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Public Private PartnershipsEnhancing Performance and Funding Infrastructure
ASMC’s 2009 Professional Development Institute May 28, 2009
Brad Watson, Partner, Global Infrastructure and Projects Group
2
Overview
Summary of P3 fundamentals
Applying P3 concepts in defense – an overview of the UK experience
Summary of P3 Fundamentals
4
What is a Public-Private Partnership?
A business relationship wherein the public and private sectors share: Risks
Rewards
Responsibility for success or failure
The term “partnership” is not intended to imply a legal partnership
Less RiskTransfer to the Private Sector
More Risk
Simple Operating Contract
Accessing Private Sector
Financing
Running the Service as a Stand Alone “Business”
Transfer to the Private
Sector
5
Overview
Two fundamental requirements for a P3 Private sector must genuinely assume risk
Value for money must be demonstrated for any expenditure by the public sector
Achieving value for money with a P3 Better allocation of risk
Better incentives to perform
Integration of service needs with facility design
Clearer focus on respective responsibilities
Continuing commercial incentive
More potential for efficiencies
P3s represent a new method of delivery – a tool is needed to: Demonstrate that alternative delivery is advantageous
Ensure that value for money is achieved from the actual RFP bids
6
P3s by Sector
Characteristics of a sector where a P3 model might be considered:
“Non-core” government service
Definable business or cost centre
Limited integration with other services
Ability to charge user fees
Impact of failure relatively low
Characteristics of a sector where a P3 model would not likely be considered:
Importance of maintaining public confidence and/or safety
Policy control not easily imbedded in a contract
Impact of failure relatively high
Relative importance of each factor will vary by jurisdiction
Sectors where P3s have been implemented: Highways, Bridges,
and Rail
Defense
Airport and Air Navigation
Water Treatment, Transmission, and Distribution
Power Generation, Transmission, and Distribution
Gas Transmission and Distribution
Marine and Ports
Justice/Corrections
Hospitals and healthcare
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The Public Sector’s Interest in P3s
Improve efficiency in the delivery of an existing good or service: Airport maintenance support equipment (Canada DoD)
Municipal garbage collection
Deliver a new good or service: SH 130, Segments5&6 (Texas)
Alberta Schools (Canada)
Northwood Military Headquarters (UK)
Leverage existing assets for up-front value: Chicago Skyway
Airport concessions
8
Contrasting P3 Business Models
Various forms of P3 business models exist
Two key dimensions Delivery method – degree of service delivery segmentation
Financing method – degree of public vs. private sector funding
Private Finance
CombinedService Delivery
Public Finance
SegmentedService Delivery
DBB
DB DBO
DBFO
Full Concession
Op Contract
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P3 Feasibility
Financial Feasibility
ImplementationConsiderations
Acceptability
Operations & Maintenance
Design & Construction
Legislation
ProjectFeasibility
SystemInterface
10
The Need for a Public Sector Comparator
General Definition: “Hypothetical, risk adjusted, whole-life costs of a project if the project is
procured traditionally.”
