T RANSACTION ADVISORY S ERVICES

1. TRANSACTION ADVISORY SERVICES PPP ADVISORY Social Service Partnerships Availability PPPs in Emerging Markets Alistair SAWERS, PPP Advisory, Ernst & Young Project Finance

2. Overview • Introduction • Theory: Social Service PPPs & Availability Payments • Description & Uses • Structures & Risk allocation • Limitations • Practice: Bajío Hospital PPS Project • Outline • Success Factors • Conclusion: Pitfalls from Other Transactions

3. Introduction • Personal Experience • UK PPP Market • Funder: First Project Financed PPP – Fazakerley Prison • Investor: UCL Hospital refinancing • Advisor: University of Hertfordshire, UK Met Office • Emerging Market PPPs • Eastern Europe • Latin America

4. Theory Social Service PPPs & Availability Payments

5. Defining Public Private Partnerships • PPP has a different meaning outside the US • Usual form of procurement is Design Build • Many services are “contracted-out” • International use of “PPP” or PFI is primarily • Design Build Finance Operate [& Maintain] (DBFO) • Concession structure • Availability & Performance Payments • Social Service PPPs rarely have market risk

6. What are Social Service PPPs? • Healthcare • Acute Hospitals • Specialist Units • Community Clinics • Education • Universities • Schools • Judicial • Courts and police stations • Prisons and youth detention centers • Others

7. Evolution of Social Service PPPs • Universal use of UK model • Focus on output specifications • Focus on building “provision” • No volume or market risk • Hard (Facilities) Maintenance included • Soft service inclusion varies • User services rarely included • Clinical, teaching, policing rarely included • Guarding, cooking, laundry and some training included

8. Utilization of Social Service PPPs ? = currently being studied  = Failed and withdrawn Please note the data is not exhaustive and new projects are being launched all the time Source: E&Y data, InfraNews Project News Database as at Sept 12th 2006

9. What are the objectives? • Cost minimization • Ensuring value for money • Risk transfer • Ensuring adequate incentives

10. How are the objectives achieved? • Concession contract • Availability Payments • Performance mechanisms • Points towards operator replacement • Points towards overall concession termination • Monetary deductions • Volume payments (rare)

11. Issues for Availability Payments • Payment mechanism • Incentives • Complexity • Underlying cost of funds • Appropriations “risk” • Affordability • Evaluation methodology • Measuring value for money • Shadow bid / Public Sector Comparator • Valuing risk transfer

12. Typical Risks Transferred • Construction • Design • Completion • Funding • Operation • Performance • Managing land sales/ development of vacated sites • Risks taken by party best placed to manage/mitigate • What does that mean in practice?

13. What are the Limitations? • Complexity of payment mechanism • Appetite for Risk • Financeability of risks in addition to country risk • Financial strength of potential operators • Affordability • Transaction Costs / Minimum deal size • Legal Framework • Napoleonic code v Precedent based • Property rights

14. Practice Bajío Hospital PPS Project

15. Bajío Hospital PPS • Location: City of Leon, Guanajuato • Capacity: 184 beds • 40 for paediatrics • 144 for adults • Size: 24,000 sq meters • Capital Investment: USD 47.5m • Coverage: 5,000,000 inhabitants • Medical Specialties Unit: • hemodialysis, • short stay surgery • rehabilitation • oncology services

16. 25 Year Concession operation $47.5m Capital Investment $12.3m pa payment Timeline Tender announced Mar 2005 Awarded 9th Dec 2005 Construction 11 months Completion Feb 2007 Acciona Hospital Services selected 4 Bidders Domestic and International Bajio Concession

17. Political Support • Political Champion • Led by Ministry of Finance • Set up Investment Unit (PPS Taskforce) • PPS legislation • Support from Partnerships UK • Issued March 2003, revised April 2004 • Additional Rules & Guidelines • 2 business case reviews (Outline & final)

18. Stakeholder Support • Consensus building • Institutional Revolutionary Party (PRI) and National Action Party (PAN) support PPS • Existing profile of Concessions • Initial toll road concessions in 90s failed • Highway PPS launched concurrently • Quick wins to launch process • Strategy to launch 3 pathfinder projects • Pick largest projects

19. Procurement Process • Planning • Strategic PPS Plan • Existing regional plan & overall national upgrade plan • Selection of credible advisors • Legal: White & Case • Technical: Currie & Brown • Financial: Ernst & Young • Marketing and building profile of transaction • Presenting to bidding community • Conferences

20. Selection Process • Open and transparent process • Lowest NPV of payments • Acceptance of Contract terms • Clear evaluation criteria • Developed from business case • Flexibility in bids versus difficulty of evaluation • Chose easy evaluation – simple contract • Lowest price v best value for money

21. Payment Mechanism • Description • Key performance indicators • Deductions • Penalty points • Issue of clarity/complexity • Practicality of on-going monitoring

22. Impediments to Process • Union/ stakeholder perception • Party of the Democratic Revolution – some opposition • Local bureaucratic resistance • Transaction cost/ complexity • Affordability problem with smaller University PPS project • Medical equipment -5yrs • Interface/ training • Maintenance/ replacement • Termination Payment

23. Conclusion Pitfalls from less successful transactions

24. Pitfalls • Transferring risks which are hard to manage • Refurbishment of existing assets • Volatile Land values • Multi-site projects – availability of sites • Volume risk • Soft services and Union agreements • Clinical Services • Unnecessary Complexity