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SADC PPP Network
Structuring a Bankable PPP Project
Kogan PillayHeadSADC PPP Network 7 March 2014
Presentation will cover:
» What do we mean by bankability?
» Feasibility Study
» Public Private Dialogue’s
» Procurement Process
What is Bankability?
A bankable PPP has an agreed upon definition (This is crucial!)
• A contract between government institution and private party
• Private party performs an institutional function and/or usesstate property in terms of output specifications
• Substantial project risk (financial, technical, operational)transferred to the private party
• Private party benefits through: unitary payments fromgovernment budget and/or user fees
What is Bankability?
The project is part of a National Development Plan
It has strategic value for the country
The Ministry of Finance is aware of the project and supports it!
Local banks have an appetite for long term lending (project finance)
The private sector is informed of the project and understands it
Government has the best advisors!
What is Bankability?
All the risks for the project are properly identified
The risks are costed and allocated in a matrix (key)
No unallocated risks remain
Development Finance Institutions will fund part of the project
Government has some public capital for the project
Draft PPP Agreements are market friendly
What is Bankability?
Where revenue is generated must be financially viable
If government pays unitary payments must be ring-fenced
Government must have a strong Treasury (tax base)
Are Sovereign Debt Guarantees available to lenders
Proper financial model (Public Sector Comparator) is completed
What is Bankability?
Must show Value for Money (VfM) for government
Must show market related profits for private sector
Refinancing risks are shared
Foreign debt exchange rate risks are shared
Continuity of contract from one government to the next
Feasibility Study
Contents
Stage 1 – Needs Analysis
Stage 2 – Solutions Options Analysis
Stage 3 – Project Due Diligence
Stage 4 – Value Assessment
▫ Developing PSC, Risk-adjusted PSC and PPP Reference
▫ Demonstrating affordability
▫ Demonstrating value for money
Stage 5 – Economic Valuation
Stage 6 – Procurement Plan
Stage 7 – Contents of the Feasibility Study Report
Stage 8 – Revisiting the Feasibility Study
Feasibility Study Framework
Legal
Socio-Economic
Site
STAGE 1 Needs
Analysis
STAGE 2Options Analysis
STAGE 3Project Due
Diligence
STAGE 4Value
Assessment
STAGE 5Economic
Assessment
Base PSC
PPP Reference
Risk-Adjusted PSC
Risk-Adjusted PPP
Affordability
Sensitivity Analysis
Value for Money (VfM)
Info Verification
Procurement Choice
Strategic Objectives
Budget
Budget
Institutional Environment
Project Definition
Options Analysis
Options Selection
STAGE 6Procurement
Plan
STAGE 7Submit Feasibility
Study for TA1
STAGE 8Review at TAIII to PPP Contract Term
Stage 4 – Value Assessment
• This is the pivotal stage of the feasibility study
• This stage puts three key questions to thetest:▫ Is it affordable?▫ Does it appropriately transfer risk from the
institution to the private party?▫ Does it provide value for money?
The PSC for an Accommodation Project
• What is a PSC?
