ppp workshop
TRANSCRIPT
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Agenda
• PPP Route Map
• Identifying Stakeholder Expectations
• Top-Down Analysis of Risks
• Project Risk Assessment and Transfer
• Structuring the PPP
• Best Practices in Contract Design
• Contract Management
• Performance Monitoring
• Role of the PPP Unit
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PPP Route Map
Decision to Consider PPP
Prepare Institutional Framework
Sector Development
Plan
Select Govt. Panel &
Consultants
Sector Stakeholder Consultation
PoliticalInitiative
SectorAnalysis
Define Policy Objectives
Project Lifecycle
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PPP Project Lifecycle
Source: EPEC, Guide to Guidance
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Potential Stakeholders and Interests
Source: ADB (2008), Public-Private Partnership Handbook
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Mapping Stakeholder Dependencies
Source: Lahmeyer International GmbH
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Engagement Model
Source: adapted from the International Association for Public Participation (IAP2) spectrum www.iap2.org (2007)
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Stakeholder Interviews
• What do they want from PPP?
• What financial or political interest do they have?
• What is their immediate need?
• What is their current view of PPP, why, and is it likely to change?
• Whose opinions do they are they influence and who influences them?
• Can they can act as a Sponsor (or will they be the opposite)?
• Can they act as a Gatekeeper (and would they open the gate?)
• How can any negative attitudes be neutralized, mollified or contained?
• Does all of the above depend on key individuals (if so, who) or are they institutional characteristics?
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Stakeholders set Risk Management Context
Multiple PPP Objectives
• Risk transfer
• Process excellence
• Transparency
• Private sector skills
• Public debt ratios
• Boost to economy
Perceptions become Reality
• Perceived risk (including risk of unknown) sets cost of capital
• Valuations based on expectedcash flows
• Public (mis)perception becomes actual political risk
• Perceptions can affect deal structure
e.g. GCCpriorities
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Top Down Analysis of Risks
Develop Construct Operate Exit
Political Risks•Expropriation•Change of law•Judicial challenge•Regulation (Environmental, Economics)•Reputation
Commercial Risks•Completion: Cost, Time , Quality•Availability•Demand: Price, Volume)•Supply: Availability, Cost
Financial Risks•Funding (timing)•Creditors•Currency convertibility•Currency transfer•Redeposit risks
Economic Risks•Inflation•Interest rates•Exchange rates•Devaluation•Taxes•Technological change
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Sample Political Risks
Phase Risk Source Mitigation/Allocation
Development Planning consent State Prior consent, or transfer to state
Construction Residents’ opposition Community Stakeholder building
Operation Tightening labour laws
State Develop subcontracting network
Exit Tighterenvironmental legislation
State Due diligence on future legislation
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Sample Commercial Risks
Phase Risk Source Mitigation
Development Land acquisitionDesign faults
Prior acquisitionEPC contractors
Stakeholder buildingContract
Construction Cost over-runsTime over-runsLabour disputes
EPC ContractorsEPC ContractorsUnions
ContractContractTerms & Conditions
Operation Asset performanceAsset availabilityLow demandSupply costs
EPC ContractorsEPC ContractorsTarget marketSuppliers
ContractContractNew buyersNew suppliers
Exit Asset damageAsset wear
VariousUsage
InsuranceAsset Management
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Sample Financial Risks
Phase Risk Source Mitigation/Allocation
Development Open-ended, cash drain
Project management Project monitoring
Construction Liquidity (for overruns)
Project management Contingency funding arrangements
Operation Credit risk Creditors Guarantee
Exit Currency transfer/ convertibility
Change of law Contingency arrangements
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Sample Economic Risks
Phase Risk Source Mitigation/Allocation
Development Key skill shortage Local labour Global recruitment
Construction Commodity supply Global markets Forward contracts
Operation InflationLow/negative growth
Economic cycleEconomic cycle
Forward contractsOffset with costreduction
Exit Asset valuation Economic cycle Examine timingoptions
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Project Risk Assessment by Type
Business Construction Funding Delivery Revenues
New Build Finance(Investment, Refinance… )
Bulk Fee
Existing Refurbish User Tariffs
“We use terms such as privatization, divestiture, concession, lease, affermage, BOT, BOOT, ROT, BOO, ROO, DBO, RBO, DCMF, BTL, RTL, BTO, RTO, DBFO, PFI, outsourcing, delegation of services, management contract, operation and maintenance contract, service contract, operating contract, performance contract… there is no clear agreement on what these terms mean”. World Bank
Five-way Model:
Model excludes:Scope of work Design RiskAsset Handover Asset HandoverAsset Renewal Subsidies
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Business
New
Benefits of:
• Defined Capex
• Ring fenced Operation
• New process design
Offset by some risks
• Data on costs & demand
Existing
Legacy risks:
• Social obligations
• Contractual (supplier, employee)
• Working practise
• Aged assets
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Construction
New
Benefits:
• Appropriate design and technology
• Fewer site unknown affecting schedule and cost
Risks still include:
• Availability material, Labour, transport etc.
