Many countries are experiencing a big infrastructure gap, and Russia is no exception. The Russian government is well aware of the problem, and it has announced that it will invest about US$1 trillion over the next 10 years in improving infrastructure. But how can the government raise that kind of capital? The expectation is that the private sector will contribute most of the financing though a Public Private Partnership (PPP).
While Russia does have some experience with PPPs, the track record so far has been spotty. We might mention in this regard one project that is sometimes considered to be the first PPP in Russia—the South-West Wastewater Treatment plant of St. Petersburg. The project was agreed upon by the Russian, Finnish and Swedish governments all the way back in 1986, but due to a lack of public financing the project was stopped. It was resurrected as a PPP in 2002 and formally procured as a 12-year BLT (Build-Lease-Transfer) contract.
The financial crisis has also thrown a wrench in the works. St. Petersburg has taken a lead in developing PPPs in Russia, but shaky credit markets have meant many projects have been put on hold.
The first PPP project launched by the government of St. Petersburg was a toll road called the Western High Speed Diameter (WHSD). The WHSD was enacted under the Federal Law on Concession agreements, which has been in force since 2005. Since the city government didn’t have the experience and proper skills to procure PPP projects, the WHSD met a lot of difficulties, including legal problems and issues with a feasibility study. In 2006 new regional legislation on PPPs was introduced in St. Petersburg that allowed the government to attract private sector interest and prompt PPP development. The value of the WHSD project is estimated at US$5-6 billion, which makes it difficult to procure in the current circumstances due to the high costs of capital and limited available funding. (Not to mention that the overall downturn of the economy has affected traffic forecasts.) Although a tender has passed and a bidder was chosen, the instability in financial markets has meant that the project had to be rescheduled. Investors need more time to redesign their financial models to meet the challenges of the financial crisis.
Read more here.
Monday, September 21, 2009
Thursday, August 13, 2009
Is public guarantee for private debt solving the problem on PPP market?
Financial crises and following credit crunch have substantially reduced options of governments in using PPPs. The reason is very simple; there is no longer enough money available for long term private infrastructure investment. However this situation is temporary as fundamentals of PPPs and reasons for PPPs remain stronger than ever.
Governments in many countries are in the process of procurement of large PPPs and therefore in need to solve this problem. More and more, the solution is, to deliver the public sector guarantee to private sector loans on the PPP projects. The question is: is this solving the problem? There are voices that say this is no longer rational, why does public sector guarantee a loan in private sector? Is not the rational for PPPs to actually let private sector provide the financing?
Actually, and for many people surprisingly, it is rational and it makes sense. First of all public sector is not doing PPPs primarily to secure financing. If public sector is doing PPPs for the right reason than it is for the expertise, innovation and motivation that private sector can deliver. Private financing is never cheaper and was never source of the value in PPP projects.
But than when we talk about moving some key risks to private sector do we cheat? Are no risks are being moved to private sector? How will private sector pay for the failure? The answer is "priovate sector invests equity, which is at stake, private sector is always risking just equity and the debt is the risk of banks, which finance the project.
Well, during financial crises, these banks do not want to do this at all, or they require additional security in form of guarantees of their loans. The only party, which can provide such guarantee on the market today is government or credit enhancement institution. And credit enhancement institutions are no longer available as their ratings have dropped due to financial crises.
To face all these issues French government has been “allowed to guarantee loans on priority projects implemented through PPPs entered into before 31 December 2010, up to a global ceiling of €10bn.”
UK, which is the largest PPP markets so far, has decided to establish Treasury Infrastructure Finance Unit (TIFU) to lend to PFI /PPP projects to “ensure that infrastructure projects go forward as planned despite financial markets conditions and thereby support jobs and economy”. This scheme found first project to bail out in April 2009, when “TIFU completed its first loan facility on 8 April 2009, providing a £120 million loan for the Greater Manchester Waste Disposal Authority’s PFI project alongside the European Investment Bank and a syndicate of commercial banks “.
Spanish ministry of infrastructure initiated special financial guarantees for PPP projects (mainly for high speed train) for an estimated amount of 15.000 M€ In Australia, the main problem is the unavailability of long tenor debt, with recent projects being financed using 5-year mini-perm structures. Governments have proved willing to share in the refinancing risk at the maturity of these financings. The State Government of Victoria has underwritten the senior debt syndication of its A$5 billion desalination project, in the expectation, that the bank club supporting the winning bidder will be able to sell down to members of the bank club that supported the losing bidder.
Portuguese government is reportedly providing Euro 800 mil. guarantee to Litoral Centro highway concession and will also guarantee Pinhol Interior concession project.
Kazakhstan had used debt instruments guaranteed by government to finance PPPs already prior financial cruises for the reasons to “encourage participation of pension funds in the system”. Currently the law enables the government to provide to the concessionaire guarantees for infrastructural bonds within the limits of concession agreements, guarantees for loans attracted to finance concession projects; the transfer of exclusive rights related to running a concession object; and the provision of grants in kind in line with Republic of Kazakhstan legislation. According to the professionals participating in the PPP process, they mentioned that the government’s accounting process in the fiscal budget will include subsidies or co-funding as state investments, whereas the guarantee will be considered as public debt.
There has also been a lot of countries having or considering Guarantee funds to support PPPs. The most successful has been Korea. Korea lunched Infrastructure Credit Guarantee Fund (KICGF) to facilitate private participation in infrastructure in 1994. In response to Asian financial crises in 1998 Korea supported even further the PPP policy and one of world largest and quite successful PPP programs has been lunched as result.
According to IMF “Korean government announced a fiscal stimulus package in response to the financial crisis with more than 15 percent of the envisaged investment to be carried out through PPPs. The package is accompanied by measures to reduce financial burdens on PPPs, smooth interest rate changes, and shorten project implementation. The measures introduce: (i) lower equity capital requirements on concessionaires (5–10 percent); (ii) for large-scale projects, higher ceilings on guarantees provided by the Infrastructure Credit Guarantee Fund (50 percent); (iii) help in changing equity investors for some projects; (iv) compensation for the preparation of proposals to encourage more vigorous competition during bidding; (v) sharing of interest rate risks with concessionaires; (vi) compensation for the excess changes in base interest rates through grading of risks at the time of the concession agreement; and (vi) shorter periods for readjusting benchmark bond yields.”
As it seems Korea has been quite happy about using this type of instrument in the financially critical times.
Governments in many countries are in the process of procurement of large PPPs and therefore in need to solve this problem. More and more, the solution is, to deliver the public sector guarantee to private sector loans on the PPP projects. The question is: is this solving the problem? There are voices that say this is no longer rational, why does public sector guarantee a loan in private sector? Is not the rational for PPPs to actually let private sector provide the financing?
Actually, and for many people surprisingly, it is rational and it makes sense. First of all public sector is not doing PPPs primarily to secure financing. If public sector is doing PPPs for the right reason than it is for the expertise, innovation and motivation that private sector can deliver. Private financing is never cheaper and was never source of the value in PPP projects.
But than when we talk about moving some key risks to private sector do we cheat? Are no risks are being moved to private sector? How will private sector pay for the failure? The answer is "priovate sector invests equity, which is at stake, private sector is always risking just equity and the debt is the risk of banks, which finance the project.
Well, during financial crises, these banks do not want to do this at all, or they require additional security in form of guarantees of their loans. The only party, which can provide such guarantee on the market today is government or credit enhancement institution. And credit enhancement institutions are no longer available as their ratings have dropped due to financial crises.
To face all these issues French government has been “allowed to guarantee loans on priority projects implemented through PPPs entered into before 31 December 2010, up to a global ceiling of €10bn.”
UK, which is the largest PPP markets so far, has decided to establish Treasury Infrastructure Finance Unit (TIFU) to lend to PFI /PPP projects to “ensure that infrastructure projects go forward as planned despite financial markets conditions and thereby support jobs and economy”. This scheme found first project to bail out in April 2009, when “TIFU completed its first loan facility on 8 April 2009, providing a £120 million loan for the Greater Manchester Waste Disposal Authority’s PFI project alongside the European Investment Bank and a syndicate of commercial banks “.
Spanish ministry of infrastructure initiated special financial guarantees for PPP projects (mainly for high speed train) for an estimated amount of 15.000 M€ In Australia, the main problem is the unavailability of long tenor debt, with recent projects being financed using 5-year mini-perm structures. Governments have proved willing to share in the refinancing risk at the maturity of these financings. The State Government of Victoria has underwritten the senior debt syndication of its A$5 billion desalination project, in the expectation, that the bank club supporting the winning bidder will be able to sell down to members of the bank club that supported the losing bidder.
Portuguese government is reportedly providing Euro 800 mil. guarantee to Litoral Centro highway concession and will also guarantee Pinhol Interior concession project.
Kazakhstan had used debt instruments guaranteed by government to finance PPPs already prior financial cruises for the reasons to “encourage participation of pension funds in the system”. Currently the law enables the government to provide to the concessionaire guarantees for infrastructural bonds within the limits of concession agreements, guarantees for loans attracted to finance concession projects; the transfer of exclusive rights related to running a concession object; and the provision of grants in kind in line with Republic of Kazakhstan legislation. According to the professionals participating in the PPP process, they mentioned that the government’s accounting process in the fiscal budget will include subsidies or co-funding as state investments, whereas the guarantee will be considered as public debt.
There has also been a lot of countries having or considering Guarantee funds to support PPPs. The most successful has been Korea. Korea lunched Infrastructure Credit Guarantee Fund (KICGF) to facilitate private participation in infrastructure in 1994. In response to Asian financial crises in 1998 Korea supported even further the PPP policy and one of world largest and quite successful PPP programs has been lunched as result.
