Public Private Partnerships 20 July 2006. Public Private Partnerships What are they? Why are they so popular? What are some of the pitfalls of this type

C A P I T A L I N S I G H T

Public Private Partnerships20 July 2006


Public Private Partnerships

What are they? Why are they so popular? What are some of the pitfalls of this type of

procurement? What are Capital Insight’s capabilities in

making PPP’s happen?


Policy Documents

Working with Government: Private Financing of Infrastructure and Certain Government Services in NSW, NSW Premiers Dept, November 2000.

Working with Government: Guidelines for Privately Financed Projects, NSW Premiers Dept, November 2001.

Working with Government: Policy for Privately Financed Projects, NSW Premiers Dept, November 2001.


Why?

Private sector participation can support the Government’s fiscal strategy by improving

value for money in Government service provision and optimising risk allocation

Working with GovernmentNov 2000 p viii


But!

Private financing does not relieve the budgetary and balance sheet constraints on government

agencies

Working with Government

Nov 2000 p viii


How

The private sector must demonstrate that its packaging of design, construction, financing,

operation and maintenance of certain types of facilities offers better value for money than a

public sector delivery model.

Working with Government

Nov 2000 p viii


Aim

To incorporate best practice in asset acquisition eg, whole of life approach

To transfer appropriate risk to PPP company

To document that risk clearly and unequivocally


Selecting the right approach

Asset creation Operation Service boundaries Physical boundaries Critical mass/scale Complexity Term ‘Client’ Opportunity for risk transfer Community Service Obligations


Jargon

BOO Build Own Operate BOOTBuild Own Operate Transfer BBO Buy Build Operate BTO Build Transfer Operate JV Joint Venture Alliance Contracts Barter Arrangements Government Office Space Leases Long-Term Service Provision Contracts


Fundamental Covenant

Supplier Performs

Principal Pays


What is Value for Money?

Value for money =f(n) A measure of the value of the entity

A measure of the total cost of the entry

From AS4183: 2006, p14 draft Australian Value Management Standard


How to improve Value for Money

From AS4183: 2006, p14 draft Australian Value Management Standard


Issues

Technical Expertise

Financial Expertise

Probity


Conventional vs PPP Procurement

Conventional Design consultants Construction contract Facilities maintenance contracts Operations support contracts

PPP Single PPP contract


Costs Methodology

Conventional Direct Procurement

Estimated Project Construction Costs

+

Estimated Operating and Maintenance Costs

+

Risk Adjustment

+

Competitive Neutrality Adjustments

=

Risk Adjusted Total Project Cost

Private Financing

Estimated construction costs

+

Estimated Operating and Maintenance Costs

+

Financing Costs

-

Private Sector efficiencies

=

Total Project Cost


Risks Methodology

Cost effective risk transfer is sought NOT maximum or total risk transfer

Value for money is usually achieved when risks are allocated to the party best able to

manage them.


Typical Risks Allocation

Private Sector Risks Site conditions Design Construction cost and time over run Maintenance and service provision cost over runs Industrial Relations Reliability and availability risks Ancillary revenue risk Physical Security Financial Risks Contractor credit risk Non-discriminatory changes in law Environmental risks (during and post operations)

Shared Risks Inflation Technology Force majeure

Government Retained Risks Site selection Scope change Political risk Discriminatory legislation changes Residual value


How to assess?

0

50

100

150

200

250

Assets Services Total PPP

Assessed TransferredRiskOngoing servicesdeliveryConsultants

Initial Construction Cost

Principal's Retained risk

Public provision of assets and services

PSC against which to assess PPP provision of

assets and services

+ =


What is the range of risk

adjustments

Source Project Delivery Operation

Victorian Treasury 12% to 18% 12% to 18%

UK Defence projects

12.3% to 16% 12.7%


What is the range of PPP cost

savings?

UK Government Average 17% Prisons 10% Defence 20%

NSW Government Schools 1.6%


Risks

Greed

Unclear management/direction/governance

Unclear specification of performance requirements.


Issues

Specification of outcomes/risk transfer Greed Lack of flexibility to Government Super profits Transaction costs/standardisation Intellectual property


Output Specifications

The first time the Ministry of Defence involved the private sector in training military pilots, it called a tender for the maintenance of the helicopters according to the manufacturer’s maintenance manuals

The United Kingdom’s Defence helicopter pilot training project is a demonstration of the advantages of such an approach.



When the contract was renewed, the specification was amended to a requirement for 25,000 hours of helicopter flying time per annum, with the contractor being made responsible for supplying the aircraft. Under the PFP approach, the number of aircraft involved in delivering the service was reduced from around 60 to just 47.



The next generation of contract is expected to be based on a specification that requires the delivery of a number of pilots per annum trained to the military's specifications. Under this approach, which enables maximum innovation, further cost reductions are anticipated through a further reduction in the number of aircraft used and a greater use of simulation.


Greed

Cross City Tunnel required payment of $93 million up front to RTA

To get payment stream to RTA up, contractual obligations for RTA to funnel traffic.

To win tender, traffic projections high Lane Cove Tunnel similar up front payment

regime but for $79 million.


Lack of Flexibility to Government

Politically – can’t just go in and arbitrarily change things

Scope change subject to: contractual provisions built constraints


Super Profits

Political problem

Normal course of business

Refinancing

Super losses – not interested!!


