key to building investor

confidence.

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Technical Assistance (T.A) and the Case of Peru

1,000 Km Amazon North Highway_

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T.A. Cost

$4.7 Million

Investment

$220 Million

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Amazon North: 960 Km.

Investments: $220 mil.

O&M: $15 mil./year

Awarded in: April 2005

Amazon Central: 854 Km.

Investments: $115 mil.

O&M: $15 mil./year South Container Terminal

Port of Callao $364-$617mil.

Awarded: June 2006

Transport PPP

Transactions

FBT: 480 Km.

Investments: $162 mill.

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Technical Assistance (T.A) and the Case of Peru

Port of Callao (Lima)_

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T.A. Cost

$3.3 Million

Investment

$430 Million

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a) Increase in Demand (Port moves

more than 1 million TEU per year

and serves 80% of Peruvian foreign

trade)

b) Overruns, low productivity and

technological change

c) Negative externalities

d) $800 million in investments required

in Peruvian ports

Callao Port

What’s wrong with this Picture?

No Gantries in Callao Port

Container docks -

ENAPU

South Breakwater

Option of second

phase

Currently

demolished

Lima-

Peruvian

Capital

7 ha

In the Case of Peru

$ 8.0 Million in Government-

Financed Technical

Assistance

$ 650 Million in Private

Sector Investment

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• Peru PPP Investment to Technical Assistance Ratio = 80:1 • Moral of the story with respect to financing PPP design/structuring:

Don’t be “Penny-wise and pound foolish”

CHEMONICS PPP PRECEPTS

Promote vigorous, open, and transparent

competition.

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Chemonics PPP Precepts (cont.)

Why?

• PPP projects in themselves do not always guarantee lower

prices or better services – competition does.

• Additionally vigorous, open competition is the single best way to

prevent corruption.

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Montería Water PPP: The first Water

PPP in Colombia

MONTERIA – year 2000

• Population: 300,000 (80% Low Income)

• Water production: 600 lps.

• Non revenue water: 55 %

• Metering: 0.7 %

• Revenues: $4 M

• Water Coverage: 50 %

• Connections: 36,500

• Sewerage Coverage: 27 %

• Connections: 14,600

• Required Capital

investments: $70-80 mill

Bogota

Montería

PANAMA

VENEZUELA

BRASIL

PERU

ECUADOR

COLOMBIA

The Case of Montería,

Colombia PPP

The Case of Montería, Colombia PPP

Montería

Water/Sewage

Coverage

Units Before Concession 3 years after

Concession

Water Coverage % 50 76

Sewage Coverage % 27 40

Water Production liters/sec. 659 915

Hours of Service Hours/day 3/4 18/24

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Competition set the stage for generation of these results.

Transaction

Structure

Prepare RFP &

Draft Contract Pre-

Qualification Consultation

“Negotiation”

Amend

Business Model

and

PPP Contract

Bidding:

Proposals &

Evaluation

PPP Contract

Award

Competitive Bidding Process

Local and International Project

Promotion

Constant Interaction with Bidders

Financial

Closure

How is Competition Maximized?

• Incentives for maximizing the number of qualified

bidders submitting proposals.

• In the case of Montería the transaction consultant

received a scaled success fee payment:

– 80% of success fee for 1 qualified bidder

– 100% success fee for 2 qualified bidders

– 120% success fee for 3 or more qualified bidders

(FCC/VIVENDI, Azurix, and CEC/Venezuela).

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How is Competition Maximized? (Cont.)

• Partial Credit Guarantee (PCG): The case of the

Amazon North Concession in Peru.

• Road shows to sell the country and the PPP

project.

• Solid technical and financial PPP Design /

Structuring.

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• Fundamental underlying precept at the core of PPP

implementation philosophy;

• PPP does not guarantee lower prices or better

service, competition does…;

• Essential that the public does not perceive that PPP

merely substitutes a private sector monopoly for a

public sector monopoly;

• Procedural transparency and professionalism is

critical to the success of PPP procurements.

Competition, Competition, and more

Competition

Chemonics PPP Precepts

Look for opportunities to leverage public sector

financing

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Chemonics PPP Precepts (cont.)

• Partial Credit Guarantees (PCG);

• Right-sizing the government’s capital commitment to

properly allocate risk between the public sector and

private sector:

Amazonas Norte PCG

Callao Port and Monteria Water/Sewage

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Chemonics PPP Precepts

Strengthen the legal/institutional regulatory

framework overtime;

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Chemonics PPP Precepts (cont.)

• In the absence of established regulatory institutions

to oversee specific PPP transactions, PPPs can and

should move forward with regulatory provisions

embedded in each PPP contract;

• Overtime the regulatory/institutional framework will

evolve and take root at the individual ministry level or

in a special purpose regulatory body…in the

meantime keep building the portfolio of PPP

transactions.

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Thank You Very Much