According to IMF “Korean government announced a fiscal stimulus package in response to the financial crisis with more than 15 percent of the envisaged investment to be carried out through PPPs. The package is accompanied by measures to reduce financial burdens on PPPs, smooth interest rate changes, and shorten project implementation. The measures introduce: (i) lower equity capital requirements on concessionaires (5–10 percent); (ii) for large-scale projects, higher ceilings on guarantees provided by the Infrastructure Credit Guarantee Fund (50 percent); (iii) help in changing equity investors for some projects; (iv) compensation for the preparation of proposals to encourage more vigorous competition during bidding; (v) sharing of interest rate risks with concessionaires; (vi) compensation for the excess changes in base interest rates through grading of risks at the time of the concession agreement; and (vi) shorter periods for readjusting benchmark bond yields.”
As it seems Korea has been quite happy about using this type of instrument in the financially critical times.
Thursday, July 30, 2009
Is your lunch delivering the Value for Money?
Value for Money (VfM) is a concept much older than PPP. You might find yourself, asking this very question, after an expensive lunch “was this value for money?”. Indeed if you can buy the same quality lunch for half of price, you can easily conclude, that this lunch was not value for your money. However the question also is; did you consider the risks? The risks you undertake in perhaps less reputable restaurant or risks related to commuting to a cheaper place or less convenient venue. Did you think about the risk that you shall not get served quickly enough and that you shall find yourself ill with food poisoning? Yeas all these factors have to be considered. On the other hand you can have the same risks in a very expensive restaurant as well –, but perhaps with a different probability.
As you can see, in order to evaluate Value for Money, you have to consider all risks and also the probability related to them. You have to consider the price and compare the quality and find some formula of how to evaluate this. Value for Money measurement in PPPs is no different. UK government started to use as a method to measure Value for Money a reference “lunch”. Reference lunch in this case is a project which delivers public infrastructure or service. This project is examined if being delivered traditionally by public sector and used as a reference. Than the reference project is being compared to options in using different forms of PPP and in the end of the day, comparing the private sector bids. UK Treasury Guidance on VfM has defined VfM “as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirement”.
The concept had some pedigree and good rational and so number of other countries has adopted Public Sector Comparator (PSC) as a way to ensure Value for Money in all procured PPP projects. One of such countries has been Australia. According to the Technical note of Partnerships Victoria “ The PSC estimates the hypothetical risk-adjusted cost if a project were to be financed, owned and implemented by government. The PSC is developed in accordance with the required output specification; the proposed risk allocation reflected in the contract released with the Project Brief, and is based on the most efficient form and means of government delivery.”
However to compare one lunch with another is rather easy – you can actually get both and taste, but with infrastructure projects you can only build the project once, and sometimes you can only procure the project once so all your comparisons are theoretical and leave an open space for questions. Number of issues in PSC has been reported by UK National Audit office and the issues around PSC have been extensively discussed since. PPIAF have discussed this and the relevance of PSC for the developing countries in the article “Is the public sector comparator right for developing countries?”. The conclusion that “the PSC method, particularly as used in some industrial countries, may not be the best way to do all this in developing countries…”
Dutch way of looking at this was a little bit different. Dutch did realize, that there is need, to asses if private sector can actually deliver value, before going in to procurement and focused on cost benefit analyses of the options that are really available prior the procurement and the Public Private Comparator (PPC) has been born. Actually two of them have been born; one focusing of financial aspect and impact to government and the second one focusing on broader economic aspects and impact. For example building the bridge has financial cost to government and financial benefit is the toll charged on the bridge. But the economic impact of the traffic, shorter commuting way or establishment of connection to a remote location is not captured in financial PPC but in the economical PPC. Many critics do find however PPC even more tricky and see PPC even less reliable than PSC (Kramer). Dutch did therefore added also reference lunch for the private sector option and do use PPC early in the process and PSC in the procurement phase to compare public reference with private bids. National Treasury of South Africa in its PPP manual also describes how PSC model and PPP model are to be developed, so that VfM assumption can be made regarding the project. Capital Assets management Framework of British Columbia also in its guidance state that “Agencies should develop and use a Public Sector Comparator (PSC) to assess the financial aspects of value for money – and as a benchmark against which to measure the net value of alternative procurement options.”
Value for Money, PSC and PPC are a way to quantify the potential benefits when considering your options in infrastructure. But in the end of the day, despite all the analyses, it is up people responsible for individual project, to consider all the modalities and make the decision. And concerning the lunch – my advice is; whatever the value for money is, don’t forget to enjoy it.
As you can see, in order to evaluate Value for Money, you have to consider all risks and also the probability related to them. You have to consider the price and compare the quality and find some formula of how to evaluate this. Value for Money measurement in PPPs is no different. UK government started to use as a method to measure Value for Money a reference “lunch”. Reference lunch in this case is a project which delivers public infrastructure or service. This project is examined if being delivered traditionally by public sector and used as a reference. Than the reference project is being compared to options in using different forms of PPP and in the end of the day, comparing the private sector bids. UK Treasury Guidance on VfM has defined VfM “as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirement”.
The concept had some pedigree and good rational and so number of other countries has adopted Public Sector Comparator (PSC) as a way to ensure Value for Money in all procured PPP projects. One of such countries has been Australia. According to the Technical note of Partnerships Victoria “ The PSC estimates the hypothetical risk-adjusted cost if a project were to be financed, owned and implemented by government. The PSC is developed in accordance with the required output specification; the proposed risk allocation reflected in the contract released with the Project Brief, and is based on the most efficient form and means of government delivery.”
However to compare one lunch with another is rather easy – you can actually get both and taste, but with infrastructure projects you can only build the project once, and sometimes you can only procure the project once so all your comparisons are theoretical and leave an open space for questions. Number of issues in PSC has been reported by UK National Audit office and the issues around PSC have been extensively discussed since. PPIAF have discussed this and the relevance of PSC for the developing countries in the article “Is the public sector comparator right for developing countries?”. The conclusion that “the PSC method, particularly as used in some industrial countries, may not be the best way to do all this in developing countries…”
Dutch way of looking at this was a little bit different. Dutch did realize, that there is need, to asses if private sector can actually deliver value, before going in to procurement and focused on cost benefit analyses of the options that are really available prior the procurement and the Public Private Comparator (PPC) has been born. Actually two of them have been born; one focusing of financial aspect and impact to government and the second one focusing on broader economic aspects and impact. For example building the bridge has financial cost to government and financial benefit is the toll charged on the bridge. But the economic impact of the traffic, shorter commuting way or establishment of connection to a remote location is not captured in financial PPC but in the economical PPC. Many critics do find however PPC even more tricky and see PPC even less reliable than PSC (Kramer). Dutch did therefore added also reference lunch for the private sector option and do use PPC early in the process and PSC in the procurement phase to compare public reference with private bids. National Treasury of South Africa in its PPP manual also describes how PSC model and PPP model are to be developed, so that VfM assumption can be made regarding the project. Capital Assets management Framework of British Columbia also in its guidance state that “Agencies should develop and use a Public Sector Comparator (PSC) to assess the financial aspects of value for money – and as a benchmark against which to measure the net value of alternative procurement options.”
Value for Money, PSC and PPC are a way to quantify the potential benefits when considering your options in infrastructure. But in the end of the day, despite all the analyses, it is up people responsible for individual project, to consider all the modalities and make the decision. And concerning the lunch – my advice is; whatever the value for money is, don’t forget to enjoy it.
Monday, July 27, 2009
PPPs endorsed on banks of Victoria Lake
There is a place, where Nile is born and local people can show you exactly where it is. It is such a privilege to see that place, which was searched for, by generations of explorers in Africa. Yeas I am talking about the place on the banks of Victoria Lake. Another perhaps important birth is taking place here at Munyonyo on the Ugandan Banks of Victoria Lake just now.
Ugandan president Museveni is hosting in this luxury resort over 1000 delegates from number of African countries including 4 other presidents to discuss how to go forward in transformation of Africa and the first day of dialogue kicked off with strong call for public private partnerships. When I was in Munyonyo last year, to hold a Regional PPP Forum for Anglophone Africa, we did have no idea, that just a year later will our efforts to push PPPs in Africa be endorsed by the most needed element in PPPs – which is broad political support from the top of the public sector pyramid. This clearly happened in Munyonyo this year and it is not just political endorsement of one country or one president, this is endorsement and consensus of Africa.
PPPs are taking nowadays strong roots in Africa. I remember couple of years ago, African PPPs were about South Africa, which first pioneered PPPs on the African continent, in modern times, establishing strong PPP Unit at the Ministry of Finance. And then I have heard very mixed news regarding PPPs coming over last years from the region. Number of countries transformed their privatization capacity in to a public private partnership capacity, building new institutions and new policies and often needed to adopt a new legislation. South Africa has been followed by Mauritius, setting up its PPP Unit and establishing PPP Policy in 2003. In the meantime number of other African countries got involved in PPPs on the project by project basis. I have to mention Maputo Port concession in Mozambique of 2003, Songas Processing Plant in Tanzania of 2004, Skikda Desalination Plant in Algeria of 2005 and Lesotho National Hospital in 2007 and most recent Ugandan Power PPP project at Bujagali. When you look at the map of PPP in Africa today , you can clearly see that PPPs have taken strong roots here and with the sort of political support that the 19th Global Smart Partnership Dialogue provided in Munyonyo this year, I do expect Africa to become regular player on the PPP global market.
Ugandan president Museveni is hosting in this luxury resort over 1000 delegates from number of African countries including 4 other presidents to discuss how to go forward in transformation of Africa and the first day of dialogue kicked off with strong call for public private partnerships. When I was in Munyonyo last year, to hold a Regional PPP Forum for Anglophone Africa, we did have no idea, that just a year later will our efforts to push PPPs in Africa be endorsed by the most needed element in PPPs – which is broad political support from the top of the public sector pyramid. This clearly happened in Munyonyo this year and it is not just political endorsement of one country or one president, this is endorsement and consensus of Africa.
