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This is the presentation that I made at Cityscape Jeddah in June this year. Some comments are available on several Middle East web sites such as Arab News link attached http://arabnews.com/economy/article453469.ece )
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Citycsape Jeddah
Effective Partnerships Structuring “win-win” Public-Private Partnerships (PPP) in real estate and infrastructure projects
11 June 2011
John DavieChairman, Altra Capital LimitedPast Chairman, UK Government PPP Advisory GroupMember, Saudi British Joint Business Council
• A method of providing public services, not simply for buying infrastructures.
• It should contain • an expectation of service improvement• a commitment to transparency• the dismantling of monopolies and the reform of public
services• A PPP project typically involves a long-term arrangement in
which the public sector will contract with the private sector to deliver a service in exchange for regular performance-based payments
What is PPP?
www.altracapital.com
TraditionalPublic SectorProcurement
Design-bid-buildDesign-build
Public Owner/Operator/Financier
Operator
ContractorEngineer
Build-Operate-Transfer
(BOT)
Turnkey DeliveryDesign-build-operate-transfer
Public Owner/Financier
OperatorContractor
Engineer
Private FinanceInitiative (PFI)
UK PPP Model
BOOT Concession
Public Owner
PrivateConcessionaire
OperatorContractor
Engineer
Maintenance Concession
Design-Build-Finance-Maintain-Operate
Private Sector
Build-Own-Operate(BOO)
DivestitureAsset Capitalisation
OperatorContractor
Engineer
Private Owner
Public Responsibility Private Sector Leading
What is PPP?
www.altracapital.com
Privatisation
A cardinal principle behind the PPP
• Intended to transform government departments from being owners and operators of assets into purchasers of services from the private sector
www.altracapital.com
What are public services?
• Previously been considered as services delivered by government employees to members of the public.
• Public services must be defined in terms of their intrinsic nature, rather than how they are delivered. A more appropriate definition is....‘… any service provided for large numbers of citizens, in which there is a potentially significant market failure (broadly interpreted to include equity as well as efficiency), justifying government involvement – whether in production, finance or regulation’
www.altracapital.com
BOT – Typical projects in Middle East• Repayment profile depends upon each particular
debt tranche. Typically, there is:
• an ECA tranche• a conventional tranche• an Islamic tranche • an equity bridge tranche
• All projects are different but a typical repayment profile might be as follows:
• Conventional and Islamic term facility ; 20 years• ECA facility; 14 years• EBL-bullet payment, repayable 5 years after FC• Working Capital facility ; revolving credit facility
www.altracapital.com
HoldingCompany
Equity
EquityEquity – 20% - 35%• contractor• operator• bank
Fee to SPCfor use of Facility
based onPerformance/
Payment
Project Company(SPC)
DirectAgreement
Build/Renew/Maintenance Costs
Construction &Maintenance
(Hard Services)
Operations(Soft Services)
Service/OperatorCharge
Insurance/Guarantees
Government
How PPP Works
www.altracapital.com
Collateral or subvention
© Altra Capital Limited 2011
Senior Debt LoanAgreement
DebtRepayment Debt
Concession/Project
Agreement
Sub-contractors Sub-contractors
Equity andsub-debt
Percentage of total nominal cash flow remaining in a typical DBMO and PFI model and percentage of total cash Flows to equity remaining in a PFI model
0 3 6 9 12 15 18 21 24 27 30
100%
80%
60%
40%
20%
0%
PFI - % Total payments remaining
PFI - % Total cash flows to equity partners
DBMO - % Total payments remaining
% R
emai
ning
Time
Total nominal cash flow
1987 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
2000
4000
6000
8000
10000
12000
14000
16000
0
20
40
60
80
100
120
1 2 25
1 2
12
35
58
8588
103
81
6963
93
6054 55
2933
Capital Value in £m No of projects
Capi
tal V
alue
£m
Num
ber o
f pro
ject
s
UK – signed PFIs by financial year
www.altracapital.com
1987 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
2000
4000
6000
8000
10000
12000
14000
16000
0
20
40
60
80
100
120
1 2 25
1 2
12
35
58
8588
103
81
6963
93
6054 55
2933
Capital Value in £m No of projects
Capi
tal V
alue
£m
Num
ber o
f pro
ject
s
UK – signed PFIs by financial year
www.altracapital.com
Some lessons learnt
• Stable long term policy commitments if changes are to be made across markets
• Scrutinise the deliverability of a project before real engagement with the market.
