The Theory and Practice of PPP

Nov-Dec 2019

M4. PPP Project Cycle

Implementation Procedure & Roles of Related Entities

Hyeon PARK
Adjunct Research Fellow of KDI/
Dean and Professor, International School of Urban Sciences, University of Seoul
hpark@uos.ac.kr, hyeon.park3@gmail.com / 09890428802

15 November 2019
Basics of PPP

1
 Responsibilities of PPP Center
⚫ The PPP Center shall be established within the MoPF and shall be
responsible for identifying Projects that are capable of being delivered
by PPP from those Projects submitted for inclusion in the Project
Bank. Additional responsibilities shall include but not be limited to:
a. facilitating the identification and development of PPP Projects;
b. managing aspects of the Project Bank relevant to PPP Projects;

c. developing requirements, guidelines, templates and procedures

to be used in the identification, preparation, bidding and
management of PPP Projects;
d. monitoring and reporting on the implementation of PPP
Projects; and
e. investigating and recommending PPP policy reforms.

Source: Article 11, Republic of the Union of Myanmar Office of the President,
“Notification No. 2 / 2018: Project Bank Notification,” 30 November 2018

2
 PPP Structure (1)
Government
Contracting
Direct
Agency Agreement
PPP
Contract

Equity Project Company

(SPC / SPV) Lenders
Investors Shareholders’ Loan
Agreement Agreement

EPC O&M
Contract Contract
EPC O&M
Contractor Contractor

USERS

Source: Adapted from WB, ADB & IADB (2014: 51) and WB(2017: 41)
PPP Reference Guide
 PPP Definition
❑ A long-term CONTRACT between a private party and a government entity, for
providing a public asset or service, in which the private party bears significant
risk and management responsibility, and remuneration is linked to
performance.
• WB(2017: 1), Public-Private Partnerships Reference Guide, Version 3.0.
❑ “Public-Private Partnership (PPP)” means an INVESTMENT MECHANISM
based on a contractual agreement between an IGA and a private party for
providing a public asset or infrastructure or service that includes but is not
limited to financing, designing, implementing, managing, and/or operating
infrastructure facilities and services traditionally provided by the public sector
in an effort to reduce the Government’s capital and operating expenditures
while improving the quality of assets and services
• Republic of the Union of Myanmar Office of the President, “Notification
No. 2 / 2018: Project Bank Notification,” 30 November 2018.

4
 PPP framework
❑ Policy: articulation of the rationale behind the government’s intent to use PPPs to
deliver public services, and the objectives, scope, and implementing principles of the
PPP program.
❑ Legal framework: the laws and regulations that underpin the PPP program—enabling
the government to enter into PPPs, and setting the rules and boundaries for how PPPs
are implemented. This can include PPP-specific legislation, other public financial
management laws and regulations, or sector-specific laws and regulations.
❑ Processes and institutional responsibilities: the steps by which PPP projects are
identified, developed, appraised, implemented, and managed, ideally within the Public
Investment Management system; and the roles of different entities in that process. A
sound PPP process is efficient, transparent, and is followed consistently to effectively
control the quality of PPP projects.
❑ Public financial management approach: how fiscal commitments under PPPs are
controlled, reported, and budgeted for, to ensure PPPs provide value for money,
without placing undue burden on future generations, and to manage the associated
fiscal risk.
❑ Other arrangements: how other entities such as auditing entities, the legislature, and
the public participate in the PPP program, and hold those responsible for implementing
PPPs accountable for their decisions and actions. The sections of this module describe
each of these elements of a PPP framework, providing examples and guidance for
practitioners
5
 Flow of Funds

Source: WB(2017: 42)

PPP cycle
1. Identifying PPP projects
2. Appraising potential PPP projects
3. Structuring PPP projects
4. Designing PPP contracts
5. Managing PPP transactions
6. Managing PPP contracts
7. Dealing with unsolicited proposals

7
 Typical PPP Process
Identify priority project

SELECT
EXIT PROCESS
PROJECT

INITIAL CONCEPT Screen as PPP Screen priority projects for PPP potential

PREPARE
OTHER OPTIONS
AS PPP

Identify and allocate risks and responsibilities

KEY COMMERCIAL TERMS Structure PPP Appraise PPP Appraise project feasibility, commercial viability,
value-for-money, fiscal responsibility