PPPs are taking nowadays strong roots in Africa. I remember couple of years ago, African PPPs were about South Africa, which first pioneered PPPs on the African continent, in modern times, establishing strong PPP Unit at the Ministry of Finance. And then I have heard very mixed news regarding PPPs coming over last years from the region. Number of countries transformed their privatization capacity in to a public private partnership capacity, building new institutions and new policies and often needed to adopt a new legislation. South Africa has been followed by Mauritius, setting up its PPP Unit and establishing PPP Policy in 2003. In the meantime number of other African countries got involved in PPPs on the project by project basis. I have to mention Maputo Port concession in Mozambique of 2003, Songas Processing Plant in Tanzania of 2004, Skikda Desalination Plant in Algeria of 2005 and Lesotho National Hospital in 2007 and most recent Ugandan Power PPP project at Bujagali. When you look at the map of PPP in Africa today , you can clearly see that PPPs have taken strong roots here and with the sort of political support that the 19th Global Smart Partnership Dialogue provided in Munyonyo this year, I do expect Africa to become regular player on the PPP global market.
Friday, July 24, 2009
'Let's not go out and throw the word privatization around…
...the way Joe McCarthy used to throw the word communism around.'—Coun. Justin Swandel
Privatization has been once magical word. I remember that, if something did not work in public sector utilities, companies or services, it was quite popular by politicians to call upon invisible hand of market and all powerful capabilities of private sector. And the magical word politicians used was privatization.
After 1980 the popularity of privatization has been decreasing steadily and PPP came in as more popular solution to problems in public services and infrastructure. Number of people is making the same mistake and PPP is becoming “magical word” of the begging of this century.
But there is no magic. There are many issues which can be solved by privatization, which PPPs can’t solve, there are projects, which are ideal for PPPs and there are some, which can’t be PPPs and should not be privatized. We have to evaluate all pros and cons rather than using magical words.
Sometimes people even define PPP as privatization like Kieran Lynch, who in his case study on London Underground defines PPP as “a variation of privatization in which elements of a service previously run solely by the public sector are provided for through a partnership between the government and one or more private sector companies. “ Obviously this kind of definitions is not helping to make substance of PPP clear to public.
As result of confusing PPP and privatization a lot of people in many countries have to explain the difference. Mr. Mitra in India recently commented "Let me make it clear, the Public-Private-Partnership model of financing projects is not privatization ... Besides building the world-class facilities, generating revenue for the Railways would also be the key consideration of the innovating business ideas," John Prescott, former UK Deputy Prime Minister, wrote in a letter to The Guardian “The PPP is not privatization…” and European Parliament explains that PPP is not even “ the first step towards privatization, because it's a contract with an end. “
Wikipedia defines privatization as the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.
Wiki definition is correct, while privatization transfers ownership, PPP does transfer risks. While in privatization public sector delivers assets and gets paid, in PPPs private sector delivers assets and gets paid. I am really surprised people can get this wrong.
Privatization has been once magical word. I remember that, if something did not work in public sector utilities, companies or services, it was quite popular by politicians to call upon invisible hand of market and all powerful capabilities of private sector. And the magical word politicians used was privatization.
After 1980 the popularity of privatization has been decreasing steadily and PPP came in as more popular solution to problems in public services and infrastructure. Number of people is making the same mistake and PPP is becoming “magical word” of the begging of this century.
But there is no magic. There are many issues which can be solved by privatization, which PPPs can’t solve, there are projects, which are ideal for PPPs and there are some, which can’t be PPPs and should not be privatized. We have to evaluate all pros and cons rather than using magical words.
Sometimes people even define PPP as privatization like Kieran Lynch, who in his case study on London Underground defines PPP as “a variation of privatization in which elements of a service previously run solely by the public sector are provided for through a partnership between the government and one or more private sector companies. “ Obviously this kind of definitions is not helping to make substance of PPP clear to public.
As result of confusing PPP and privatization a lot of people in many countries have to explain the difference. Mr. Mitra in India recently commented "Let me make it clear, the Public-Private-Partnership model of financing projects is not privatization ... Besides building the world-class facilities, generating revenue for the Railways would also be the key consideration of the innovating business ideas," John Prescott, former UK Deputy Prime Minister, wrote in a letter to The Guardian “The PPP is not privatization…” and European Parliament explains that PPP is not even “ the first step towards privatization, because it's a contract with an end. “
Wikipedia defines privatization as the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.
Wiki definition is correct, while privatization transfers ownership, PPP does transfer risks. While in privatization public sector delivers assets and gets paid, in PPPs private sector delivers assets and gets paid. I am really surprised people can get this wrong.
Wednesday, July 8, 2009
We will not be silenced
This is the main message I remember from reading about the PPP regeneration project in Dublin, which has acquired great interest of citizens. They went out to the streets and demonstrated. They demonstrated surprisingly in support of the regeneration deal saying” They hope we will go away and stay in our long forgotten ghettos across Dublin City. We will return to our homes not to forget our dreams of a decent place to live but to organise our fight against Dublin City Council. We are asking people to come out and support us, to wear black and bring pots and pans to make plenty of noise. We will not be silenced. We want our 14 acres site developed as agreed.” This shows unprecedented support the community of citizens provided for the redevelopment of brownfield ghettos. This kind of PPP is much closer to hearths of all citizens living in a city under regeneration and every success as well as failure is immediately recognized.
Ireland had its own troubles with regeneration PPPs as well as other courtiers pioneering regeneration projects experienced, and this negative experience has turned some professionals against this concept. Regeneration projects are indeed quite complex going across state and municipal budgets, across number of financial public facilities and government departments. Complexity is also multiplied by large number of stakeholders with often contradictory interest. Stakeholder’s consultations regarding urban regeneration are therefore difficult and lengthy. But this industry has also a lot of successes in for example in US, Canada, Germany and UK.
UK has established special agency English Partnerships (EP) to deal with brownfield regeneration and in 2008 merged EP with Academy for Sustainable Communities creating “The Homes and Comunities Agency (HCA)”. HCA has become the largest regeneration Agency in Europe with annual investment budget over £5 billion.
It is great when you have funds, strategy and institution to deal with brownfield regeneration – this makes much easier dealing with large municipal areas of development and regeneration. It also helps to solve slams and ghettos providing friendly living environment, jobs and housing rather as opposed to poisonous, crime concentrating brownfields on the borders of large industrial cities.
This has also been recently strategy of government in Thailand supporting the bailout of ghettos, which often are located on a valuable development sites and then use the money to pay for the new housing development for the people from ghetto. Example of this is Bang Bua Canal in Bangkok, which has been redeveloped based on 30 years land lease, developing great network out of communities alongside the canal, which in past have been just slumps. Thai PPPs delivering public transport do also help in fighting poverty and regeneration of urban areas. If this becomes government strategy and as such it is successfully applied, people will not have to go to streets and shout “we will not be silenced”.
Ireland had its own troubles with regeneration PPPs as well as other courtiers pioneering regeneration projects experienced, and this negative experience has turned some professionals against this concept. Regeneration projects are indeed quite complex going across state and municipal budgets, across number of financial public facilities and government departments. Complexity is also multiplied by large number of stakeholders with often contradictory interest. Stakeholder’s consultations regarding urban regeneration are therefore difficult and lengthy. But this industry has also a lot of successes in for example in US, Canada, Germany and UK.
UK has established special agency English Partnerships (EP) to deal with brownfield regeneration and in 2008 merged EP with Academy for Sustainable Communities creating “The Homes and Comunities Agency (HCA)”. HCA has become the largest regeneration Agency in Europe with annual investment budget over £5 billion.
It is great when you have funds, strategy and institution to deal with brownfield regeneration – this makes much easier dealing with large municipal areas of development and regeneration. It also helps to solve slams and ghettos providing friendly living environment, jobs and housing rather as opposed to poisonous, crime concentrating brownfields on the borders of large industrial cities.
This has also been recently strategy of government in Thailand supporting the bailout of ghettos, which often are located on a valuable development sites and then use the money to pay for the new housing development for the people from ghetto. Example of this is Bang Bua Canal in Bangkok, which has been redeveloped based on 30 years land lease, developing great network out of communities alongside the canal, which in past have been just slumps. Thai PPPs delivering public transport do also help in fighting poverty and regeneration of urban areas. If this becomes government strategy and as such it is successfully applied, people will not have to go to streets and shout “we will not be silenced”.
Tuesday, July 7, 2009
Honduras a dónde vas?
The president of Honduras Manuel Zelaya was kidnapped by the Army on June 28, 2009 and expatriated to Costa Rica. What a great political problem this is for Honduras and Latin America as well. Why do I discuss this on Public Private Partnership blog? Well the reason is very clear – there is a connection between political stability and PPP in particular and foreign direct investment in general. This is also reason why World Bank has set up MIGA to insure this kind of political risks to investors. The Honduras already weak rating S&P long-term debt B+ is the fourth-lowest non-investment grade and can be further downgraded on the basis of political risk, which would make almost impossible for Honduras to refinance its debt and also can have major implications for infrastructure development and certainly will discourage foreign investors from investing in Honduras PPPs.
Honduras has been in past years very interested in developing PPPs. I remember last year, when World Bank Institute hold a capacity building event in Tegucigalpa, how well attended this is event was by the political leaders and personally by president Manuel Zelaya. Manuel Zelaya has participated on the top government “only” seminar and during the lunch he did sit with us and discussed his visions for the Honduras infrastructure development using PPPs. His minister of finance Rebeca Santos has participated for most of the time during whole event and did speak about PPPs with great interest and insight. While the government was at the seminar, they were already working on the action plan, defining next steps to implement PPPs. Rarely seen commitment at the highest political level was very encouraging and at the time I had no doubt, that this government is able to make substantial and quick steps to develop Honduras. Every PPP professional will confirm that political support is a first essential condition to build PPP market and the case of Honduras is teaching us about the second essential condition – and this condition is political stability.
