Value-for-money in practice
6 June 2008
EU Twinning Project: “Implementing PPP policy”
Content
On Value-for-Money in practice:
1. Real-life examples
2. Its sources
3. Its drivers
4. Its management
5. The affordability-dilemma
6. The do’s and don’ts
Morning session
Afternoon session
Real-life examples
N31 Motorway Project
• A 25 km provincial road
• Upgrading to a two-lane motorway
• Road infrastructure, bridge and aqueduct.
• DBFM-contract
• Contract value: € 80 million
• Contract duration: 15 years
N31 PPP Motorway Project
Value-for-money 21%
Value-for-money 21%
Cost savings from different material use
Cost savings from different material use
25% less lane closures
25% less lane closures
11 months shorter
construction
11 months shorter
construction
A’dam – Brussels High Speed Rail Link
• A 125 km high-speed rail line
• Greenfield + Upgrading existing rail
• Infrastructure and superstructure.
• 2 DBFM-contracts / 1 O-contract
• Contracts value: € 7 billion
• Contract duration: 15 – 25 years
A’dam – Brussels High Speed Rail Link
Value-for-money 2%
Value-for-money 2%
Non-application of unproven technologies
Non-application of unproven technologies
Greater availability
Greater availability
Embedded-rail Embedded-rail
Renovation Finance Ministry
• Accommodation of Finance Ministry
• Renovation
• 1 DBFMO-contract
• Contracts value: € 175 million
• Contract duration: 25 years
Renovation Finance Ministry
Value-for-money 15%
Value-for-money 15%
Energy efficiencyEnergy efficiencyImproved logistics
Improved logistics
Montaigne School Building
• School building
• Greenfield
• DBFM-contract
• Contracts value: € 27 million
• Contract duration: 30 years
Montaigne School Building
Value-for-money (Quality)
Value-for-money (Quality)
Multi-purpose rooms
Multi-purpose rooms
Large “learning spaces”
Large “learning spaces”
Delfuent Water Sanitation Plant
• Water sanitation plant
• Greenfield & modernization
• DBFMO-contract
• Contracts value: € 450 million
• Contract duration: 30 years
Delfuent Water Sanitation Plant
Value-for-money 17%
Value-for-money 17%
Lower exploitation
costs
Lower exploitation
costs
Process innovations
Process innovations
Shorter construction
Shorter construction
Real estate development
• Port and accommodation
• Greenfield, expansion & renovation
• Multiple DBFM-contracts
Value-for-moneyValue-for-money
FlexibilityFlexibility
Phased-implementation
Phased-implementation
Alternative usage
Alternative usage
The sources of value-creation
The main principles
QualityQuality
The Value-tree
Timing Cost-savingRevenue-generation
FlexibilityQuality-
improvement
Value-for-money
Life-cycle costing
InnovationsExploiting
commercial value
Off-balance financing
Technical know-how
Business process
skills
Commercial expertise
Incentive structure
Risk allocation
Output specifications
Payment mechanism
CompetitionProject scoping
Key Value-drivers: N31 Motorway Project
Output specifications
Functional output specifications on safety and comfort standards
By Ministry of Transport
Conditions tree
Technical specifications By private
partner
Responsibility matrix
L and ac quis ition
Infras truc ture
S upers truc ture
B ridg e
Aqueduct
T raffic and s afety manag ement
G overnmentP rivate consortium
Infraprovider
Manag eDes ig n B uild Maintain F inanc e
Risk allocation
Government Private consortium
Design K
Construction Risk K
Maintenance risk (infrastructure) K
Interface Risk K
Budget Risk K
Political risk (including amendments to laws) K
Act-of-god / force majeure K
Incentive structureQ
ual
ita
tiv
e
Procurement Contract implementation
€ Financial selection criteria
Minimum requirements
Market testing
Payment mechanism
Output specifications
Payment mechanism
Payment Timing Basis & reason
One-off or milestone payment
On construction completion • To ensure timely availability• To lower budget risk for financiers and thus lower financing costs• the amount is predetermined during tender
Compensation for delay in availability
Subsequent to scheduled availability
• To prevent construction / availability delays • Daily penalty (with a maximum total)• the amount is predetermined during tender
Bonus for early completion and availability
Prior to scheduled availability • To stimulate early availability• Daily amount
Availability payments During the “operational” phase • Performance-based payments• To promote maximum availability, quality service delivery, and compliance with safety standards.• See next sheet for further details
Payment mechanism – N31 / trends
Gross availability payments • Monthly performance-based payment • Level determined at contract close• Fixed indexation formula
Availability deductions • Deductions in case of (partial) lane closures or temporary speed limits • Level of deductions depends on traffic volumes and duration (see upcoming sheet)
Penalties • Predetermined (during tender stage) penalty regime• Concerns safety and planning issues (see upcoming sheet)
Nett availability payments • Equals Gross availability payments - / - Availability deductions - / - Penalties