PROCEED
OTHER OPTIONS
AS PPP
Define performance requirements
Define payment mechanisms
DRAFT PPP CONTRACT Draft PPP contract Create adjustment mechanisms
Establish dispute resolution mechanisms Provide
for termination
Decide the procurement strategy
Market PPP
Manage PPP transaction Qualify bidders
Manage bid process
Reach financial closure
SIGN
PPP CONTRACT EXIT PROCESS
CONTRACT

Set up contract management structures

Manage PPP contract Monitor and manage PPP delivery and
자료: WB(2017), p.114 risk Deal with change

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3.1 Identifying PPP projects

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 3.1.1 Identifying priority public investment projects
• A project should be a priority project whether it is a PPP or
conventional government project.
– Sound public investment management (PIM) is critical component of
the success of PPP projects
• IMF (2015): big difference in fiscal productivity by PIM
– Countries with stronger PIM have more predictable, credible, efficient,
and productive investments
– The empirical study on 25 countries shows that there is about 30%
efficiency gap in public investment process and 2/3 of them can be
filled by better PIM.
– The most efficient public investors get twice the growth “bang” for
the their public investment “buck” than the least efficient.
• Rajaram, et al(2014), The Power of the PIM, WB.

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 Setting Priority and PPP Project Selection

white bar = B/C; blue bar = R/E

Project Project Accumulated
B/C B/C R/E
R/E name Cost Project cost
I
2.5
A A 100 100 2.5 0.0

B B 150 250 2.0 1.1

2.0 C
C 80 330 1.8 0.8
D
E
1.5
F D 100 430 1.6 0.2
G E 50 480 1.5 0.3
1.0
H F 70 550 1.3 0.1
0.5
G 200 750 1.1 0.5
$ H 100 850 0.6 0.3
Gov’t
Budget Infrastructure I 100 950 0.5 2.0
Gap

Given the budget constraint of USD 330 million, by implementing B thru PPPs, the
government can divert the saved funding from B in the amount of USD 150 billion to D,
and E, which is expanded fiscal space by PPPs.

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 3.1.2 Screening for PPP potential

• PPP process can be see as a “branch” of the broader

PIM process
• The points of branching PPP from the whole PIM
process
– Korea, after PFS; similar with South Africa
– Chile, all public investment projects undergo a CBA by
the National Planning Commission. PPP projects are take
from this list
– Australia and Netherlands, procurement options are
assessed only after a project has been approved and
budgeted for as a public investment projects

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 Criteria of PPP Project Selection (Korea)
❑ Legally eligible
⚫ Listed in the PPP Act as an eligible facility type. Positive list system in Korea
❑ Consistent with priorities set by infrastructure related mid-to-long term
plans and national investment projects
❑ Economically viable for the national economy
⚫ To deliver timely benefits than a conventional government-procured projects,
which have budget constraints
❑ To deliver Value for Money, reducing government burden while the
quality of service improved
❑ Financially viable at the reasonable/affordable level of tariffs for BTO
projects

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Box 3.2 PPP potential screening factors in South Africa

• Scale of the project

• Outputs capable of clear specification
• Opportunities for risk transfer
• Market capability and appetite

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3.2 Appraising potential PPP projects

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 Good and Suitable Project for PPP
• Good project
– Economically, technically, environmentally and legally feasible
– Affordable both for government and users
• Suitable Project for PPP
– Commercial viability (and bankability)
– Value for Money
– The ability to be ring-fenced
– Definable outputs
– Sufficient information to be able to assess costs and risks

Source: APMG(2016), Chapter 2, pp. 44-46.

