Introduction to Public Private Partnerships

Module 1

2013
 Module Structure

• Good Governance
• Funding PPPs
• Developing an OBC
• Effective procurement
• Risks in PPPs
• Sustainability
• Lessons and recommendations
 Definition of PPP

• Public private partnerships (PPPs) are agreements between

government and the private sector for the purpose of providing
public infrastructure, community facilities and related services.

• The private sector enter into a contract with government for

the design, delivery, and operation of the facility or
infrastructure and the services provided.

• The private sector finance the capital investment and recover

the investment over the course of the contract.

• The asset transfers back to the public sector at the end of the
contract
 Range of PPPs

Adapted from Canadian Council PPP 2009

Privatisation
Degree of private sector risk

Concession
PPP Models

DBFM-operate

Design build finance maintain

Build and finance

Operate and maintain

Design and build

Degree of private sector involvement

 Principles of PPPs

• Cost measured against conventional procurement.

• Whole life costs and quality are combined to gauge VFM

• Transfer of design and construction risk

• Risk of ownership transferred to the private sector

• Long term responsibility for building operation and maintenance

• Focus on reducing cost
 Typical SPV structure for PPPs

Government

PPP
Agreement

Private Sector Loan

Equity Shareholding (Special Purpose Vehicle) Debt
(SPV) agreement

Subcontractors

Subcontractor Subcontractor
Construction Operations
 PPP and Traditional
Procurement
Approvals – PPP
Initial appraisal procurement
Planning and Post project
assessment
implementation review

Traditional procurement

PPP PPP procurement

Assessment

Establish Contract
Procurement
output award
VFM assessment
specification
Contract
management and
review
 Governance - principles

• Participation
• Decency
• Transparency
• Accountability
• Fairness
• Efficiency
 Funding - Project finance

The financing of long-term infrastructure is based

upon a non-recourse or limited recourse financial
structure where the debt and equity used to finance the
project are paid back from the cash flows generated by
the project.
 Project finance

• High gearing requiring less equity

• Tax benefits

• Public sector use of revenue

• Long term debt funding

 Why use PPPs?

• Focus on outputs
• PPPs make projects affordable
• Better value for money over the lifetime of the project
• More efficiency in procurement
• Faster project delivery with more projects in a defined
timeframe
• Risks are allocated to the party best able to manage
the risk
Why use PPPs? (2)
 Outline Business Case
Strategic Context
STEP 1

Establish the Need for Expenditure

STEP 2

Define Objectives and Constraints

STEP 3

Identify and Describe Options

STEP 4

Option 1 Option 2 Option n

Identify & Quantify Monetary Costs

STEP 5 and Benefits

Assess Risks & Adjust for Optimism

STEP 6 Bias

Weigh up Non-Monetary Costs &

STEP 7 Benefits

Calculate NPV/(C)s and Assess

STEP 8 Uncertainties

Assess Affordability & Record Arrangements

for Funding, Management, Marketing,
STEP 9 Procurement, Monitoring, Benefits Realisation
and Ex-Post Evaluation

Results and Conclusion on

STEP 10 Preferred Option
 Critical stages of a PPP

• Initial feasibility

• Procurement phase

• Construction phase

• Operation phase
 Stages in procurement

• Procurement strategy stage

• Qualification and selection stage

• Dialogue

• Award
 Procurement Process

Prepare Preparation and evaluation of bidder documents

Documents

• Project Selection
• Brief development Financial
• Market testing Close
 Risks in PPP

• Optimal risk sharing

• Risk borne by the party best able to
manage it
• Risk management
 Identification
 Allocation
 Mitigation
Stages of risk management
 Sustainability

• Embedded environmental and social

safeguards

• Focus on longer timescales

• Public, business and government

working in partnership
 What makes a successful
PPP?
• Political will
• Government commitment
• PPP Champion
• Clear output specification
• Appropriate risk sharing
• Value for money
• Performance management
 Conclusions
• Undertake projects for the benefit of the citizens,
including the socially and economically disadvantaged
• Allows governments to approach projects hitherto
unobtainable due to lack of funding
• Provide incentives to the private sector to adopt green
criteria
• Embraces the MDGs
• PPPs allow the injection of private sector capital
 End-of-Module Questions
1. Which of the following best describes PPP projects?
a) Using funding from public borrowing.
b) Local government sets the specification
c) Public sector details design and pays for the construction
d) Government sets the required outputs and funding is provided by the
private sector.
Answer: d)

2. What is the name of the organisation created to design, build finance

and maintain the asset?

Answer: Special Purpose Vehicle - SPV

 End-of-Module Questions
3. Which of the following are critical to good governance?
a) Funding for the project
b)Clarity and openness
c) Putting the public first
d)Transferring the risk to the private sector.
Answer: b) and c)
4. Which one of the following would not be described as an
international investor?
a) Banks
b) Pension funds
c) Insurance companies
d) Employees holding shares through an employee share
scheme.
Answer: d)
 End-of-Module Questions
5. The term sustainability refers to?
a) Maintaining resource use at current or higher levels
b)Keeping the natural environment and society in a happy healthy
and functional state
c) Holding or increasing the value of human life
d)Focus on fulfilling short term need.
Answer: b)

6. Risks should be borne by the party best able to manage them.

a) True
b) False
Answer: a)
 End-of Module Questions
7. What does an OBC demonstrate?
a) That a project is economically sound, financially viable and will be well managed
b)That a project meets market expectation
c) That significant profit will accrue for the public and private sector
d) None of the above
Answer: a)
8. What are the phases in a PPP project life cycle?
Answer: Initial feasibility, Procurement phase, Construction phase, and
Operational phase
9. Match up the boxes.
Service contracts Design, build, finance

Concession contracts Private sector managing services

Construction contracts Public sector provides

management support