Introduction to Public Private Partnerships

Module 1Module 1

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Module Structure

• Good Governance• Funding PPPs• Developing an OBC• Effective procurement• Risks in PPPs• Sustainability• Lessons and recommendations

Definition of PPP

• Public private partnerships (PPPs) are agreements between government and the private sector for the purpose of providing public infrastructure, community facilities and related services.

• The private sector enter into a contract with government for the design, delivery, and operation of the facility or infrastructure and the services provided.

• The private sector finance the capital investment and recover the investment over the course of the contract.

• The asset transfers back to the public sector at the end of the contract

Range of PPPs

Adapted from Canadian Council PPP 2009

Design and build

Operate and maintain

Build and finance

Design build finance maintain

DBFM-operate

Concession

Privatisation

PPP

Mod

els

Degree of private sector involvement

Degr

ee o

f priv

ate

sect

or ri

sk

Principles of PPPs

•Cost measured against conventional procurement.•Whole life costs and quality are combined to gauge VFM

•Long term responsibility for building operation and maintenance•Focus on reducing cost

•Transfer of design and construction risk•Risk of ownership transferred to the private sector

Typical SPV structure for PPPs

Government

PPP Agreement

Private Sector(Special Purpose Vehicle)

(SPV)

Loan agreement Debt

Subcontractors

SubcontractorConstruction

SubcontractorOperations

ShareholdingEquity

PPP and Traditional Procurement

Contract management and

review

PPP Assessment

Initial appraisal

Approvals – PPP procurement assessment Planning and

implementation Post project

review

Establish output

specification

Procurement VFM assessment

Contract award

PPP procurement

Traditional procurement

Governance - principles

• Participation• Decency• Transparency• Accountability• Fairness• Efficiency

Funding - Project finance

The financing of long-term infrastructure is based upon a non-recourse or limited recourse financial

structure where the debt and equity used to finance the project are paid back from the cash flows generated by the project.

Project finance

• High gearing requiring less equity

• Tax benefits

• Public sector use of revenue

• Long term debt funding

Why use PPPs?

• Focus on outputs• PPPs make projects affordable• Better value for money over the lifetime of the project• More efficiency in procurement• Faster project delivery with more projects in a defined

timeframe• Risks are allocated to the party best able to manage

the risk

Why use PPPs? (2)

Outline Business Case

Strategic Context

Establish the Need for Expenditure

Define Objectives and Constraints

Identify and Describe Options

Identify & Quantify Monetary Costs and Benefits

Assess Risks & Adjust for Optimism Bias

Option 1 Option 2

Weigh up Non-Monetary Costs & Benefits

Calculate NPV/(C)s and Assess Uncertainties

Assess Affordability & Record Arrangements for Funding, Management, Marketing,

Procurement, Monitoring, Benefits Realisation and Ex-Post Evaluation

Results and Conclusion on Preferred Option

Option n

STEP 1

STEP 2

STEP 3

STEP 4

STEP 5

STEP 6

STEP 7

STEP 8

STEP 9

STEP 10

Critical stages of a PPP

• Initial feasibility

• Procurement phase

• Construction phase

• Operation phase

Stages in procurement

• Procurement strategy stage

• Qualification and selection stage

• Dialogue

• Award

Prepare Documents

Preparation and evaluation of bidder documents

Financial Close

Procurement Process

• Project Selection• Brief development• Market testing

Risks in PPP

• Optimal risk sharing• Risk borne by the party best able to

manage it• Risk management

Identification Allocation Mitigation

Stages of risk management

Sustainability

• Embedded environmental and social safeguards

• Focus on longer timescales

• Public, business and government working in partnership

What makes a successful PPP?

• Political will• Government commitment• PPP Champion• Clear output specification• Appropriate risk sharing• Value for money• Performance management

Conclusions• Undertake projects for the benefit of the citizens,

including the socially and economically disadvantaged• Allows governments to approach projects hitherto

unobtainable due to lack of funding• Provide incentives to the private sector to adopt green

criteria• Embraces the MDGs• PPPs allow the injection of private sector capital

End-of-Module Questions1. Which of the following best describes PPP projects?

a) Using funding from public borrowing.b) Local government sets the specificationc) Public sector details design and pays for the constructiond) Government sets the required outputs and funding is provided by the

private sector.

Answer: d)

2. What is the name of the organisation created to design, build finance and maintain the asset?

Answer: Special Purpose Vehicle - SPV

End-of-Module Questions3. Which of the following are critical to good governance?

a) Funding for the projectb)Clarity and opennessc) Putting the public firstd)Transferring the risk to the private sector.

Answer: b) and c)4. Which one of the following would not be described as an international investor? a) Banks b) Pension funds c) Insurance companies d) Employees holding shares through an employee share scheme.

Answer: d)

End-of-Module Questions5. The term sustainability refers to?

a) Maintaining resource use at current or higher levelsb)Keeping the natural environment and society in a happy healthy

and functional statec) Holding or increasing the value of human lifed)Focus on fulfilling short term need.

Answer: b)

6. Risks should be borne by the party best able to manage them. a) True b) False

Answer: a)

End-of Module Questions7. What does an OBC demonstrate? a) That a project is economically sound, financially viable and will be well managed b)That a project meets market expectation c) That significant profit will accrue for the public and private sector d) None of the above

Answer: a)8. What are the phases in a PPP project life cycle? Answer: Initial feasibility, Procurement phase, Construction phase, and

Operational phase

9. Match up the boxes. Service contracts Design, build, finance

Concession contracts Private sector managing services

Construction contracts Public sector provides management support