IRF e-Learning Webinar Series – Public-Private Partnerships Value for Money (VFM) in PPPs

I. PPPStructure

II. VFMAnalysisandPractices

III. PracticeSuggestions

Discussion/Questions

Presentation Index

§ More expensive in initial stages of planning and procurement

§ Cost efficiencies through innovation, taking risks, and good management

§ Projects need to be “bankable”

§ Payments are (generally) made after substantial completion (availability deal)

§ Key to success is good planning and reasonable risk transfer.

§ Design-Build-Finance-Maintain-Operate (or variations of)

§ Financing provided by the private sector

§ Risks assigned to the entity best able to handle the risk

§ Selection skewed towards the lowest cost to owner (NPV)

§ Terms are generally about 30 years+

§ Based on availability payment or revenue generation

§ Attract internationally experienced teams and financing

Characteristics

I. PPP Structure

§ Use Alternative Financing and Procurement to maximize risk transfer and achieve value for money in the delivery of large, complex projects

§ Establish a maximum project cost prior to RFP release§ Exploit the discipline of private sector capital§ Drive innovation in scope, schedule and budget§ Tightly manage procurement process§ Ownership remains with the public sector§ Funding could be combination of public and/or private

PPP Objective

Approach

§ Value for Money Exercised

§ Procurement efficiency achieved with experience

I. PPP Structure – PPP Objective and Approach

Design-Build JV(DBJV)

Op. & Maint. Service Provider

Project Co (Private Consortium)

Owner (Gov. Agency)

Banks / Investors /Equity Partners

§ Technical Advisor§ Legal Advisor§ Process Advisor § Financial Advisor§ Markets Advisor (Capital)§ Insurance Advisor§ Traffic & Revenue (applicable)

§ Lenders’ Technical Advisor§ Lenders’ Legal Advisor§ Lenders’ Insurance Advisor

Advisors

AdvisorsLenders

Life-Cycle/Rehab. (Project Co)

Operations PhaseConstruction Phase

RiskTransfer

Organization/StakeholdersI. PPP Structure – Roles, Relationships, Risk Sharing

§ Engineering§ Financial§ Legal§ Insurance

Advisors

Public Authority (Owner)

Concession Company (Private Sector)

Availability Payment

Milestone Payment

Revenue (all or share)

Revenue (if any)

Revenue (if any)

I. PPP Structure – Funds Flow

$$

$

$

$

§ VFMisaprocessofcomparingcostsusing twodeliverymodelstodeterminewhichisthebettervalueproposition: IfthePPPcostislessthantheTraditionalProcurementCost,thenthereispositiveValueforMoneybyprocuringaprojectusingPPP

+ Value For Money

RiskRetained

AncillaryCost

FinancingCost

RiskPremium

BaseCost

Traditional Procurement Cost

(DBB - PSC)

PPP Procurement

Cost

I. PPP Structure – Concept of Value for Money

I. PPP Structure – Procurement and VFM

Note: Political, operational and other influences can also make PPP a consideration as a procurement option.

Bus.Case+

ValueforMoneyAnalysis(VFM)

ProcurementPhase

RFQ RFP

FCComm.Close

RFP Prep./ProponentResponse

Design/

Const.OM&R

Evalt./SelectMarket

Sounding

Implementation

RFQ

ProjectAgreement(Draft) Proj.Agrmt.

BusinessModel

VFMUpdate

Evalt./Select

Risk ManagementFinancial Modeling

I. PPP Structure – Business Case and VFM

ProjectPlanning§ Aprojectcomesfromatechnicalplanning exercise§ Definethegeneralprojectscope§ Havesomeengineering andcostingdata§ QualitativeAnalysis:

§ Scorecorporateobjectivesagainstpotentialprocurementoptions§ Identifywhichmodels shouldbefurtherconsideredbyQuantitativeAnalysis

