Alternative Financing Structures

Public Private Partnership

How can the Caribbean strengthen its infrastructure ?

..and what would it take to successfully implement

PPPs
 I. Overview of Public-Private Partnerships

Alternative II. Structuring Considerations

Financing
Structures: III. Availability Payment Models
PPP or “3P”
IV. Public Relations and Key Issues for Private Investors

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Public-Private Partnerships provide a new source of capital for state
and local governments

Historical
Option #1 Raise
More taxpayer burden
Taxes immediately

Alternative
Financing Historical
Option #2 Issue
Allows conservative amount
of debt to fund projects
Structures Tax Exempt
Bonds

Can be structured to avoid

impact on taxpayers
New Option
Public Private More capital for given
Partnerships project (debt & equity)
Operating risk shifted to
private party 3
 Strategy Description
1.Public Ownership 1.Traditional toll/revenue system –
design, construction, O&M,
governance, etc. remain with
government.
2.Public Ownership / Private 2.Same as above, except that
Contracting certain activities may be
contracted out.

Alternative
3.Public owns facilities and
Financing 3.Public Private Partnership maintains governance, enters
into lease agreement with a
Structures private entity that is
responsible for operations,
maintenance, construction, etc.
4.All activities, including setting of
4.Private Ownership rates, are controlled by a private
entity (e.g. Grand Bahama
Island)

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  A public private partnership refers to a contractual agreement
formed between a government agency and a private sector entity
that allows for greater private sector participation in the delivery
of public infrastructure projects.
 In some countries involvement of private financing is what makes
Alternative a project a PPP.
 PPPs are used around the world to build and upgrade existing
Financing public facilities such as roads, airports, maritime ports, schools,
hospitals, waste and water treatments plants and prisons (e.g.
Structures Barbados Correctional Corporation in Barbados).
 Compared with traditional procurement models, the private
sector assumes a greater role in the planning, financing, design,
construction, operation and maintenance of public facilities. Risk
associated with the project is transferred to the party best
positioned to manage it.

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 New Projects

Build-Own Build-Own
Design-Build Design-Build Design-Build Design-Build
Maintain Operate-Maintain Operate-Transfer Operate
Operate

Alternative
Financing Public Responsibility Private Responsibility

Structures Service
Management
Contracts Lease Concession Divestiture
Contracts

Existing Services and Facilities

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 Design Build (DB) The gov’t contracts with a private partner to design and build a facility in
accordance with the requirements set by the gov’t. After completing the facility,
the gov’t assumes responsibility for operations and maintenance.

Design Build This model is similar to Design-Build except that the private sector also
Maintain (DBM) maintains the facility. The public sector retains responsibility for operations.

Design Build Under this model, the private sector designs and builds a facility. Once the
Operate (DBO) facility is completed, the title for the new facility is transferred to the public
Alternative sector, while the private sector operates the facility for a specified period.

Financing Design Build

Operate Maintain
Combines the responsibilities of design build procurements with the operations
and maintenance of a facility for a specified period by a private sector partner. At

Structures (DBOM) the end of that period, the operation is transferred back to the public sector.

The gov’t grants a franchise to a private partner to finance, design, build and
Build Own
operate a facility for a specific time period. Ownership of the facility is
Operate Transfer
transferred back to the public sector at the end of that period.
(BOOT)

The gov’t grants the right to finance, design, build, operate and maintain a project
Build Own
to a private entity, which retains ownership of the project. The private entity is
Operate (BOO)
not required to transfer the facility back to the gov’t.

Design Build Under this model, the private sector designs, builds, finances, operates and/or
Finance Operate maintains a new facility under a long term lease. At the end of the lease term, the
Maintain facility is transferred to the public sector. 7
 Service Contract The gov’t contracts with a private entity to provide services the gov’t
previously performed.

Management A management contract differs from a service contract in that the

Contract private entity is responsible for all aspects of operations and
maintenance of the facility under contract.

Alternative Lease
The gov’t grants a private entity a leasehold interest in an asset. The
private partner operates and maintains the asset in accordance with the
Financing terms of the lease.

Structures Concession
Grants a private entity exclusive right to provide, operate and maintain
an asset over a long period of time in accordance with the performance
requirements set forth by the gov’t. The public sector retains
ownership of the original asset.

The gov’t transfers an asset, either in part or in full, to the private

Divestiture
sector. Generally the gov’t will include certain conditions with the sale
of the asset to ensure that improvements are made and citizens
continue to be served.

