Introduction to Public Private
Partnerships; Where and How to Select
Investments
CHINCA – 22 June 2011
Ian Laing, Partner, Pinsent Masons
About me
• Advised exclusively on PPP projects for over 12 years.
• Advised on over 50 PPP projects with a total value of over US$ 15
billion
• Diverse range of sectors from roads and rail to renewables and
waste water treatment facilities
• Specialist in advising equity investors and those involved in
infrastructure related joint ventures
• Have advised parties at all levels within
the “traditional” PPP structure
• Part of a United Nations team (through UNECE)
developing a “PPP Toolkit” for emerging markets.
• Currently advising Chinese investors on US$ 7 billion
of international PPP investments
What is PPP?
• Public Private Partnership
• Many forms of a partnership between public and private
sectors depending on the political environment, the
nature of the assets and the level of private sector
participation.
• Adopted internationally across Europe and worldwide
DesignBuild
DesignBuildMaintain
DesignBuildOperate
DesignBuildOperateMaintain
BuildOwnOperateMaintain
Public Responsibility
BuildOwnOperate
Private Responsibility
Service
Contracts
Management
contracts
Lease
Concession
Existing Services and Facilities
Divestiture
What is a PPP?
• There is no one model for PPP. There are many possibilities.
• PPP is not a defined procurement model with a common
understanding across the world. When a project is described
as a PPP, do not make assumptions as to what that means!
• PPP is not simply a means of accessing private. Many forms
of PPP involve no capital investment by the private sector.
• Different models of PPP have gained popularity in different
jurisdictions.
• When reference is made to PPP, people are generally
referring to private finance models so that is what we will
focus on today.
PPP is not…..
• PPP is not the same as EPC Contracting (it requires a
fundamentally different approach).
• PPP is not EPC Contracting with some additional tasks
(it requires a fundamentally different approach). If
approached in a compartmentalised way, you will be at a
disadvantage.
Sectors where PPP has been successful
• PPPs have been successful in many sectors where
service outputs can be described objectively and are
capable of verification.
• PPPs are suitable for both primary and social
infrastructure although in emerging markets generally
limited to primary infrastructure (power, water and
transportation).
• Not suitable where technology is likely to change rapidly
over the life of the contract (so PPPs in the IT sector are
generally not considered to have been successful).
Key Features of a “Good” PPP Project
• A contractual arrangement between the public sector
and a private entity to provide a public service (not an
asset) based on:
– Substantial risk transfer to the private sector;
– An output specification stating the desired output
quality and quantity;
– Performance related rewards (payment depends on
standards being met); and
– Whole life costing (a balance between construction
and maintenance costs).
How to Identify PPP Opportunities
• Many PPP projects are “solicited” government projects
advertised in official journals or gazettes.
• Some are “unsolicited” if legal framework allows.
Unsolicited market opportunities are:
– difficult to identify remotely;
– require on the ground market knowledge
• Many PPPs are announced and only some of them
proceed (particularly true in Asia).
• Less is more.
PPP Structural Scorecard
Macro
management
Vietnam
Capital market
support
Philippines
Subsidy
management
Malaysia
Competent
Regulators
Lao PDR
Failure support
Unit
Indonesia
Law
Cambodia
Policy
Bangladesh
Pipeline/VMF
No action
Contingencies
Partially
developed
MTEF
Well
developed
Institutional
framework
Factors Influencing PPP Model Success
• The 3 Ps – “pipeline, pipeline and pipeline”.
• Integration with the fiscal management of the jurisdiction.
• Strong institutional framework (including a strong PPP unit
and the necessary legal framework).
• An influential “champion” and political support essential (as
line ministries are comfortable with traditional procurement)
• A suitable regulatory environment and competent
regulators.
• Macro fiscal management that accounts for contingencies and
operational costs.
• Good concession design (duration of concessions).
• Ability of bidders to respond to opportunity.