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 3.2.1 Assessing project feasibility and economic viability

• Feasibility and economic viability of the project

• Commercial viability (Financial analysis)
• VfM of the PPP
• Fiscal responsibility (Affordablility)
– The requirements of repayments are within the
capacity of users and the public authority to pay for
the infrastructure services
• Project management capacity of the contracting
agency

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3.2.2 Environmental and social studies and standards
• Potential damage to the environment and the impact on populations are key
issues when planning infrastructure projects.
• Investment decisions increasingly include an assessment of the management
of E&S risks and impacts—not only when MDBs and international financial
institutions are involved but also when commercial banks and private equity
funds are the source of financing.
• E&S framework
– Assessing E&S impacts when selecting PPP projects to mitigate negative project
impacts and optimize social welfare
– Engaging with stakeholders during project preparation to communicate
government concerns and solutions regarding environmental and social impact,
and to receive useful feedback and suggestions
– Defining the specific E&S standards to be included in the PPP contract
– Monitoring E&S issues during the contract term (design, construction, and
operation)

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 World Bank E&S standards (Box 3.4)
• Standard 1: Assessment and Management of Environmental and Social
Risks and Impacts
• Standard 2: Labor and Working Conditions
• Standard 3: Resource Efficiency and Pollution Prevention and
Management
• Standard 4: Community Health and Safety
• Standard 5: Land Acquisition, Restrictions on Land Use and Involuntary
Resettlement
• Standard 6: Biodiversity Conservation and Sustainable Management of
Living Natural Resources
• Standard 7: Indigenous Peoples/Sub-Saharan African Historically
Underserved Traditional Local Communities
• Standard 8: Cultural Heritage
• Standard 9: Financial Intermediaries
• Standard 10: Stakeholder Engagement and Information Disclosure

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 3.2.3 Assessing commercial viability
❑ For a viable project, determine whether it would be attractive to the
market if structured as a PPP.
❑ Market sounding
⚫ Present the main parameters of the project to the selected potential
investors for questions and comments
– Typically the project concept and initial structure developed
during the structuring phases are presented
⚫ MS can be done by the government agencies directly, or can be
delegated to transaction advisors
- Market feedback can be more honest and specific when the
consultation is conducted by transaction advisor
⚫ International advisors, or IFC PPP advisory service
⚫ MIF(Multilateral Investment Fund) of IADB, or GIF (Global
Infrastructure Fund)

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 3.2.3 Assessing commercial viability

❑Financial Analysis
⚫ An analysis of financial viability of a project based on the
future cash flow (cash in and cash out)
⚫ FA is the analysis from a project implementation agency

❑Criteria of Financial Viability

⚫ R/C; R/E; PI > 1
⚫ FNPV > 0
⚫ FIRR > rm (minimum FIRR for the implementor)

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 3.2.4 Assessing VfM of the PPP
• VfM
– Achieving the optimal combination of benefits and
costs in delivering services users want
– Quantitative vs qualitative analysis
• Qualitative VfM analysis
– Is the project type suitable for PPP?
– Has the PPP been structured well?
– Competition at the bidding?
• Quantitative VfM analysis
– Comparison of fiscal cost of procurement options

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 3.2.5 Assessing fiscal implications
❑ Is the PPP affordable for the government and users?
❑ Public–Private Partnership (PPP) contract can impose an obligation on
governments.
⚫ Direct fiscal commitment and contingent liabilities
⚫ Financial commitment in the form of payment, guarantee, subsidy, etc.
⚫ In particular, government-pays PPPs put fiscal burden on fiscal management
in the future.
⚫ Governments’ risk bearing under PPP contracts (e.g. demand, foreign
exchange, early termination liabilities, etc.) produces obligations.
⚫ By signing a concession type PPP, the public sector gives up future revenue
(tariff collection) in return for saving upfront capital expenditure.
❑ Governments bear the risks in order to:
⚫ Apply the best way of allocating risks (reduce private sector risk)
⚫ Make the project more bankable

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 Fiscal Impact of PPP
Inter-generational budget constraint
Next Government

570

B.C. with PPP having

positive fiscal impacts
500
B.C. without PPP
450
B.C. with PPP

500 550 Current Government

 3.2.6 Assessing the ability to manage the projects
• Appraisal of the current capacity of the procuring authority
including its leadership, the identification of future needs
– Appropriate resources and governance arrangements
• UK case
– Program and Project Management Methodology and Structure
– Program and Project Management Plans
– Use of Specialist Advisers
– Change and Contract Management Arrangements
– Benefits Realization
– Risk Management
– Monitoring during Implementation
– Post Implementation Evaluation Arrangements
– Contingency Arrangements