QuantitativeAnalysis(ValueforMoneyAnalysis)§ Beginsafterithasbeendecidedthattheprojectwillproceed§ Toestablishesthemostappropriateprocurementmodel§ Itisatoolforcomparingprocurementmodels(andnotforassessingwhethera

projectshouldproceedornot)§ Comparestotalrisk-adjustedcostofshortlistedoptionsagainstatraditionalPublic

SectorComparator(PSC)procurement:design, andthenbuild separatelybyacontractorwithnoprivatefinancingorprivateoperationsconsidered

§ PSCiscomparedwithoneormorePPPoption

§ ValueforMoney$:(TotalPSCPresentValueCost)– (TotalPPPPresentValueCost)

II. VFM Analysis – Components

IdentifytheProcurement/PPPOption§ DBF,DBFM,DBFOMvs.PublicSectorComparator(PSC)traditional

procurement

1. BaseCosts– DevelopProjectCosts§ PSCProcurementCosts§ ShadowBid(PPP)Costs§ AncillaryCosts§ EfficiencyFactors§ SpentCurve– whatisspentwhen/constructionduration

2. RiskPricing– DevelopaRiskMatrix§ Considerallrisksthroughout theprojectcycle:planning, design,

construction,operations, maintenance,life-cycle/rehabilitation,end-of-term

3. FinancialModel(technicalperspective:inputs)§ Input– Constructionperiod+theoperationsperiod$+Cashflow§ ApplyRisk$(retainedrisks)§ DiscountRate§ NetPresentValueforcomparingPSCagainstthePPP(ShadowBid)

II. VFM Analysis – Costing

1. BaseCosts– DevelopProjectCosts§ DesignandConstructionCosts– typicallythesameforPSCandPPPoptions§ MaintenanceCosts– Agencyinput,pastdata,expertinput§ OperationsCosts– Agencyinput, pastdata,expertinput§ Life-CycleCosts– Whatrehabilitationwillhappenwhen,end-of-term§ InflationRate– Applied totheconstructiondurationforeachmodel.Typically

takenandadjustedatmid-pointofconstruction§ AncillaryCosts– Bothwillhavefull costsforthetermoftheproject(spentby

publicorprivatesectors)

§ CostingAdjustments(optional)– ifthesamePSC/PPPcostbasisareused:- PSCConstructionCost:Sometimesincreased,ifsamePSC/PPPCostisusedto

reflectefficienciesinPPPprocurement (ifusedthesamePSC/PPPbasecosts)- Life-CycleCostAdjustment:PSClife-cyclecostisreducedtoreflecttypicallack

ofexpenditurebythepublic sector

CostingAdjustments:§ Basedonhistoricaldata§ Basedonexpertinput§ Willdependonthesector:road,transit,social,etc.

II. VFM Analysis – Risks

2. Risks– Allocation,CostsandImpacts§ Project-SpecificorTypical?– Dependsonagency§ IdentifyRisksforeachphase:Planning, policy,site,design/construction,

operations,……§ Costs($)impactedandassociatedwitheachrisk:Totalcosts,designand

construction$,operations$,life-cycle$§ Whowillcarrytherisk?Public(Retained),Private(Transferred),Shared§ Costofeachrisk:(probabilityofoccurrence%)x(impact%)x($ofcostsimpacted)§ StatisticalAnalysis:MonteCarloAnalysistoassesscumulativeimpactofrisks§ AssignRisks:

- PSCCost+RetainedPSCRisks$=TotalPSCCostforFinancialModel input- PPPCost+RetainedPPPRisks$=TotalPPPCostforFinancialModel input

§ Analysisbasedonexpertinput§ Basecostingwouldincludetransferredrisks§ InVFManalysis,theriskscostisoftenthefactorbringingVFMtoPPPs

Name Graph Min Mean Max 5% 95%

Retained Risk / DBFM $810,000 $179,000,000 $356,000,000 $51,000,000 $222,000,000

Retained Risk / Traditional $4250,000 $789,000,000 $1,215,000,000 $642,000,000 $1,001,000,000

