Saudi mega transport and infrastructure projects

Saudi Mega Transport and Infrastructure Projects

18 September 2013

Social Infrastructure sector- Regional best practices involving the private sector in PPPs, BOT or Outsourcing

Confidential – All Rights Reserved – Ernst & Young 2013

Contents

Section Page

1 Public Private Partnerships Principles 2

2 Different Delivery Models 5

3 Public Private Partnership Principles

4 Affordable & Social Housing Sector 8

5 The Educational Sector 9

#1

Confidential – All Rights Reserved – Ernst & Young 2013 9

1 Background


Background

The need for social infrastructure is in continuous increase ► Fast growing nations in the middle east ► Awareness of social needs increased after the Arab Spring

Need to optimize the social accommodation supply

► Limited budgets ► To avoid unnecessary costs in the procurement and operations of the social accommodation

► Not enough housing to meet either the existing populations requirements or the expanding population growth. ► The pressing need is for affordable housing for mid to low income Saudis. ► The cost and responsibility of primary infrastructure development.

The new trend of achieving the most form the private sector expertise ► Creativity ► Enhanced experience/credentials in the sector


2 Different Delivery Models


Examples of Different Delivery Models

► We have set out below a short commentary on commonly used delivery models that are used for developing major Infrastructure Projects:

Design-Bid-Build (DBB)

Design-Build (DB)

Public-Private Partnerships (PPP)

► Design-Bid-Build (DBB): traditional model, which is the most commonly used delivery model

► Design-Build (DB): could be considered as an innovative option which is being increasingly used

► Public-private Partnership (PPP): considered as an innovative procurement option and is also becoming more widely used, it may include both models involving demand risk transfer to the service provider and can include or exclude the provision of external financing

Key characteristics of DBB model: ► Separate contracts for design and construction ► Contractor selection usually based entirely on the lowest cost ► Design documents are 100% complete in advance of the construction contract tender

Key characteristics of DB model: ► Single contract for design and construction ► Contractor selection based on technical merit and price ► Schedule allowing for overlapping design and construction ► Contractor expected to provide a lump sum fixed price and to commit to delivery schedule

Key characteristics of PPP (DBFOM) model: ► Single contract for design, construction, financing and operation & maintenance ► Risks are assigned based on each party able to manage them ► Contractor responsible for life-cycle cost optimization of the asset ► Private finance can (if required) be provided in form of equity and debt

19


Benefits of Different Delivery Models

Category Characteristics DBB D&B PPP

Schedule Shortest Schedule

Delivery Schedule Certainty

Cost Cost Certainty

Lowest Tender Price

Early Cost Estimates

Whole Life Efficiency

Quality High Quality Assets

High Quality Service for users

Sustainability Overall sustainability of project

Partnership Delivering Innovation

Dealing with technical complexities

3

2

1

1

2

2

2

1

2

1

1

3

3

3

3

1

1

1

2

3

3

1

1

3

3

1

2

3

3

3

3

3

3

20


PPP: Potential benefits

Public Private Partnerships could be used be used to help resolve the issues of: ► Attracting private sector interest in mid to low income housing; ► Innovation and quality of design and construction of new housing; and ► Attracting long term private finance into the sector. PPP’s provide good value for money when there is: ► Major capital investment program (efficiencies of scale savings) ► Private sector has knowledge and expertise to deliver services ► Requirements/services can be specified as ‘outputs’ ► Facilities and services can be costed (whole life basis) ► Procurement costs are not disproportionate ► Technology is not susceptible to fast-paced change ► Incentives for the private sector to perform can be established


3 Public Private Partnership Principles


Public Private Partnership Defined

PPP are “legal agreements” between government and private sector entities for the purpose of providing public infrastructure,

community facilities, and related services. Typically the partners share risk, reward and responsibility – for a

shared investment

(Not all Projects are suitable to be delivered as PPP, Partners could be public sector or not-for-profit and PPP are only one of the tools in the tool box)

9


Typical PPP Project’s Structure

11

The Government

The Concession Agreement

Project Co. (SPV)

Lenders (Debt)

Shareholders (Equity)

Design & Construction Operations & Maintenance


The Concession Agreement

► The output specification sets the service outputs required. Moreover the assets Handover Requirements specify the asset condition at the end of concession term prior to handing over the asset back to the Government.

► The payment mechanism determines how the Government will remunerate the SPV,

balancing positive and negative financial incentives to meet the output specification and the performance region based on clear prescribed KPIs along with agreed performance threshold levels.