Payment mechanism
Traffic volumes (number of vehicles)
Availability value (EUR/hour)
Lane closure Temporary speed limit
Partial lane closure
0 – 1.000 1.000 250 250
1.000 – 1.500 1.500 375 375
1.500 – 2.000 2.000 500 500
2.000 – 2.500 4.000 1.000 1.000
2.500 – 3.000 8.000 2.000 2.000
> 3.000 or with a traffic jam 15.000 2.000 2.000
Payment mechanism
Safety
1. A traffic accident has occurred with one or more casualties due to a shortcoming of the private consortium
10
2. A traffic accident has occurred without casualties due to a shortcoming of the private consortium
6
3. A shortcoming of the private consortium has put users at risk 4
4. A shortcoming of the private consortium has put third-parties, construction or maintenance workers, or emergency service personel at risk
3
Process management
5. A shortcoming of the private consortium with respect to contract clause 10.11 (Managementsystem)
3
6. A contract deviation not caused by a shortcoming of the contracting enity or a supervening event
1
7. A contract deviation or shortcoming by the private consortium is not reported timely to the contracting authority
4
8. Failure to timely rectify the shortcoming (as laid down in the contract). 4
Competition
Stages
Key Decision-making points
FinalEvaluation
Phase
Selection Phase
Dialogue Phase 1
DialoguePhase 2
FinalNegotiation
phase
Announcement Invitation for Dialogue Ph. 1 (Incl. Selection)
Invitation for Dialogue Ph. 2 (Incl. Shortlist of three firms)
Invitation for Submission
BAFO
Selection of preferred
bidder
Contract close / financial
close
Preperation for Realisation
Realisation Phase
Oplevering
Operation Phase
Aanvangs-certificaat
DialoguePhase 3
Invitation for Dialogue Ph. 3
(optional)
Certificate of Completion
Certificate of Commence-
ment
Competitive dialogue procedureCompetitive dialogue procedure
Value-for-money management
Process, instruments and time
PPP potential scan
Business case
ProcurementRequest for
proposals
Conventional implementation
PPP implementationTime
6 months 6 months
Dynamic PPC
QualitativeQualitative QuantitativeQuantitative
Organization
Management
Management support
Technical team Financial team Legal team
Negotiation team
Communication
• Finance (project/ corp./ public)
• Financial modeling
• Investment & valuation
• Risk analysis
• Market supply and demand
• Civil engineering
• Technical evaluations
• Innovative contracting
• Market supply and demand
• Procurement and contract law
• Contract management
• Public finance and tax policy
• Innovative contracting
Project organization
Management
Management support
Technical team Financial team Legal team
Negotiation team
Communication
• Finance (project/ corp./ public)
• Financial modeling
• Investment & valuation
• Risk analysis
• Market supply and demand
• Civil engineering
• Technical evaluations
• Innovative contracting
• Market supply and demand
• Procurement and contract law
• Contract management
• Public finance and tax policy
• Innovative contracting
Management
Management support
Technical team Financial team Legal team
Negotiation team
Communication
• Finance (project/ corp./ public)
• Financial modeling
• Investment & valuation
• Risk analysis
• Market supply and demand
• Civil engineering
• Technical evaluations
• Innovative contracting
• Market supply and demand
• Procurement and contract law
• Contract management
• Public finance and tax policy
• Innovative contracting
Project organization
PPP Unit
Treasury
Market
Contract management
Private consortium
Project organization
Quality management
planShow performance
and contract compliance
Process management / supervision
Contract
management plan
Ministry of Transport
Project organization
Civil works
Maintenance activities
Quality supervision
Contract management
process product
Quality Management
Plan
Process control Product control
Verify processVerify product
quality
Check process directly
Check product directly
Private consortium
Ministry of Transport
Contract management
plan
Main focus’
On an exceptional basis
The affordability-dilemma
Conflicting objectives
Value-for-money
Optimal risk transfer
Affordability
Risk transfer to private sectorRisk transfer to private sector
The do’s and don’ts
The do’s and don’ts
1. Do allow for task-integration by private sector partner
2. Do parallelize the interests of public and private partners
3. Do ensure competitive tendering
4. Do promote cooperation and partnership
5. Do make use of international - both UK and continental - experiences
6. Do not create, but enable value-creation
7. Do not transfer all risks to private sector or keep everything yourself
8. Do not increase project scope indefinitely (do create appetite)
9. Do not create extensive tender procedures causing high transaction costs
10. Do not tender unfeasible projects
Risk transfer
Traditional model
Early DBFM-contracts
New PPP deals. .
Government Private sector
Contact information
Rebelgroup Advisory BVGeert Engelsman
Wijnhaven 3-O, 3011 WG Rotterdam, The Netherlands Tel +31 10 2755995 Fax +31 10 2755999
www.rebelgroup.nl