PPP in Infrastructure Projects

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Advisors in Infrastructure

George Currie

July 2010


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Public Private Partnerships in Infrastructure Projects

Public Private Partnerships (PPPs) are arrangements

wherein private sector parties participate in, or provide

support for, the provision of infrastructure to deliver publicsector services.


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PPPs can be defined as agreements where public sector

bodies enter into long-term contractual agreements with

Privatee sector entities for

- the construction or management of public sector

infrastructure facilities by the Privatee sector entity,

- or the provision of services (using infrastructurefacilities) by the Privatee sector entity to the

community on behalf of a public sector entity.



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PPPs are models to bring competitive forces and market

discipline to bear on government provision of goods and

services

PPPs involve a sharing of both responsibility and risk in acollaborative framework

PPPs seek to draw upon the best available skills, knowledge

and resources, whether they are in the public or the private

sector, to deliver the best value for money in the provision

of services to the public.



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A common misconception about PPP projects is that they are just

about mobilising private sector financing of public infrastructure.

This is fundamentally incorrect!



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APPP is at heart a risk-sharing relationshipbetween the

public and Privatee sector which exists to bring about a

desired public policy outcome in a cost effective manner.

Achievement ofvalue for money relies on obtaining an

optimal transfer of riskbecause the entity in the best

position to manage a particular risk should be able to do soat the lowest price.



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Value for money is a key facet of the policy and if

sufficient risk cannot be transferred to Privatee parties, it

is unlikely that a PPP is appropriate to deliver value formoney.

Any PPP project needs to be structured to achieve optimal

risk allocation. For this, appropriate financial models haveto be developed and evaluated.



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Common interest of various players in a PPP

GovernmentsInterest

InvestorsInterest

Suppliers

Interest

PPP



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Interest of the various Parties

What Government wants: What Government can do:

Provide an efficient and affordable

transportation system Provide a save and reliable

transportation system

Sustain/enhance economic growth

Solve traffic congestion

Reduce accidents

Reduce pollution Gain political recognition

Relief governments budget

Work out a clear strategy and a

reliable framework for rights andobligation.

Assume risk of land appropriation

Insure that permits and permissions

are granted

Take currency devaluation risk

Take ridership risk in exchange fortariff control

Provide financial contribution for

transport infrastructure (fixed

assets)



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What Suppliers want: What Suppliers can do:

Sell their equipment and services

Long term Relationship with clients

Reference and showcase for future clients

Supply parts and expansion parts

Provide maintenance

Increasingly take operational

responsibility

But no long term financial commitments

Take construction and completion

risks

Take performance risk

Provide maintenance and take

availability risk

In some cases take operational risk

Provide short term financialsupport with clear exit



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What Financier want: What Financiers can do:

Invest their funds with a return,

interest in case of debt, IRR in caseof equity

Expect the company to generate a

profit

The project company can control its

revenue by setting tariffs and

control over costs A stable financial environment

No or minimum interference from

government

Provide the funds for the projectand relieve the public budget

Ensure that the project is

constructed in time and on budget

Effect efficient operation



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B = Build

D = Design

D = Deliver

F = Finance

L = Lease

M = Maintain

O = Operate

O = OwnT = Transfer

R = Rent

R = Rehabilitate

Some Vocabulary used in PPP

any combination

= PPP



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BOO - Build-Own-Operate

BOD - Build-Operate-Deliver

BOL - Build-Operate-Lease

BOLT - Build-Operate-Lease-Transfer

BOT - Build-Operate (Maintain)-TransferBOOT - Build-Own-Operate (Maintain)-Transfer

BTO - Build-Transfer-Operate

BRT - Build-Rent-Transfer

DBO - Design-Build-Operate

DBOM - Design-Build-Operate-Maintain

DBOT - Design-Build-Operate-Transfer

DBFM - Design-Build-Finance, Maintain

DBFOM - Design-Build-Finance-Operate-Maintain

FBOOT - Finance-Build-Own-Operate-Transfer

ROT - Rehabilitate-Operate-Transfer

LOM - Lease-Operate-Maintain

Some Models/Combinations used in PPPs

PPP



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Characteristics of various PPPs

The Privatee sector designs, builds, owns,

develops, operates/maintains and manages

an asset with no obligation to transfer

ownership to the government.

