Stakeholder Briefing

International Experience with PPPs and Meeting the MDGs

Rolf Dauskardt

12 October 2008rolf.dauskardt@rebelgroup.com+31 612506624

Towards Effective Partnerships Between the Public and Private Sectors in BahrainRebelGroup Advisory Netherlands. 12.10.2008

2. Role of PPPs Internationally in Reaching MDGs

Contents

3. Use of PPPs in Different Sectors

4. How Some Countries have Promoted PPPs

5. Promoting PPPs in Bahrain

1. Foreword

1. Foreword

“An internationally competitive economy needs internationally competitive infrastructure …“

“Effective infrastructure investment and service delivery is critical for managing rapid urbanization…”

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2. Role of PPPs Internationally and for MDGs

• Major global shift toward use of PPPs – seen in all regions: North America, Europe, Australasia, Middle East, Asia, Latin America, Africa

1. New source of investment for infrastructure (limited public budgets)

2. More efficiency / effectiveness in services (poor public performance record)

3. Realize more value from public assets (value creation and capture)

SLIDE 4

It is no longer a question of ‘if PPPs’ ?, but rather ‘when and how PPPs’ ?

Traditional Procurement vs PPP SLIDE 5

– Contribution of private sector limited to construction

– Frequent construction cost overruns, delays

– Poor operation and maintenance of services by governments

– Simple tendering based on cheapest price offered to do the job

• The public and private sectors have always worked together…– Companies have paid taxes– Companies have supplied

governments with goods– Companies have constructed

projects for the government

• Traditional infrastructure procurement– Gov designs / finances– Private company constructs– Government owns / operates /

maintains Example– Government designs a bridge joining 2 islands– Runs tender and gets cheapest construction

company to build it– Government pays for the construction from the

budget– When built the government operates and maintains

the bridge– If anything goes wrong the government pays

PPPs are Fundamentally Different SLIDE 6

• Formal contract between public and private partner (over the years duration the service will be provided) – usually multiple years duration

• Entered through competitive procurement – not just price, negotiated procurement

• Using output specification – government specifies ‘what’, private sector can define ‘how’

• With suitable risk allocation between parties• Putting private investment at risk• With regulation or contract management of performance of the

private partner Example– Government defines output = connection to let 1,000 vehicles p.d. travel

between islands– Government tenders for best solution over 30 years – e.g. ferry, tunnel,

bridge??– After negotiated tender government enters 30-year contract with private

company– Private company designs, builds, finances bridge, then operates and

maintains it for 30-years– Private company receives payment if the bridge works and is available for

traffic– Government checks on safety and availability– If the bridge is closed, or unsafe, the private company looses money

PPP Value Drivers SLIDE 7

Less Value Added More Value Added

Fixed price Performance-based payment mechanism: carrots and sticks! Above-par performance should give higher profitability, low performance should trigger penalties.

Performance payments

Input contracting Output specifications: Output-based contracting leaves

room for the private sector to decide how to deliver the envisaged services. This uses the private sector's creativity to deliver the agreed public service at lower costs, or to provide better quality at the same cost to the user.

Output contracting

Risks all placed in one

hand

Intelligent risk allocation: a risk should be allocated to the party that is best able to manage that risk. If too many or the wrong risks are held by either the public or private party the PPP will not add value.

Risks with party best

able to manage risk

Less project phases in

one hand

Lifecycle optimization: integrating different components and phases of a service increases its performance over its lifecycle and minimizes interface problems.

More project phases in

one hand

Informal contracts Formal contracting: formal contracting with clear legal

recourse in case of disputes increases clarify and reduces risk.

Formal contracting

Less competition Competition / functioning market: competition from an adequate number of companies increases value-for-money. PPPs without competition are inefficient.

More competition

Public financing Private financing: private financing also results in strong oversight from debt and equity providers which can increase project performance.

Private financing

Value for Money

• VfM = relationship between what is invested and the quality, coverage and price of services delivered

• Well structured PPPs can deliver better VfM than public sector provision

• Examples–N31 Road, 25km, DBFM, € 80m, 15 years

• 21% better VfM

–Finance Ministry Building, DBFMO, € 175m, 25 years• 15% better VfM

–Delfuent Water Sanitation Plant, DBFMO, € 450m, 30 years• 17% better VfM

SLIDE 8

Why can PPPs Deliver Better Value for Money?

• PPPs let Public Sector and Business do what they do Best!

• Private– Innovation, use of technology–Professional management–Good project and lifecycle management–Efficiency–Technology–Maintenance practices–Financing

• Public–Policy setting–National planning–Regulation–Looking after public interest

SLIDE 9

PPP Models SLIDE 10

Pri

vate

Private

Man

ag

em

en

t

Service Contract• Maintenance of equipment• Ownership: remains with public sectorRisk profile: private sector receives a fee for their servicesDuration: 1 - 5 years approx.

Mgt. Contract• Facility management• O & M, supply• Ownership: remains with public sectorRisk profile: private sector receives a fee, partially linked to performance. No / very limited capital investments by private sector.Duration: 5 – 15 yrs. approx.

Lease• Full responsibility for services• Operational investments• Ownership: remains with public sectorRisk profile: Revenue risk with private sector; major investments made by public sector, minor investments made by private sectorDuration: 10 – 30 yrs approx.

Full Privatisation Complete transfer to private• Duration: In perpetuity

PublicOwnership / capital investment

DBFMO / Concession• Investments into new (DBFMO) or existing (concession) infrastructure made by private sector• full system operation by private sector• Ownership of infrastructure / facilities with private sector for

duration of contract•Risk profile: Budget-based: revenue risk with government, Revenue-based: revenue risk with government. Technical, financial, operational risks fully with private sectorDuration: 20 – 50 years. approx.

