Selecting and Designing Concession / PPP Projects

1. Selecting and Designing Concession / PPP Projects Martin DarcyUnited Kingdom « Concessions and Public-PrivatePartnerships »Ankara, 10-11 March 2008

2. Points to Consider from the Start • PPP is a concept that can be adapted to individual project conditions • It is essential to be clear about the Objective (s) • There is no such thing as a PPP project intrinsically, only Public Investment Projects that may or may not be procured using a PPP methodology • PPP cannot make a bad project a good one • PPP should not be used as an accounting trick but as an efficient method of delivering the a Public Investment Project • The Ministry of Finance must develop the necessary skills that enable it to identify contingent liabilities that can come with PPP projects • Unrealistic expectations (affordability, timetable, development budget) will cause problems and, ultimately, disappointment

3. Life cycle of PPP projects Strategic analysis Mature operational Tendering Early operational Contract completion Pre-operational Implementation

4. The Importance of Selecting Good Projects • Capital investment is vital • Good projects: • create economic benefits and growth • create confidence in a country • create value for money solutions thus minimising tax-take • Bad projects: • create ongoing liabilities for many years • big projects = big risks • failure is often high profile: nationally and internationally • can undermine investor confidence in the country • can make the good projects unaffordable

5. How Poor Quality Projects Happen • Poor Objective Setting • Weak Option Appraisal • Inadequate Cost/Benefit Analysis (CBA) • Political rather than economic decisions • Poor Identification of recurrent costs • Under estimation of Capital costs • Inability or unwillingness to hire appropriate expertise • Fear of peer review • Lack of transparent and fair procurement processes • All summarised by the phrase: ‘poor preparation’

6. Issues to Consider 1 • Does the proposed project reflect the current policy environment of the government? • Is there political support? • Are the objectives of the proposed project clear and easy to communicate? • Have the project governance arrangements been agreed? • Skills and capacity (and funds to pay for it all)

7. Issue to Consider 2 • Have all the options for realising the objectives been identified and evaluated? • How do you test the capital cost estimates? • How do you identify the recurrent costs? • Is the proposed project affordable to the State / to the Ministry’s budget • What is the likely impact on the National Debt?

8. Issues to Consider 3 • Have all the Risks to the Project been identified? • Have the ‘worst case’ costs been evaluated and considered? • What other factors could influence the outcome? • Who are the stakeholders in the project? • Are project delivery times realistic? • Is there likely to be a competitive market to allow a healthy procurement process?

9. Strategic Assessment Output Specification Option Assessment

10. Common Challenges in Evaluating PPP Opportunities • Ensuring there is a market demand for the proposed investment • Understanding Investor and Lender Requirements • Insufficient bidders to provide competition • Establishing the correct governance structure • Sourcing appropriate skills in order to pursue a PPP project • Political rather than Economic choices place the outcome at risk • Not all investment projects are suitable for PPP in terms of: • Type of investment opportunity (sector) • Size of investment

11. Evaluating and Selecting PPPs (1) • Clarity of Objective(s) • Links to published policy statements • Priority setting for public investment • Create an Outline Business Case that can be adapted as the project progresses. • Use Cost Benefit Analysis to assess the value of the project. • This allows comparison with other projects competing for scarce resource • Create a ‘should cost’ model and consider the concept of ‘Optimism Bias’

12. Evaluating and Selecting PPPs (2) • Questions: • Is there a competitive market? • Does the Contracting Authority have the skills and capacity to deliver the project? • Does this sector of the market enjoy a good track record? • What precedents are there for this type of PPP, nationally and internationally? • Where can lessons be learned? • Are the stakeholders to the proposed PPP project fully supportive? • What are the motivations for investigating the use of PPP for this project? • Will bidders be given freedom to achieve the objectives of the investment using their own initiative? • If so, what will be the award criteria?

13. Managing Risk • Simple Principles: • Each identified risk must be accepted by the party best able to manage (or to bear) the risk • Those risks that neither party can manage – use insurance to cover the risk • Transferring unrealistic risks to the private sector is a risk in itself • Transferring risks to the private sector that it cannot manage will cost more – they will charge a premium for managing the risk

14. 100% More risk more equity Simple Funding Principles For A PPP Project EQUITY 25% Investment cost Long term Borrowings Debt is cheaper than equity 75% 0% Note: Illustrative Example Only

15. Contingent Liabilities • Any contractual obligation that may, if it is called up on, create a liability for the government • Examples: • Payments guaranteed at a minimum level • Events of Termination that incur compensation costs for the government

16. PPPs - Lessons learned • Political will and visible support is essential. • A clear, permissive and flexible legal framework is necessary • The necessary supporting institutional structures need to be in place (‘Public Public Partnership’) • Consider the cost of hiring experienced advisers as a positive investment in the outcome of the project • Full and adequate preparation is essential. Without it, the project will probably fail