Procuring Public Private Partnerships (PPP)

1. Procuring Public Private Partnerships (PPP) Martin Darcy Valletta, 25-26 January 2006

2. What is a PPP? • Can be any arrangement where the public sector works with the private sector to produce a mutually beneficial outcome. • But…generally refers to arrangements where private finance and / or management is employed in public service • Other definitions……

3. Acronyms PSP=Private Sector Participation PPI=PrivateParticipationinInfrastructure PFIP=Privately FinancedInfrastructureProjects PPP=PublicPrivatePartnerships IPP =IndependentPowerPlant DBFO = Design Build Finance and Operate BOO = Build Own Operate BOT = Build Operate Transfer ROT = Rehabilitate Operate Transfer APOP = Asset Procurement and Operating Program DOT / BROT / BLT / BLO / DBOM…etc……………...

4. Old skills re-discovered • A history of private participation • After 1945 • Turning back the clock or moving forward ? • Increasing participation across Europe and the World

5. Government or private sector?Different perspectives in different countries

6. Why do governments bringin the private sector ? • Years of under investment mean the needs are great • To access better or wider skills • People expect more…. • greater access to services • better services • Limited scope to finance investments via the budget • Tax increases politically unpopular • Tougher legislation, for example, environmental …… BUT …!!

7. Private sector involvement in delivering public services is almost always controversial

8. Alleged risks... • loss of control • loss of in-house abilities and skills • inability to change • private sector will make big profits from citizens needs • resistance to foreign ownership

9. Real risks • Unrealistic expectations (affordability, timetable, development budget) • Inability to develop and communicate objectives of involving the private sector • Poor co-ordination between government bodies - weak institutional structure • Poor project preparation • Lack of experience in PPP / Privatization • Bad advice • Insufficient bidders to provide competition • Post event issues - social, political, economic • Contract with poor change mechanisms • Legal challenge to award process

10. Options summary

11. Mapping PSP options to government objectives

12. Selecting a PPP option • Key steps: • identify the problem • set objectives for private involvement • assess government/stakeholders willingness to accept the roles, duties and risks in various PPP options • consult the market – Technical Dialogue • choose the PPP option which best fits

13. Potential Projects • Water/Sewerage • Power provision • Airports / Seaports • Highways / Bridges / Tunnels • Hospitals • Prisons and Court Buildings • Schools / Colleges / Universities • Libraries and Museums • Government Buildings (National / Municipal) • IT / IS / Telecoms • Waste Management • Car parking

14. Requirements necessary to create private sector interest • At a national level • Strong political will and leadership • Clear and permissive legal framework • A skilled co-ordinating entity at the centre of government, providing support and drive • Clarity about the overall objectives for private sector involvement • Setting priorities • Awareness, education and training

15. Requirements necessary to create private sector interest 2. At a sectoral level (the Ministry) • Commitment of the Minister • Realistic expectations • Identifying and supporting priority projects • Concentrating efforts on the priorities • Regulation where necessary

16. Requirements necessary to create private sector interest 3. At the Project level • Clarity about the objectives of the project • The project is clearly defined, necessary and affordable • Realistic timetable and development budget • Good quality, experienced advisers • Clear support from the necessary stakeholders • Size of project • Rights of access to perform works

17. Basic Political requirements • Orderly elections, and changes of government • Government is subject to judicial review • Independent central bank • Limited tiers of government • Sustained national policies through term and change of government

18. Economic Environment • Currency - convertibility, liquidity, stability relative to benchmark currencies • Inflation targeting • Credit rating • Manageable debt and no debt default history • Banking system - well regulated, good capital adequacy • Transparency in Public Procurement system • Educated workforce

19. Legal Environment • Enforceable contracts - is the authority able to enter into a concession contract? • Arbitration - International Chambers of Commerce Procedures and offshore • Appropriation of assets - is equitable reimbursement enforceable at law? • Continuity - can a political government commit future political governments? • Change of Law: • does the authority accept economic responsibility for Change of Law? • No retrospective Changes of Law. • Experience - the above seen to be done.

20. The Investment • O&M Contract - this is the core business of most investors. • Operational control of the business. • Design control over new assets • Clear statement of objectives from the authority - what does the authority want to achieve? • Efficiency - optimising resources ? • Risk Transfer for Operations and Construction? • Asset design and build skills? • Funding of capital expenditure ? • Receipt of funds - privatisation ? • A combination of these ?

