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An introduction to smart investment solutions: the case of PPP

An introduction to smart investment solutions: the case of PPP. Twinning project Public Agency for Rail Transport of Republic Slovenia Daniel Loschacoff 18 January 2005. Content. Personal introduction Public Private Partnerships? Evolution of thinking about private sector involvement

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An introduction to smart investment solutions: the case of PPP

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  1. An introduction to smart investment solutions: the case of PPP Twinning project Public Agency for Rail Transport of Republic Slovenia Daniel Loschacoff 18 January 2005

  2. Content • Personal introduction • Public Private Partnerships? • Evolution of thinking about private sector involvement • The first Dutch PPP: HSL-South Infrastructure Provider • Coffee break • Who were involved? • What does this imply for the Public sector

  3. Please ask for clarifications !!!

  4. Main message Always consider for the realisation of future large rail investments if the benefits of a PPP approach outweigh the inherent problems

  5. What is a Public Private Partnership ?

  6. Characteristics of a PPP: • Public control and policy through private execution • Integration of Design, Build, Finance and Operate/Maintain. • Allocation of risk to the party that can best manage it. • The public sector receives a service not a product. • LT (investment life-cycle) relation.

  7. Evolution of thinking • In earlier centuries most infrastructure was in private hands (Michael Klein) • The nationalisation period • Margaret Thatcher in the UK (80’s) • Private Finance (budget restrictions) • Demand risk to the private sector • Value for money – availability contracts

  8. Why do we do this ? • Lack of capital ? • Private Sector is always better ? • Private competition against a public benchmark! But also: • Project life cycle approach (service approach) • Use of private sector capabilities (innovations, incentives, economies of scale) • Public sector reform ?

  9. The High Speed rail Line

  10. What is HSL-South? Amsterdam Schiphol Rotterdam Breda Antwerp Brussels London Paris

  11. Facts and Figures • 15 million passengers • 50% national / 50% international • Ready 2006/7 • contract award civils: 2000 • contract award IP: 2001 • Infra: 96 km new track • State of the art technology

  12. PPP contract characteristics • Scope: design and build new systems operate and maintain al new infra • Terms: 5+25 years • Size: over 1 billion Euro • Type: DBFM • Interfaces: civils works, existing rail infra, train operations • Payments are based on availability

  13. Private finance Infraprovider Civil works Government Transport Companies Payment during constr. phase Transfer Payment during operations

  14. Availability is key concept • IP paid on availability of the service; no payments for products. • IP receives no payments during construction. • Hence: the State procures a service rather than a product.

  15. Outcomes • HSL will have a 99% availability (output indicator) • Private investment of > 1 bn. • More budget certainty. • Through innovations and contracting less expensive than the traditional alternative

  16. Coffee break

  17. What parties were involved? • The State • Private parties • Advisors

  18. The State = Client (1) • Public service (which needs an initial investment) • Extensive decision making process • Focus on annual budget and less on Value for Money through PPP • Averse to risks and responsibilities • Conditionality of scope remains through out the process

  19. The State = Client (2) Conditions for success: • Good preparation, know what you want • Be a reliable and stable partner • Have upfront public-public agreements • Understand where the private sector is coming from • Good contracting skills

  20. Contractor/ Maintenance company • Contractor is responsible for the Design and Build (subcontract) to completion • After that the Operate and Maintenance company takes over for the whole contract duration • Who is for the procurement the most important?

  21. Contractor versus other financiers (2) • The contractor (industrial sponsor) is sometimes willing to accept lowing revenues and a higher risk in order to get the project • The other investors look for a low risk and stable high long term revenues

  22. The role of the banks (1) • Major involvement in bidding process • Technical, legal and financial due diligence • Interest is depending on the cash flows of the project (project finance) • Tight financial conditions (ratio’s)

  23. The banks as debt providers (2) Banks don’t like risk !!! • No more than 4% of all projects may go wrong. • All risks have to be well allocated (back to back)

  24. The advisors Technical, legal and financial advisors are necessary !!! • Please note: both the Client and the bidders have their own advisors

  25. What does this imply for the public sector?

  26. Public sector implications (as a condition for success): • More focus on the delivery of policies and less on specifying technical details • Able to understand private sector objectives and incentives • Be a reliable partner • Enhance PPP and contracting skills • ???

  27. Should you consider PPP with the upcoming Slovenian rail projects?

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