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8/3/2019 PPP in Infrastructure Projects
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Advisors in Infrastructure
George Currie
July 2010
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Public Private Partnerships in Infrastructure Projects
Public Private Partnerships (PPPs) are arrangements
wherein private sector parties participate in, or provide
support for, the provision of infrastructure to deliver publicsector services.
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PPPs can be defined as agreements where public sector
bodies enter into long-term contractual agreements with
Privatee sector entities for
- the construction or management of public sector
infrastructure facilities by the Privatee sector entity,
- or the provision of services (using infrastructurefacilities) by the Privatee sector entity to the
community on behalf of a public sector entity.
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PPPs are models to bring competitive forces and market
discipline to bear on government provision of goods and
services
PPPs involve a sharing of both responsibility and risk in acollaborative framework
PPPs seek to draw upon the best available skills, knowledge
and resources, whether they are in the public or the private
sector, to deliver the best value for money in the provision
of services to the public.
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A common misconception about PPP projects is that they are just
about mobilising private sector financing of public infrastructure.
This is fundamentally incorrect!
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APPP is at heart a risk-sharing relationshipbetween the
public and Privatee sector which exists to bring about a
desired public policy outcome in a cost effective manner.
Achievement ofvalue for money relies on obtaining an
optimal transfer of riskbecause the entity in the best
position to manage a particular risk should be able to do soat the lowest price.
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Value for money is a key facet of the policy and if
sufficient risk cannot be transferred to Privatee parties, it
is unlikely that a PPP is appropriate to deliver value formoney.
Any PPP project needs to be structured to achieve optimal
risk allocation. For this, appropriate financial models haveto be developed and evaluated.
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Common interest of various players in a PPP
GovernmentsInterest
InvestorsInterest
Suppliers
Interest
PPP
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Interest of the various Parties
What Government wants: What Government can do:
Provide an efficient and affordable
transportation system Provide a save and reliable
transportation system
Sustain/enhance economic growth
Solve traffic congestion
Reduce accidents
Reduce pollution Gain political recognition
Relief governments budget
Work out a clear strategy and a
reliable framework for rights andobligation.
Assume risk of land appropriation
Insure that permits and permissions
are granted
Take currency devaluation risk
Take ridership risk in exchange fortariff control
Provide financial contribution for
transport infrastructure (fixed
assets)
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Interest of the various Parties
What Suppliers want: What Suppliers can do:
Sell their equipment and services
Long term Relationship with clients
Reference and showcase for future clients
Supply parts and expansion parts
Provide maintenance
Increasingly take operational
responsibility
But no long term financial commitments
Take construction and completion
risks
Take performance risk
Provide maintenance and take
availability risk
In some cases take operational risk
Provide short term financialsupport with clear exit
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Interest of the various Parties
What Financier want: What Financiers can do:
Invest their funds with a return,
interest in case of debt, IRR in caseof equity
Expect the company to generate a
profit
The project company can control its
revenue by setting tariffs and
control over costs A stable financial environment
No or minimum interference from
government
Provide the funds for the projectand relieve the public budget
Ensure that the project is
constructed in time and on budget
Effect efficient operation
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Public Private Partnerships in Infrastructure Projects
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Public Private Partnerships in Infrastructure Projects
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B = Build
D = Design
D = Deliver
F = Finance
L = Lease
M = Maintain
O = Operate
O = OwnT = Transfer
R = Rent
R = Rehabilitate
Some Vocabulary used in PPP
any combination
= PPP
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BOO - Build-Own-Operate
BOD - Build-Operate-Deliver
BOL - Build-Operate-Lease
BOLT - Build-Operate-Lease-Transfer
BOT - Build-Operate (Maintain)-TransferBOOT - Build-Own-Operate (Maintain)-Transfer
BTO - Build-Transfer-Operate
BRT - Build-Rent-Transfer
DBO - Design-Build-Operate
DBOM - Design-Build-Operate-Maintain
DBOT - Design-Build-Operate-Transfer
DBFM - Design-Build-Finance, Maintain
DBFOM - Design-Build-Finance-Operate-Maintain
FBOOT - Finance-Build-Own-Operate-Transfer
ROT - Rehabilitate-Operate-Transfer
LOM - Lease-Operate-Maintain
Some Models/Combinations used in PPPs
PPP
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Characteristics of various PPPs
The Privatee sector designs, builds, owns,
develops, operates/maintains and manages
an asset with no obligation to transfer
ownership to the government.