I can hardly judge what is best for the people of Honduras, but I would say that military regime is the worst option and should this situation continue for years to come, one thing is clear as well, nobody will invest a dollar in Honduras, for a very long time.
Honduras has been in past years very interested in developing PPPs. I remember last year, when World Bank Institute hold a capacity building event in Tegucigalpa, how well attended this is event was by the political leaders and personally by president Manuel Zelaya. Manuel Zelaya has participated on the top government “only” seminar and during the lunch he did sit with us and discussed his visions for the Honduras infrastructure development using PPPs. His minister of finance Rebeca Santos has participated for most of the time during whole event and did speak about PPPs with great interest and insight. While the government was at the seminar, they were already working on the action plan, defining next steps to implement PPPs. Rarely seen commitment at the highest political level was very encouraging and at the time I had no doubt, that this government is able to make substantial and quick steps to develop Honduras. Every PPP professional will confirm that political support is a first essential condition to build PPP market and the case of Honduras is teaching us about the second essential condition – and this condition is political stability.
I can hardly judge what is best for the people of Honduras, but I would say that military regime is the worst option and should this situation continue for years to come, one thing is clear as well, nobody will invest a dollar in Honduras, for a very long time.
Wednesday, July 1, 2009
Nigeria has set up a PPP focused association
I did suspect Nigeria is to become leader in African PPPs for some time already. Several projects have been announced, serious government interest demonstrated by discussion on policy, legislation and deal flow. Global Legal Group provided excellent insight to this in their 2007 Guide to PPP/PFI projects. Surprisingly quickly have Nigeria been able to sign a 25-year concession agreement with Bi-Courtney Consortium, concessionaires of the Lagos-Ibadan Motorway (reportedly 27 months). The other areas besides roads in which Nigeria is involving PPP are ports, tourism, healthcare and housing.
Therefore, I was very happy, to hear earlier this year from Saidu Njidda, that he succeeded in forming Foundation for Public Private Partnerships of Nigeria ( FPPPN), to support and advocate PPP development of Nigeria. Personally, I see PPP associations, as an important and integral part of any PPP market. Public sector should be able to consult private sector prior approval of a policy or legislation and also to hear somewhat united voice of private sector in the country. FPPPN as proponents of the concept of PPP's in Nigeria conducts research, publishes findings, facilitates forums for discussion and sponsors seminars/ on topics related to PPP's in Nigeria.
This practice of private sector organizing platform for private and often public entities as well, to promote, discuss and work together is quite well recognized in number of well developed PPP markets.
One of the oldest examples is certainly NCPPP of US (National PPP Council), mission is to advocate and facilitate the formation of public-private partnerships at the federal, state and local levels, where appropriate, and to raise the awareness of governments and businesses of the means by which their cooperation can cost effectively provide the public with quality goods, services and facilities. Canada has developed very large and well functioning Canadian Council for Public-Private Partnerships (CCPPP): the objective of CCPPP is to foster innovative forms of cooperation between the public sector - at the municipal, regional, provincial and federal levels - and the private sector, for the benefit of all Canadians.
UK, the leader in PPP, has IFSL (International Financial Services of London): established to promote the UK-based financial services industry throughout the world. In Czech republic, private sector set up APPP (Asociace PPP): for support and development of public investment and services using the PPP form in the Czech Republic. Australia has IPA (Infrastructure Partnerships Australia): established to brink together the public and private sectors to promote partnerships in infrastructure and provide cross-industry leadership in Australia.
And this is only small example of the world of PPP Associations, PPP market has grown indeed in couple of years and still is growing, let’s hope that the good practice in PPP will also take deep roots in Nigeria and the rest of Africa.
Therefore, I was very happy, to hear earlier this year from Saidu Njidda, that he succeeded in forming Foundation for Public Private Partnerships of Nigeria ( FPPPN), to support and advocate PPP development of Nigeria. Personally, I see PPP associations, as an important and integral part of any PPP market. Public sector should be able to consult private sector prior approval of a policy or legislation and also to hear somewhat united voice of private sector in the country. FPPPN as proponents of the concept of PPP's in Nigeria conducts research, publishes findings, facilitates forums for discussion and sponsors seminars/ on topics related to PPP's in Nigeria.
This practice of private sector organizing platform for private and often public entities as well, to promote, discuss and work together is quite well recognized in number of well developed PPP markets.
One of the oldest examples is certainly NCPPP of US (National PPP Council), mission is to advocate and facilitate the formation of public-private partnerships at the federal, state and local levels, where appropriate, and to raise the awareness of governments and businesses of the means by which their cooperation can cost effectively provide the public with quality goods, services and facilities. Canada has developed very large and well functioning Canadian Council for Public-Private Partnerships (CCPPP): the objective of CCPPP is to foster innovative forms of cooperation between the public sector - at the municipal, regional, provincial and federal levels - and the private sector, for the benefit of all Canadians.
UK, the leader in PPP, has IFSL (International Financial Services of London): established to promote the UK-based financial services industry throughout the world. In Czech republic, private sector set up APPP (Asociace PPP): for support and development of public investment and services using the PPP form in the Czech Republic. Australia has IPA (Infrastructure Partnerships Australia): established to brink together the public and private sectors to promote partnerships in infrastructure and provide cross-industry leadership in Australia.
And this is only small example of the world of PPP Associations, PPP market has grown indeed in couple of years and still is growing, let’s hope that the good practice in PPP will also take deep roots in Nigeria and the rest of Africa.
Monday, June 29, 2009
Privately financed infrastructure from Pension funds: the missing link in development?
What would you like to finance form your pension fund? Would you rather like to finance debts of corporations, emerging capital markets, public debts or public infrastructure privately financed and operated? Of course, it depends on risks and returns, and also opportunity costs. Given the choice, I would certainly go for infrastructure.
This also has been quite a trend in recent years. “Over the past decade, pension funds … have moved significantly into infrastructure, as part of their "alternative investment" category. Long-lived assets such as toll roads, airports, and electric utilities are a good match for the investment needs of such funds: long-term, steady growth in revenues based on providing an essential public service.” This has been pioneering by pension funds from Australia, Canada and UK. Pension funds investments have focused on publicly traded infrastructure funds, but not exclusively. Some pension funds found event courage to invest directly in to PPP/infrastructure projects. Examples include Ontario Teachers Pension Plan purchasing in to the Birmingham Airport or Canada Pension Plan Investment Board investing in to New Zealand International Airport in Auckland. Telegraph has reported on this “In the past two years, a fledgling market has sprung up. Pension funds have put aside £2billion for PFI investments, with groups such as the Secondary Market Infrastructure Fund, Barclays' I2, Henderson, 3i and the Prudential managing the proceeds.”
In US is the situation completely different. Despite the fact that US pension plans have over USD 15 trillion (2007) value representing over 60% of pension funds globally, connecting pension funds and PPPs have not been successful so far in US. The main reason for this is simply lack of PPP projects available for pension funds investment, given US public sector ownership and even operation of infrastructure. The discussion on the link between pension funds and PPPs has been ongoing for some time especially in California and Texas. Last week there has been Stanford organized Executive Roundtable to discuss these issues supported by very good paper by Stanford Managing Director Ryan Orr. His paper not only looks at California, it looks at the possible impact of US pension funds on infrastructure investment globally in the comment saying:
“In 2007, U.S pensions were valued at just over $15 trillion (109% of GDP) and represented 60% of pension capital held globally.35 If 5-10% of this amount were invested in infrastructure, this would equate to $750 billion–$1.5 trillion. Levered conservatively at 60% debt to equity, this would amount to $1.9 – $3.8 trillion of overall investment for infrastructure projects.
OECD and World Bank research shows that most developed countries invest in infrastructure at the rate of 3.5% of GDP, which for the U.S. in 2007 amounted to $490 billion. Assuming that 15% of infrastructure transactions ($73 bn per annum) could be delivered via the public-private partnership format (which is what the UK and Canada have concluded to be the appropriate mix of conventional and P3 delivery), then the $1.9–3.8 trillion that is available could provide for a staggering 26-51 years of public-private partnership investment needs, assuming zero growth of the pension capital stock.”
This can also have tremendous impact on developing countries, should the US pension funds have the expertise and being able to invest in developing countries, this could provide additional enormous capital flows to finance the infrastructure in developing countries. How can we help to mobilize this opportunity?
This also has been quite a trend in recent years. “Over the past decade, pension funds … have moved significantly into infrastructure, as part of their "alternative investment" category. Long-lived assets such as toll roads, airports, and electric utilities are a good match for the investment needs of such funds: long-term, steady growth in revenues based on providing an essential public service.” This has been pioneering by pension funds from Australia, Canada and UK. Pension funds investments have focused on publicly traded infrastructure funds, but not exclusively. Some pension funds found event courage to invest directly in to PPP/infrastructure projects. Examples include Ontario Teachers Pension Plan purchasing in to the Birmingham Airport or Canada Pension Plan Investment Board investing in to New Zealand International Airport in Auckland. Telegraph has reported on this “In the past two years, a fledgling market has sprung up. Pension funds have put aside £2billion for PFI investments, with groups such as the Secondary Market Infrastructure Fund, Barclays' I2, Henderson, 3i and the Prudential managing the proceeds.”
