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1
TRANSACTION ADVISORY SERVICES
PPP ADVISORY
Social Service PartnershipsAvailability PPPs in Emerging MarketsAlistair SAWERS, PPP Advisory, Ernst & Young Project Finance
2
Overview
Introduction Theory: Social Service PPPs & Availability
Payments» Description & Uses» Structures & Risk allocation» Limitations
Practice: Bajío Hospital PPS Project» Outline» Success Factors
Conclusion: Pitfalls from Other Transactions
3
Introduction
Personal Experience UK PPP Market
» Funder: First Project Financed PPP – Fazakerley Prison
» Investor: UCL Hospital refinancing» Advisor: University of Hertfordshire, UK Met
Office Emerging Market PPPs
» Eastern Europe» Latin America
4
Theory
Social Service PPPs & Availability Payments
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Defining Public Private Partnerships
PPP has a different meaning outside the US» Usual form of procurement is Design Build»Many services are “contracted-out”
International use of “PPP” or PFI is primarily » Design Build Finance Operate [& Maintain]
(DBFO)» Concession structure» Availability & Performance Payments
Social Service PPPs rarely have market risk
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What are Social Service PPPs?
Healthcare» Acute Hospitals» Specialist Units» Community Clinics
Education» Universities» Schools
Judicial» Courts and police stations» Prisons and youth detention centers
Others
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Evolution of Social Service PPPs
Universal use of UK model Focus on output specifications Focus on building “provision”» No volume or market risk» Hard (Facilities) Maintenance included» Soft service inclusion varies
User services rarely included» Clinical, teaching, policing rarely included» Guarding, cooking, laundry and some
training included
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Utilization of Social Service PPPs
? = currently being studied
= Failed and withdrawn
Please note the data is not exhaustive and new projects are being launched all the time
Source: E&Y data, InfraNews Project News Database as at Sept 12th 2006
Healthcare Education Judicial Other Social
Australia Canada Denmark France Germany Holland Italy Ireland Portugal Singapore Spain UK USA Argentina ?Botswana Brazil ? ?Chile ? Czech Republic ? Hungary Mexico ? ?Poland South Africa ?
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What are the objectives?
Cost minimization Ensuring value for money Risk transfer Ensuring adequate incentives
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How are the objectives achieved?
Concession contract Availability Payments Performance mechanisms
– Points towards operator replacement– Points towards overall concession termination– Monetary deductions
Volume payments (rare)
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Issues for Availability Payments
Payment mechanism» Incentives» Complexity» Underlying cost of funds» Appropriations “risk”
Affordability Evaluation methodology» Measuring value for money» Shadow bid / Public Sector Comparator» Valuing risk transfer
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Typical Risks Transferred
Construction» Design» Completion» Funding
Operation» Performance
Managing land sales/ development of vacated sites
Risks taken by party best placed to manage/mitigate
What does that mean in practice?
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What are the Limitations?
Complexity of payment mechanism Appetite for Risk Financeability of risks in addition to country risk Financial strength of potential operators Affordability Transaction Costs / Minimum deal size Legal Framework» Napoleonic code v Precedent based» Property rights
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Practice
Bajío Hospital PPS Project
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Bajío Hospital PPS
Location: City of Leon, Guanajuato
Capacity: 184 beds » 40 for paediatrics» 144 for adults
Size: 24,000 sq meters Capital Investment: USD
47.5m Coverage: 5,000,000
inhabitants Medical Specialties Unit:
» hemodialysis, » short stay surgery» rehabilitation» oncology services
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Bajio Concession
25 Year Concession operation
$47.5m Capital Investment
$12.3m pa payment Timeline
» Tender announced Mar 2005
» Awarded 9th Dec 2005» Construction 11 months» Completion Feb 2007
Acciona Hospital Services selected
4 Bidders Domestic and International
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Political Support
Political Champion» Led by Ministry of Finance» Set up Investment Unit (PPS Taskforce)
PPS legislation» Support from Partnerships UK» Issued March 2003, revised April 2004
Additional Rules & Guidelines» 2 business case reviews (Outline & final)
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Stakeholder Support
Consensus building» Institutional Revolutionary Party (PRI) and
National Action Party (PAN) support PPS Existing profile of Concessions» Initial toll road concessions in 90s failed» Highway PPS launched concurrently
Quick wins to launch process» Strategy to launch 3 pathfinder projects» Pick largest projects
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Procurement Process
Planning» Strategic PPS Plan» Existing regional plan & overall national upgrade plan
Selection of credible advisors» Legal: White & Case» Technical: Currie & Brown» Financial: Ernst & Young
Marketing and building profile of transaction» Presenting to bidding community» Conferences
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Selection Process
Open and transparent process» Lowest NPV of payments» Acceptance of Contract terms
Clear evaluation criteria» Developed from business case
Flexibility in bids versus difficulty of evaluation» Chose easy evaluation – simple contract
Lowest price v best value for money
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Payment Mechanism
Description» Key performance indicators» Deductions» Penalty points
Issue of clarity/complexity Practicality of on-going monitoring
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Impediments to Process
Union/ stakeholder perception» Party of the Democratic Revolution – some
opposition» Local bureaucratic resistance
Transaction cost/ complexity» Affordability problem with smaller University PPS
project Medical equipment -5yrs» Interface/ training»Maintenance/ replacement
Termination Payment
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Conclusion
Pitfalls from less successful transactions
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Pitfalls
Transferring risks which are hard to manage» Refurbishment of existing assets» Volatile Land values»Multi-site projects – availability of sites» Volume risk
Soft services and Union agreements Clinical Services Unnecessary Complexity