21. Technical Dialogue Current position is confirmed: • Before launching a procedure for the award of a contract, contracting authorities may, using a technical dialogue, seek or accept advice which may be used in the preparation of specifications, provided such advice does not have the effect of precluding competition.

22. Competitive Dialogue New procedure – where the award criterion is ‘most economically advantageous tender’ • for use in particularly complex contracts • where an authority considers that the open or restricted procedure will not allow the award of the contract • based on an inability to define the technical, financial or contractual solution to meet the needs

23. Competitive Dialogue Definition “Competitive Dialogue is a procedure in which any economic operator may request to participate and whereby the contracting authority conducts a dialogue with the candidates admitted to the procedure, with the aim of developing one or more suitable alternatives capable of meeting its requirements, and on the basis of which the chosen candidates are invited to tender”

24. Competitive Dialogue Authorities: • must publish a contract notice setting out the requirements, which they shall define in that notice and/or in an associated descriptive document. • can open a dialogue the aim of which is to identify and define (one or more) means best suited to satisfying their needs. • may discuss all aspects of the contract with the chosen candidates during this dialogue.

25. Competitive Dialogue During the dialogue, Authorities: • shall ensure equality of treatment among all tenderers. In particular, they shall not provide information in a discriminatory manner which may give some tenderers an advantage over others. • may not reveal to the other participants solutions proposed or other confidential information communicated by a candidate without their agreement.

26. Competitive Dialogue • The procedure can take place in successive stages in order to reduce the number of solutions to be discussed by applying the award criteria • The contract notice or the descriptive document must indicate this

27. Competitive Dialogue • When the dialogue has been concluded and the participants have been informed, authorities ask the candidates to submit their final tenders on the basis of the solution or solutions presented during the dialogue. • These tenders must contain all the elements required and necessary for the performance of the project. • Tenders may be clarified, specified and fine-tuned at the request of the authority. • However, this cannot involve changes to the basic features of the tender or the call for tender, if this is likely to distort competition or have a discriminatory effect.

28. How a PPP project is created • Three main phases • Project preparation and development • The bidding and negotiation phase • Implementation and operating phase

29. 1. Project preparation and development • Define project objectives, need and business case • Create the team (including external advisers) • Risk assessment and strategy • Technical Dialogue • Procurement strategy and realistic timetable • Develop bid evaluation criteria • Draft contract documentation • Approvals and marketing • Without proper preparation the project will probably fail (before or after award process )

30. 2. Procurement and negotiation • Advertisement and calls for expressions of interest • Prequalification and selection of bidders • Issue of tender documents to selected bidders • Return of bids • Evaluation of bids • Select ‘Preferred Bidder’ • Contract negotiations • Commercial / financial close • At least 12 months

31. 3. Implementation,Operationand Regulation • Creating a working partnership • Managing contractual obligations • Extracting the efficiencies • Delivering / improving the services • Change management

32. Financial Advisers Government Client Legal Advisers Financial Advisers Project Agreement Specialist Advisers Legal Advisers Special Purpose Company Equity Financed by Specialist Advisers Long Term Debt Finance Principle subcontracts Operating Contract Design and Construct Contract Design Construction Subcontracts Operating Subcontracts Contractual Organisation Example

33. 100% More risk more equity 20% EQUITY Investmentcost Long term Borrowings Debt is cheaper than equity 80% 0% Simple Funding Principles For A PPP Project using Private Finance

34. Differing Equity levels in different sectors • Power projects 25-30% • Airports 30% • WWT 25% • Telecoms 50-60% • Highways 20-25% • Seaports 30-35%

35. Common Problems • Relationship failure between the parties • Problems of culture • government objectives / private sector objectives • Inability to understand the contract • Over ambition • government • private sector • Inability to manage change • Contractual ‘time-bombs’

36. Essentials for good value projects • Strong political will and leadership • Legal and institutional framework • Transparency • Comprehensive project preparation • Open and fair competitive process • Genuine partnership

37. Benefits to the governmentand citizens • Use of private finance for commercially attractive projects frees more money for social schemes • Transfers risk from governments to private business • Encourages better project management and outcomes • Quality standards and long term maintenance built into the project agreement • Brings forward investment and improvements to services

38. Difficult but Possible • Establish political will • Understand and communicate the economic case • Engage in Technical Dialogue • Comprehensive preparation is essential • Get outside help • Transparent and fair competition