issues for the host government

Issues for the Host Government

PRESENTED BY : DIXON DOMINIC PALETT

INTRODUCTIONCRITICAL ISSUE

Must have a +ve net economic value to the host jurisdiction

Expected economic return + > expected social costExpected additional social benefits

Contribution to the Host Jurisdiction's Economic DevelopmentSocial Benefits

Construction of infrastructure for which the financing is by 3rd parties and the cost is repaid entirely out of project cash flows.

e.g. : roads, dock facilities, or an airport Education and training of a local workforce Construction of public facilities financed by the project's sponsors e.g. : schools, housing, or fire stations Establishment or expansion of an industrial base [ attract further

investment and can lead to the development of various service companies and other “spin-off' effects ]

the generation of incremental tax revenue , which can be used to finance public projects

“Multiplier” impact that typically accompanies any major capital investment project

INTERNATIONAL PROJECTS BENEFITS

Generation of incremental hard currency, which will be valuable to the extent that the host country's shortage of hard currency is inhibiting its economic development

Development of a local capital market

Host Jurisdiction's Expected Economic Return

Maximize the public welfare. Developing country - limited resources. The possible alternative uses for any resources must be carefully

considered. Besides the economic return from direct participation , additional

social benefits must be weighed against any project-related costs, especially if the host government is asked to provide certain investment incentives.

Impact on the Availability of Hard Currency

The allocation of hard currency is a potentially contentious issue for projects located in developing countries.

The co-sponsors : normally require assurances that sufficient hard currency will be available from the project - to service project debt and to enable them to realize an acceptable rate of return on their investments.

Lenders will want to ensure that sufficient hard currency is available to service project debt in a timely manner.

The host country will want to maximize its receipt of hard currency in order to further its development objectives.


Usually, a compromise is reached When the output of international projects is sold overseas, generating

hard currency - overseas escrow account maintained by a reputable financial institution.

Hard currency is applied first to operating costs (by remitting sufficient funds back to the project entity),

Then to servicing project debt (by remitting funds directly to project lenders)

Finally to the sponsors/equity investors.


Foreign equity investors would like to have the hard currency remitted directly to them - rather than through the project entity - where it might get trapped by foreign exchange controls.

The host country would like to see the hard currency remitted via the project entity - it might be able to obtain at least part of it for other purposes.

Contractual undertakings are necessary to reconcile these competing interests.

Avoiding Undesirable Precedents

The host government will understandably be concerned as to whether the project, and the manner in which it is structured and financed, establishes any undesirable precedents that might adversely affect negotiations with prospective co-sponsors of future projects.

Tax arrangements e.g. : tax holidays or withholding tax provisions Any development incentives e.g. : subsidized land, guaranteed feedstocks or power etc. Arrangements governing the allocation of the hard currency

generated by the project

Public–Private Infrastructure Partnerships

Definitions:

► PPP is an arrangement where private parties participate in or provide support for the provision of infrastructure.

► PPP describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector company.

► PPP is Not the procurement of an asset but the payment of a stream of services under specified terms and conditions.

WHY PPP ? ► Traditional Procurement

Inefficient Unreliable with Poor fiscal Management

► Other factors Short political tenures – government rush Rent seeking behavior - interest groups Putting on a good spin – moral hazards

WHY PPP ? ► Financial need - budget deficit, large debt► Aging or deteriorating infrastructure► Growing demand on public sector services► Search for greater efficiency and creativity► Strides to introduce competition► Lack of domestic experience or skills► Need to educate local contractors while remaining competitive► Bandwagon effect

Questions while planning a PPP

Who will be responsible for the design and construction of the project?

Who will provide the construction funds? Who will arrange the financing? Who will hold legal title to the project's assets, and for how long? Who will operate the project facility, and for how long? Who will be responsible for each source of project revenue?

Types of PPP

► BOT – Build Operate Transfer► BOO – Build Own Operate► BOOT – Build Own Operate Transfer► DBF – Design Build Finance► DBFO – Design Build Finance

Operate► DBO – Design Build Operate► BLT – Build Lease Transfer► BTO - Build Transfer Operate

►DBFOM – Design Build Finance Operate Manage►Leasing►Joint Ventures►Operations or Management Contracts►Cooperative Arrangements►LROT – Lease Renovate Operate Transfer►DCMF – Design Construct Manage Finance

►BOOR - Build Own Operate Remove

One Type of PPP BOT – Build Operate Transfer

The Private Sector:

► Source Financing► Carries out all designs► Builds the infrastructure► Operates the facility and,► Hands over ownership to public sector.

Model 1 The Public entity transfer land, property or facility to private

sector. Private sector builds or renovates facility Public sector sets standard of service Private sector provide service for set term Private sector transfer ownership at end of term

Model 2 Public sector defines service over long-term No payments made until asset is delivered as promised Private sector assumes risks associated with design &

performance Private sector provides no funding during construction Private sector allowed to own and run facility for profit

Varying Models of PPP’s

Suitable Candidates for PPP’s► Transport (road, rail, ports, airports)► Fixed links (bridges, tunnels)► Water resources (filtration plants, irrigation, sewage treatment,

pipelines)► Tourism (facility development)► Health (hospitals and specialized health services)► Specialized accommodation facilities (courts, police stations)► Educational facilities (schools, museums, libraries)► Correctional services (prisons, remand and detention centres)► Arts, sport and recreational facilities► Convention centres► Government office accommodation► Social housing

Suitable Conditions for PPP’s► Accommodating Political framework ► Right Legal framework► Public acceptance► Quality practitioners► Availability of finance

Good Practice, using PPP’s► Ensure that:

Private sector partner has the required capacity Ensure public sector interests are factored in Taxpayers are guaranteed value for money Private sector partner/s has proper motivation

► Establish a PPP Unit for Government

Benefits of PPP’s

► Mitigates and properly allocates risks► Provide incentives for lowering costs ► Ensures value for money ► Attract the right skills and management expertise► Promotes innovation ► Reduces corruption and waste ► Reduce burden on taxpayers

Pitfalls of PPP’s

► Depends on EGAP principle (Everything Goes According to Plan) ► The process of creating a PPP is much more demanding than a

traditional procurement process. This is normally underestimated.

References Project Financing: Asset-Based Financial Engineering by John D. Finnerty http://ppp.worldbank.org/public-private-partnership/financing Private Sector Investment in Infrastructure by J Delmon

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