21 st May 2008 “CREATIVE SOLUTIONS TO PPP RISKS” Presented by: Jeremy Terndrup & Vyacheslav...
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Transcript of 21 st May 2008 “CREATIVE SOLUTIONS TO PPP RISKS” Presented by: Jeremy Terndrup & Vyacheslav...
21st May 2008
“CREATIVE SOLUTIONS TO PPP RISKS”Presented by:Jeremy Terndrup & Vyacheslav Andriyko
Page 2
What is PPP?
Public Private Partnership (PPP) is an alternative to standard public sector procurement of capital assets by ‘up-front’ payment.
PPP can be described as, “An agreement between a Public and Private Entity in which a Private Entity delivers goods or services under the Public Entities Regulatory Authority for a financial return.”
A typical PPP structure involves the creation of a single stand-alone company/business financed and operated by the private sector. The purpose is to create the asset and then deliver the service to the public sector in return for payment equal to the service levels provided.
Page 3
New concept?
UK first to develop the PFI concept as is known today, but…..
the concept of a working partnership between the private sector and public bodies is well established. Compagnie Generale des Eaux, launched in 1853 and the founders of the Veoila Environment, was contracted to supply water to the city of Lyons. The company was awarded a 50 year contract to supply water to Paris in 1860.
Page 4
PPP Model – an example
Procuring Authority/
Public Agency, and ongoing users of public services
Special Purpose Vehicle
Construction contractor
Facilities mgmt (FM) operator
Construction investor
Facilities mgmt (FM) investor
3rd party equity investor
Debt investor
Services delivered in return for annual charge
Unitary charge payment
Carried out under contract
Equity and sub debt finance
Debt finance
Government Customer
Operation Finance
The consortium company joint venture model
Page 5
Why is PPP needed?
Maximise value for money (VFM) of providing service over a long timescale of 20-30 years or more having taken account of all the risks. Maximising efficiency and innovation is key to achieving VFM.
Enable public sector to procure services in a manner consistent with economic policy; in particular where public sources of funding are lacking/in short supply.
There are 2 key objectives in commissioning a PPP Project
Page 6
Benefits of PPP
Relieve Public sector cash constraints
PPP allows public and private sectors to concentrate on activities that best suit their respective skills
Procurement efficiency Improved accountability Risk management Enhance quality and quantity of
infrastructure
Page 7
UK PPP/PFI experience
The Private Finance Initiative (PFI) was launched by UK Treasury in 1992
Applied to a wide range of projects (road, rail, tram, rail, airport, hospital, IT, telecoms, water, sewage, military, prisons etc)
Now accounts for 10-15% of public services budget
630 UK PFI projects £40 billion investment UK model is being applied (in
modified forms) throughout Europe
Page 8
PPP/PFI Credentials – some examples Home Office HQ PFI project in the UK - value £311 million Sydney Harbour Tunnel project – first major transport PFI in
Australia Cyprus Airports BOT project – scheme closed 20 years after
first mooted, reserve bidder stepped in A41 France motorway PPP project– 55 year tenor worth
€941million Port of Miami Tunnel (POMT) and access improvement PPP
project – value $1 billion
Page 9
Responsibility
DesignBid
Build
PrivateContract
FeeServices
DesignBuild
BuildOperateTransfer(BOT)
LongTermLeaseAgrmnt
DesignBuild
Finance Operate(DBFO)
BuildOwn
Operate(BOO)
OtherInnovative
PPPs
Page 10
The Insurance Schedule and Insuring Clauses within the Concession and Loan Agreements The Minimum Insurance Requirement Schedule within
Concession and Loan Agreements details the “required” insurances to be procured during the phases of the project e.g. construction and operational
The Schedule defines the operative cover, policy limits, levels of deductible, principal extensions and exclusions based on prevailing insurance market conditions
The Schedule contains a Broker Letter of Undertaking (BLU) providing undertakings on behalf of the placing Broker
The insurance clauses define the regime and mechanism under which the required insurances operate for the Project period
Page 11
Key PPP Project Insurances
Insurance requirements on a co-insured basis during the construction phase
Construction Period
1. Construction “All Risks”
2. Construction “All Risks” Terrorism
3. Advanced Loss of Profits (Soft Costs/Delay in Opening)
4. Advanced Loss of Profits Terrorism
5. Third Party Public Liability
6. Statutory Insurances (Workers Compensation/EL - not co-insured)
7. Professional Liability (Design and Build - not co-insured)
8. Pollution Legal Liability
9. Auto Liability
10. Performance Bonds
Page 12
Key PPP Project Insurances (cont’d)
Insurance requirements on a co-insured basis during operational phase
Operational Period
1. Property Damage “All Risks”
2. Property Damage “All Risks” Terrorism
3. Business Interruption
4. Business Interruption Terrorism
5. Third Party Public and Products Liability
6. Statutory Insurances (Workers Compensation/EL - not co-insured)
7. Pollution Legal Liability
8. Auto Liability
Depending on the nature of the project, there may be a requirement for
specialist project related insurances e.g. Aviation, MARINE, Professional
Liability (operational)
Page 13
Why are these insurances required? They protect the Public Agency, SPV, Lenders and other
parties with an insurable interest in respect of physical loss or damage to Project property/assets earnings and additional costs of the SPV in respect of the
above incurred Third Party Legal Liabilities (bodily injury and
property damage) Without insurance the SPV could not accept the financial
consequences of such risk events occurring
Page 14
Role of Insurance Means of Risk Transfer; SPV is constrained to a much greater
degree in terms of manner in which it can adopt its business to prevailing risk environment. Insurance is a tool used for the transfer of risk.
