Cityscape jeddah jun 2011

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?


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


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’


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


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


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


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.


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


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


Equity – 20% - 35%• contractor• operator• bank

Performance/Payment

Concessionaire/SPV

Debt/EquityFunders Security package

DirectAgreement

Loan Agreement



(Hard Services)



Insurance

Government

How PPP Works

Hiba – gift?Ijara – lease?Istisna – custom manufacturing?Musharaka – partnership ?



Performance/Payment

Concessionaire/SPV

Debt/EquityFunders Security package

DirectAgreement

Loan Agreement



(Hard Services)



Insurance

Government

How PPP Works


Collateral or subvention

Investors / SubscribersRabb Al-Mal

Performance/Payment

Concessionaire/SPVSecurity package

DirectAgreement

Loan Agreement



(Hard Services)



Insurance

Government

How PPP Works



Debt/EquityFunders

Financing SPVMudarib

Mudaraba

Performance/Payment

Concessionaire/SPV

Financing SPVMudarib Security package

DirectAgreement

Loan Agreement



(Hard Services)



Insurance

Government

How PPP Works



Mudaraba


Performance/Payment

Project SPVSponsor/Developer

Financing SPVMudarib

DirectAgreement

Return on Investment

(no interest)



(Hard Services)



Insurance

Government

How PPP Works


Mudaraba

Debt & Equity(Muharaba, Istisna

Salem, etc)

Thank You


London : [email protected] Abu Dhabi: [email protected]

Cityscape jeddah jun 2011

Economy & Finance

Transcript of Cityscape jeddah jun 2011