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1. UK/European PPP Experience and Lessons

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1. UK/European PPP Experience and Lessons

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  1. Public Private Partnerships in the Baltics and EuropeVilnius, 22-23 November 2006DAY I, TOPIC IVStructuring and Implementing PPPs: Risk Allocation and Mitigation1. UK/European PPP Experience and Lessons2. Risks in PPP ProjectsScott DicksonSenior Associate, Projects GroupBerwin Leighton Paisner LLP, London22 November 2006[5440725]

  2. 1. UK/European PPP Experienceand Lessons

  3. History of PFI in the UK • 1992: Launch of the Private Finance Initiative by the Conservative Government • 1997 to date: changes introduced by the Labour Government, including relaunch as Public Private Partnerships (PPPs) • Policy development now rests with HM Treasury, including standardisation

  4. European takeup and globalisation • Includes Italy, France, Portugal, Germany, Spain, Greece, Austria, Ireland, Netherlands, Scandinavia, Hungary, Poland • Early projects – Finland (roads) • Increasing deal pipeline • Keep an eye on experience further away: Canada, Australia, Central/South America, South Africa, Japan

  5. Key drivers for PFI • Neglected and crumbling infrastructure and public assets • Need for investment, avoiding the public balance sheet • Failures of public procurement • Political consistency – move from public to private • Utilisation of private sector expertise • Promotion of value for money and more efficient of use of resources • Promotion of innovation (especially design)

  6. Tested benefits/success of PFI • Transferred risk from the public authority to private sector • Harnessed private sector skills and expertise • Introduced competition into procurement of public assets • Payment linked to performance • deductions for unavailability and poor performance • incentive for private sector to deliver

  7. UK sector breakdown (by capital value)

  8. UK sectors (by capital value) – in figures • Health (21%) • Transport (18%) • Defence (15%) • Education (13%) • Scotland/Wales (13%) • Other accommodation projects (government buildings, prisons) (12%) • Housing (4%)

  9. UK position today…. • 700 signed projects worth £46bn • 500 operational projects • Standard contractual/risk positions • Commoditised market • Pipeline: Health, Defence, Transport, Education, Housing, Waste • Market uncertainty – health projects • Growth of other sectors – defence, housing, waste

  10. Consequences of UK commoditised market…. • Tight returns • Interest moved to the margins: • bundling • long-term relationships • new structures, including not-for-profit • funding competitions • secondary market • Opportunities in Europe

  11. Lessons (1): development aide-mémoire • Choosing projects - sectors/assets • Assemble the right public sector team • Robust business case • Analysis and allocation of risks • Learn from early projects • Project planning and management • Legal framework in place • Standardisation/co-ordination

  12. Lessons (2): general • Understand the private sector • Take long term approach and sell project flow to attract private sector • Communication with stakeholders • Deal with opposition • Promote innovation • Limit transaction costs

  13. 2. Risks in PPP Projects

  14. Thinking about project risks • Risk transfer/balance sheet vs Value for money • Analysis of risks • Specifics: Sectoral/Geographical • Funder expectations/bankability • Always open for negotiation? vs Transaction costs • UK settled risk allocation • Private sector: risk mitigation

  15. Public sector – scoping the project • Full risk transfer • Pricing/Value for money considerations • example: condition of existing buildings • impossibility of rational pricing? • risk premium too high? • consider competitive bidding environment • Approach • methodical analysis • justifiable risk transfer • consider value for money • bankable • consistent

  16. Categorisation of risks, with examples • Construction • failure of design • cost of materials • delay/incorrect time estimate • condition of site/existing buildings • change in law • Operational • failure of perform • incorrect cost estimates • change in public authority requirements • change in law • Pure financial risks • tax • inflation • insurance costs

  17. Risk mitigation/management • Contractual/negotiation (inc ringfencing) • Private sector passdown • SPV management • Insurance • Senior funding • Equity funding • Effects of secondary market/ portfolio risk spreading Decreasing Sponsor Appeal

  18. Recommendations Public authority • Early analysis of the project risk matrix • Take soundings from funding market Private sector • Work on risks register/internal compliance • Pricing/mitigation issues • Early discussions with insurance advisers

  19. Vilnius, 22 November 20061. UK/European PPP Experience and Lessons2. Risks in PPP Projects Scott DicksonSenior Associate, Projects Group t: +44 (0)20 7760 4392e: scott.dickson@blplaw.com Berwin Leighton Paisner LLP Adelaide House London Bridge London EC4R 9HA t: +44 (0)20 7760 1000 f: +44 (0)20 7760 1111 www.blplaw.com

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