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3.3 Structuring PPP projects:
Allocating responsibilities, rights
and risks to each party to the
PPP contract

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 Why risk allocation is important?
❑ The potential benefits of PPP
• Fiscal space
• Efficiency gains
– LCC costing by integrating DBFOM into a single contract
– Minimizing overall cost through risk allocation
– Resource allocation through market mechanism
• Quality service by performance orientation
• Public sector reform
❑ Appropriate risk allocation/transfer is the key to
materializing PPP benefits
❑ It also contribute to bankability of a PPP project

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 Financial Viability and VfM
Risk- VfM for
adjusted Govt
FIRR for
SPV
VfMmax

r0

Risk
0 RT0 RT1 Transfer

❑ The green arrow area (RT0 < RT < RT2 ) is a set of appropriate risk
allocations
⚫ RT < RT1 → FIRR > r0 ,where r0 = minimum FIRR of SPC; and
⚫ RT < RT0 → VfM > 0
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 Financial Viability and VfM (2)
Risk- VfM for
adjusted Govt
FIRR for
SPV
VfMmax

r0

Risk
0 RT0 RT2 RT1 Transfer

❑ The green arrow area (RT0 < RT < RT2 ) is a set of appropriate risk
allocations
⚫ The VfM reaches its maximum at RT = RT2 < RT1

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 Risk management in PPP
❑ PPP and risk allocation
• PPP is a CONTRACT that allocates responsibilities, rights and
risks between public and private parties
❑ Risk management in PPP
• Identifying risks (assessing & mitigating risks)
– Risk = likelihood • impact
= probability • financial cost of the event
• Mitigating risks
– Public entity provides reference information (geo-technical, traffic
forecast, and ESIA) to allow private entity to evaluate risks and decide
to manage risks.
• Allocating risks
→ Translating into contract

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3.4 Designing PPP contracts
• Performance requirements
• Payment mechanism
• Adjustment mechanism
• Dispute resolution procedures
• Termination provisions

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 Aim of PPP contract design
• To create certainty where possible, and
bounded flexibility where needed –
thereby retaining clarity and limiting
uncertainty for both parties.
– Creating a clear process and boundaries for
change

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Five areas of PPP contract design and considerations
• Five areas of PPP contract
– Performance requirements
– Payment mechanism
– Adjustment mechanism
– Dispute resolution procedures
– Termination provisions

• Considerations
– Risk allocations in the contract
– Standardized elements of PPP contract design to reduce time and
cost frequently involved in preparing and finalizing a given PPP
contract (Template)
• P 151, Table 3.1 Examples of standardized PPP contracts and contract clauses

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 3.4.1 Performance requirements
• PPP contract should set out the followings
– Clear performance targets or output requirements
• SMART (Specific, Measurable, Achievable, Realistic, and Timely)
indicators
– How performance will be monitored
• What information must be gathered, by whom, and reported to
whom and how frequently
– Consequences for failure to reach the required performance
targets, clearly specified and enforceable
• Penalty payments, liquidated damages, or performance bonds
• Specifying payment deductions for poor performance (or
bonuses for good performance)
– Step-in rights for the public party

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 3.4.2 Payment mechanism
• User pays vs government-pays
• Government payments
– Usage based (shadow tolls)
– Based on availability: conditional on the availability of an asset
or service to the specified quality
– Upfront subsidies based on achieving certain milestones
• Bonuses and penalties, or fines
– Deduction on payments to the private party, or penalties or
fines payable by the private party, due if certain output or
standards are not reached; or conversely
– Bonus payments due to the private party if specified outputs
are reached
• The payment mechanism also specifies timing and
mechanism for making the payments in practice
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 3.4.3 Adjustment mechanism
• PPP contract are necessarily incomplete
– Long term nature of PPP makes the definition of adjustment mechanism necessary
• Financial equilibrium clauses
– Force majeure
– Government action
– Unforeseen changes in economic conditions
• Changes to service requirements
– Changes to service requirements in response to changing circumstances (e.g.
changing technology)
• Changes to tariff or payment rules or formulae
• Market testing and benchmarking operating costs
– Periodic market testing or benchmarking of certain sub-services in the contract, to
allow costs to be adjusted to market conditions
• Refinancing