Link to Fiscal Policy is Important
Some success
Little Success
Success of PPP
Program
Much Success
=
South Africa
Portugal
South Korea
UK
Victoria
(Australia)
The Philippines
Bangladesh
Jamaica
Not Located in Treasury
Outside of But Directly
Advisory to Treasury
Located in Treasury
Why use a PPP model?
BENEFITS
DISADVANTAGES
• Bring in private capital and make
projects affordable
• Budgetary certainty and avoiding “soft
budgetary constraint”
• Whole life costing and synergies of
integration of DBF and M
• Maximise use of private sector skills
• Public sector only pays when services
delivered
• Quality of service has to be maintained
• Accountability
• Ensures that assets are properly
maintained
•Strong Customer Service orientation
• Long term relatively inflexible structures
• Procurement delays and high
procurement costs
• Loss of management control by the
public sector
• Private sector has higher cost of
finance
• Does not achieve absolute risk transfer
• Requires public sector capacity and
skills that may not be available
• Potential for negative public reaction to
profit and control
Basic Contractual Structure for Project
Finance
Direct Agreement
Authority
Project
Agreement
Direct
Agreement
Sponsors
Subordinated
Loans
Equity
Subordinated Loans
Senior Debt
Funder
Construction
Contract
Construction
Contract
Guarantor
Senior Debt Facility
Project
Company
Holding
Company
Equity
Construction/EPC
Contract
Operating
Sub-Contract
Guarantee
Operating
Contract
Operating
Contract
Guarantor
How to invest in a PPP project?
•
•
•
•
•
Necessary to determine where in the contractual matrix
you want to enter the market.
It is possible to fulfil more than one role.
Common for international contractors to undertake EPC
work and invest in the Project Company.
If investor and contractor:
– the potential for conflict of interest must be managed
– the expectations of international partners will be for
arms length relationships.
Relative “value” of contracting and investing has been a
significant driver of change for European Contractors.
Understand market specific risks
• Relief Events and Compensation Events – very limited
protection and significant risk transfer compared to
“standard” EPC contracting
• Caps on liability high
• Performance security robust
• Change in Law
• Indexation
• Fit for purpose
• Return as an investor often linked to matters that may
feel outside your control
Understand Sector Specific Risks - Demand
• Standard & Poors study shows significant optimisation bias.
Of 32 projects studied, traffic was on average only 70% of the
forecast.
• Traffic forecasting by lenders proved to be more accurate
(traffic was 82% of their forecast)
• “Measuring inaccuracy in traffic demand forecasting” looked
at 210 projects over 30 years and showed rail projects
overestimated demand by an average of 106%. Roads
performed better but 1 in 4 projects still overestimated by
more than 40%.
• Willingness to pay may also present a difficulty particularly if
there is no history of payment for the service (particular
problem for water sector but also can apply to transport).
How to submit a winning tender?
• Whole life cost NPV/lowest tariff so;
– ensure that risk is assumed by the party best able to
manage it (assumption of risk by equity is generally
expensive and represents poor value for money).
– ensure that risk is priced once only. Integration of the
legal, financial and technical advisers is essential.
• Be careful to understand affordability criteria and
evaluation criteria (as well as any underlying weighting).
• Understand that in many jurisdictions transferring risk
back to the public sector will either lead to
disqualification or a risk weighting whereby the Employer
will add the cost (estimated by him) to your price.
What is the future for PPPs
Reasons to be confused……
I know I am feeling bullish about Asia right now but…
1.
2.
3.
4.
5.
What – sectors?
Where – jurisdictions?
When – timing?
How – what role?
Global trend impact – i.e. the
Asian megacities?
Regional “complex procurement”
opportunities
• Power, transport and (to a lesser extent) water
• Social infrastructure
• PPP as a driver for growth in the regional
infrastructure market
•
………..but moving to
• Opportunities for Chinese outbound
• Opportunities for Western inbound
• Philippines and Indonesia
• Vietnam
Working hard to make it easier
LONDON DUBAI BEIJING SHANGHAI HONG KONG SINGAPORE
OTHER UK LOCATIONS: BIRMINGHAM BRISTOL EDINBURGH GLASGOW LEEDS MANCHESTER
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