In US is the situation completely different. Despite the fact that US pension plans have over USD 15 trillion (2007) value representing over 60% of pension funds globally, connecting pension funds and PPPs have not been successful so far in US. The main reason for this is simply lack of PPP projects available for pension funds investment, given US public sector ownership and even operation of infrastructure. The discussion on the link between pension funds and PPPs has been ongoing for some time especially in California and Texas. Last week there has been Stanford organized Executive Roundtable to discuss these issues supported by very good paper by Stanford Managing Director Ryan Orr. His paper not only looks at California, it looks at the possible impact of US pension funds on infrastructure investment globally in the comment saying:
“In 2007, U.S pensions were valued at just over $15 trillion (109% of GDP) and represented 60% of pension capital held globally.35 If 5-10% of this amount were invested in infrastructure, this would equate to $750 billion–$1.5 trillion. Levered conservatively at 60% debt to equity, this would amount to $1.9 – $3.8 trillion of overall investment for infrastructure projects.
OECD and World Bank research shows that most developed countries invest in infrastructure at the rate of 3.5% of GDP, which for the U.S. in 2007 amounted to $490 billion. Assuming that 15% of infrastructure transactions ($73 bn per annum) could be delivered via the public-private partnership format (which is what the UK and Canada have concluded to be the appropriate mix of conventional and P3 delivery), then the $1.9–3.8 trillion that is available could provide for a staggering 26-51 years of public-private partnership investment needs, assuming zero growth of the pension capital stock.”
This can also have tremendous impact on developing countries, should the US pension funds have the expertise and being able to invest in developing countries, this could provide additional enormous capital flows to finance the infrastructure in developing countries. How can we help to mobilize this opportunity?
Thursday, June 25, 2009
Is bail out of privately financed infrastructure projects good idea?
When I have first heard about PPPs, the most significant accent was on PPPs being privately financed with private money at stake. Now I hear news about need to bail out PPP projects, with taxpayer money and I wonder; is this good idea?
Financial recession and credit crunch did bring new concerns to very large PPP markets. This concern is how does the financial crises hit PPP projects and how do we rescue projects, which are not going to make it? We have to look first, if the reasons for failure are on the side of mismanagement of the project by private partner, or on the side of macroeconomic impact, which could not have been mitigated and foreseen by neither procuring authority nor private partner. And in the case that it is macroeconomic impact, there is very good rational for public sector bail out. In the case that this infrastructure would be public, the same problem would escalate and therefore as long as if private sector partner is performing well, under given circumstances, it can only be recommended to public sector to consider playing properly its partnership role. And this means to find solutions for the project to survive and deliver expected results.
UK, which is the largest PPP markets so far, have decided to establish Treasury Infrastructure Finance Unit (TIFU) to lend to PFI /PPP projects to “ensure that infrastructure projects go forward as planned despite financial markets conditions and thereby support jobs and economy”. Generally good idea, but at first, it seemed almost, as it will not be needed and used. Banks in the end always formed a club or EIB supported the project. However margins went further up and banks could deliver only short maturities in form of mini-perms. Bank clubs are much larger with single banks holding smaller share that it would 2 years ago and this has also impact on competition as it is hard to form several bank clubs to support number of bidders.
Bond market and credit insurance is dead for the time being and so finally the good idea found first project to bail out in April 2009, when “TIFU completed its first loan facility on 8 April 2009, providing a £120 million loan for the Greater Manchester Waste Disposal Authority’s PFI project alongside the European Investment Bank and a syndicate of commercial banks “.
Second project, to be bailed out, was considered in May for the waste treatment Wakefield project. Finally two years after selection of proffered bidder, the financing of £700 million has been preliminary secured in June, without TIFU assistance and is expected to financially close within several weeks. Bailing out PPPs might be controversial for taxpayers but remain the only practical option for public sector. Hopefully financial crises will be over soon and financial markets will come back to traditionally aggressive and long term lending to PPPs.
Financial recession and credit crunch did bring new concerns to very large PPP markets. This concern is how does the financial crises hit PPP projects and how do we rescue projects, which are not going to make it? We have to look first, if the reasons for failure are on the side of mismanagement of the project by private partner, or on the side of macroeconomic impact, which could not have been mitigated and foreseen by neither procuring authority nor private partner. And in the case that it is macroeconomic impact, there is very good rational for public sector bail out. In the case that this infrastructure would be public, the same problem would escalate and therefore as long as if private sector partner is performing well, under given circumstances, it can only be recommended to public sector to consider playing properly its partnership role. And this means to find solutions for the project to survive and deliver expected results.
UK, which is the largest PPP markets so far, have decided to establish Treasury Infrastructure Finance Unit (TIFU) to lend to PFI /PPP projects to “ensure that infrastructure projects go forward as planned despite financial markets conditions and thereby support jobs and economy”. Generally good idea, but at first, it seemed almost, as it will not be needed and used. Banks in the end always formed a club or EIB supported the project. However margins went further up and banks could deliver only short maturities in form of mini-perms. Bank clubs are much larger with single banks holding smaller share that it would 2 years ago and this has also impact on competition as it is hard to form several bank clubs to support number of bidders.
Bond market and credit insurance is dead for the time being and so finally the good idea found first project to bail out in April 2009, when “TIFU completed its first loan facility on 8 April 2009, providing a £120 million loan for the Greater Manchester Waste Disposal Authority’s PFI project alongside the European Investment Bank and a syndicate of commercial banks “.
Second project, to be bailed out, was considered in May for the waste treatment Wakefield project. Finally two years after selection of proffered bidder, the financing of £700 million has been preliminary secured in June, without TIFU assistance and is expected to financially close within several weeks. Bailing out PPPs might be controversial for taxpayers but remain the only practical option for public sector. Hopefully financial crises will be over soon and financial markets will come back to traditionally aggressive and long term lending to PPPs.
Wednesday, June 24, 2009
PFI is mysterious acronym
In many countries PFI (meaning Private Finance Initiative) acronym is used as synonymous for PPP (Public Private Partnership). While it originated in UK, it is not a synonymous expression in UK with PPP; PFI being more specific relating to special government policy clearly defining what is and what is not PFI.
While Wikipedia defines PFI as a “method to provide financial support to PPPs”, which certainly is not correct, “as part of a wider program for privatization and deregulation” which is incorrect either, as PFI is a form of PPP and it is not mechanism for privatization or deregulation. Saying this, I have to add, that privatization or deregulation can be one of characteristics of a specific PFI project. Investopedia on the other hand defines PFI as a “method of providing funds for major capital investments, where private firms are contracted to complete and manage the project”, which is not complete definition but it is at least correct feature of PFI.
These were just two examples of PFI definition, and indeed when I look on the expression Private Finance Initiative I can assume that (a) this is initiated by private sector; and (b) it is about financing; which is not the case. In reality PFIs are initiated by public sector and financing part is important, but not essential feature of PFI. Many PFIs were financed directly from public budgets even at the investment phase. So the expression indeed is confusing.
In United States expression PFI did not take very deep roots, however Millennium Challenge Corporation under the State Department defines interestingly PFI in the Private Sector Initiative Toolkit as a “Private Financing of Infrastructure” and PFI is a form of the Private Sector Initiative (PSI) among Output Based Aid and Outsourced Management.
I would like to know would you define PFI.
While Wikipedia defines PFI as a “method to provide financial support to PPPs”, which certainly is not correct, “as part of a wider program for privatization and deregulation” which is incorrect either, as PFI is a form of PPP and it is not mechanism for privatization or deregulation. Saying this, I have to add, that privatization or deregulation can be one of characteristics of a specific PFI project. Investopedia on the other hand defines PFI as a “method of providing funds for major capital investments, where private firms are contracted to complete and manage the project”, which is not complete definition but it is at least correct feature of PFI.
These were just two examples of PFI definition, and indeed when I look on the expression Private Finance Initiative I can assume that (a) this is initiated by private sector; and (b) it is about financing; which is not the case. In reality PFIs are initiated by public sector and financing part is important, but not essential feature of PFI. Many PFIs were financed directly from public budgets even at the investment phase. So the expression indeed is confusing.
In United States expression PFI did not take very deep roots, however Millennium Challenge Corporation under the State Department defines interestingly PFI in the Private Sector Initiative Toolkit as a “Private Financing of Infrastructure” and PFI is a form of the Private Sector Initiative (PSI) among Output Based Aid and Outsourced Management.
I would like to know would you define PFI.
Tuesday, June 23, 2009
How far can we go? … in public scrutiny of a PPP projects
Taxpayers, citizens or call them just simply public, they are the reason why PPPs are being done, they are the users, ultimate financiers, whether by paying taxes or tolls, and they want to have bigger role in decisions about what infrastructure shall be build and how. It is no surprise that public opinion is the ultimate judge of the success of PPP project.
And this ultimate judge is not always just; it does not always have proper information and certainty in public sector transparency and reporting. It is up to public sector officials to ensure proper information and reporting is available to public and proper stakeholder consultations take place prior key decision regarding the project. Interestingly a lot of government officials believe that the huge public interest in PPP projects is dangerous and they rather use traditional procurement under the legal procedures, which they know so well and build upon old customs, providing therefore safe haven for themselves. It is perhaps safe heaven, but development is about trying new things, it is about experimenting with innovations, new ways to achieve efficiencies and also about taking risks.
One of these risks is a cost of procurement of PPP projects. In my experience some of the costs that would be capital costs under the traditional public provision are transferred in to the procurement and advisory costs in developing PPP project. This is quite a risk for public officials, but it is risk well justified, by the quality of preparation and unprecedented learning process for both public and private sides to the PPP agreement. Partnerships of British Columbia in their recent Value for Money (VfM) report regarding Surrey Outpatient Hospital published that the costs of public sector procurement in PPP was 9.7$ compared to PSC 4.7$ (Public Sector Comparator is a measurement of public sector costs if the project would not be done as a PPP); therefore PPP procurement costs is about a double hit to public budget. And it is not just public officials who take this risk; private sector side is also making significant investment in developing proposals which can go as far as several percent of the project capital costs.