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 3.4.4 Dispute resolution mechanism
• Mediation and conciliation by aa neutral
third party
• Recourse to a sector regulator
• Judicial system
• Panel of experts as arbitrators
• International arbitration
– International Center for Settlements of
Investment Disputes (ICSID)

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 3.4.5 Termination provisions
• Contract term and asset handover
– Government choose the term
– The term is determined by the bidders
– Length of concession is determined
endogenously by inviting bids on the basis
of the least present value of revenue
• The concession terminates when that value is
reached

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3.5 Managing PPP transactions
(Tender/ bid)

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 Steps of PPP transaction
• Deciding on a procurement strategy
• Marketing the upcoming PPP project
• Identifying qualified bidders
• Managing the bid process
• Executing the PPP contract and ensuring all conditions are met to
reach contract effectiveness and financial closure

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 Four stages of tender process
• Pre-qualification
• Bid period
– from launching through to bid submission/reception (in
open tenders without PQ)
– From an invitation to offer through bid submission
• Bid evaluation (Tendering)
• Contract signature or “commercial close” (from
decision to award to the effective date of the
contract)
– Financial close my occur at the end of this period or at a
later time after contract signature

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 3.5.1 Deciding the procurement strategy
• PQ:
– Whether to use pre-qualification
• Bid process:
– Whether to use a sing-stage process to select the preferred bidder,
or a multi-stage process in which proposals and the bidding
documents may be reviewed and iterated
• Negotiation with bidders:
– to what extent discussions with bidders may lead to changes in the
initial draft contract; either during the bidding process or after final
bids have been submitted
• Bid for award:
– whether to rank proposals and choose the preferred bidder based on
a single financial or value-related criterion (after screening for
technical merit), or some weighted evaluation of financial and
technical criteria

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 Main types of tender process
• Open tender or one-stage tender process
– LAC countries, Philippines
• Open tender with pass/fail pre-qualification (or two-stage open tender)
– Separation of RFQ from FRP
– Mexico
• Restricted procedure (shortlisting with one bid)
– EU countries, India, KOREA
• Negotiated process (shortlisting with negotiation)
– Bids may be iterative, with more than one bid submitted by each proponent
during the bid process before calling for the final offer
• Dialogue or interaction process
– Shortlisting is accompanied by a dialogue or interactive structure process
– First, the PFQ is issued with the intention of pre-selecting a shortlist of
qualified bidders
– Dialogue or interaction then takes place in conjunction with the RFP process
– Australia, EU, New Zealand, KOREA
• Table 3.3 Examples of PPP procurement procedures

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 3.5.2 Marketing the PPP
• Some governments take a more proactive
approach to marketing to generate investor
interest prior to the official project launch.
– Conducting investor presentations, meetings, or
road shows to present the project. The scale and
location of meetings can be tailored to the
expected interested investors—for example, whether
likely to be local or international.
– Releasing teaser material about the project. This
could include publishing material in industry
publications, such as Global Water Intelligence, or
dedicated project development platforms, such as
Zanbato.

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 3.5.3 Qualifying bidders
• The approach to qualifications
– The timing of the issue of the RFQ
– Whether to pre-select (shortlist) or only apply
pass/fail qualification criteria

• Box 3.12: Firm qualification criteria

– Quantitative or qualitative
– Financial robustness, previous experience with
similar projects, experience of key members of
management team

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 3.5.4 Managing the bid process
• Preparing and issuing RFP documents
– Information on the PPP project opportunity.
– Information on the bid process.
• Interacting with bidders during the bidding
period
– Q&A
• Receiving bids
– Bids in two sealed envelopes (financial bid and
technical bid)

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 3.5.4 Managing the bid process
• Evaluating bids to select the preferred bidder
– Assessing bid completeness and compliance with minimum
requirements of bid process;
– Assessing conformity with requirements of the project brief.
– Bid clarification, which can involve a bidder presentation and a Q&A
session.
– Detailed review by evaluation teams, following the pre-defined
evaluation criteria.
• Financial evaluation: tariff, government cost, LPVR
• Technical evaluation
– Preparation of evaluation reports, detailing the process followed and
the analysis of the evaluation teams.
• Dealing with problems such as receiving only one bid, or no fully
compliant bids
• Finalizing the contract with the preferred bidder
– Negotiation precedes