II. VFM Analysis – RisksDBFOM Traditional Model DBFOM Traditional Model

Cost Base Probability Impact Probabil

ity Impact

Risk CategoryPortion of DBFM %

10th perct

Typical

90th perct %

10th perct Typical

90th perct Public Transfer Shared Public Transfer Shared

1.00 Policy / Strategic1.01 Government Approvals for Program (not

applicable) Total Contract1.02 Government Approvals for Project Total Contract 20% 5% 20% 40% 20% 5% 20% 40% $62,864.000 $0 $0 $62,864,000 $0 $01.03 Government Funding Total Contract 5% 1% 3% 10% 20% 3% 6% 25% $2,858,000 $0 $0 $12,986,000 $0 $01.04 Project Schedule Design &

Construction2.00 Transaction / Tender Process2.01 Due Diligence (by the owner in preparation of

tender in RFP) Total Contract2.02 Tendering Competition Total Contract

Scope Changes during Tendering (combined with 4.03) Total Contract

2.03 Delays in Contract Award/Financial Close Total Contract2.04 Termination prior to Contract Award/Financial

Close Total Contract3.00 Project Agreement3.01 Ambiguities In Legal Agreements Total Contract3.02 Termination For Convenience During Construction Design &

Construction3.03 Termination For Convenience During

Operations/Maintenance Phase Operations & Maintenance

4.00 Design4.01 Stakeholder Consultation Pre FC Design &

Construction4.02 Stakeholder Consultation - Post FC and Tender Design &

Construction4.03 Scope Changes initiated by Owner During Tender

Process and DesignDesign &

Construction4.04 Compliance with Codes and Standards - During

Design Design & Construction

5.00 Site Conditions / Environmental5.01 Utility/Services Relocations Design &

Construction5.02 Geotechnical Design &

Construction

RiskCategory Owner PCo Share CommentsPolicy/Strategy:Gov. ApprovalandFunding xTransaction/TenderProcess

DueDiligenceScopeChangesDelaysinAward/FinancialCloseTermination(withoutcause)

xxx

x

x SomedelaysmaybeexpectedP Cowillsuffersomecosts

ProjectAgreementAmbiguityTerminationDuringConstruction/Operations x

xx

IfwithoutcauseDesign

StakeholderConsultationDesign/Innovation/CodeComplianceScopeChanges x

xx Externalstakeholders

ByOwnerSiteCondition/Environmental/

GeotechnicalEnvironmental/Exist.Contamination/ArchaeologyUtilities Relocation

xxxx

Sometimes $$$ totransferKnown/Unknown

Sharedifexternalutilities

Construction xSpecializedEquipment/Technology x IfprescribedbyOwnerCompletion/Commissioning xMaintenance andLifeCycle x IfnochangeinroadusageOperation x TollRevenue– SpecialCasesInflation– DuringOM&R x Indexed

II. VFM Analysis – Risks

II. VFM Analysis – Financial Model

3. FinancialModel(technicalinputsoverview)§ Costs:

- Construction, Operations,LifeCycle- AncillaryCosts- SpentCurve– Whatwillbespentwhen

§ Risks– Mean$Valueof“RetainedRisks”forPSC,and“RetainedRisks”forPPP§ PublicSectorPayments– MilestonePayments(ifapplicable)§ RevenueStream(ifapplicable)§ DiscountRate– ToCalculatePresentValueofCosts,options are:

- Risk-FreeRate- Risk-LoadedRate- FixedRateforeachsector- DifferentRatesforPSCandforPPP- Apointofcontention– Obtainindependent advice

§ FinancingConsiderations (non-technical): Inflation,financingstructure(bank/bond), milestonepayment,debtservice,internalrateofreturn,etc.