The above mentioned Surrey Hospital seems to deliver Value for Money (8.8% on overall costs) and not only number of reports have been published including Fairness Advisor Report, but also cameras have been installed directly on the construction site and webcam enables direct online supervision of the public of how the construction of their hospital is going on. Excellent idea, is it not?
See here the snapshot of th
e webcam
And this ultimate judge is not always just; it does not always have proper information and certainty in public sector transparency and reporting. It is up to public sector officials to ensure proper information and reporting is available to public and proper stakeholder consultations take place prior key decision regarding the project. Interestingly a lot of government officials believe that the huge public interest in PPP projects is dangerous and they rather use traditional procurement under the legal procedures, which they know so well and build upon old customs, providing therefore safe haven for themselves. It is perhaps safe heaven, but development is about trying new things, it is about experimenting with innovations, new ways to achieve efficiencies and also about taking risks.
One of these risks is a cost of procurement of PPP projects. In my experience some of the costs that would be capital costs under the traditional public provision are transferred in to the procurement and advisory costs in developing PPP project. This is quite a risk for public officials, but it is risk well justified, by the quality of preparation and unprecedented learning process for both public and private sides to the PPP agreement. Partnerships of British Columbia in their recent Value for Money (VfM) report regarding Surrey Outpatient Hospital published that the costs of public sector procurement in PPP was 9.7$ compared to PSC 4.7$ (Public Sector Comparator is a measurement of public sector costs if the project would not be done as a PPP); therefore PPP procurement costs is about a double hit to public budget. And it is not just public officials who take this risk; private sector side is also making significant investment in developing proposals which can go as far as several percent of the project capital costs.
The above mentioned Surrey Hospital seems to deliver Value for Money (8.8% on overall costs) and not only number of reports have been published including Fairness Advisor Report, but also cameras have been installed directly on the construction site and webcam enables direct online supervision of the public of how the construction of their hospital is going on. Excellent idea, is it not?
See here the snapshot of th
e webcam
Thursday, June 18, 2009
EPEC – the best example so far …. of the regional PPP knowledge centre
Yeas, regional cooperation is not only possible but certainly desirable. EU has made its big jump on September 16th 2008 and established EPEC on the meeting in Paris.
What does EPEC stands for; it is European PPP Expertise Centre established under the hosting wings of EIB (European Investment Bank) and therefore located in Luxembourg.
“In the general aims of EPEC are providing support to, and assisting its Members in the development of the skills and capacity required within the Public Sector to define, manage and/or implement their PPP policies and programmes in accordance with market best practice. Moreover, based on the Members’ experience, the expertise center will provide its Members with guidelines, papers and comments on relevant issues concerning the structuring of effective and efficient PPP projects.”
What does EPEC do?
- Policy and program support
- Helpdesk to EPEC members
- Collaborative network activities, which include:
(a) Value for Money- assessing the wider benefits of PPPs; (b) Value for Money- reviews of independent reports; (c) Applying Eurostat guidance to PPPs; (d) Operating Competitive Dialogue procedures; (e) Credit Crisis
EPEC’s main task is to help the public sector to overcome shortfalls in PPP expertise across EU and especially in new EU members. EPEC is in operation more than 9 months, and during this whole time we can hear very unfavorable news from the world of PPP. All conditions have changed in financing PPPs. EIB is now playing even more prominent role in financing PPPs as bank clubs are not able to raise enough of money with reasonable long term conditions.
Nicolas Jennet of EPEC suggested some of the solutions to the current market situation in his presentation in Warsaw (May 2009), however in EU has not been still able to find any solution on how to replace wrapped bonds ,which are not longer option in Europe.
Wednesday, June 17, 2009
Who is who in PPP; Sir Malcolm Bates
'
Sir Malcolm Bates has died less than a week ago, on second week of June 2009. He has been icon of PFI development in the UK recommending establishment of a PFI Taskforce, which latter has evolved in to PUK, making several key recommendations in his two reviews of PFI for UK Treasury. His two reports become cornerstones of PFI development in UK and further behind the borders of UK.
Sir Malcolm Bates had been a non-executive director of London Transport, a non-executive director of BICC (the holding company for Balfour Beatty). Before that he was deputy managing director at GEC, now known as Alstom. Sir Malcol Bates served as Chairman of HHG PLC (which includes Pearl Assurance plc, National Provident Life Limited and NPI Limited). He also helped to make the General Electric Company (GEC) one of Britain's most successful and most profitable industrial companies.
This is a quote from UK Treasury report on PPP (2000) documenting impact of Bates Report of 1997
"In addition, the Government asked Sir Malcolm Bates, Chairman of the Pearl Group, to carry out a review of the PFI. His main recommendations in June 1997 were:
• to create a Taskforce within the Treasury. The first appointments to the Taskforce were made in September 1997. Members with project management and financial skills and experience were recruited from the private sector on fixed term contracts. The Taskforce was charged with supporting departments to deliver good quality transactions, in particular by helping them test significant projects before procurement commenced. This was to include: checking that they were affordable for the public sector; that the output requirements were appropriately specified; that risk was allocated to the party best able to manage it; and that funding was likely to be forthcoming from the private sector. The Taskforce was also to advise on draft contractual terms and conditions, project resources and on whether proposed timetables were realistic, as well as then monitoring the progress of projects.
• to establish standard contract conditions. It was recognised that standardisation of tender documents would sharply reduce legal fees and other costs, and the time required for negotiation with tenderers and financiers. The Taskforce standard terms were published in July 1999;
• to prioritise projects better. Bates proposed that effort in the Treasury and elsewhere in the public sector should be focused on establishing quality transactions which would then become the basis for other deals. For local government projects, a project review group was set up to prioritise projects and agree to them proceeding to procurement.
• to learn lessons. Although it was accepted that public sector experience of PFI was growing, those with that experience needed to be encouraged to make available their expertise for the benefit of future projects.”
Tuesday, June 16, 2009
Corporate Governance key for PPP projects?
There is a lot of evidence that Governance of PPP projects is essential for public sector to succeed in PPP, but not very much attention has been given to Corporate Governance of SPV. And indeed the philosophy of PPP is that private sector knows what it is doing and gets things right, or at least better than public sector. And this is correct – as long as public sector does its job in supervising and managing the overall project and behavior of private partner in particular.
As I see it, Corporate Governance is a bit forsaken subject, when establishing PPPs. Governments should not only get familiar with corporate structure of SPV, but also should be fully familiar with all contractual relationships within the PPP structure and perhaps should be represented on the Board of the SPV (certainly not being responsible for its decisions) or in its controlling governance structure.
Recent Report of UK National Audit Office (published 5 June 2009) clearly states responsibility of the poor Corporate Governance for the failure of this very important PPP project.
"The main cause of Metronet’s failure was its poor corporate governance and leadership. Many decisions had to be agreed unanimously by five shareholders, which all acted as Metronet’s suppliers and had different motivations depending on their roles. The executive management changed frequently and was unable to manage the work of its shareholder-dominated supply chain effectively. These suppliers had power over some of the scope of work, expected to be paid for extra work undertaken and had better access to cost information than the management. The poor quality of information available to management, particularly on the unit costs of the station and track programmes, meant that Metronet was unable to monitor costs and could not obtain adequate evidence to support claims to have performed work economically and efficiently."
As I see it, Corporate Governance is a bit forsaken subject, when establishing PPPs. Governments should not only get familiar with corporate structure of SPV, but also should be fully familiar with all contractual relationships within the PPP structure and perhaps should be represented on the Board of the SPV (certainly not being responsible for its decisions) or in its controlling governance structure.
Recent Report of UK National Audit Office (published 5 June 2009) clearly states responsibility of the poor Corporate Governance for the failure of this very important PPP project.
"The main cause of Metronet’s failure was its poor corporate governance and leadership. Many decisions had to be agreed unanimously by five shareholders, which all acted as Metronet’s suppliers and had different motivations depending on their roles. The executive management changed frequently and was unable to manage the work of its shareholder-dominated supply chain effectively. These suppliers had power over some of the scope of work, expected to be paid for extra work undertaken and had better access to cost information than the management. The poor quality of information available to management, particularly on the unit costs of the station and track programmes, meant that Metronet was unable to monitor costs and could not obtain adequate evidence to support claims to have performed work economically and efficiently."
Thursday, June 11, 2009
Who is who in PPP; Sir Adrian Montague
Sir Adrian Montague was previously Chief Executive of the Treasury Taskforce and Deputy Chairman of Partnerships UK plc. Probably most influential person in UK adoption of PFI.Appointed Chairman of Provident Financial since May 2005.Member of the Investment, Nomination and Remuneration Committees. Currently Chairman of Anglian Water Group Limited, London First, Michael Page International plc and Cellmark Investments AB. A member of the Supervisory Board of Skanska AB. Formerly Chairman of British Energy, Deputy Chairman of Network Rail and Chairman of Cross-London Rail Links Limited (Crossrail). Adrian Montague is leading UNECE PPP Advisory Board.
In his early career, he was a partner of Linklaters & Paines, and subsequently the Global Head of Project Finance for Dresdner Kleinwort Benson.
Quo Vadis PPP?
There are two extremes, how people look at PPP under current market situation. One extreme is quite negative, saying that PPPs have never worked any way, and that current turmoil on financial markets has only made it easier to recognize. On the other end of the rope are people, who see PPPs being remedy to financial crises. Most of professionals fortunately find themselves somewhere in the middle.
Sung Hoon Park, Senior Deputy Director of the Korean PPP Unit thinks that “during the time of financial crises PPPs are not the priority solution for Infrastructure financing; however Korea did use PPPs as one of the solutions to fight Asia financial crises impact in 1998-1999 and currently Korea is adopting the very same policy to rejuvenate the economy”.