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Creating a PPP https://www.youtube.com/watch?v=3nnNWLQ0jqU
enabling
environment

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  Concession leases provide an opportunity to capture
the “growth wedge” in volume and revenue increases
 Public sector bond investors rely on historical revenues
Concession to determine the leverage levels which constrains total
value for the owner
Leases – An
 Equity investors look for future returns based on
introduction… growth
 Debt + Equity = Greater Proceeds for Owner of Asset

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Alternative  Concession Agreement – A legal document that
evidences a long-term lease of a public asset by a
Financing private operator.
Structures

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 Public Body Retains
1. Up-front payment by
Private Operator
2. Oversight of Operation
3. Rights to mandate
Alternative operating performance
under the agreement
Financing 4. Rights to expand/enhance
Structures asset beyond those
specified in agreement
5. Right to cancel agreement
if Private Operator doesn’t
perform.
Private Operating Accepts
1. Construction duties and
related construction risk
2. All operating
responsibilities and costs
3. Requirements to
expand/enhance the asset
and related costs
4. Reporting responsibilities
to public body
5. Asset’s revenues
throughout life of
agreement
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 Policy Decision Description Considerations
1. Term of 1. Length of time that a 1. Political
sensitivities? Value
Concession concession partner of term length?
will be allowed to
lease and operate
the asset. 2. Public appetite for
future fee increases /
2. Fees 2. Fee limits will be what is elasticity of
mandated
Alternative demand?

Financing 3. Will the gov’t 3. Enhancements

necessary? Future
3. Expansion/ allow/mandate
Structures Enhancements future enhancements expansion prospects
if capacity
to the asset
constrained.
4. Non-Compete
4. Gov’t may commit to 4. Is this good public
compensate if future policy? What impact
development causes future capital plans
competition issues. could have?

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 Policy Decision Description Considerations
5. Construction 5. Capacity constraints 5. What construction
Requirements if any and materials factors are important?
& methods
stipulations
6. Operating & 6. Operations manual 6. What operating and
Maintenance and rules which must maintenance conditions
Alternative Standards be adhered to by are most important?
concession partner.
Financing 7. Status of existing 7. Will the concessionaire
7. Labour be held to gov’t
Structures employees and
conditions for new standards?
concession
employees
8. Environmental 8. Responsibility for 8. Are there known
environmental environmental
liabilities liabilities?

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 Availability Payment Models
Full Concession Model Availability Payment Concession Model

Revenue Generating Assets Subsidized Assets

• Toll Roads • Transit Systems
• Maritime Ports • Non-tolled Roads
• Airports • Hospitals
Alternative
Financing Premise: Concessionaire will
typically pay an up-front amount in
Premise: Concessionaire will build
and/or operate an asset in exchange

Structures exchange for future revenues for a rent-like payment stream

from the public sponsor

P3 Availability Concession structure can:

• Transfer risk (construction, financing, O&M) / Reduce Costs
• Increase the certainty or execution / Accelerate funding & project completion
• Provide for other construction benefits

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 Full Concession Model
1. When assuming similar
revenue projections, a
concession financing may
produce similar results to a
traditional tax-exempt bond
financing
Alternative 2. The State’s goals with
respect to project
Financing construction, operations
and maintenance are
Structures contained in the concession
agreement
Availability Payment Model
1. The State makes ongoing
rent-like payments to private
concessionaire for ability to
make the project “available”.
As with the full concession
model, the State’s goals with
respect the project
construction, operations and
maintenance are contained
in the concession
agreement. Payments to
concessionaire depend upon
performance, with clear
penalty system to ensure the
concessionaire is bearing
meaningful risk (e.g.
construction completion risk
or ongoing O&M risk).
Concessionaire has an
incentive to manage
maintenance programs
efficiently in order to avoid
disruption to users and
maximise payments
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 Full Concession Model Availability Payment Model
3. Value can be gained when a 2. Structure allows for cost effective
concessionaire applies their own financing for the concessionaire.
parameters for assessing the risks Typically concessionaire’s debt
and revenues associated with the viewed favourably by rating
construction and operation of the agencies, depending on the
asset: likelihood of breaching availability
 Concessionaire can take a more conditions and construction risks.
aggressive view on revenue growth Concessionaire uses the
and operating margins availability payments to pay for
Alternative  Concessionaire may assume lower
operations and maintenance and
to repay debt and equity
construction cost on ongoing capex
Financing and maintenance expenses 3. State payments to concessionaire
are a binding obligation (subject

Structures In a typical concession, target
return on equity ranges from 10-
14%, however return on equity is
to annual appropriation); but not
viewed as an “on balance sheet”
not guaranteed as the
debt to the State.
concessionaire is assuming
operating risk
 Concessionaire will assemble
competitive debt and equity capital
structures to finance the project

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 Key considerations when approaching the Public
Frame the Issue
• Solve a Problem: Use funds to solve a major
problem. Lead with the solution.
• Describe it as a “Partnership” or “Lease”, not a
“Sale” or “Privatization”
• Emphasize continuing gov’t control
Alternative • Frame as a Non-Partisan Issue
Financing Use Effective Messaging
Structures What Works
• Gov’t control via cancellation rights, oversight
and ultimate ownership
• Public benefit via jobs, economic development
• Proof of Success, via highlighted successes
along the way
Engage the Public
• Anticipate and engage key stakeholders –
lawmakers, unions, geographic players
• Carefully construct proceeds distribution plan –
spread the benefits
• Educate clearly – simplify a complicated issue
What Doesn’t
• Focusing on Efficiencies of Private Sector over
Public Sector
• Threatening tax increases or more debt without
the transaction
• Being branded a “sale”
• Foreign investment without an explanation
providing an easy target for opponents
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