Presentation Dubrovnik, 08.04.2011

1. “Preparation of a transport infrastructure PPP project” A practitioner’s view Presentation Dubrovnik, 08.04.2011

2. Presentation agenda Project preparation lessons learned PPP projects as alternative to public procurement Project structuring and preparation roadmap Options for private sector participation Allocation of project risk Enhancement of project bankability Closing remarks

3. Project preparation lessons learned International experience suggests that the vast majority of the “major” capital projects have a tendency to exceed the original budget and time schedules Characteristics of a “major” project Inadequate preparation of “major” projects • It is a one-off effort, complex both in terms of management and technology; • The project leads to a step change in the quality of transport service; • Different resources and skills are required over the life of the project; • Project priorities and the corresponding risk profile will change considerably over time; • A large spending profile will be required over a period of years; • There is potential to underestimate execution risks and their impact on costs and operations; • The project will need to meet high safety standards during construction and operations; • The project sponsors and the delivery team are subject to demanding expectations from the authorities, the financiers, the suppliers, the operators, and the travelling public. • Analysis of 258 mega projects (Flyvberg, 2006) • Project costs are underestimated in 90% of transport infrastructure projects; • For all project types actual costs are on average 28% higher than estimated costs. • Cost underestimation and overrun have not decreased over the past 70 years. • Percentage budget overruns increases with the project size. • Analysis of 50 projects in the UK (S&P, 2005) • Top three factors for cost overruns in the UK as follows[3]: business case (52%), design (19%), legislation and contracts (14%) • Analysis undertaken for DG TREN (2007) • Poor project preparation is amongst top three* major problems hindering the successful implementation of TEN transport projects. * Also include land expropriation and inadequate administrative and technical management

4. PPP projects as alternative to public procurement Although there is no single PPP model available, PPP projects drive a complete shift in public procurement from procuring an “asset” to procuring an “end to end” service Complete shift in public procurement Characteristics of a PPP project • Through complete shift in public procurement from procuring an “asset” to procuring an “end to end” service, PPPs result in a change of the public sector’s role from being an asset owner and service provider to enabler and procurer of a service in the public interest. • The public sector side is required to specify “service outputs” it wishes to buy while the private sector needs to determine the best way to deliver the required service, through provision, maintenance and operation of the underlying asset. • The public sector remains ultimately responsible for the quality of public service delivered. • Experience has shown that there is no single PPP model available as (1) practices tend to be project specific and (2) vary between countries for different reasons. • Some fundamental issues commonly apply: • The principal reason for using PPPs is the “value-for-money” argument. • Treatment of PPPs in the national legislation affects both the public and private sector. • Affordability, speed and cost of PPP procurement have considerable budgetary consequences. • Managing a PPP contract involves management of multiple stakeholder relationships under the PPP umbrella.

5. Project structuring and preparation roadmap A practical roadmap for structuring and preparation of a transport infrastructure PPP project involves three consecutive stages PSP = private sector participation

6. Options for private sector participation For each asset/function, available PSP options and the resulting implication on cost and risk need to be assessed, in order to select the option which maximises benefits to the procuring authority FOR ILLUSTRATION PURPOSES ONLY Source : Booz & Company (2007)

7. Allocation of project risk The authority should ensure the project is able to demonstrate “value” for the taxpayer through appropriate risk allocation, regardless of the delivery route • Successful allocation of project risk between the parties requires clear understanding of the following principles: • The authority will need to recognise that there is a link between the risks assumed and expected returns for project participants; • The allocation of risk should follow the principles of risks being allocated “to the parties best positioned to assess and manage these risks”; • Risk assessment and allocation should be based on the “whole of life” project cost; • To provide sufficient level of freedom for the private sector to develop lateral scope that provides efficiencies and benefits to the taxpayer, the procuring authority should not seek to overly specify project design or delivery methodology. Instead, the procuring authority’s effort should be focused on the project performance criteria, service specifications and expectations

8. Enhancement of project bankability The authority should also ensure that the bankability of its project is maximised in order to attract international investors and key industry players Practical measures to enhance project attractiveness • “Bankable” business case based on predictable CAPEX and OPEX, and robust revenue stream. • Considerable risk transfer to the private sector to enable it to deploy its expertise and efficiently control allocated risks. • Framework for project decisions based on good economics and in consideration of explicit and contingent liabilities. • Clearly identified ’Project champion’ on the client side. • Public sector’s understanding of the private sector’s financial incentives and resource commitments. • Legal and regulatory frameworks supportive of the proposed contract structure, risk transfers and private sector’s commercial goals. • Specific public sector bodies dedicated to development of industry-standard documentation. • Standardised documentation developed in consultation and accepted by the market. • Acceptance strongly linked to project goals. • Comprehensive stakeholders' management programme.

9. Closing remarks Key components of a successful PPP project • Professional experience suggests that, as a minimum, a successful PPP project requires the following components: • Viable business case and commercial proposition. • Procurement and contract strategy is designed to secure predictable cost, schedule and risk estimates through engagement and full commitment of the competent supply chain. • In consideration of the influence on the manner and boundaries within which the works and services are delivered, the project governance framework is tailor made for the project. • Sufficient institutional capacity of the procuring authority and robust regulatory and legal frameworks are place. • Performance regime is directly linked to committed service levels and asset condition identified in the PPP contract, and includes incentives to penalise underperformance throughout the length of the contract.

10. Branko Bajatovic Director Avistum Ltd 10 Greycoat Place Westminster London SW1P 1SB United Kingdom Telephone: +44 (0)20 7960 6069 Fax: +44 (0)207 960 6100 Mobile: +44 (0)759 569 9960 E-mail: branko.bajatovic@avistum.com