► Contractual remedies in the form of warning notices, step-in and termination rights underpin incentives to perform.

Output specification & Handover Requirements

Performance regime

Payment mechanism

Performance

Contractual remedy

Main Elements of the Concession Agreement

12


Risk Type Mitigation

Pre-completion ▶ Cost over-runs ▶ Delays

a) Fixed price turnkey contracts b) Warranties/penalties/incentives c) Fixed project specification d) Strong contractors

Post-completion ▶ Revenue forecasts ▶ Revenue build-up ▶Operating costs ▶Management failure

a) Committed supply contracts b) Committed off-take contracts c) Strong operators d) Performance guarantees

Technical ▶ Performance ▶ Environmental ▶ Safety

a) Warranties b) Proven technologies c) Public consultation and approval

Financial ▶ Structure: debt//equity ratio, e.g. 75/25 ▶ Structure: return on capital ▶ Structure: risk/reward ratio ▶ Foreign exchange ▶ Debt service cover ratio ▶ Taxation

a) Equitable ROE (e.g. 15-20%) b) Acceptable cover ratios (e.g. 1.5-2.0) c) Escrow reserve accounts d) Dividend constraints e) Loan syndication f) Insurance/financial derivatives g) Standby funding arrangements

Legal ▶ Regulatory framework ▶ Concession law

a) Experienced lawyers b) Clear, simple documents

Political ▶ Regime stability ▶ Force majeure ▶ Political intervention

a) Clear regulatory regime b) Investment insurance c) IFI support

Sample Public Private Partnership Risk Matrix

15


Typical PPP Cost and Revenue Profile

16 Tim

e Over

runs

Estimated Running Cost

Running Cost Overruns

Cost Overruns

Estimated Capital Cost

Construction Phase

Operation & Maintenance Phase

Conventional public Procurement

0 5 10 15 20 Pay

ments

Payment based on usage

Payment based on availability

No payments until

facilities ready

Construction Phase

Operations & Maintenance Phase

PPP procurement

0 5 10 15 20

Payme

nts


Potential Benefits of Public Private Partnership

► Improving financial risk sharing since risks are negotiated to rest with the party who is best to manage them.

► Facilitating and incentivizing project implementation on time and within budget. ► Optimizing capital, infrastructure services and maintenance expenditure over project life. ► Make the cost of services more visible. ► Allow government agency to focus on functions where it has a comparative advantage (i.e.

Policy, guidelines and oversight). ► Using innovative design, operation and financing structures. ► Improving management of operational risks, thereby reducing risk provisioning costs ► Allowing for synergies between participating organizations.

► Improved timeliness and adherence to specifications in delivery of infrastructure and related services.

► Improved quality in delivery of post-construction services. ► Improving the reach of infrastructure facilities ► Access and securing specialized skills & technology that may not be available in public

sector. ► Facilitate the deployment of more public facilities by the private sector. ► Address infrastructure and service gaps more quickly than under traditional public

procurement. ► Provide for a predictable assets and service quality levels at end of contract period, through

handover specifications.

Improved Service Levels

Reduced Costs (Value for Money)

PPPs: An Effective and Efficient Service Delivery Model

Public Private Partnerships could be used be used to help resolve the issues of: ► Attracting private sector interest in mid to low income housing, develop education programs and assets, and providing third party finance; ► Quality of design and construction.

17


4 Affordable & Social Housing Sector

49


Common challenges in the Affordable Housing sector

Supply

Demand

Price

increa

se Affordability decline

Housing & Planning laws not in place

Some uncertainty of land ownership

Private Land not being developed for housing Speculative land holding

Housing finance not readily accessible to all households

Finance not as readily available to residential developers


What is the Government and Private Sector’s role?

Private Sector needs to bring: ► Innovative Construction Solutions. ► Efficiencies of Delivery. ► Deliver real homes in vibrant neighborhoods. ► Develop unique identities and facilitate social integration.

► Integrate whole life considerations into design. ► Design Energy Efficiency into Housing Units. ► Financing solutions (including PPP, BOT). ► Financially strong and proven sponsors and developers. ► Experienced operators and maintainers.


What is the Government and Private Sector’s role?

Private sector support. ► Government to partner with private sector to increase the provision of infrastructure and housing versus the land ready for development. ► Instruments to encourage the private sector to invest include PPP’s BOT’s etc. ► Government – A facilitator, creating the right legal and regulatory framework to facilitate private sector and charity involvement, a commissioner of services. ► Private Sector – Assume the responsibility of providing housing stemming from the expansion and development of financial investment and construction markets.