Build-own-operate (BOO)
Build-develop-operate (BDO)
Design-build-finance-operate
(DBFO)
Design-build-finance-operate-maintain
(DBFOM)
Buy-build-operate (BBO)
Lease-develop-operate (LDO)
The Privatee sector buys or leases an existingasset from the government, renovates,
modernizes, and/or expands it, and then
operates the asset, again with no obligation to
transfer ownership back to the government.
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Characteristics of various PPPs
Build-operate-transfer (BOT)
Build-own-operate-transfer (BOOT)
Build-lease-operate-transfer (BLOT)
Build-transfer-operate (BTO)
Design-build-finance-operate-
maintain-transfer (DBFOMT)
The Privatee sector designs and builds an asset,operates it, and then transfers it to the
government when the operating contract ends,
or at some other prespecified time.
The Privatee partner may subsequently lease
the asset from the government.
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Financing Approaches
100% Government Finance
Gives the government control
Easy and quick financing
Risk of inefficiencies during
Construction and operation
Potential burden on the budget
and therefore often notapproved by government
Leaves all risks with the
government
Advantage Disadvantage
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Financing Approaches
100% Privatee Finance
High possibility that construction
and operation is in time and budget
Financiers are not willing to take
demand risk or only with big
safety margins
Conflict between entrepreneurial
freedom and government controlon tariffs
Privatee sector worry of risk of
government interference
Advantage Disadvantage
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Financing Approaches
Privatee sector finances the project, Government takes
demand risk, but not performance and operational risks
Mobilizes Privatee sector money
Performance and operation risk
with Privatee sector, which financiers
can asses better than demand
Penalties when performanceparameters are not reached insures
best service
Allocates risks to parties most fairly
Leaves the government with
demand risk but also with
tariff control
Advantage Disadvantage
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Financing Approaches
Government pays for infrastructure (fixed assets),
Privatee sector finances and performs operation
Makes the project more feasible for
the Privatee sector.
Relieves the government budget
Ensures high level of performance
and quality of transport servicedelivery
Danger of conflict on revenue
sharing, tariffs, control over the
operation
Danger of incompatibility between
infrastructure and operationalrequirements if procurement of
infrastructure is done without
involvement of Privatee operator
Advantage Disadvantage
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The previous graphic illustrates the cash flow differences
between public funding and a PPP project.
From the public sector side, PPPs require little or no upfront
capital expenditure but involve a larger operating expenditure
over time to purchase the services.
By contrast, the public asset approach requires a large upfrontcapital funding commitment and relatively lower operating
expenditure over time.
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Why entering into a PPP?
Under what circumstances should governments invite
Privatee sector entities to enter into long-term contractual
agreements for the financing, design, construction and/or
operation of
capital intensive projects?
Whether or not a service should be delivered by means of a
PPP project depends on the answer to three key questions:
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1. Which (if any) part or parts of the proposed service is
a service which government itself should deliver to
sustain and enhance its economy?(the core services question);
2. For all other aspects of the service and supporting
physical infrastructure, what is the project model
(financial model) that delivers the best value formoney? (the value for money question); and
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3. Do the outcomes of the value for money question
satisfy the government interest criteria policy and ifnot, can the government interest be satisfied by
either building safeguards into the contract or
through regulatory measures? (the public interest
question).
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The combined response to the three central questions
core services,value for money and
public (governments) interest
determines the underlying financial model for the project.
Obviously if the whole service is considered to be core, there
will be no scope for a PPP arrangement.
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Please keep in mind:
PPP projects are not principally about Privatee sector financingof public infrastructure.
PPP is a risk-sharing venture
between
the public and Private sector.
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