SESSION 2: Public and Private Sector Click to edit Master ... · • Provision of assets otherwise...

www.altracapital.com

Click to edit Master title styleClick to edit Master subtitle style

11/6/2015 1

SESSION 2:

Public and Private Sector Collaboration

Presented byMr. John D. M. Davie

Chairman,Altra Capital Limited,

United Kingdom.


SESSION 2:


PPP in a globally competitive market


SESSION 2:


International interest in PPP in 1999


SESSION 2:


International interest in PPP in 2015


SESSION 2:


• Basel III effectively tripled the size of the capital reserves that the world’s banks must hold against losses

Why are banks not lending?

• Top 19 banks • Risk-weighted assets are around

$167,000,000,000,000

• Current Core Tier 1 = $3,340,000,000,000

• Basle III Core Tier 1 = $11,690,000,000,000

• An additional $8,350,000,000,000

• They do not fully trust each other yet!


SESSION 2:


• Privatisation and PPP are not the same!

• Explaining the terminology is important!

• Privatisation: Existing Business• State owned entity tidied up for market

• Dropped into Private sector

• Little government control except regulation on tariffs

• Asset is “lost” to the government

• Not a partnership

• Permanent

• PPP creating a new business• Government determines outputs it requires of private sector

• Sets and monitors service and quality

• Control of asset/service reverts to Public sector at end of contract

• Temporary

The P word


SESSION 2:


• Spread of capital cost amortised over all taxpayers for life of contract

• Combined services budget can’t be raided

• Government budgets for operation and maintenance are protected

• Better integration of operation and maintenance with design

• A strategic whole life approach to delivering services

• Services paid for as they are consumed

• Provision of assets otherwise unavailable

PPP model

Result: • Better services to the public in the long term


SESSION 2:


A fundamental principle behind PPP

• PPP is intended to transform government departments from being

owners and operators of assets into knowledgeable purchasers of

services from the private sector


SESSION 2:


Types of PPP

PPP can be grouped into two sorts:

• User-Pay PPP where the private firm takes revenue and/or demand risk

• User-Pay PPP is usually called a concession and relies on end-user customer payments

• Annuity based PPP where the government retains those risks

• Annuity based PPP is usually called a DBFO (PFI) and involves availability payments


SESSION 2:


Equity

Equity

Fee to SPVfor use of Facility

based onPerformance/

Payment

Project Company

(SPV)

DirectAgreement

Build/Renew/Maintenance Costs

Construction &Maintenance

(Hard Services)

Operations

(Soft Services)

Service/OperatorCharge

Guarantees

How PPP works

Collateral or subvention

Senior DebtLoan

Agreement

DebtRepayment

Debt

Concession/Project

Agreement

Sub-contractors Sub-contractors

Capital

InsuranceCompaniesDebt

Insurance

Rating AgenciesDebtRating

© Altra Capital Limited 2011

Re-Payments

Equity & Loan Stock20% - 35%

• Specialist Bank

• Contractor

• Operator

Equity andLoan StockRepayment

Equity andLoan Stock

Equity andLoan Stock

Government(Awarding Authority)

They need very competent

advisorsThey need

very competentadvisors

They need very competent

Advisors

HoldingCompany


SESSION 2:


Finance


SESSION 2:


Revenues

• Tolls or user fees

• Revenue guarantees

• Cap & collar arrangements

• Service fees (e.g.

availability payments;

shadow tolls; etc)

• Government subvention

• Unitary charge

• Subsidies

Construction

Operation

Special Purpose

Vehicle (SPV)Financing

• Sponsor’s equity

• Subordinated debt

• Bank loans

• Government grants

• Bond rating agencies

• Insurance companies

• Third party equity investor

• Revenue cash flow

Financial Life-cycle of a PPP

Asset is

transferred

to the government


SESSION 2:


Key issues for lenders in PPP projects

Micro• Well defined projects; clarity on

output specification

• Strong, experienced contractors

• Credible completion undertakings

• Appropriate allocation of risk reflected in payment regime

• High quality predictable cash flows – low volatility

• Alternative service providers in the event of bank’s step-in

• Adequate termination protection

• Protection from other adverse events, change in law, force majeure, insurance etc.

Macro• Legal regime permitting taking of

security and enforcement of contractual rights

• Political commitment to PPP and to specific projects

• Competition amongst construction companies

• Availability of service providers

• Availability/capacity of long-term debt market

• Availability of project equity

• Established exit route for project equity

• Transparent procurement process.