Simpler PPPs

More Complex PPPs

Two Important PPP Structures

1. “Off-Budget” PPPs• Traditional BOT model• Revenues collection from users given to private partner (e.g. tolls paid on a

toll road)• Project is “off the budget” of government as revenues flow directly to private

sector• Used only where there are substantial revenues that can be directly charged

to users• ‘US model’

2. “On-Budget” PPPs• DBFMO model• Revenues collection stays with government• Government pays private partner to make the service available (availability

payments)• Project is “on the budget” of government as revenues flow through

government• Can be used widely for services paid by users, or for those paid through taxes• ‘European model’

SLIDE 11

Tools for PPPs

• Public Sector–Feasibility study–PPP options assessment–PPP Business Case – financial

modeling–Public Private Comparator (PPC)

Model–Public Sector Comparator (PSC)

Model–Negotiated procurement strategies

• Private Sector– Lifecycle financial modeling–Project finance structuring–Operational / technical tools

• Public and Private Sector–PPP project structuring–Transaction strategy

SLIDE 12

Contribution to MDGs

• Strengthen economy of Bahrain = jobs and tax revenues• Improve service coverage• Companies can apply MDG principles (e.g. gender promotion) in PPPs• PPPs can create opportunities for disadvantaged groups and

unemployed• ‘Pro-poor add-ons’ can be included to PPPs• Human and financial resources of government are freed up to

address welfare issues

SLIDE 13

3. Use of PPPs in Different Sectors

• If value drivers used properly and deal well structured PPPs can be applied almost anywhere…

1. Physical Infrastructure2. Social Infrastructure3. Strategic Infrastructure

SLIDE 14

Physical Infrastructure PPPs

• Large capital investment, substantial revenue flows, long time frames

• Such as roads, railways, bridges, tunnels, ports, airports, etc.

SLIDE 15

Social Infrastructure PPPs

• Such as education, health, welfare systems, social housing, etc.

SLIDE 16

Strategic Infrastructure PPPs

• Such as prisons, military, policies, border management, etc.

SLIDE 17

4. How Some Countries have Promoted PPPs

• UK – Private Finance Initiative• Netherlands – PPS programme• South Africa – National PPP Programme• Canada – P3 programme• Egypt – new PPP policy, PPP Unit and Pilot PPP

Transactions !!• PPP Units now in many countries

• And many, many more country experiences …

These countries have found ways to strengthen the understanding and

cooperation between the public and private sectors through

partnerships !

SLIDE 18

Some PPP Units and What they Do SLIDE 19

What Government and Business Address

SLIDE 20

Political and social commitment

PPP vision and clear commitment from government Create certainty

Local and National government policy

Supportive policy Structure, process, issues

Legal Framework Enabling laws Remove obstacles to PPPs in existing and sectoral

laws

Market capacity Build understanding and capacity of private sector to respond

Cost recovery issues Sufficient cost recovery from users Set up payment mechanisms through

government

Taxation, reporting and accounting framework

Tax treatment of PPP investments Inclusion of PPPs in government budget

Financing sector issues Capital market conditions Capacity and interest in long term financing of

infrastructure

Technical and organizational issues

Developing technical information on service provision Clear and transparent procurement process

Trust Develop understanding and trust between public and private sectors

Stakeholders Ensure public is consulted and concerns addressed

Some PPP Projects in the Gulf and Middle East

• Jordan / As-Samra Wastewater Treatment Plant – DBFMO on 25-year concession agreement with combined private, local government and donor financing (MIGA Guarantee)

• Jordan / Queen Alia International Airport – BOT for maintenance, expansion, rehabilitation and modernization. $450m

• Kuwait / Sulaibiya Wastewater Treatment Plant – 30-year BOT

SLIDE 21

PPP Projects in the Gulf and Middle East [2] SLIDE

22

• Jordan / Gas Transmission Pipeline – 30-year DBFMO concession for a natural gas pipeline from Aqaba to Amman and the Syria Border. Approx $500m structured debt / equity

• Morocco / Guerdane Irrigation Project – 30-year concession for an irrigation network

• Tunisia / Independent Power Producers – 20-year BOOT and 30 Mw gas plant

5. Promoting PPPs in Bahrain

1. Vision / Strategy for PPPs in Bahrain– Role of PPPs in the competitive development of Bahrain– Forms of that PPPs Bahrain wants to establish– Key infrastructure and services where PPPs are wanted – e.g.

transport, energy, water, education, social, etc.–Commitment of the government and the private sector to PPPs– This should be developed jointly by government and business

2. Institutional Arrangements for PPPs– Identify the champions for PPPs– Responsibility in government for structuring and tendering PPP

projects– Public interest checks – value for money, procedural– Possible PPP Unit in Bahrain?

3. Tools for PPPs–How expertise needed by the public and private sectors to structure

PPPs will be obtained

4. PPP Transactions / Deal Flow !!!!!– Identify priority projects for PPPs in key sectors–Conduct pilot PPP transaction with external support

SLIDE 23

Opportunities and Challenges for Government and Business in Bahrain

•Major opportunities for government and business in infrastructure• PPPs are not “business as usual”•Means changes for

–Public sector (from direct provider, to organiser and regulator)–Private sector (from simple construction, to integrated lifecycle projects)–Financial sector (short term corporate finance, to long term infrastructure project finance)

New knowledge, skills, expertise and tools needed

SLIDE 24

Future of PPPs in Bahrain

• An internationally competitive economy needs competitive infrastructure• PPPs for flagship infrastructure projects, and smaller scale (social)

infrastructure• PPPs can help Bahrain to…1.Build an internationally competitive economy2.Fully reach the MDGs

SLIDE 25