David Asteraki, Director in KPMG did mention in his recent report published in May 2009 (http://www.kpmg.com.au/Default.aspx?TabID=1621), that “Despite these problems, the prospects for PPP projects are reasonably good. They are attractive to the public sector as, historically, and where projects have been suitable for a PPP, they have provided strong value for money (VFM), delivering high quality outcomes on-time and on-budget.”
And Michal Tesar, Director of NEWTON Business Development says in the last Slovak PPP Association Newsletter (http://asociaciappp.sk/) that “PPP projects are just different way of financing, but they deliver benefits in comparison with traditional procedure:
- Fixed price of project, construction and operations
- Transfer of risks to private sector party
- Diligent analyses of project using due diligence
- Access to projects whole life costs
- Focus on outputs… “
EC Harrise in its report “Is PPP Dead and Buried?” does see future of PPP more in social economic benefits rather than just looking at VFM “Greater emphasis also needs to be made towards the social economic benefits delivered to a country or region which could mean adopting a more visionary approach to PPP models to include agglomeration benefits. Failure to do so will mean that PPP projects may never get off the ground on a pure cost benefit basis.”(http://www.echarris.com/pdf/7148_Public%20Private%20Partnerships%20Expert%20View%20FOR%20WEB.pdf)
Very interesting, I am not sure, I know where the PPP is going, but one thing, I am sure of, is that PPPs are going to stay and play even more prominent role in infrastructure once the global economy and financial markets recover.
Sung Hoon Park, Senior Deputy Director of the Korean PPP Unit thinks that “during the time of financial crises PPPs are not the priority solution for Infrastructure financing; however Korea did use PPPs as one of the solutions to fight Asia financial crises impact in 1998-1999 and currently Korea is adopting the very same policy to rejuvenate the economy”.
David Asteraki, Director in KPMG did mention in his recent report published in May 2009 (http://www.kpmg.com.au/Default.aspx?TabID=1621), that “Despite these problems, the prospects for PPP projects are reasonably good. They are attractive to the public sector as, historically, and where projects have been suitable for a PPP, they have provided strong value for money (VFM), delivering high quality outcomes on-time and on-budget.”
And Michal Tesar, Director of NEWTON Business Development says in the last Slovak PPP Association Newsletter (http://asociaciappp.sk/) that “PPP projects are just different way of financing, but they deliver benefits in comparison with traditional procedure:
- Fixed price of project, construction and operations
- Transfer of risks to private sector party
- Diligent analyses of project using due diligence
- Access to projects whole life costs
- Focus on outputs… “
EC Harrise in its report “Is PPP Dead and Buried?” does see future of PPP more in social economic benefits rather than just looking at VFM “Greater emphasis also needs to be made towards the social economic benefits delivered to a country or region which could mean adopting a more visionary approach to PPP models to include agglomeration benefits. Failure to do so will mean that PPP projects may never get off the ground on a pure cost benefit basis.”(http://www.echarris.com/pdf/7148_Public%20Private%20Partnerships%20Expert%20View%20FOR%20WEB.pdf)
Very interesting, I am not sure, I know where the PPP is going, but one thing, I am sure of, is that PPPs are going to stay and play even more prominent role in infrastructure once the global economy and financial markets recover.
Wednesday, June 10, 2009
Financial Crises and Public Private Partnership by Filip Drapak
Check out this SlideShare Presentation:
LPVR- Innovative bidding for PPP projects from Chile by Bernardo Weaver and Patricio Mansilla
Chile’s Ministry of public works has developed an interesting bidding mechanism- Least Present Value of Revenues (LPVR). LPVR Bidders submit their proposals with their future revenues discounted to present value. The lowest bidder wins a flexible-term PPP concession. This model allows for risk transferring mechanisms that reduce overall insolvency risk.
Usually the final term date of the average PPP contract is definitive. But on LPVR PPP contracts the term is always variable. This flexibility mitigates and diversifies potential demand, insolvency and financing risks for PPP’s. By providing the Least Present Value of Revenues, investors commit to recover only a certain amount for the concession. After they have done it, the concession reverts to the government.
This allows concessionaires to sell debt to investors fully aware, that the principal repayment is not tied to a certain date, but to an expected cash-flow that might not materialize at promised time in the future. To this cash-flow estimates, lender (herein financers) take this risk and charge a premium to the concessionaire. Premium materializes through higher spread on the loans.
Insolvency Risk
As the PPP concession term is flexible, if the project does not beat earnings estimates, the risk of insolvency is partially mitigated. Contracts do not need to go through lengthy renegotiations, as the risk of overextending the time to re-pay principal amount of debt is already priced on the original lending agreement. The concessionaire can concentrate on operational risk and transfer renegotiation risk. This strategy weighs down on insolvency risk of the whole operation.
Hence, public sector wins a more stable and trustworthy structure of PPP concessionaire contract. It reduces the chances of producing chaotic situations seen during Privatizations in the 80’s and 90’s.
Easier Enforcement
Once the concession starts, the only contractual enforcement burden for the government is to examine the concessionaire’s operational cash-flow revenue. Of course, there is still a need to verify solvency and overall performance and maintenance. Nevertheless, these burdens are mitigated, as the risk of contract renegotiation and overextending the concession has been shared with lenders, who already charged a premium. In regular projects, concessionaires are pressed to meet lending deadlines; otherwise the whole structure runs the risk of default.
So, if a contract comes close to the end, and if revenue has not repaid concessionaire, there is a risk that maintenance will lag, or cost cutting measures will be taken to be able to recover investments in a timely manner, and repay investors. In this model, lenders are aware that toll flow might take a few more months or a couple years to allow for a sustainable repayment of both equity and debt.
In this example: If the concessionaire runs a toll road, government needs to examine number of vehicles passing through the toll. The number of vehicles multiplied by the value of the tariff is equal to the concessionaire’s operational revenue flow. This revenue flow should accumulate until it reaches the final total value of the PPP bidding price. At that moment, the PPP concession is over, and it reverts to the government again.
Here are some examples from Chile:
Road: Santiago Viña del Mar-CH 68
In the year 1998, the concessionaire Rutas Del Pacífico offered to the Chilean government US$381 million from toll roads and was awarded the concession over Securitas (US$389 million), Autopistas de Peaje (US$442 million) and Cicasa Chile (US$452 million). The concession has a referential period of 25 years unless the concessionaire gets the LPVR before the date. Conversely, if at the year 25 the concessionaire has a gap, the period of the contract is extended automatically until it gets the total amount of LPVR, in this case US$381 million. The Chilean government also offered to the bidders a Minimum Revenue Guarantee with a price of 0.75% of the value of the guarantees outstanding, but in the case of the winner it did not take this option.
This provides an interesting scenario, as the government suggests a limit to banks charging more than certain level of Basis Points for their volatility risk or delay in debt payments.
Airports: Iquique and Puerto Montt
Recently in 2008, two Chilean airports received new bids under the LPVR mechanism: Iquique airport in the North of the country and Puerto Montt in the south. Both of these airports were bid through the LPVR mechanism. These have a main distinctive feature with regard to roads. Roads depend on tolls, whereas airports depend on tariffs per air passenger. In the case of Iquique the maximum LPVR established by the government was around US$19.426.000 and the winner (Arrigoni-Sifon-Tecas) offered US$12.737.000 under strong competition (5 bidders). In the case of Puerto Montt the ceiling was US$23.700.000 and the winner was ACC-Icafal-Vecta with US$15.337.000 (6 bidders).
____________________________________
About the Authors:
Bernardo Weaver, Consultant at World Bank Institute, Financial Sector on PPPI and a Wharton MBA in finance candidate.
Patricio Mansilla, Consultant at Chemonics International, and a Duke MBA graduate.
Both authors are based in Washington, DC.
Usually the final term date of the average PPP contract is definitive. But on LPVR PPP contracts the term is always variable. This flexibility mitigates and diversifies potential demand, insolvency and financing risks for PPP’s. By providing the Least Present Value of Revenues, investors commit to recover only a certain amount for the concession. After they have done it, the concession reverts to the government.
This allows concessionaires to sell debt to investors fully aware, that the principal repayment is not tied to a certain date, but to an expected cash-flow that might not materialize at promised time in the future. To this cash-flow estimates, lender (herein financers) take this risk and charge a premium to the concessionaire. Premium materializes through higher spread on the loans.
Insolvency Risk
As the PPP concession term is flexible, if the project does not beat earnings estimates, the risk of insolvency is partially mitigated. Contracts do not need to go through lengthy renegotiations, as the risk of overextending the time to re-pay principal amount of debt is already priced on the original lending agreement. The concessionaire can concentrate on operational risk and transfer renegotiation risk. This strategy weighs down on insolvency risk of the whole operation.
Hence, public sector wins a more stable and trustworthy structure of PPP concessionaire contract. It reduces the chances of producing chaotic situations seen during Privatizations in the 80’s and 90’s.
Easier Enforcement
Once the concession starts, the only contractual enforcement burden for the government is to examine the concessionaire’s operational cash-flow revenue. Of course, there is still a need to verify solvency and overall performance and maintenance. Nevertheless, these burdens are mitigated, as the risk of contract renegotiation and overextending the concession has been shared with lenders, who already charged a premium. In regular projects, concessionaires are pressed to meet lending deadlines; otherwise the whole structure runs the risk of default.
So, if a contract comes close to the end, and if revenue has not repaid concessionaire, there is a risk that maintenance will lag, or cost cutting measures will be taken to be able to recover investments in a timely manner, and repay investors. In this model, lenders are aware that toll flow might take a few more months or a couple years to allow for a sustainable repayment of both equity and debt.
