PPP in Hong Kong - What the public sector needs to know

1. CORPORATE FINANCE PPP in Hong Kong -What the public sector needs to know Efficiency Unit PPP Seminar 30th September 2005 ADVISORY

2. PPP – considerations in tendering • Context - Public Sector Objectives • Private Sector Objectives • Private Sector Issues • Summary

3. Context - Public Sector Objectives • Deliver better public services • A political agenda driven by the desire for choice • To address sector needs • Accommodation projects - better services • Civil engineering – e.g. transport = increased mobility • Process engineering - e.g. waste management = better environment • To create sustainable markets • With a sector focus and robust deal flow • By adopting a standardised approach

4. Private Sector Objectives • To create sustainable, profitable businesses • To manage risk, resources and capacity efficiently • Construction capability • Competing priorities • Requirement for ongoing service provision • Develop technical expertise • Utilise available funds effectively • Optimise the investment in tendering costs and resources

5. Private Sector Issues • Sustainable business • Appropriate return on investment • Satisfies other investment criteria • Predictable deal flow • Confidence in the public sector • Ability to manage risk efficiently and effectively

6. Private Sector Issues • Risk management • Size and complexity of the deal • Risk allocation • Following precedent or novel? • Insurable events • Available market? Deal structure • Standard or novel?

7. Private Sector Issues • Resource management and capacity constraints • Bidding capacity • Competing priorities – can be across sectors • Finite resources • Delivery capability • Construction and service provision • Ongoing management needs

8. Private Sector Issues • Availability of funds • Internal • Required returns • Competing needs • Borrowing constraints • Third party • Long or short term • Equity or debt • Are there liquid markets • Investment aims

9. Private Sector Issues • Public sector partner • Intelligent/experienced buyer? • If the first time, how strong is their advisory team • Authority to negotiate and contract? • Approvals process may be lengthy • Committed at a senior level? Procurement process • Predictable and realistic? • Expected (sunk) costs of bidding

10. Private Sector Issues – approach to individual transactions • Key issues in the bid preparation process • The Consortium Structure • The Consortium approach to risk allocation • The management of process risk • The thorny issue of bid costs

11. Private Sector Issues – approach to individual transactions • The Consortium Structure • Determining the Consortium roles and responsibilities • Approach to equity investment • Commoditising the various components of the deal • Short v long term participants

12. Typical risk allocation structure under a PPP

13. Private Sector Issues – approach to individual transactions • Process risks and bid costs • Is the transaction likely to complete at all? • Timetable issues • Changes to the process • Approval stages • Management of the bid process

14. What makes a Project attractive? • Risk management • Finite, quantifiable and manageable • Robust income stream • Established business sector • Appropriate task pass through • Substantial, experienced and proven sub-contractors • Committed Public sector partner • Political will and public demand Good Project • Acceptable returns based on: • Project Risks • Funders Cost of Capital