Public Private Partnerships (PPP), Challenges and the Way Forward

1. Public Private Partnerships (PPP), Challenges and the Way Forward Delivering Growth by Partnerships- sharing UK capabilities in PPPs Presented by Veronica Bennett- Warmington Senior Director –Public Private Partnerships Public Enterprises Division Ministry of Finance and Planning Kingston, JamaicaFebruary 19,2014

2. Infrastructure Investment Public infrastructure investment is the “heart” of the PPP programme. Infrastructure investment is : • Critical for growth, development and poverty reduction in every economy. • Used as markers for the Human Development Index • the “heart” of the Millennium Development Goals • Reason for great concern, if there is a lack or reduction • Demonstrated in various studies to be positively correlated to growth and equity and through both channels also assist in poverty reduction.

3. Traditional Procurement • Jamaica as a developing country has consistently had a need to invest in infrastructure of various types • Hence Government has played a leading role in the development of infrastructure projects • These include schools, hospitals, roads, water and sewerage systems etc.

4. Traditional Procurement • Government has focussed heavily on the traditional procurement method for infrastructure projects • Projects are developed, advertised and the competitive tendering process takes place. The contract is awarded using the Government’s Procurement Guidelines. • Projects are handed over after completion and a defects liability period of 12 months follows.

5. Traditional Procurement-Problems • Time overruns • Cost overruns • Project design issues • General inefficiencies, among other problems. These issues result in wasted public funds

6. Economic Challenges • Over the past two decades the Jamaican economy like other world economies has faced increasing challenges of various types, specifically fiscal • Shocks in oil prices • The global fallout in the world economies has impacted the Country negatively; recession • Limited cash resources to fund an increasing capital programme

7. Economic Challenges cont. • Greater demand to buffer the safety net programmes for the very poor • Reduced revenue intake consequent on the fallout in local businesses • Competing demands for the limited fiscal resources • High Debt to Gross Domestic Product Ratio - 146%

8. Infrastructure Gap • Limited /reduced revenue flows to the Government result in casualties in several areas • Usually Infrastructure spending is one of the first to be affected • Due to its impact on growth and development there is a point at which the Government must take stock

9. Alternatives • The Government pursued various alternatives: -Divestment of state owned assets - Telecommunications, Light and Power company, Sugar company and National airline -Arrangements with the Private sector; deferred financing of schools, roads and police stations etc.

10. Alternatives contd. • Build Own Operate Transfer (BOOT) • Tolled Highways- Trans-Jamaican Highway • Airport Concession- Sangster

11. Lessons Learnt • Divestment achievements mixed • Deferred financing worked for the moment. However they became burdensome when commitments had to be included in the budget • Rapid increase in the debt stock • Improved fiscal management needed • Private sector will continue to be involved in infrastructure investment • Risk identification and allocation are critical for success • Value for money must be achieved

12. What are PPPs • PPPs are a form of procurement • PPPs are long term procurement contracts between public and private sector, in which the proficiency of each party is focused in the designing , financing, building and operating an infrastructure project or providing a service, through the optimum sharing of resources , risks and rewards.

13. Procurement Models • Build own operate transfer (BOOT) • Build own transfer (BOT) • Build own operate (BOO) • Full enterprise privatisation (sale) • Licences, leases and statutory monopolies • Outsourcing and contracting out • Joint ventures • Privately finances projects , PPPs • Traditional procurement

14. PPP Policy • PPP Policy provides for PPP Unit within the Ministry of Finance and Planning (MOFP) to complement the work of the PPP Unit in the Development Bank of Jamaica (DBJ). Main Focus of MOFP’s PPP Unit are: • Value for Money Analyses and • Fiscal Responsibility

15. Value for Money (VFM) • VFM is essentially a Cost Benefit Analysis • A PPP project yields VFM if it results in net positive gains to society which is greater that that which could be achieved through the best realistic public sector project alternative • The public sector alternative is called the “public sector comparator”

16. VFM contd. VFM Drivers are: • Risk transfer • Whole of life costs • Output specification • Competition • Performance measurement • Private sector management skills

