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European Investment Bank

Basic concepts Jaime Barragan EIB – European Investment Bank

IADB, 8-9 December 2005


What is a PPP? A Complex Web of Contracts & Cash Flow Direct Agreement

Risk appetite

minus

plus

Senior lenders Subordinated lenders Financial equity investors

70 to 95% Debt

Concession Agreement

Debt service Loan Contract

s d n ide v i D

Shareholders Agreement

Sponsor

?

Public sector body

Revenu es Private Special Purpose Co.

Paying users Customer Contract

Capex

EPC Costs Contract

Ope O&M x Contract Dividends

Sponsor

Constructio n Co.

Sponsor

Operating Co.

3


Definitions The term public-private partnership is not defined at Community level. In general, the term refers to forms of cooperation between public authorities and the world of business, which aim to ensure funding, construction, renovation, management or maintenance of an infrastructure or the provision of a service. EC, Green Paper on PPPs

Many definitions & interpretations across Europe Ingredients: Public service responsibilities Private sector expertise Bundling of operation & construction Incentives for innovation & performance

PPP

Risk sharing Private finance Long term contracts

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Key Characteristics

Cashflow (un)certainty Credit intensive. Long Term Highly structural Large Low Margins Mature in some markets, innovative in other

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Process

Assesment of the market. Need for the project. Technical feasibility Financial Feasibility Support/commitment Letter. Award. Due diligence Mandate/syndication Docummentation Financial closing Administration 5


Main Risks

Cashflow. Construction Risk. Operating Risk Participant Risk Supply Risk Market Risk Infrastructure Risk Environmental Risk

Political Risk Force Majeur Foreign Exchange Risk Engineering Risk Syndication Risk Funding Risk Legal Risk

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Forms of private participation PPP

commercialized public enterprise service managt. contracts contracts

Private O&M

lease

concession BOO BOT/DBFO divestiture

Private O&M + financing

• Continuous spectrum of partnerships, with private sector taking variable degrees of risk • Other Hybrid or intermediate forms possible • Differ in duration, financing & risk transfer 7


Choosing the right structure Key questions Is legal/institutional/economic framework ready? Who decides (local v central authorities)? Is there robust political support for PPP? Is project revenue generating/cost recovery? Is purpose to delegate service to consumers or just to build & operate a large new asset? What risks will private sector take? Is PPP timetable compatible with other constraints? PPP is a policy choice NOT a quick fix 8


European Investment Bank

Economics


PPP Investment Rationale Conventional model:

Definition of inputs Procurement of assets

PPP model:

Definition of outputs Procurement of service

Encouraging the private sector to:

apply expertise for better service delivery innovate in finding new technical solutions optimise the capital component of projects enter contracts with appropriate risk sharing

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Sources of Value-for-Money

Bundling  Life-cycle approach

Risk sharing  Better risk management

Private asset ownership  Control over asset and adoption of

cost saving innovation & efficient contracting

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Tests of value for money Is the legal and institutional framework right?  High quality capital planning is essential

How is risk to be transferred and to whom?  Just substituting private for public capital won’t give value for money. Is risk sharing realistic?

Is the scope of procurement correct?  Is there private sector expertise? Will there be competition?

Is public sector team skilled & experienced?  Will evaluation be robust? Can deal be closed?

Is there a credible public sector comparator?  The test for the value of risk transfer

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PPP is not a “free lunch” 

Transaction costs  Bidding, negotiation, monitoring  Renegotiation over life-cycle

Pursuit of cost efficiency may impact service quality

Institutional and administrative capacity requirements

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PPPs and the macroeconomy

Accounting rules affect incentives  They may bias the public sector for PPPs

No macroeconomic case for or against PPPs  No automatic link between cost efficiency and

aggregate growth

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Economics Summary 

PPPs can boost cost efficiency at the project level.

Need to be mindful about service quality, transaction costs, and institutional requirements.

No macroeconomic case for or against PPPs, but they must be accounted for appropriately.

Life-cycle transaction costs, benefits & value-formoney are key to public policy decision.

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European Investment Bank

Experiences


EU15 Experience - PPPs mainly in transport and buildings Sector split of signed PPP contracts in EU by value 5%

13%

7%

0% Rail (LU & CTRL)

9%

5%

Roads, brigdes, etc. 3%

Health 51%

7%

Education Police & prisons Defence

11%

Airports 6%

83%

Other

UK Source:ProjectWare, HM Treasury

Non-UK 17


European Investment Bank

Successful procurement


Requirements for successful PPP Preparation Employ Good Advisors – Spend to Save Don’t Rush – Political Deadlines Weaken Negotiating Position

Research and Choose Appropriate PPP Model – To Suit Local Market & Law Maintain Competition – Avoid Tempting Single Bidder Offers, Minimum Two BAFOs 19


Requirements for successful PPP Implementation Simple Payment Mechanisms –

Significant Performance Element But Not Too Many Parameters

Equity Level Appropriate to Risk – Returns Not Taken Too Early

Independent Supervision and Good Quality Reporting – Early Warnings, Prompt Remedial Actions (covered in agreement)

Minimise Third Party Involvement – Provides Excuses for Poor Performance

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Value-for-Money Early review based on sector experience Build into bid evaluation process Flexible use of Public Sector Comparator Allow for optimism bias Adjust for risk transfer Allow alternative bids & innovation

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Sustaining the partnerships Budget for adequate monitoring Transparent reporting to maintain public confidence Early warning systems for essential public services Financial “health“ monitoring of major contractors Independent audit reports to “learn lessons” 22


basic public private partnership (ppp) concepts