selecting and designing concession / ppp projects
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Selecting and Designing Concession / PPP Projects. Martin Darcy United Kingdom. « Concessions and Public- Private Partnerships » Ankara, 10-11 March 2008. Points to Consider from the Start. PPP is a concept that can be adapted to individual project conditions - PowerPoint PPT PresentationTRANSCRIPT
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Selecting and Designing Selecting and Designing Concession / PPP ProjectsConcession / PPP Projects
Martin DarcyUnited Kingdom
« Concessions and Public-Private Partnerships »Ankara, 10-11 March 2008
« Concessions and Public-Private Partnerships »Ankara, 10-11 March 2008
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UPoints to Consider from the StartPoints to Consider from the Start
PPP is a concept that can be adapted to individual project conditions
It is essential to be clear about the Objective (s) There is no such thing as a PPP project intrinsically, only Public
Investment Projects that may or may not be procured using a PPP methodology
PPP cannot make a bad project a good one PPP should not be used as an accounting trick but as an
efficient method of delivering the a Public Investment Project The Ministry of Finance must develop the necessary skills that
enable it to identify contingent liabilities that can come with PPP projects
Unrealistic expectations (affordability, timetable, development budget) will cause problems and, ultimately, disappointment
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ULife cycle of PPP Life cycle of PPP
projectsprojects
Strategic analysis
Tendering
Earlyoperational
Pre-operationalImplementation
Contract completion
Matureoperational
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UThe Importance of The Importance of
Selecting Good ProjectsSelecting Good Projects Capital investment is vital Good projects:
• create economic benefits and growth• create confidence in a country• create value for money solutions thus minimising
tax-take Bad projects:
• create ongoing liabilities for many years• big projects = big risks• failure is often high profile: nationally and
internationally• can undermine investor confidence in the country• can make the good projects unaffordable
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UHow Poor Quality Projects HappenHow Poor Quality Projects Happen
Poor Objective Setting Weak Option Appraisal Inadequate Cost/Benefit Analysis (CBA) Political rather than economic decisions Poor Identification of recurrent costs Under estimation of Capital costs Inability or unwillingness to hire appropriate
expertise Fear of peer review Lack of transparent and fair procurement
processes All summarised by the phrase: ‘poor
preparation’
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UIssues to Consider 1Issues to Consider 1
Does the proposed project reflect the current policy environment of the government?
Is there political support? Are the objectives of the proposed project
clear and easy to communicate? Have the project governance
arrangements been agreed? Skills and capacity (and funds to pay for it
all)
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Issue to Consider 2Issue to Consider 2 Have all the options for realising the
objectives been identified and evaluated? How do you test the capital cost
estimates? How do you identify the recurrent costs? Is the proposed project affordable to the
State / to the Ministry’s budget What is the likely impact on the National
Debt?
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Issues to Consider 3Issues to Consider 3 Have all the Risks to the Project been
identified? Have the ‘worst case’ costs been
evaluated and considered? What other factors could influence the
outcome? Who are the stakeholders in the project? Are project delivery times realistic? Is there likely to be a competitive market to
allow a healthy procurement process?
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UStrategic AssessmentStrategic Assessment
Government Policy
Public InvestmentProgram
Public InvestmentProject
Public InvestmentProject
Public InvestmentProject
Conventional Procurement
PPP / PFI / BOT etc
Output SpecificationOutput Specification
Option AssessmentOption Assessment
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UCommon Challenges in Common Challenges in
Evaluating PPP OpportunitiesEvaluating PPP Opportunities
Ensuring there is a market demand for the proposed investment
Understanding Investor and Lender Requirements Insufficient bidders to provide competition Establishing the correct governance structure Sourcing appropriate skills in order to pursue a PPP project Political rather than Economic choices place the outcome at
risk Not all investment projects are suitable for PPP in terms of:
• Type of investment opportunity (sector)• Size of investment
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UEvaluating and Selecting Evaluating and Selecting
PPPs (1)PPPs (1)
Clarity of Objective(s) Links to published policy statements Priority setting for public investment Create an Outline Business Case that can
be adapted as the project progresses. • Use Cost Benefit Analysis to assess the value
of the project. • This allows comparison with other projects
competing for scarce resource Create a ‘should cost’ model and
consider the concept of ‘Optimism Bias’
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UEvaluating and Selecting PPPs (2)Evaluating and Selecting PPPs (2)
Questions:• Is there a competitive market?• Does the Contracting Authority have the skills and
capacity to deliver the project?• Does this sector of the market enjoy a good track record?• What precedents are there for this type of PPP, nationally
and internationally?• Where can lessons be learned?• Are the stakeholders to the proposed PPP project fully
supportive?• What are the motivations for investigating the use of PPP
for this project?• Will bidders be given freedom to achieve the objectives of
the investment using their own initiative?• If so, what will be the award criteria?
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Managing RiskManaging Risk
Simple Principles:• Each identified risk must be accepted by the
party best able to manage (or to bear) the risk• Those risks that neither party can manage –
use insurance to cover the risk• Transferring unrealistic risks to the private
sector is a risk in itself• Transferring risks to the private sector that it
cannot manage will cost more – they will charge a premium for managing the risk
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USimple Funding Principles For Simple Funding Principles For A PPP ProjectA PPP Project
100%
25%
0%
EQUITYEQUITY
Long termLong term
BorrowingsBorrowings
More riskMore risk
more equitymore equity
Debt is Debt is cheaper cheaper than equitythan equity
75%
Investment cost
Note: Illustrative Example Only
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Contingent LiabilitiesContingent Liabilities
Any contractual obligation that may, if it is called up on, create a liability for the government
Examples:• Payments guaranteed at a minimum
level
• Events of Termination that incur compensation costs for the government
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PPPs - Lessons learnedPPPs - Lessons learned Political will and visible support is essential. A clear, permissive and flexible legal
framework is necessary The necessary supporting institutional
structures need to be in place (‘Public Public Partnership’)
Consider the cost of hiring experienced advisers as a positive investment in the outcome of the project
Full and adequate preparation is essential. Full and adequate preparation is essential. Without it, the project will probably failWithout it, the project will probably fail