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 3.5.5 Achieving contract effectiveness and financial close

• Some more steps after signing the contract

• Finalizing financial agreements (financial close)

– Financial close my occur at the end of this period or at a later time after
contract signature

• Meeting conditions for contract effectiveness and financial close. The

government checklist:
– Finalizing all project agreements and contracts
– Securing final approval from relevant government entities—for example, review and
approval of the procurement process and final contract
– Securing permits and planning approvals
– Commencing or completing project land acquisition

48
3.6 Managing PPP contracts

49
 Aims of contract management
• Services are delivered continuously and to a
high standard, in accordance with the contract,
and payments or penalties are made accordingly;
• Contractual responsibilities and risk allocations
are maintained in practice, and the government’s
responsibilities and risks managed efficiently;
• Changes in the external environment—both risks
and opportunities—are spotted and acted on
effectively; and
• The efficiency expectations of the contract are
achieved and the handback provision in the
contract are met.

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 Tasks at the contract management phase
• Establishing contract management structure (governance)
– Designating a PPP contract manager and management roles: sufficient resource,
skills, appropriate seniority
– Roles of other entities in contract management: sector regulators and Finance
Ministry, PPP units
– Communication and contract management protocols
• Monitoring and managing PPP delivery and risk
– Monitoring and enforcing service performance and contract compliance
– Monitoring and managing government responsibilities and risks
• Dealing with change
– Planned reviews and adjustments
– Renegotiation or contract variations
– Disputes
• Contract expiry and asset handover
– Regular termination
– Early termination

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3.7 Dealing with unsolicited proposals

52
 Benefits and pitfalls of USP
• Benefits of USP
– USPs may allow governments to identify and prioritize projects with little
efforts
– An appropriately designed USP process can harness the private sector’s
interest in developing commercially viable project solutions
– USP can reduce bottlenecks at an early stage of the PPP process.
– Private providers of technology often possess greater knowledge about
potential solutions to infrastructure challenges
• Challenges of USP
– Most PPPs require government fiscal support: the government typically
accepts risks, and the associated contingent liabilities, even if direct subsidies
are not needed.
– Unsolicited proposals do not originate as part of a government planning
process, and, in some cases by definition, are not part of sector plans.
– Unsolicited projects may divert government attention from a planned
approach to infrastructure as a whole.
– Negotiating with a project proponent based on an unsolicited proposal in the
absence of a transparent or competitive procurement process can create
problems.
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 Creating competition with USP
• Lack of competition:
– Many private companies submit unsolicited proposals with a view to directly
negotiate a contract for the proposed project

• Alternatives (county practice)

– To accept proposals and simply follow the normal competitive procurement
process. No incentive to the proponent
– Competitive tender process, to provide some advantage or compensation to
the project proponent for developing a project, while retaining competitive
tension and ensuring transparency.

• Approaches to incentivize proponent

– Automatic shortlisting
– Bid bonus
– Right to match (Swiss challenge)
– Developer’s fee (paid by the government or winning bidder)

54
• Defining the role at each step among
government entities as well as between
the public and private are important

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 PPP Cycle in Korea
Solicited Proposal Unsolicited Proposal

Select PPP Candidate Submission of

Screen as PPP After PFS
SPV→ C.A.
Project Proposal
VFM Test (or Review C.A
VFM Test
of Proposal) PIMAC
Structure/Appraise
Designate a PPP Notification of PPP C.A → Original Proponent
Proposal Acceptance PPP Review Committee

Draft PPP Contract Announcement of RFP C.A.

Manage PPP transaction Tender evaluation SPV → C.A.

Preferred Bidder Selection

Negotiation C.A and SPV

Sign PPP Contract Contract signed/ Concession Reviewed by

Award PPP Review Committee

Approval of Detailed C.A.

Implementation Plan
Manage PPP Contract Land Acquisition/ SPV
Construction

O&M SPV
56