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Public-Private Partnerships Neil McMonagle March 2011

Public-Private Partnerships Neil McMonagle March 2011. America's Infrastructure Report Card A need for significant infrastructure investment….

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Public-Private Partnerships Neil McMonagle March 2011

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  1. Public-Private Partnerships Neil McMonagle March 2011

  2. America's Infrastructure Report CardA need for significant infrastructure investment… The Bottom Line: America will need to spend $2.2 trillion in infrastructure investment over the next five years for the nation’s infrastructure to be ranked in “Good” condition (Overall Grade: B).

  3. Budget Shortfalls as a Proportion of FY11 Budget…at a time of budget constraint

  4. Higher immediate taxpayer burden • Full retention of revenue and operating risks by public sector Paying for infrastructure at the State and Local level • Decreases funds available for other projects • Retention of financing and operating risks by public sector Traditional Model #1: Raise Taxes • Reduces immediate impact on taxpayer • More capital available for other projects • Operating and financing risks transferred to private party Traditional Model #2: Issue Bonds Alternative Model: Public-Private Partnerships 4

  5. What is a Public Private Partnership (PPP/P3)? Public Private Partnerships are…. “A contractual agreement between a public agency and a private sectorentity to share the risk and rewards of asset and service delivery – in order for projects toleverage the private sectors’ skills and funding, and provide enhanced value for money.” • Around 28 US States have PPP enabling legislation, including Georgia, Texas, Michigan, Virginia, California. Pennsylvania and Ohio are amongst the States preparing or passing legislation at present • Projects to date have focused mainly on transport infrastructure, although each State has a different approach: • NY/ NJ’s Goethals Bridge is being replaced through a 30 year "Design, Build, Finance and Maintain" (DBFM) PPP contract • Texas' NorthTarrantExpressway and LBJhighway P3 projects use "managed lane" concepts and dynamic user tolls to control traffic flow. • California's PresidioParkway P3 is using an availability payment structure but no tolls, partly because a tolling structure would require complex agreements between regional funding partners 5

  6. Drivers for use of P3 • Inefficient public sector delivery – excessive time and cost overruns suggested certain risks may be better managed by private sector (Australia, UK); • Access to • private capital, • additional resources, • private sector skillsets, and • market innovation. • Acceleration of infrastructure delivery • Integration of asset delivery and associated services Important to note that P3 is therefore not solely a financing tool – State and local governments should consider all project delivery elements, not just cost of finance.

  7. International experience of P3 as delivery method P3 has been largely successful in improvingefficiency of delivery for infrastructure across a range of sectors. The table below reflects the UK National Audit Office report on the performance of PFI (P3) procurements (2003), and a P3 study by Allen Consulting/ UniversityofMelbourne (2007). P3 has brought greater discipline to public sector capital procurements in terms of defining project outputs and protecting against scope creep.

  8. Basic P3 Structure 8

  9. Potential benefits of P3 9

  10. Procurement Models Sale or Divestment Concessions (inc revenue risk) Design, Build Finance, Maintain and Operate Contracts Level of Risk Transfer to Private Sector “Public Private Partnerships” Design, Build Finance and Maintain Contracts Contractual Joint Venture Agreements Design Build Contracts Traditional Public Sector Procurement Procurement models

  11. Different levels of risk transfer

  12. Developing a partnership structure 12

  13. Project type drives most suitable delivery model Delivery model reflects commercial intent – risk transfer, "bankability", marketacceptedcommercial positions. The US market is transitioning from early brownfield projects to higher proportion of greenfield, capacity expansion transportation projects => evolution of project models?

  14. Appropriate models for sectors 14

  15. P3 Delivery modelsInternationally applied models for transportation… Increasing level of risk transfer

  16. Availability payment modelsFactors to consider at State and Local level • Availability payment models require the procuring agency to take a more involved role during operations than is the case for a concession with higher risk transfer. • Specific factors to consider for contract development include: • Paymentmechanismcalibration; determining measures for performance, safety and availability, ratchet mechanisms performance failures through remedial process to termination triggers; • Approach to performancereporting; • Refinancing sharing mechanisms; • Compensationontermination under various default scenarios; • Contractmonitoring provisions; • Source of availability payments – annual appropriations, tax base?

  17. P3 Delivery models… incorporating domestic market considerations • All countries develop infrastructure delivery models that reflect domestic factors. • In the US these factors include; • Access to TIFIA and RRIF Federal loan and credit programs, • PrivateActivityBond issuance, • Highly developed tax exempt debt market, large number of alternative financing approaches, • Incorporation of unsolicited proposals. While standardization of projects is beneficial, there is no "one size fits all" structure. The specific objectives of the State or agency, type of project and internal capability will all impact on the optimal delivery model.

  18. What can P3 be used for?Selected sectors – slightly different structures in each

  19. Challenges to the use of P3 • PPP is not suitable for all projects – but should be considered as part of the options appraisal for major capital procurements. • Recognize parameters of P3 approaches: • Long contracts, so can be inflexible if material future changes in demand are likely • Procurement process can be complex. • Private sector costofcapital normally higher than public cost of finance. • Although high practical risk transfer can be achieved to the private sector, catastrophicrisks can revert to public sector as the ultimate procurer. • Should only use PPP where it offers bettervalueformoney than traditional procurement routes.

  20. Assessment of value for money 20

  21. Conclusion: P3 as part of a wider procurement toolbox Consider the characteristics present in most successful P3 projects: • Statutory and political environment • Organized structure (public sector delivery capability, governance) • Detailed BusinessPlan (business case to contract) • Guaranteed revenue stream • Stakeholder support • Careful selection of partner (NCPPP's six success factors) PPP should be one of the procurement and financing options considered for capital by State and Local governments – but it needs to be evaluatedagainstotherprocurementroutes, and only used where it offers better value.

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