§ Useexperiencedfinancial+financingexperts+ratingagencyinput§ Basecostingwouldincludetransferredrisks§ InVFManalysis,theriskscostisoftenthefactorbringingVFMtoPPPs

II. VFM Analysis – Financial Model

3. FinancialModel(outputsummary)

§ (1)ConstructionCosts:AppliedInnovationFactor(increasedPSC)§ (2)LifeCycleCosts:AppliedLifeCycleFactor(reducedPSC)§ ConsiderotherDiscountRates– arange

Traditional - Public Sector Comparator (PSC) Shadow Bid (DBFM)Nominal, in M$

Construction costs (1) 2,055 Construction costs 1,829 Maintenance Costs 212 Maintenance Costs 212 Life Cycle Cost (2) 420 Life Cycle Cost 700 Present Value terms, in M$ Present Value terms, in M$PV of base PSC 1,950 PV of Annual Service Payment 451

PV of Life Cycle Cost Payment 234 PV of Substantial Completion Payment 1,500 PV of Shadow Bid 2,185

Risk retained under PSC delivery 945 Risk retained under PPP delivery 179 Transaction costs - Transaction costs 6 Other procurement costs - Other procurement costs 35 PV of Public Sector Comparator 2,739 PV of adjusted Shadow Bid 2,405

VFM savings ($) 334 VFM savings (%() 12.20%

Discount Rate: 5.5%

II. VFM Analysis – Practices (samples)Agency A Agency B Agency C

Base CostsWho provides base costs (construction, maintenance, lifecycle)?

Typically provided by an external cost consultant.

Capital and lifecycle costs typically provided by an external cost consultant. Authority often provides maintenance costs.

Combination of internal resources (including reference to past projects) and external consultants.

Are base costs consistent for PSC and shadow bid?

Yes - prior to adjustments. No - separate cost estimates developed for the PSC and shadow bid.

Yes - prior to adjustments.

Public Sector ComparatorAre PSC base costs adjusted?

Yes – The lifecycle cost is reduced to reflect anticipated underspending by the public sector (based on historical observations). PSC base costs are also increased to reflect an assumed innovation factor of the AFP model.

No (project dependent) No

Procurement model Traditional Design, Bid, Build (DBB) model always used.

Traditional DBB model unless a Design, Build (DB) model is deemed more appropriate.

Traditional DBB model always used. A DB may be considered as one of the alternative procurement models.

Financing Assumptions No explicit financing costs included in the PSC when the AFP model is a DBFM.

No explicit financing costs included in the PSC.

No explicit financing costs included in the PSC.

Competitive Neutrality Adjustments

Tax – income tax payable under the AFP model is added to the cost of the PSC. No distinction between provincial and federal taxes (since federal tax receipts also benefit the province).

Tax – 100% of provincial income tax payable and 50% of federal income tax payable under the PPP model is added to the cost of the PSC.

None

Ancillary Costs Various Authority planning and delivery costs included (e.g. procurement and project management costs).

Various Authority planning and delivery costs included (e.g. procurement and project management costs).

Various Authority planning and delivery costs included (e.g. procurement and project management costs).

Shadow Bid (PPP Model)Are shadow bid base costs adjusted?

No – but the AFP model is assumed to benefit from an innovation factor (by increasing PSC base costs as noted above).

Permitted - efficiency factor reductions to capital or lifecycle costs permitted if there is justification based on the type of PPP model selected and provided there is no risk of double counting with the risk analysis. Infrequently used on recent projects.

Yes – efficiency factors often used to reduce the base costs. This is to reflect the competition, design integration and innovation under a PPP model.

Who provides financing assumptions?

Third party consultant with input from Infrastructure Ontario based on precedent projects.

Third party consultant. Derived through: marketing sounding, precedent projects, consultation with Alberta Finance and Enterprise, and/or consultant input.

Ancillary Costs Various Authority planning and delivery costs included (e.g. procurement and project management costs). In addition, costs incurred by the project company (such as bid fees and SPV management costs) are included as part of the shadow bid cost.

Various Authority planning and delivery costs included (e.g. procurement and project management costs). In addition, costs incurred by the project company (such as bid fees and SPV management costs) are included as part of the shadow bid cost.

