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11/6/2015 1
SESSION 2:
Public and Private Sector Collaboration
Presented byMr. John D. M. Davie
Chairman,Altra Capital Limited,
United Kingdom.
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SESSION 2:
Public and Private Sector Collaboration
PPP in a globally competitive market
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SESSION 2:
Public and Private Sector Collaboration
International interest in PPP in 1999
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SESSION 2:
Public and Private Sector Collaboration
International interest in PPP in 2015
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SESSION 2:
Public and Private Sector Collaboration
• 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!
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SESSION 2:
Public and Private Sector Collaboration
• 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
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SESSION 2:
Public and Private Sector Collaboration
• 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
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
Finance
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
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.
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SESSION 2:
Public and Private Sector Collaboration
Typical financial characteristics for a PPP
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
The financing tool-box
Mezzanine
Low risk Medium risk High risk
Equity>20%
15-20%
<10%
Return
SeniorDebt
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SESSION 2:
Public and Private Sector Collaboration
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?
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
• Project
• Design
• Technical
• Human
• Criminal
• Safety
• ???
• Political
• Environmental
• Planning
• Market
• Economic
• Financial
• Natural
Risk Identification
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SESSION 2:
Public and Private Sector Collaboration
Anatomy of a PPP Contract
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SESSION 2:
Public and Private Sector Collaboration
• 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
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SESSION 2:
Public and Private Sector Collaboration
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
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SESSION 2:
Public and Private Sector Collaboration
• 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
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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
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Thank you!