► Charities – In cooperation with both Government and Private Sector create new support mechanisms for those who cannot access the market via the private sector.


5 The Educational Sector


High

ly Ce

ntraliz

ed De

cision

M

aking

Tr

aditio

nal P

ublic

Educa

tion S

ystem

s Re

source

s do n

ot Flo

w to

Educa

tion

impro

vemen

ts Allocation of students to schools is state controlled

Top down control over curriculum & resources

Inspection focuses on compliance rather than performance

Teacher’s creativity is discouraged

Curriculum updates based on rigid schedule

State provided educational material and resources

State assigned teachers and principals

Little authority given to school admin to influence school performance

Resources primarily used to support large number of staff

Salary increments to unqualified teachers consume budget increases

Old deteriorating school infrastructure

Overcrowded classrooms

Lack of professional development for teachers

Lack of advanced technologies and communication facilities

Low

quali

ty ed

ucatio

n with

high

resou

rce dr

ainage

Private Sector Participation in Public Education

Improved Resource Utilization Higher Autonomy in Decision Making

Improved training and development systems

Improved classroom availability

Provision of advanced technologies

Salary increments are performance and qualification based

School manages allocation of resources to maximize benefit

Improved infrastructure

More authority given to school admin to enable competition

School provided material and resources

School management’s involvement in teachers recruitment & selection

Curriculum updates based on priority needs and global developments

Encourages innovative teaching techniques

Schools’ management involvement on curriculum setting

Periodical performance measurement for school and students

Parental choice of schools (Encourages competition among schools)

Improved Education quality and resource utilization

Traditional Systems vs. Private Participation

36


Contracting Form Description Examples

Management contracts

Government contracts with private sector to manage an existing public service/set of services using public infrastructure. Staff are employed by the public sector.

► Contract schools, United States ► PPPs for public schools management, Abu Dhabi ► Independent schools, Qatar

Operational contracts Government contracts with a private provider to manage an existing public service/set of services using public infrastructure. Staff are employed by the private sector.

► Contract schools, United States ► Colegios en Concesión (Concession Schools), Colombia ► Fe y Alegría, Latin America/Spain

Service delivery Contract / Vouchers - Subsidies

Government contracts with the private sector to deliver a specified service/set of services using private infrastructure. Vouchers are common delivery tools this model

►Government Sponsorship of Students in Private Schools, Côte d’Ivoire ► Alternative Education, New Zealand ► Educational Service Contracting, Philippines

Auxiliary/professional Services contracts/ Affiliations arrangements / Non core services

Auxiliary / professional services: Government contracts with the private sector to undertake education-related functions such as school review, schooling improvement or curriculum development.

Non core services: Private sector provision of services such as student transportation, catering, student dorms, facilities cleaning, Information technology infrastructure etc

► Contracting out Local Education Authority functions, United Kingdom ► Pitágoras Network of Schools, South America ► Sabis Network of Schools, Middle East/Europe/North America

Infrastructure provision contracts

Government contracts with the private sector for the provision of educational infrastructure. Contracts can involve finance, design, construct, and long term maintenance

► Private Finance Initiative, United Kingdom ►New Schools’ Project, Australia ► Public–Private Partnerships (P3) for Educational Infrastructure, Canada ►Offenbach and Cologne Schools Projects, Germany ►Montaigne Lyceum, Netherlands

Models and International Examples of PPPs in Education

Hybrids of the above models are used to produce ultimate solutions that fit local contexts

37


Contact Us

Abraham Akkawi Head of Infrastructure & PPP Advisory Services – Middle East Ernst & Young Phone: + 971 2 417 4556 Mobile (UAE) : + 971 50441 8830 Email - [email protected]

42


Ernst & Young

Assurance Tax Transactions Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www ey com Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients The Middle East practice of Ernst & Young has been operating in the region since 1923 For over 85 years, we have evolved to meet the legal and commercial developments of the region Across the Middle East, we have over 4,400 people united across 20 offices and 15 Arab countries, sharing the same values and an unwavering commitment to quality We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com/me

© 2013 Ernst & Young All rights reserved

Date post:	20-May-2015
Category:	Business
Upload:	ibrahim-al-hudhaif
View:	613 times
Download:	0 times

Saudi mega transport and infrastructure projects

Business