• Environmental unknowns
Existing
Additional risks:
• Asset conditions
• Regulations on existing works (e.g. heritage)
• Interface issues
• Site conditions (e.g. asbestos)
• Suitability of existing assets to output specification
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Funding
Funding Demands
Funding required beyond project revenues, e.g.:
• Initial operating losses
• Upfront working capital
• Investment (land, project)
• Refinance debt
Funding Supply
Equity (risky, costly)
• Debt
• Senior, Subordinated, Non-Recourse
Minimize:
• cost of capital:
• fees
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Delivery
Bulk
Commercial interfaces:
• Engineering, Procurement and Construction Contractor
• Operational & Maintenance Contractor
• Off take purchaser
• Input Suppliers
User
Additional scope for benefits:
• Distribution network
• Supply process, including billing & collection
Additional risk:
• Tariffs & regulation
• Social sensitivities
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Revenue
Fee
• One source (e.g. local utility, authority)
• Many possible bases:
– Capacity, availability, usage
• May insulate projects company from demand risk
Tariff
• Revenue collected from customers
• Higher costs (billing) and risks (credit)
• May expose company to demand risk (unless offset by regulation)
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Transfer: Role of the Public Partner
Project Risk
• Protect lenders from SPV default
• Demand/usage risk
• Construction Risk
• Technology Risk
• Sub-sovereign risk
• Policy risk
• Macroeconomic
• Residual value
Guarantees Offered
• Loan/refinancing
• Revenue/usage
• Service charge to cover debt
• Change of law/regulations
• Debt assumption on termination
• Sub-sovereign creditworthiness
Source: EPEC (2011), State Guarantees in PPPs
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Financiers’ Perceptions of Risk by Phase
Pre-Operational Phases(% state very important/important)
Fitness for purpose of design, 100%
Delivery of design, 100%
Planning problems, 98%
Construction cost over-run, 98%
Planning approvals, 98%
Late delivery of design, 98%
(9 risks cited in all)
Operational Phases(% state very important/important)
Asset/service performance, 100%
Asset/service reliability, 97%
Employment laws, 93%
Security, 91%
Change in public partner requirements, 91%
Costs of latent defects in assets, 85%
(11 risks cited in all)
Source: SATER (2010), Public Private Partnership financiers’ perceptions of risk
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Perceptions differ between Equity & Debt
Top Risks for Equity Providers(% state very important/important)
Risk transfer to subcontractors, 97%
Return on subord.debt/quasi equity, 91%
Target return on equity, 91%
Availability of insurance, 86%
Inflation on opex, 77%
Available insurance for construction, 74%
(9 risks cited in all)
Top Risks for Senior Debt Providers(% state very important/important)
Availability of interest rate swaps, 100%
Risk transfer to subcontractors, 97%
Availability of insurance, 91%
Interest margin on cost of debt 91%
Cover ratios, 91%
Due diligence on financial model, 88%
(13 risks cited in all)
Source: SATER (2010), Public Private Partnership financiers’ perceptions of risk
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Structuring the PPP
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Service Contracts
Strengths
• Low risk
• Repeated competition
• Low barrier to entry
Weaknesses
• No incentive to invest
• Poor operational integration
Features
• Outsourcing of specific service for a period (1- 3 yrs)
• Fee basis varies, e.g. fixed price, cost-plus, time/material
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Management Contracts
Strengths
• Potential for efficiencygains
• Skill injection
Weaknesses
• Expansion responsibilities unclear
• Incentive payments need careful design
Features
• Handover of management control
• Private sector working capital (not fixed)
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Lease & Affermage Contracts
Strengths
• Incentives for growth and efficiency
Weaknesses
• Perverse incentives for maintenance on contract end
• No capital injection
Features
• Full transfer of operating risk but not assets for a period
• Affermage based on pro-rated revenue not fixed fee
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Concessions
Strengths
• Attract private finance:
– Construction
– Refurbishment
• Incentives for efficiency revenue and expansion
Weaknesses
• Complexity
• Long period (>25 yr.) and need to review
• Creation of monopoly
Features (Variable)
• Operator responsible for operations and investment
• Assets ownership typically public
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BOT Contract (and variants)
Strengths
• Risk transfer between public and private
• Debt finance for new assets
Weaknesses
• Allocation of demand risk is problematic
• More expensive than public finance
Features
• Operator builds and operates assets for period
• Typically used for major greenfield investments
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Best Practices in Contract Design
Focus on following areas:
• Risk Allocation
• Payment Mechanism
• Output Specification
• Flexibility & Duration
(Administration addressed later)
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Initial Risk Allocation
• Guiding principles:– Allocate risk where it can be controlled and then to less risk adverse
– Distinguish control frequency and impact
• Limits to risk transfer:– Change of Law & Planning Consents
– Environmental liabilities
– Output mis-specification
– Changing public needs
– Essential services (last resort)
• Demand risk may be shared:– Capacity and usage charges, based on fixed/variable cost
– Recognise differences in short/long run cost elasticity and rising/falling demand
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Payment Mechanism (‘PayMech’)
• User charges
• Usage payment
• Capacity/availability payments
• Quality/service:
– payments
– abatements
• Price reviews
• Monitoring/audit arrangements
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Output Specification
1. State Authority’s objectives and constraints
2. Make explicit compliance with statutory requirements
3. Be unambiguous and concise
4. Be sufficient for bidders to estimate facilities & services
5. Make explicit bid evaluation criteria (across lifecycle)
6. Define performance measures, weights & monitoring
7. Co-ordinate design, construction and operation
8. Contain only necessary and affordable requirements
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Flexibility & Duration
Flexibility
• Contract drafting
– Anticipate changes
– Cost reflective principle
– Benchmarking
• Unanticipated changes:
– Variation protocol
– Market test
– Independent assessment
• Freeze period
– Ownership& refinancing
Duration
Competitive Pressure vs. Incentive to Invest:
– Fixed term
– Endogenous (e.g. based on revenue)
• Unbundle services
– Core
– Ancillary
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Contract Management
Formally begins after Financial Close, but ensure continuity with pre-Close project lifecycle
• Several Phases– Design and Construction Contract Management
– Operational Contract Management (longest and most complex)
– Post-contract Review
• Four Aspects:– Contractual
– Technical
– Financial
– Quality/Service
Codify in contract administration manual
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Design and Construction Contract Management
Outputs defined in contract so Project company assumes risk but contract should allow monitoring of:
• fulfilment of contractual conditions and milestones
• conformance to schedule and standards (legal, technical, & documentary)
• use of public assets
• supervision by Independent Engineer
• raising of objections and initiating arbitration
• information necessary for financial management
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Operational Contract Management
• Governance arrangements
• Measuring delivery performance
• Financial management
• Proactive risk management (discussed previously)– On-going risk register
• Manage changes– within the contract
– outside the contract
– renegotiation
• Disputes & Default
• Expiry
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Governance Structures
Source: 4ps, A Guide to Contract Management
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Partnership Board (Quarterly)
• Provide a strategic overview to consider and resolve long-term issues
• Ensure that the objectives of the contract are met and communicated over the full term of the contract
• Encourage an ethos of working in partnership is developed and maintained
• Ensure that the project is aligned with both parties’ business or service plans
• Agree proposed changes and efficiency targets
Source: 4ps, A Guide to Contract Management
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Contract Management Board (Monthly)
• Review monitoring report
• Review payment report and agree payments due
• Identify efficiencies and necessary changes
• Record issues, e.g. compensation events, delays,
• Promote partnership working
• Ensure the Partnership Board is briefed and respond to actions
Source: 4ps, A Guide to Contract Management
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Contract Team (Continuous)
Organisation Design:
• Structure, Roles, & Responsibilities
• Processes and Standard Operating Procedures
• Resources levels based on activities
• Skills and Knowledge
• Tools and Technology
Objectives:
• Identify issues early
• Produce monitoring reports and payment reports
• Resolve minor operational issues
• Discuss service provision with users and provider
• Clarify required service levels to all parties
• Promote partnership working
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Measuring Contract Performance: Framework
StateVision
Department Objectives
Source: State of Victoria, Australia (Adapted)
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Measuring Contract Performance: Mechanisms
• Operators to report required performance indicators and provide commentary on exceptions
• Independent audits and spot checks to verify
• Use of experts to confirm pass-through charges
• Use of consumer surveys and complaint mechanisms
• Publication of performance as permitted