Most-likely alternative approach as the reference point
Used to justify implementing a project using a non-traditional approach
Typically developed and refined throughout the transaction process Broad estimates at transaction planning stage
Further detailed in consideration of delivery options
Final value for comparison with actual bids
Ultimately, focuses on the financial impact of rejecting the RFP bids
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Use of PSC Issues
Complexity and subjectivity in converting risks into dollars
Estimation optimism
Selection of the Discount Rate
Adjusting for information availability
Disclosure of PSC to bidders
Tendency to over-simplify and ignore other decision criteria (e.g., broader economic benefit, labour relations, safety)
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Typical Procurement
Determine project scope and business model
Issue request for qualifications
Evaluate and create short-list
Issue request for proposals
Evaluate and select “winner” Negotiate as required
Achieve commercial close
Achieve financial close
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Basic P3 Structure
MaintenanceCompany
Dividends
Grant or Periodic Payment
Repayments +interest
Loans
Overheads & Tax
Construction payments
Maintenance & Life Cycle payments
Equity
ShareholdersDebt Funders
Government
Third PartiesContractor
Project Company
Maintenance and lifecycle services
Services
Concession fee and/or Revenue Share
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P3 Project Risk Profile
0%
2%
4%
6%
8%
10%
12%
14%
Conceptionat bidding
Financialclose
At servicecommencement
Handback
Risk free Regulatory/Unforeseeable risk Volume risk premium Operational risk premium Construction/Refurb/Financing risk premium Bid risk premium
Bidding Construction
Time in years
0 1 4 7 n
Mature operation
Risk falls at financial close
Risk falls as construction/refurb risk diminished
Risk falls relatively quickly in first few years of operation as operational and volume risk diminishes
Risk gradually declines as operational and volume risks are fully understood and managed before hand back
0%
2%
4%
6%
8%
10%
12%
14%
Conceptionat bidding
Financialclose
At servicecommencement
Handback
Risk free Regulatory/Unforeseeable risk Volume risk premium Operational risk premium Construction/Refurb/Financing risk premium Bid risk premium
Bidding Construction
Time in years
0 1 4 7 n
Mature operation
Risk falls at financial close
Risk falls as construction/refurb risk diminished
Risk falls relatively quickly in first few years of operation as operational and volume risk diminishes
Risk gradually declines as operational and volume risks are fully understood and managed before hand back
Risk falls at financial close
Risk falls as construction/refurb risk diminished
Risk falls relatively quickly in first few years of operation as operational and volume risk diminishes
Risk gradually declines as operational and volume risks are fully understood and managed before hand back
15
Typical P3 Business Terms
Project term
Toll rates/schedule of allowable user fees
Rights to revenue
Revenue share
Technical provisions
Financing
Capacity improvements
Handback requirements
Competing facilities
Relief events
Compensation events
Force majeure
Termination provisions and compensation upon default
Insurance requirements and project security provisions
Others
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Key Lessons Learned
P3s do not fit all situations – careful assessment is required
Value for money must be demonstrated, and private entity must genuinely assume risk
A PSC evaluation will help to demonstrate value for money
Creating a business case forces the project team to clearly define a project
Do not underestimate the importance of achieving buy-in on all facets of a P3 project
P3s in the UK Defense Sector
18
UK Defense P3s – Overview
Defense has proven on one of the most varied and dynamic sectors for P3s in the UK
Some 49 defense P3 projects have closed in the UK over the last 12 years with a total capital value of almost £9bn out of a UK total of £53bn
The UK market has been driven by several key factors: The checkered history of managing complex procurements to cost and
time
Affordability issues favouring payments spread over longer periods
Initially, achieving off-balance sheet structures
19
Number of Transactions
The graphs illustrate the number and value of closed deals to date in each of the accommodation, training & support and equipment sectors
Total: Closed UK PFI Deals
0
10
20
30
40
50
60
Total UK PFI
Tota
l
Total EquipmentTotal AccommodationTotal Training and Support
Closed UK PFI Deals (Capital Value)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Total UK PFI
£m
Total EquipmentTotal AccommodationTotal Training and Support
20
Types of Transactions
Asset based PFI transactions have been a key ingredient in UK defense P3s, but we have also seen:
Major programs in service-based strategic partnering
More recently, in “alliancing” for equipment build and “through life” support
The characteristics of the deals have varied greatly depending on their requirements and degree of risk transfer
The more standardized, lower risk programs, such as single and married accommodation projects have generally been the easiest to complete as the risk profile and requirements are easily understood
But the UK has successfully closed deals covering: Major fixed infrastructure
Synthetic and live training
Front line equipment
21
UK Defense Projects – Examples
Medium Support Helicopter Aircrew Training
UK Military Flying Training System
Defense Training Review Package
Heavy Equipment Tank Transporter
Strategic Sealift Service
Future Strategic Tanker Aircraft
Maritime Industrial Strategy
22
Summary
The UK has found substantial scope for P3s in the defense sector including: Equipment
Training
Facilities
Strategic partnering
Successful models have been introduced to deliver all of these types of requirement
Key cost, time and sustained performance benefits have been proven
Understanding the requirements, catering effectively for change over time and a realistic approach to risk transfer are key ingredients in any successful deal
Contact Information:Brad [email protected]