▫ Costing the construction of the facilities as if built on a traditional Public Works contract
• Cost the life cycle of the facilities, equipment and service outcomes using existing data where possible
▫ Use an equivalent recent government accommodation project as the data source
▫ Life cycle could mean for 20+ years
▫ Must cost according to the output specifications in order to get a basis for comparison
Affordability and Value for Money (VfM)
NominalAffordabilit
y
Preliminary VfM (Value for
Money)
TA : I
Value for MoneyTA : III
RetainedRisk
Determined Affordability LimitRand
PSCPublic Sector
Comparator
Risk Adjusted
PSC
PPP Reference
Private Sector
Proposal
PreliminaryAffordability
Construct the Base PSC Model
• Provide a technical definition of the project
• Calculate direct costs
• Calculate indirect costs
• Calculate any revenue
• Explain all assumptions used in the constructionof the model (e.g.. inflation rate, discount rate,depreciation, budget(s), MTEF)
• Construct the base PSC model and describe itsresults
Formula for the Risk-Adjusted PSC Model
NominalAffordabilit
y
Preliminary VfM (Value for
Money)
TA : I
Value for MoneyTA : III
RetainedRisk
Rand
PSCPublic Sector
Comparator
Risk Adjusted
PSC
PPP Reference
Private Sector
Proposal
PreliminaryAffordability
Risk-adjusted PSC = Base PSC + Risk
The PPP Reference Model
• The PPP reference is ideally a ‘virtual bid’constructed by the transaction advisors (experience necessary)
• The risk-inclusive costing of the PPP reference must be based on the same outputs as used in the PSC (‘apples with apples’)
• Needs its own risk assessment using same risks (identified in the PSC) but with a different costing –do market testing
• Remember that not all risk is transferred to the private party – some is retained and must be accounted for in the PPP reference model
Construct the Risk-Adjusted PPP Reference Model
• Because of the private sector’s better capacity tomanage risk, risk is incorporated into the costingof the project and should be reflected as:
▫ specific line items in the model dealing with directrisk-related costs (eg. insurance or guarantee costs)
▫ subcontractor costs▫ increased required return on equity▫ increased cost of debt
• The PPP reference model must reflect, as specificadd-on costs, the risk retained by the institution
Formula for the Risk-Adjusted PPP Reference Model
NominalAffordabilit
y
Preliminary VfM (Value for
Money)
TA : I
Value for MoneyTA : III
RetainedRisk
Rand
PSCPublic Sector
Comparator
Risk Adjusted
PSC
PPP Reference
Private Sector
Proposal
PreliminaryAffordability
Risk-adjusted PPP Reference Model = PPP Reference
Model + Retained Risk
The PPP reference model
cost is thus an ‘all-in’ cost
to the institution for
undertaking the project
through a PPP
Public Private Dialogues
PPD’s
Private Sector must know about the project from inception
At each stage of the feasibility information must be disbursed
Forums are created to discuss feasibility findings
Funding issues are openly discussed with Private Banks and DFI’s
Inputs from private sector are invited and incorporated if necessary
PPD’s
Timeframes for procurement are clearly delineated
Information provided must be publicly available
Sector specialists must be made available by the private sector
Private sector should provide some project development costs
Government must ensure full transparency during feasibility study
Procurement Phase of the PPP
Contents of the RFP
1. General information to bidders
2.Essential minimum requirements
3.Service specifications
4.Standard specifications
5.Payment mechanism and penalty
regime
6.Legal requirements and draft PPP
agreement
7. Commitments required from bidders
8.Evaluation criteria
9.Bid formalities
Commitments Required from Bidders
• More and better quality informationgiven by the institution in the RFPresults in higher quality proposals frombidders
• This section is the crux of the RFP andsets out what information is requiredfrom bidders on all aspects of the bidincluding legal, technical, financial andBEE
Stages of PPP Procurement
• RFQ – Pre-qualification
• Request for Proposals (RFP)
• Best and Final Offer (BAFO), where appropriate
• Negotiations
• Financial closure
Get TA:IIB
• The institution's accountingofficer/authority must submit thevalue-for-money report to the relevanttreasury
• Only when this approval has beenreceived may the preferred and reservebidders be announced and negotiationscommence with the preferred bidder
Negotiations
• Successful negotiations culminate inawarding the contract, concluding theprocurement phase and startingimplementation
• The output of the negotiations must bea PPP agreement with all ancillaryagreements containing the service levelagreements and payment mechanism
The Close Out Report and Case Study
• The close-out report: provides acomprehensively summarisedinstitutional record, with all projectdocumentation, including details oftransaction and all confidentialnegotiated, contracted and financingmatters
• The case study is to build a publiclibrary of PPP experience
Successes and Challenges
Success Factors• Political commitment• Clear PPP law, robust project cycle• Strong feasibility study standards• Clear terms for PPP agreements• Early good projects, training, communication• Strong financial markets, competitive private
sector
Challenges• Increase deal flow• Build public sector capacity• Build private sector capacity• Delegate treasury approvals to provinces• Grow municipal PPPs• Develop sector-specific toolkits
Thank you
Kogan Pillay
Email: kpillay@sadc-dfrc.org
T: +267 319 1146 F: +267 319 1147
Or visit us on the web:
www.sadcpppnetwork.org