• Exchange of information on costs and service levels, as permitted, with other authorities and regulators
• Engage consultants (e.g. with prior knowledge)
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Financial Management Illustration:M25 Scorecard and PayMech
Safety
• Improve road user safety
• Improve road worker safety
Operations
• Maintain network
• Improve incident management
• User satisfaction
• Journey improvement
• Congestion reduction
• Network Availability
Management
• Continuous Improvement
• Management of Agreement
External
• Enhance the environment
• Technology adoption
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Financial Management Illustration:Abatements
• Can be complex, e.g. London Underground
• May rise to 5%* rebate of charges and may be disclosed in financial accounts of operator, so:
– Apply with caution
– But ensure a waiver of abatement does not set precedent
* Source: State of Victoria, Australia
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Change within the Contract
Variation protocols crucial:
• timescales should be defined for small changes and agreed individually for large changes;
• define funding options, if authority or company is liable, and when payment becomes due;
• define arrangements for verification of costs and retention of documentation
• define legal obligations, including intellectual property
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Proactive Cost Saving Opportunities
– Audit of payment mechanism
– Examine insurance cost sharing provisions
– Increasing energy efficiency
– Review asset usage and sublet/hibernate spare capacity
– Check service specification still reflects requirements
– Benchmark cost/performance
– Consider services outside the PPP contract
– Assess benefits and costs of variation (using protocol)
Source: HMT
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Change Outside the Contract
Renegotiation brings hazards:
• Uneven competitive field for re-tender
• Lenders may prevent changes that add risk to company
• Potential pass-back of risk to public, e.g. asset hand-over requirements, taking-on senior debt
• Debt-service ‘holidays’, debt-term extension, or unitary charge re-profiling can add to borrowing costs
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Disputes: why they happen
Source: Service Works Intl. (2011), The Importance of Transparency & Auditability in PPPs
Cited reasons for contract dispute:
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Disputes: What to Do
Be prompt and distinguish disputes of:– Fact, e.g. was the failure caused by the authority or the company?
– Legal interpretation, i.e. contract is ambiguous on requirements
Source: New South Wales Government (2008), Contract dispute resolution (Adapted)
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Defaults
Defaults may be caused by:
• Failure to construct, i.e. ‘Abandonment’
• ‘Drawstop’ by lenders, i.e. stop in lending
• Insolvency of Project Company
• Service Availability Date beyond ‘backstop date’
• Non-payment of Liquidated Damages
• Abatements or (mal)Performance Points exceed threshold
• Recurrent breaches despite warning (‘Persistent Breach’)
• Breach of fundamental conditions, e.g. Insurance
However contract may continue , i.e. potential for ‘creative destruction’
Source: Yescombe (adapted)
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Expiry
• Expiry: opportunity or threat?
• Plan in advance for re-tender, if required
• Supervise asset hand-back:
– Asset condition
– Documentary completeness
• Plan for supplier and employee continuity
• Prepare for discontinuities
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Post-Contract Review
Prior to conducting review, define:
• Governance framework, e.g. PPP unit, national audit office, to ensure independence
• Objectives, e.g. review of policy, or types of project, or specific project
• Questions that requiring answers (to meet objectives)
• Availability of information to answer the questions
• Duration, resource and timing of review
• Form of output, e.g. report, workshop
• Level of publication
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Proactive PPP Unit
• Inform future PPP policy development
• Promote use of PPPs according to current policy
• Identify potential use sector-by-sector
• Develop criteria for assessment of potential projects
• Issue guidance on design and implementation
• Act as Centre of Excellence to assist PPP project teams
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Reactive Role of PPP Unit : Remedies
Source: PPIAF (2007) Gridlines
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PPP Units: Some Successes
Source: PPIAF (2007) Gridlines
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Summary
• Contract Management extends beyond start and expiry dates
• Context is crucial: what are the policy objectives and stakeholder requirements?
• Design contract to allocate risk and provide clear measurable output specification
• Ensure contractual compliance (of course) but obtain positive outcomes from shortfalls
• Strive to preserve partnership approach for flexibility and long-term gain