Public Private Partnership

What is PPP

•PPP (Public Private Partnership) is a collective name

for various relationships between public bodies and

private companies.

•Traditionally the term is being used for those projects •Traditionally the term is being used for those projects

carried out jointly by the Government and a private

company.

When PPP

• Not every project is suitable for PPP outsourcing.

• Most appropriate when:

– The scale of project/ task is manageable– The scale of project/ task is manageable

– Projects/ tasks where the responsibility can be defined for a longer period

PPP is often seen as being a solution for a lack of governmental resources or for financing the governmental deficit

Why PPP

• Bringing Added Value of optimisation of services by a private service provider, allowing the government to keep hold of the reins while at the same time minimising its own involvement in the actual

execution of the work execution of the work

• Realising benefits from the projects earlier than would otherwise be possible within the current budgets, because they have been financed up front by a private party.

PPP - Benefits

• Long – term assurance about the cost. Most PPP contracts are long-term agreements with a term ranging from 20 to 30 years. Clients no longer need to provide advance financing, but the investment sum is spread out over the term of the project, offering long-term predictability of expenditure.

Financial Advantages

• Total project costs are lower due to the optimal coordination of design, construction, maintanance, operation and supporting services over the contract term (life cycle management)

• Risks are placed with the parties best able to control them, another cost-lowering factor.

PPP - Benefits

• The client is assured of a high-quality and sustainable project

• The client assumes only a general directive role, thus requiring only a small internal project organisation mainly limited to functional and performance specification and contract issues. Client spends significantly less time on

Qualitative and Operational Advantages

contract issues. Client spends significantly less time on technical specifications for the design and construction process.

• Timely delivery, Since the contractor effectively finances the investment in the construction asset and only receives payment when this is complete, this logically forms a serious incentive for completing the construction phase in time.

PPP - Benefits

• Risk allocation, both in terms of time and money, is agreed at an early stage between the parties. The client contracts out the services he requires according to clear and measurable performance criteria.

• If the quality of the services does not meet the agreed

Performance Advantages

• If the quality of the services does not meet the agreed performance requirement, the contractor is penalised by reductions to his periodic payment. Contractors will therefore make every effort to meet the agreed performance standards.

Public Private Partnership (PPP)

Models and StructuresModels and Structures

Design Build

Design Build Maintain

Design Build Operate

Design Build Operate Maintain

Build Own Operate Transfer

Build Own Operate

PPP Models

New Projects

Public Responsibility Private Responsibility

Service Contracts

Management Contracts

Lease Concessions Divestiture

Existing Services and Facilities

Factors deciding choice of PPP Model

Objective of

Outsourcing/

PPPResponsibility

for InvestmentOwnership of

Capital Assets

Choice of PPP Model

Duration of

Contract

Assumption of

Risks

PPP Options Service Contracts

Management Contracts

Lease Contract

BOT Concessions

Financing Investment

Public Sector Public Sector Public Sector Private Sector Private Sector

Financing Working Capital

Public Sector Public Sector Private Sector Private Sector Private Sector

Contractual Public Sector Private Sector Private Sector Private Sector Private Sector

Main Features of PPP Options

Contractual Relations with customers

Public Sector Private Sector on behalf of

Public Sector

Private Sector Private Sector Private Sector

Private Sector Responsibility & Autonomy

Low Low Low to Medium

High to Medium

High

Need for private capital

Low Low Low High High

Financial risk for private sector

Low Low Low to Medium

High High

Main Features of PPP OptionsPPP Options Service

ContractsManagement

ContractsLease

ContractBOT Concessions

Duration of Contract/ License

½ - 2 Years 3 – 5 Years 5 – 15 Years 15 – 30 Years 20 – 30 Years

Ownership Public Sector

Public Sector Private Sector Private then Public Sector

Public Sector

Management Mainly Public Sector

Private Sector Private Sector Private Sector Private Sector

Setting Prices Public Sector

Public Sector Contract or Regulator

Public Sector Contract or Regulator

Collecting Bills Public Sector

Private Sector Private Sector Public Sector Private Sector

Mode of Payment

Work Done/ Unit Price/

Lump sump

Cost Plus & Productivity

Bonus

Proportions of Tariff

Tariff Tariff

Main Objective of PPP

Improve Operating Efficiency

Improve Technical Efficiency

Improve Technical Efficiency

Mobilise Private Capital

and/ or expertise

Mobilise Private Capital

and / or expertise

InceptionFeasibility

StudyProcurement Construction Operation

Need for change

Project study and

public consultations

Project team of the

client is build

Engineering, design

and financial due

Edition and

publication of tender

documents

Selection of qualified

bidders

Prior to construction,

creation of the SPV

and financial close is

reached

Operation of the

facility

Maintenance public consultations

Identifications of

goals and priorities

and financial due

diligence

Rough risk analysis

bidders

Evaluation of the

bids and negotiations

Awarding of the

contract

Construction of the

infrastructure

Maintenance

End of contract

All Risk

Legal and Political

Risk

Demand RiskDemand –side

operation Risk

Government

Private partner

(government may

provide guarantee

to mitigate Risk

Types of Risk Risk in general most

efficiently borne by:

Commercial Risk

Supply Risk

Supply –side

operation Risk

Construction

Risk

to mitigate Risk

Private partner

Private partner

Project

Stakeholders

Project Stakeholders differ in their:

•Objectives

•Functions throughout the project life cycle

•Risk perception, willingness and capability

Project Life

Cycle

Risk

management

process

PPP

risk managementSub-processes differ in:

•Organisational and operational requirements

•The extend of available information and

data

•Applicability of reasonable methods and

techniques

Stage-specific risk profile at different project

stages:

•Amount of risk expense

•Capability to influence risk

•Consistency of revenue

Pre - Qualification

• Objectives & priorities; Defining of PPP Service

• Technical, Economic, Commercial, Financial, Environmental reviews;

• Pre-feasibility study & Project Information Memorandum;

• Bid evaluation criteria determined;

• Prequalification notice issued

Tendering

• Preparation of bid documents and contracts;

• Preparation for detailed Information Memorandum for lenders;

• Issue request for bids to Pre - qualifiers

Formation of SPC

• Detailed negotiations on concession, PPA, FSA, etc.;

• SPC formation and equity allocation;

• Approve licences, taxation regime, etc.

• Negotiate Government Undertakings

• Concessionaire negotiates loan agreements

Financial Closure

• Complete all necessary documentation and conditions precedent

Typical Timeline

Pre-

Qualification

Formation of

SPC2-3 Months 3-9 Months

Tendering

Negotiations

Financial

Closure

3-6 Months

3 Months

3-6Months

Total Time : 14 – 27 Months

PPP FinancingPPP Financing

PPP Financing Principles

• Private Investors apply their own funds only to a minor portion of the projects.

• Most of the funding would be provided by financiers –Commercial banks and international financial institutions.

• Projects’ Bankability – ability to attract funding is one of the key issues to be resolved by both the public and the private sectors.

• Non – Bankable projects are not PPP – feasible.

Bankable PPP Projects

Bankable

PPP

Certain

Cash

Flow

Public

Guarantees

PPPProjects

SecurityStep-in

Provisions

Service

Output

Specification

Service

Delivery

Performance

Monitoring

Payment

Mechanism

PPP Financing Approaches

• Resource (Corporate) Financing: Lenders look to existing corporate cash flow and a corporate guarantee of the borrower’s obligations

• Non-Resource (Project) Financing: Lenders rely exclusively on a project’s cashflow and assets to obtain repayment of loans; not on project’s cashflow and assets to obtain repayment of loans; not on the corporate balance sheet and profits

• Limited Resource (Project) Financing: Lenders look initially to a project’s cash flow and assets to obtain repayment of loans

Pros/ Cons of Project Finance

Advantages• Protects and attract sponsors

• Efficiently and comprehensively

allocates project risks

• Lessens political risks

• Improves creditworthiness of

Disadvantages• Inherently complex

• Higher development cost (time

and money) for government

• Likewise, very significant bidding

costs for sponsors• Improves creditworthiness of

project and chances of fundings

costs for sponsors

• Committed equity required

Funding Options

Bankable

PPP

EquityDebt

PPPProjects

Grants Subsidies

Guarantees

Factors Impacting Project Financial Structure

PPP

Project

Capital Requirements and cash flows vary depending on the stage of project development. The initial capital structure (high equity or costly debt) can be refinanced through cheaper debt once construction risk is over.

Taxes can impact cost of capital and earnings. Interest on debt if tax deductible can significantly reduce the cost of debt capital and hence there is an incentive for the sponsor to use debt instead of equity.

Project Cycle

& Cash Flows

TaxesProject

FinancialStructure

the sponsor to use debt instead of equity.

Too much of debt in a project with fluctuating cash flows may have problems of meeting debt covenants. Also some flexibility ought to be maintained in case unforeseen situations demanding additional funding.

Actual cost of capital is also factored into decision making process. Though cost of debt is generally lower than equity, it depends on risk & recourse and timing.

Financial Risk

& Flexibility

Cost of Capital

PPP Project Financial Structuring

•Capital Investment

•Capital Structure

•Operating Cost

•Revenue Stream

Developing

Cash Flow

Model

•DSCR

•Capital Cost Estimation

•Assumptions

+ Ve : Proceed to Analysis of Financial Indicators

- Ve : Change Assumptions

Analysis of

Financial

Indicators

Sensitivity

Analysis

•DSCR

•NPV, IRR & Pay Back

•ROE

•Ratio Analysis

•Concessional Life

•Length of construction period

•Structure and cost of capital

•Facility Usage Projections

•Inflation Rates

•Interest Rates

Acceptable : Proceed to Sensitivity Analysis

Not Acceptable : Change Assumptions

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