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TRANSACTION ADVISORY SERVICES

PPP ADVISORY

Social Service PartnershipsAvailability PPPs in Emerging MarketsAlistair SAWERS, PPP Advisory, Ernst & Young Project Finance

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Overview

Introduction Theory: Social Service PPPs & Availability

Payments» Description & Uses» Structures & Risk allocation» Limitations

Practice: Bajío Hospital PPS Project» Outline» Success Factors

Conclusion: Pitfalls from Other Transactions

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Introduction

Personal Experience UK PPP Market

» Funder: First Project Financed PPP – Fazakerley Prison

» Investor: UCL Hospital refinancing» Advisor: University of Hertfordshire, UK Met

Office Emerging Market PPPs

» Eastern Europe» Latin America

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Theory

Social Service PPPs & Availability Payments

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Defining Public Private Partnerships

PPP has a different meaning outside the US» Usual form of procurement is Design Build»Many services are “contracted-out”

International use of “PPP” or PFI is primarily » Design Build Finance Operate [& Maintain]

(DBFO)» Concession structure» Availability & Performance Payments

Social Service PPPs rarely have market risk

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What are Social Service PPPs?

Healthcare» Acute Hospitals» Specialist Units» Community Clinics

Education» Universities» Schools

Judicial» Courts and police stations» Prisons and youth detention centers

Others

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Evolution of Social Service PPPs

Universal use of UK model Focus on output specifications Focus on building “provision”» No volume or market risk» Hard (Facilities) Maintenance included» Soft service inclusion varies

User services rarely included» Clinical, teaching, policing rarely included» Guarding, cooking, laundry and some

training included

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Utilization of Social Service PPPs

? = currently being studied

= Failed and withdrawn

Please note the data is not exhaustive and new projects are being launched all the time

Source: E&Y data, InfraNews Project News Database as at Sept 12th 2006

Healthcare Education Judicial Other Social

Australia Canada Denmark France Germany Holland Italy Ireland Portugal Singapore Spain UK USA Argentina ?Botswana Brazil ? ?Chile ? Czech Republic ? Hungary Mexico ? ?Poland South Africa ?

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What are the objectives?

Cost minimization Ensuring value for money Risk transfer Ensuring adequate incentives

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How are the objectives achieved?

Concession contract Availability Payments Performance mechanisms

– Points towards operator replacement– Points towards overall concession termination– Monetary deductions

Volume payments (rare)

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Issues for Availability Payments

Payment mechanism» Incentives» Complexity» Underlying cost of funds» Appropriations “risk”

Affordability Evaluation methodology» Measuring value for money» Shadow bid / Public Sector Comparator» Valuing risk transfer

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Typical Risks Transferred

Construction» Design» Completion» Funding

Operation» Performance

Managing land sales/ development of vacated sites

Risks taken by party best placed to manage/mitigate

What does that mean in practice?

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What are the Limitations?

Complexity of payment mechanism Appetite for Risk Financeability of risks in addition to country risk Financial strength of potential operators Affordability Transaction Costs / Minimum deal size Legal Framework» Napoleonic code v Precedent based» Property rights

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Practice

Bajío Hospital PPS Project

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Bajío Hospital PPS

Location: City of Leon, Guanajuato

Capacity: 184 beds » 40 for paediatrics» 144 for adults

Size: 24,000 sq meters Capital Investment: USD

47.5m Coverage: 5,000,000

inhabitants Medical Specialties Unit:

» hemodialysis, » short stay surgery» rehabilitation» oncology services

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Bajio Concession

25 Year Concession operation

$47.5m Capital Investment

$12.3m pa payment Timeline

» Tender announced Mar 2005

» Awarded 9th Dec 2005» Construction 11 months» Completion Feb 2007

Acciona Hospital Services selected

4 Bidders Domestic and International

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Political Support

Political Champion» Led by Ministry of Finance» Set up Investment Unit (PPS Taskforce)

PPS legislation» Support from Partnerships UK» Issued March 2003, revised April 2004

Additional Rules & Guidelines» 2 business case reviews (Outline & final)

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Stakeholder Support

Consensus building» Institutional Revolutionary Party (PRI) and

National Action Party (PAN) support PPS Existing profile of Concessions» Initial toll road concessions in 90s failed» Highway PPS launched concurrently

Quick wins to launch process» Strategy to launch 3 pathfinder projects» Pick largest projects

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Procurement Process

Planning» Strategic PPS Plan» Existing regional plan & overall national upgrade plan

Selection of credible advisors» Legal: White & Case» Technical: Currie & Brown» Financial: Ernst & Young

Marketing and building profile of transaction» Presenting to bidding community» Conferences

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Selection Process

Open and transparent process» Lowest NPV of payments» Acceptance of Contract terms

Clear evaluation criteria» Developed from business case

Flexibility in bids versus difficulty of evaluation» Chose easy evaluation – simple contract

Lowest price v best value for money

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Payment Mechanism

Description» Key performance indicators» Deductions» Penalty points

Issue of clarity/complexity Practicality of on-going monitoring

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Impediments to Process

Union/ stakeholder perception» Party of the Democratic Revolution – some

opposition» Local bureaucratic resistance

Transaction cost/ complexity» Affordability problem with smaller University PPS

project Medical equipment -5yrs» Interface/ training»Maintenance/ replacement

Termination Payment

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Conclusion

Pitfalls from less successful transactions

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Pitfalls

Transferring risks which are hard to manage» Refurbishment of existing assets» Volatile Land values»Multi-site projects – availability of sites» Volume risk

Soft services and Union agreements Clinical Services Unnecessary Complexity