SESSION 2:


Typical financial characteristics for a PPP


SESSION 2:


Project funding cashflow

2005

2007

2009

2011

2013

2015

2017

2019

2021

2013

2015

2017

2019

2031

2033

2035

- 20

- 15

- 10

-5 0 5 10

15

20

25

30

35

£ million

Equity and Loan Stock invested

Senior Debt drawdown

Change of Law Reserve Account deposit

Debt Service Reserve Account deposit

Senior Debt repayment and interest payable

Major Maintenance Reserve Account deposit

Equity and Loan Stock repayment and interest payable

Dividends

Equity and Loan Stock repayment and interest payable


SESSION 2:


15,000

12,500

10,000

7,500

5,000

2,500

0

-2,500

-5,000

-7,500

-10,000

-12,500

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

22

25

20

26

20

27

20

28

20

29

20

30

20

31

20

33

20

35

£’000

Cashflows to shareholders

Equity Invested Equity Repaid Loan Stock Invested Loan Stock Repaid Loan Stock Interest Dividends


SESSION 2:


Pledge over Equity andLoan Stock

HoldingCompany

Project Company

(SPV)

DirectAgreement

Modernisation &Maintenance

(Hard Services)

Service Delivery &Operations

(Soft Services)

Insurance/Guarantees

Government(AwardingAuthority

Senior Debt

Pledge over Shares and Bank AccountsPledge over Shares and Bank Accounts

Sub-contractors

Equity & Loan Stock20% - 35%

• Specialist Bank

• Contractor

• Operator

TripartiteAgreement

(Step-in rights)

Sub-contractors

TripartiteAgreement

(Step-in rights)

S

Loan security in PPP


SESSION 2:


The financing tool-box

Mezzanine

Low risk Medium risk High risk

Equity>20%

15-20%

<10%

Return

SeniorDebt


SESSION 2:


Commercial viability – will the project

work and make money?

• Is there a sound market for the project or service?

• How will current and future competition affect the viability of the project?

• How are the running costs expected to escalate?

• How reliable is the supporting infrastructure (e.g. the roads leading to the bridge which the project will construct)? Is a guarantee available from the public entity?

• How reliable are the input supplies (e.g. fuel), and are alternatives available?

• Does the project company have the resources and skills to successfully implement and manage the project?


SESSION 2:


Percentage of total nominal cash flow remaining in a typical BOT and DBFO model and percentage of total cash flows to equity

remaining in a DBFO model

0 3 6 9 12 15 18 21 24 27 30

100%

80%

60%

40%

20%

0%

DBFO- % Total payments

remaining

BOT - % Total payments

remaining

% R

em

ain

ing

Time

DBFO - % Total cash flows

to equity partners

Cashflow can influence behaviour


SESSION 2:


Risk and risk mitigation

• PPP was designed as a means to transfer risk to the party best able to manage it

• A well designed PPP project contract will represent a better way to share all types of risk • responsibilities are negotiated at contracting stage

• assessed on a case by case basis

• assigned appropriately to the parties involved, according to who is best able to manage the particular risk



SESSION 2:


Private Sector Risk

Concessions

BOT, BOOT,

DBFO, etc

Management

& O&M

Contracts

Leases;

Affermage

Agreements

Divestitures

&

Privatisations

Works and

Services

Contracts

Public Private Partnerships

HighLow


SESSION 2:


• Project

• Design

• Technical

• Human

• Criminal

• Safety

• ???

• Political

• Environmental

• Planning

• Market

• Economic

• Financial

• Natural

Risk Identification


SESSION 2:


Anatomy of a PPP Contract



SESSION 2:


• Relationship of the Parties

• The Works Period

• The Services Period

• Intervening Events

• Compensation Events

• Relief Events

• Force Majeure Events

• Changes in Law

• Termination Events and compensation on termination

• Refinancing

Outline


SESSION 2:


Lenders’ Direct

Agreement(Substitution Agreement)

Interface

Agreement

Project Company

(SPV)

ConstructionContractor

O&M

Contractor

Sponsors

Government(Procuring Authority)Funders

Construction

Contract

HoldingCompany

O&M

Contract

Project

Agreement

PPP contracting structure

Finance

Agreement

Shareholder

Agreement


SESSION 2:


• With the current reduction in banks tenor due to the credit crisis, this has assumed greater prominence in PPP’s

• Who takes the risk

• Soft and Hard Mini Perms

• Reduction of borrowing costs following completion of construction: controls required?

Refinancing


Everything we have discussed

today is set out in more detail in

the

The PPP BookPublic-Private Partnerships unbundled

TPG Inspire Publishing

www.pppbook.co.uk

which is in your library


Thank you!

Date post:	13-Aug-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

SESSION 2: Public and Private Sector Click to edit Master ... · • Provision of assets otherwise...

Documents