Build-own-operate (BOO)

Build-develop-operate (BDO)

Design-build-finance-operate

(DBFO)

Design-build-finance-operate-maintain

(DBFOM)

Buy-build-operate (BBO)

Lease-develop-operate (LDO)

The Privatee sector buys or leases an existingasset from the government, renovates,

modernizes, and/or expands it, and then

operates the asset, again with no obligation to

transfer ownership back to the government.



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Characteristics of various PPPs

Build-operate-transfer (BOT)

Build-own-operate-transfer (BOOT)

Build-lease-operate-transfer (BLOT)

Build-transfer-operate (BTO)

Design-build-finance-operate-

maintain-transfer (DBFOMT)

The Privatee sector designs and builds an asset,operates it, and then transfers it to the

government when the operating contract ends,

or at some other prespecified time.

The Privatee partner may subsequently lease

the asset from the government.



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Financing Approaches

100% Government Finance

Gives the government control

Easy and quick financing

Risk of inefficiencies during

Construction and operation

Potential burden on the budget

and therefore often notapproved by government

Leaves all risks with the

government

Advantage Disadvantage



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100% Privatee Finance

High possibility that construction

and operation is in time and budget

Financiers are not willing to take

demand risk or only with big

safety margins

Conflict between entrepreneurial

freedom and government controlon tariffs

Privatee sector worry of risk of

government interference




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Privatee sector finances the project, Government takes

demand risk, but not performance and operational risks

Mobilizes Privatee sector money

Performance and operation risk

with Privatee sector, which financiers

can asses better than demand

Penalties when performanceparameters are not reached insures

best service

Allocates risks to parties most fairly

Leaves the government with

demand risk but also with

tariff control




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Government pays for infrastructure (fixed assets),

Privatee sector finances and performs operation

Makes the project more feasible for

the Privatee sector.

Relieves the government budget

Ensures high level of performance

and quality of transport servicedelivery

Danger of conflict on revenue

sharing, tariffs, control over the

operation

Danger of incompatibility between

infrastructure and operationalrequirements if procurement of

infrastructure is done without

involvement of Privatee operator




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The previous graphic illustrates the cash flow differences

between public funding and a PPP project.

From the public sector side, PPPs require little or no upfront

capital expenditure but involve a larger operating expenditure

over time to purchase the services.

By contrast, the public asset approach requires a large upfrontcapital funding commitment and relatively lower operating

expenditure over time.



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Why entering into a PPP?

Under what circumstances should governments invite

Privatee sector entities to enter into long-term contractual

agreements for the financing, design, construction and/or

operation of

capital intensive projects?

Whether or not a service should be delivered by means of a

PPP project depends on the answer to three key questions:



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1. Which (if any) part or parts of the proposed service is

a service which government itself should deliver to

sustain and enhance its economy?(the core services question);

2. For all other aspects of the service and supporting

physical infrastructure, what is the project model

(financial model) that delivers the best value formoney? (the value for money question); and



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3. Do the outcomes of the value for money question

satisfy the government interest criteria policy and ifnot, can the government interest be satisfied by

either building safeguards into the contract or

through regulatory measures? (the public interest

question).



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The combined response to the three central questions

core services,value for money and

public (governments) interest

determines the underlying financial model for the project.

Obviously if the whole service is considered to be core, there

will be no scope for a PPP arrangement.



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Please keep in mind:

PPP projects are not principally about Privatee sector financingof public infrastructure.

PPP is a risk-sharing venture

between

the public and Private sector.



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PPP in Infrastructure Projects

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