Various Authority planning and delivery costs included (e.g. procurement and project management costs). In addition, costs incurred by the project company (such as bid fees and SPV management costs) are included as part of the shadow bid cost.

II. VFM Analysis – Practices

Risk QuantificationOverview • Risk-free discount rate

• Standardized Risk matrix

• Tailored to project

• Risk workshop(s)

• Statistical simulation

• All risks quantified

• Risk-adjusted discount rate

• Largely standardized Risk matrix using precedents

• Tailored to project

• Risk workshop(s)

• Statistical simulation

• Key project specific risks quantified

• Risk-free discount rate

• Standardized Risk matrix

• Tailored to project

• Risk workshop(s)

• Statistical simulation

• All risks quantified

Retained Risk (PSC) Quantified and added to cost of PSC. The anticipated underspending on asset maintenance is incorporated into the retained risk assessment.

Quantified and added to cost of PSC. Quantified and added to cost of PSC.

Transferred Risk (PSC) Not quantified as risk not incurred by the Authority.

Quantified and added to cost of the PSC, but priced based on an estimate of what the contractor would charge for assuming this risk.

Quantified and added to cost of PSC.

Retained Risk (Shadow Bid)

Quantified and added to cost of the shadow bid.

Quantified and added to cost of the shadow bid.

Quantified and added to cost of the shadow bid.

Transferred Risk (Shadow Bid)

Not quantified as risk not incurred by the Authority.

Quantified and added to cost of the shadow bid, but priced based on an estimate of what the private sector would charge for assuming this risk.

Quantified and added to cost of the shadow bid.

Discount Rate Risk-free rate with project risk quantification addressed separately (provincial cost of borrowing used as a proxy).

Risk-adjusted rate (Project IRR of privately financed model).

Risk-free rate with project risk quantification addressed separately (provincial cost of borrowing used as a proxy).

Decision ProcessProcurement model selection

Determined by both qualitative and quantitative factors.

Determined by both qualitative and quantitative factors.

Determined by both qualitative and quantitative factors.

Agency A Agency B Agency C

§ TheVFManalysisshouldproducethroughsensitivityanalysisabandwidth/rangeofnumbers:notaprecisenumber

§ ShouldwedoaVFMAnalysis?§ Yes.NeedtobeabletoestablishthataprojectcanbenefitfromPPPprocurement.§ Ifitcannot,then itshouldnotbeprocuredasaPPP

§ WhenshouldaVFManalysisbedone?§ Duringprojectplanning/businesscasedevelopment§ JustbeforetheRFPisissued– andaftertheProjectAgreementtermsaredeveloped:PAcanimpactVFMrisksandscope

analysis.Discountratecouldchange.Risktolerance/transfercouldchange§ Afterthebidsarein:DosetheprojectstillmakessenseasaPPP?§ PostConstruction– Aslessonslearned

§ WhatstepsaretakeninVFManalysis?§ Hirecompetentandindependentconsultants:technical,costing,finance,construction,operations,etc.§ Defineprojectscopeandexpectations:servicedelivery, roles,schedule,performance,financingoptions§ ConductMarketSounding– gatherindustry input(design,construction,operations,finance,ratingagencies)§ Conductpropercostingandriskanalysis– Maintenance,OperationsandLife-Cycleareoftenachallenge§ Don’t letoneskillset(finance,engineers,etc.)torunwiththeVFManalysisonitsown§ Lookatwhatotheragenciesaredoing– USFHWA toolkit,Canada,India,UK,Australia,TheWorldBank,ADB,etc.§ Lookatprocurementoptions§ Donotfudge!

§ Howmuchtime,$shouldbeallowedforproperVFManalysis?§ Sufficienttime(tomeetgoaltimelinerequirements)§ Allowareasonablebudget– comparetheProjectcostswiththeanalysisbudget(itwillbenegligible)

§ Whattodowiththeresults?§ Publishit§ Updateit§ Useforthenextproject

III. Practice Suggestions

Questions