• Project Governance• Programme delivery platforms • Mix of mandatory procedures and support • Proper attention paid early on to the operational phase of
projects • A view about what you want the market to look like in 5 -10
years’ time.
www.altracapital.com
History
• Saudi Arabia has a history of being very innovative in its approaches to privitasation.
• 2002 the SEC approved a series of measures aimed at promoting the activities of the private sector with the aim of achieving greater national economic growth.
• 80s /90s UK initiatives brought private sector into activities once considered preserve of Government • first privatizing state-owned industries, • then private sector management and funding for public sector
projects – the Private Finance Initiative
Saudi Arabia - strengths• capital market is relatively large • the monetary system is stable • government commitment is strong • government movement toward private sector and investors
to participate in the development process is encouraging • experience of local and international banks in funding
projects has been successful • willing to participate in future projects, provided they have
an assurance of project viability and profitability.
• Contracts are sufficient for getting started In PPPs, only a strong contract between the parties is needed. Putting in place the overall legal, policy and institutional framework can wait
• PPPs are all embracing panaceas that can be implemented all at once irrespective of the competence, knowledge and skills on the part of governments
• PPPs provide a number of infrastructure assets, roads, bridges, power plants etc., to Governments either free or little cost and no risk
• PPPs are sophisticated technical financial transactions• Using a PPP can bring private money into public coffers
and be an additional source of payment for government departments
The Misconceptions
www.altracapital.com
An Ethical Thought• The genius of the UK PPP model for PPPs is the creative tension
induced by private capital at risk • To mirror this simply by eliminating interest is missing an
opportunity• Islamic finance cannot be reduced to its economic components• Islamic finance carries ethical, social, political and religious
dimensions that informs its structure.• Islamic financial institutions should foster social justice as well as
generate wealth• Similar to the wider objectives of many of the commissioning
agents of PPP projects
www.altracapital.com
Equity – 20% - 35%• contractor• operator• bank
Performance/Payment
Concessionaire/SPV
Debt/EquityFunders Security package
DirectAgreement
Loan Agreement
Build/Renew/Maintenance Costs
Construction &Maintenance
(Hard Services)
Operations(Soft Services)
Service/OperatorCharge
Insurance
Government
How PPP Works
Hiba – gift?Ijara – lease?Istisna – custom manufacturing?Musharaka – partnership ?
www.altracapital.com
Equity – 20% - 35%• contractor• operator• bank
Performance/Payment
Concessionaire/SPV
Debt/EquityFunders Security package
DirectAgreement
Loan Agreement
Build/Renew/Maintenance Costs
Construction &Maintenance
(Hard Services)
Operations(Soft Services)
Service/OperatorCharge
Insurance
Government
How PPP Works
www.altracapital.com
Collateral or subvention
Investors / SubscribersRabb Al-Mal
Performance/Payment
Concessionaire/SPVSecurity package
DirectAgreement
Loan Agreement
Build/Renew/Maintenance Costs
Construction &Maintenance
(Hard Services)
Operations(Soft Services)
Service/OperatorCharge
Insurance
Government
How PPP Works
www.altracapital.com
Equity – 20% - 35%• contractor• operator• bank
Debt/EquityFunders
Financing SPVMudarib
Mudaraba
Performance/Payment
Concessionaire/SPV
Financing SPVMudarib Security package
DirectAgreement
Loan Agreement
Build/Renew/Maintenance Costs
Construction &Maintenance
(Hard Services)
Operations(Soft Services)
Service/OperatorCharge
Insurance
Government
How PPP Works
www.altracapital.com
Investors / SubscribersRabb Al-Mal
Mudaraba
Investors / SubscribersRabb Al-Mal
Performance/Payment
Project SPVSponsor/Developer
Financing SPVMudarib
DirectAgreement
Return on Investment
(no interest)
Build/Renew/Maintenance Costs
Construction &Maintenance
(Hard Services)
Operations(Soft Services)
Service/OperatorCharge
Insurance
Government
How PPP Works
www.altracapital.com
Mudaraba
Debt & Equity(Muharaba, Istisna
Salem, etc)