Coverage will generally be bought on a wide basis with low deductibles to ensure minimum risk is retained at SPV level.
Project Insurances relied upon by main project related parties as a key mechanism for the management of risk.
Page 15
Why is the insurance regime under PPP different to standard procurement? The Public Agency, Lenders and others with an insurable
interest sit inside the insurance mechanism as a co-insured taking direct benefit for their separate insurable interest
Insurances to be procured on a project specific basis (in the main) and not derived from parent company programme.
Public Agency guidelines and Lender requirements seek to ensure specific conditions are in place defining the duties of the parties to the Project in terms of the operation of the ‘required insurances’
Page 16
What are the key conditions of a PPP insurance regime?
Non vitiation protection (Multiple Insured Clause)
Waiver of subrogation (Multiple Insured Clause)
Separate policy
Waiver of disclosure of material information
No obligation for premium payment
Additional insured
Control of claim monies (Loss Payee)
Notification of change in cover
Notice of cancellation and subsequent step in rights of various parties to the Project
Page 17
PPP Insurances –considerations & solutions Relief Events and Force Majeure Premium increases– who bears the risk? Insurance market capacity and market participants Uninsurability Excesses/Deductibles – who pays? Bid costs – funding bid process = sunk cost, which can amount to $
million per project Meeting bid/tender requirements - what level of information is required
– insurance proposals must remain “fluid” and negotiable until final design and construction timetable is known
Cost of insurance – provision for cost of insurance in the Financial
Model; prevailing market cost + contingency amounts
Page 18
PPP Insurances – considerations & solutions Phased completion timetable Overlap of ALOP/BI Pre-existing property LAD interface with ALOP Latent Defects Environmental/Contamination issues Contractor’s plant and equipment Terrorism risk Marine/Transit
Page 19
PPP Insurances – considerations & solutionsPremiums – Who bears the risk?
Firm Pricing – Is it achievable?
Alternatives:
Cap and Collar premium movement mechanism
Firm Price [X] years + RPIX thereafter
Benchmarking annual pass through cost
Public Agency Related Claims increasing premiums. Who bears this risk how is it stipulated within the Concession Agreement?
Page 20
PPP Insurances – considerations & solutions
Insurance Market Capacity
Size and nature of risk exposures
Market security issues
Importance of quality risk data
Number of Market participants
Page 21
PPP Insurances – considerations & solutions
Uninsurability
Uninsurability
Definition of trigger of Uninsurability – what is the test?
What happens to the risk if it becomes uninsurable (Termination/Public Agency “insurer of last resort”)
Page 22
PPP Insurances – considerations & solutionsDeductibles – Who pays? Public Agency accepts no liability? Public Agency liability for Public
Agency default and/or negligence only (Public Agency Related Claims)
Must link to general Indemnity provisions
Page 23
What does this mean for the project insurances? Contractor/Lender uncertainty over “the risk of insurance” – cost and
availability
Fear of the unknown from insurers on contractual requirements of PPP
No established insurance market experience of some risk exposures through PPP contracts
Unpredictable insurance market cycles
Sector specific claims impacting on competitive terms and also cost provision in Financial Model
Short term underwriting stance for both cover provision and pricing
Page 24
PPP Project Insurances – working examples Project Insurance Package – making the package fit with the
contractual obligations and the financial model to the Lenders and Government Agency satisfaction
Structure of Project Insurance Package where project “affordability” is an issue
Covering off unidentified risks through an insurance solution to ensure “bankability” of project
Utilisation of premium efficiencies via Annual Insurance Programmes
Page 25
An Introduction to PPP
Questions?