17. VFM Drivers - Risk Transfer • Optimal risk allocation is the key driver i.e. risk is allocated to the party able to manage it at lowest cost • Private sector often better placed to manage project risk • Risk transfer is not an end in itself-inappropriate transfer will lead to “premium” pricing. PPP process seeks to identify optimum allocation through the tender process by assessing the market’s view of the cost of the risk

18. VFM Drivers - Risk Transfer Typical risks transferred include: • Design and construction of the asset • Long term asset performance • Service delivery

19. VFM Drivers- Whole of Life Costing • Whole of life focus, drives efficiencies • PPP projects require bidders to consider whole life costs of a procurement i.e. assets capital and maintenance (life cycle) costs. • Design to minimise maintenance/replacement costs i.e. use of high quality construction materials • Whole of life approach transfers costs/risk to private sector hence govt. insulated from higher maintenance cost over life of project • Avoids backlog maintenance issues into the future i.e. asset maintenance “locked” in for many years

20. VFM Drivers –Output Specification PPP projects: • Typically use output specifications • Define deliverables in terms of outputs required rather than inputs • Allow bidders to consider the best way (use of innovation and technology) in achieving outputs

21. VFM Drivers – PerformanceMeasurement • Many PPP projects use payment mechanism to incentivise performance • Key Performance Indicators (KPI) are used to set bench marks for contractor performance • Penalties are applied for sub-standard performance • Represents major change in traditional delivery approach. Examples: • Maintenance rectification period and • Minimum standards of cleanliness

22. VFM Drivers - Competition • Competitive tension is very important • Competition in key areas of PPP projects can reduce costs • Construction and service provision contracts • Debt margins and equity returns • Pricing of risk Process typically structured to generate competition • Initial process to shortlist strongest bidders • Request full proposals from 2-4 bidders • Maintain the competitive tension for as long as possible

23. VFM Drivers-Mechanisms to Evaluate • Public Sector Comparator (PSC) • Functions as a cost benchmark • Based on public sector financing and co-ordination of delivery

24. VFM Gains • PPPs have much higher financing and legal costs than traditionally procured projects: • Financial Advisors • Legal Advisors Hence it is the efficiency gains from the various risks transferred to the private sector that will bring about the Value for money gains.

25. Contract Management PPPs contracts must be carefully managed; this is critical specifically during operations. • PPPs avoid upfront capital expenditure. Instead, can create a stream of future Government commitments • PPPs can be used to get around prudent budget and public financial management controls • PPPs can be a tempting option to provide better services now, at the expense of future generations

26. Way Forward • PPPs are here to stay • Government views the Private Sector as a partner in the development process and the engine of growth

27. Way Forward - Accounting Treatment All PPPs must be paid for: • Government pays • Users pay • Combination PPPs are essentially two types: • Financial liability model/social projects/Government- pays • Economic projects/user-pays

28. Accounting Treatment • PPP projects where the Government pays (social projects) the Private sector for the service, will be included in the debt stock of the Government – IPSAS-32 • Economic projects that have limited contingencies, no guarantees etc., and the users pay will be accounted for using the Accounting Standards for Contingencies - IPSAS 19

29. Why do PPPs? • PPPs are another method of Procurement • PPPs should be done based on Value for Money considerations PPPs DO NOT provide fiscal space. Other countries have improved PPP accounting , based on lessons learnt. Jamaica can therefore benefit from current best practises.

30. Way Forward- Project Selection and Approvals Project Implementation and Management System (PIMS) • All projects including PPPs will go through the PIMS, approved by Cabinet and currently being developed -Legislated • Limited fiscal space results in project selection and approval processes becoming extremely critical • Projects must be well defined, scoped and developed with feasibility studies • Projects must pass the various criteria e.g. 2030 Vision • Only good projects should move forward- “an elephant will always be an elephant”

31. Way Forward- Project Prioritisation • High debt to GDP Ratio is still with us • Plan to reduce debt to GDP Ratio to 60% by 2025/26 • Limited fiscal space • Projects must therefore be prioritised

32. Project Prioritisation cont. Projects should: • Give the “most bang for the buck” • Contribute to economic growth- revenues, value added and employment etc. • Cause a ripple effect in the economy • Overall Jamaica needs sustainable development and the selection of good projects should assist the process.

33. Port of Kingston

34. PPP Tolled Highway

35. Sangster International Airport

36. END Thank you