Why the need for critical mass?


Benefits

Costs savings Risk transfer/sharing Innovation Speed of delivery Flexibility to PPP company Single point responsibility


PFI Performance

29 out of 37 projects surveyed reported no construction price increase after contract award.

Where they had been a price increase, it had been Principal initiated.

28 out of 37 projects were delivered on time, or earlier

Of the 9 not delivered on time, 6 were delayed by two months or less.

PFI: Construction Performance, UK National Audit Office,

February 2003


Project Approvals Process

Stage

Phase Actions

1 Project Definition Strategic Planning Initial Project Development Budget Committee Approval

2 Proposals and Short Listing

Call for Proposals Evaluation and Short listing Budget Committee Approval

3 Detailed Proposals and assessment

Call for Detailed Proposals Evaluation and Recommendation Budget Committee Approval

4 Negotiations and Contracts

Negotiations with Preferred Proponent Contractual Agreement Budget Committee Approval if significant variations arise in negotiations

5 Disclosure and Implementation

Issue Contract Summary Implement Project Post Implementation Review


Key PPP Success Factors

Make this project a good deal

Make the project objectives clear

(Top Management)

Apply the proper processes (Project management)

Select the best available deal(Bid quality)

Challenge : make sure the deal

makes sense (Top management review)

1. Examining the value for money of deals under the Private Finance Initiative, UK National Audit Office, August 1999


Making the project objectives clear1. Make the project objectives clear

(Top management)

A. Select the best project to pursue

B. Make the project deliverables clear

C. Determine best form of partnership

D. Produce an outline business case

1. Prioritise projects

2. Select only top priority projects

1. Express the Results Desired in

output terms

2. Assess private sector capabilities

3. Make preliminary Evaluation of the benefits sought

4. Assess the weight to be attached to policy imperatives

1. Identify feasible project mechanism

2. Identify room for innovation in

advance

3. Identify the scope for risk transfer

in advance

4. Establish likelihood of a vfm

affordable project

1. Objectives

2. Option Appraisal

3. Project timetable

4. Evaluation criteria

5. Commitment


Apply the proper processesii. Apply the proper

processes (Project management)

A. Plan procurement thoroughly

B. Establish conditions for a successful

competition

C. Regularly reassess that project is worthwhile

D. Control costs

1. Assemble properly Qualified project team in good time

2. Investigatethe market

3. Identify likely contract issues

4. Prepare a tendering strategy and timetable

5. Prepare a credible project timetable

6. Prepare a public sector comparator if required

1. Create a good tender list

2. Create a good specification of requirements

3. Maintain competitive tension to final contracts

1. Set realistic budgets

2. Appoint advisors after competition

3. Monitor and manage costs


Select the best available deal

iii. Select the best available (Bid quality)

A. Ensure that a good range of solutions was put forward

B. Evaluate elements of the bid

C. Select the most economically

advantageous bid

D. Manage differences between the winning bid

and contract award

1. Design variants

2. Operational variants

3. Financing variants

4. Deliverable variants

5. Risk transfer variants

1. Financial

2. Risk transfer

3. Financial stability of bidder

4. Quality of service

1. Cost

2. Bidder track record

3. Design features

4. Operational features

5. Impact of risk

1. Financial

2. Design deviation

3. Operational deviations

4. Deliverables

5. Risk allocation

6. Sanctions


Does the deal make sense?

iv. Challenge: Make sure the deal makes sense

(Top management review)

A. Does it and will it meet the

objectives

B. Were alternatives evaluated and

fairly eliminated?

C. Will the contract ensure delivery of the service over the contract life?

D. Is the deal affordable in the short term and long term?

1. Original objectives?

2. Fit with latest circumstances?

1. Were all reasonable alternatives examined?

2. Was it the most economically

advantageous solution?

3. Was there a clear overview confirming the desirability of

proceeding with the ‘best deal’?

1. Does the contract reflect the deal that has been negotiated?

2. Are there adequate arrangements to

manage the contract?

3. Are termination/handover arrangements clearly specified?

4. Are there appropriate sanctions/ bonuses?

5. Are there appropriate provisions for dealing with

changing requirements?

1. Are there sources for capital funds?

2. Are there sources for ongoing payments?


Capital Insight PPP Experience

Advice (by BF) in 1980’s (prior to Capital Insight) to: Bennelong Point Parking Station 1985

(Department of Public Works) Walsh Bay 1986 (Maritime Services Board) Woolloomooloo Wharf 1987 (Maritime Services

Board)

In 1993 (ie, Capital Insight) Hawkesbury Hospital Project (Wesley Mission/Uniting Church)


Capital Insight

Sydney Hospital (financial) Canterbury Hospital (financial, implementation) Westmead Hospital (value management) Royal North Shore Hospital (strategy) Royal Prince Alfred Hospital (implementation) Nepean Hospital (probity)

Through 1990’s and early 2000’s advisors to Health, Area Health Services and Treasury on carparks at:


Capital Insight

Rachel Forster Community Health Centre

Inner West Health Centre at Croydon (included Barter transaction)

In 2004, Headquarters Joint Operations Command Project (Department of Defence)

Currently, Orange Hospital

plus UK experience by various staff