In this example: If the concessionaire runs a toll road, government needs to examine number of vehicles passing through the toll. The number of vehicles multiplied by the value of the tariff is equal to the concessionaire’s operational revenue flow. This revenue flow should accumulate until it reaches the final total value of the PPP bidding price. At that moment, the PPP concession is over, and it reverts to the government again.
Here are some examples from Chile:
Road: Santiago Viña del Mar-CH 68
In the year 1998, the concessionaire Rutas Del Pacífico offered to the Chilean government US$381 million from toll roads and was awarded the concession over Securitas (US$389 million), Autopistas de Peaje (US$442 million) and Cicasa Chile (US$452 million). The concession has a referential period of 25 years unless the concessionaire gets the LPVR before the date. Conversely, if at the year 25 the concessionaire has a gap, the period of the contract is extended automatically until it gets the total amount of LPVR, in this case US$381 million. The Chilean government also offered to the bidders a Minimum Revenue Guarantee with a price of 0.75% of the value of the guarantees outstanding, but in the case of the winner it did not take this option.
This provides an interesting scenario, as the government suggests a limit to banks charging more than certain level of Basis Points for their volatility risk or delay in debt payments.
Airports: Iquique and Puerto Montt
Recently in 2008, two Chilean airports received new bids under the LPVR mechanism: Iquique airport in the North of the country and Puerto Montt in the south. Both of these airports were bid through the LPVR mechanism. These have a main distinctive feature with regard to roads. Roads depend on tolls, whereas airports depend on tariffs per air passenger. In the case of Iquique the maximum LPVR established by the government was around US$19.426.000 and the winner (Arrigoni-Sifon-Tecas) offered US$12.737.000 under strong competition (5 bidders). In the case of Puerto Montt the ceiling was US$23.700.000 and the winner was ACC-Icafal-Vecta with US$15.337.000 (6 bidders).
____________________________________
About the Authors:
Bernardo Weaver, Consultant at World Bank Institute, Financial Sector on PPPI and a Wharton MBA in finance candidate.
Patricio Mansilla, Consultant at Chemonics International, and a Duke MBA graduate.
Both authors are based in Washington, DC.
The confusion, about what is PPP, made its home in US
While UK, the "homeland" of PPPs, does call them PFI and number of other countries varies in how to name this basket of public private contractual relationships, US has contributed further to the confusion. It is not clear to me why suddenly all initiatives newly developed have to be called Public Private Partnership in the US. PPPs have generated a lot of excitement, but this excitement was not always accompanied by knowledge and understanding.
Arnold Schwarzenegger, the Governor of California did his homework and personally visited some of the Centers of Excellence in PPP like Partnerships UK of Partnerships of British Columbia, and as result he has quite strong understanding of PPPs and sophisticated approach to how this concept should be used for California benefit. Despite or perhaps because of the understanding, the term PPP motivated California to adapt its own acronym and call PPPs newly as "Performance Based Infrastructure" (PBI).
Most of "others" do not have this kind of spirit and just do call any relationship between public and private a PPP. Two of the most recent examples:
1) Selling “toxic” assets under Treasury Department’s Public Private Investment Program can hardly be recognized as a PPP, perhaps the only similar component is sharing the risks, but this is defined as
”Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.” US Treasury Department Release on Public Private Partnership Investment Program
Private sector risking its investment and sharing of profits with taxpayers is not really PPP approach but rather asset investment (or joint venture). There is no whole life costing, no other than investment risk transfer, it is therefore not a PPP.
2) Public health insurance in the form of PPP is being proposed as a solution to the expensive private sector insurance. Public option in health insurance – why not? But why this has to be called a PPP when this is introduction of a public entity among privately operated health insurance companies? I have no clue what looks like PPP here.
And perhaps, it is not that essential, how we name things, as long as we understand, what we mean and others do understand, what we would like to say.
Arnold Schwarzenegger, the Governor of California did his homework and personally visited some of the Centers of Excellence in PPP like Partnerships UK of Partnerships of British Columbia, and as result he has quite strong understanding of PPPs and sophisticated approach to how this concept should be used for California benefit. Despite or perhaps because of the understanding, the term PPP motivated California to adapt its own acronym and call PPPs newly as "Performance Based Infrastructure" (PBI).
Most of "others" do not have this kind of spirit and just do call any relationship between public and private a PPP. Two of the most recent examples:
1) Selling “toxic” assets under Treasury Department’s Public Private Investment Program can hardly be recognized as a PPP, perhaps the only similar component is sharing the risks, but this is defined as
”Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.” US Treasury Department Release on Public Private Partnership Investment Program
Private sector risking its investment and sharing of profits with taxpayers is not really PPP approach but rather asset investment (or joint venture). There is no whole life costing, no other than investment risk transfer, it is therefore not a PPP.
2) Public health insurance in the form of PPP is being proposed as a solution to the expensive private sector insurance. Public option in health insurance – why not? But why this has to be called a PPP when this is introduction of a public entity among privately operated health insurance companies? I have no clue what looks like PPP here.
And perhaps, it is not that essential, how we name things, as long as we understand, what we mean and others do understand, what we would like to say.
Tuesday, June 9, 2009
How did PPP influence public procurement practices?
PPPs have made their impact on legislation and practices of infrastructure delivery related to procurement in many countries. There is no question, a lot of innovations have been stipulated by wave of innovative private sector driven projects and so was the public approach to the procurement of privately financed infrastructure. Public sector can only be as innovative in its procurement as how much would legislation and government policies allow. Let us examine couple of cases and discuss in this article how far we can go in procurement innovations.
European Commission has implemented in its Directive 2004/18 the procedure called Competitive Dialogue. This procedure has opened the doors for further innovations in procurement. The idea of competitive dialogue is basically idea of completely different approach to public procurement of infrastructure. How is it different? In traditional procurement public sector will provide detailed specification of the inputs and the competition is mostly about price. PPP has innovated the approach in to public sector specifying outputs and the competition is therefore about innovation and risk transfer as much as it is about the price.
Competitive Dialogue is becoming proffered procurement method for large infrastructure projects in which intensive communication, clarification and risk transfer negotiations are essential. Why not let private sector to be innovative – great idea with many issues down the road.
UK Treasury has identified as one the main issues how is financial close impacting projects and decided to issue a guidance on an innovative approach to procurement of funding to PPP (PFI in UK) projects in 2006. This new procedure is called Preferred Bidder Debt Funding Competition (PBDFC) and is to be a default option in privately financed, but publicly procured projects. This concept has been tested in UK since 2000. Under PBDFC procedure, government selects a preferred bidder and that preferred bidder, in consultation with government, then goes to the debt market seeking the best price for the debt funding for the project.
Other innovations seems to emerge from Australia, Chile and Canada, lets discuss these in the future.
European Commission has implemented in its Directive 2004/18 the procedure called Competitive Dialogue. This procedure has opened the doors for further innovations in procurement. The idea of competitive dialogue is basically idea of completely different approach to public procurement of infrastructure. How is it different? In traditional procurement public sector will provide detailed specification of the inputs and the competition is mostly about price. PPP has innovated the approach in to public sector specifying outputs and the competition is therefore about innovation and risk transfer as much as it is about the price.
Competitive Dialogue is becoming proffered procurement method for large infrastructure projects in which intensive communication, clarification and risk transfer negotiations are essential. Why not let private sector to be innovative – great idea with many issues down the road.
UK Treasury has identified as one the main issues how is financial close impacting projects and decided to issue a guidance on an innovative approach to procurement of funding to PPP (PFI in UK) projects in 2006. This new procedure is called Preferred Bidder Debt Funding Competition (PBDFC) and is to be a default option in privately financed, but publicly procured projects. This concept has been tested in UK since 2000. Under PBDFC procedure, government selects a preferred bidder and that preferred bidder, in consultation with government, then goes to the debt market seeking the best price for the debt funding for the project.
Other innovations seems to emerge from Australia, Chile and Canada, lets discuss these in the future.
Monday, June 8, 2009
PPP in Syria - great news Alessandro indeed
Public-Private Partnership (PPP), Build-Operate-Transfer (BOT), Build-Own-Operate Transfer (BOOT) and Build-Own (BO) and other investment systems were the focus of the symposium for promoting partnership between the public and private sectors which was held under the patronage of Dr Abdulla al-Dardari, Deputy Prime Minister for Economic Affairs at the Headquarters of the Presidency of the Council of Ministers on 24 May in cooperation with the International Chamber of Commerce - Syria.
The seminar was held particularly for the introduction of the Anglo-Saxon experience in investment based on PPP principles, presented by two British experts who gave their own ideas on the subject and what PPP needs in terms of legislative and legal frameworks which may vary according to the different priorities of each country and type of project.“The Tenth Five-year Plan (FYP) (2006-2010) aims to achieve growth in the Gross Domestic Product (GDP) by 7%”, said Dr. Yaroub Bader, Syrian Minister of Transport on behalf of the al-Dardari adding that according to what has been implemented so far, Syria needs investments estimated at 1850 million SYP (40 billion USD) during this period in order to reach this figure. He pointed out that the Syrian general budget can cover about half of that amount, adding that Syria needs to encourage the private sector to contribute to the 7% growth through achieving investment inflows worth 20 billion USD to generate employment opportunities and bring added value to the national economy.
The Syrian government has raised efforts to achieve PPP in order to push forward the development process in Syria. He stressed that the private sector has great capacities but does not invest in development projects. Savings are gone to the real estate sector for fast profit gain ignoring the need to reach high economic growth rates necessary to the generations to come.In response to the above, the Syrian government has opened the opportunity for the private sector to invest in many projects such as the infrastructure sector.A PPP Committee has been established and is the legislative framework for PPP in addition to a Unit specializing in PPP affiliated to Prime Ministry to transfer the PPP vision into reality.John Jenkins, the British Ambassador to Damascus, said that timing of the workshop couldn’t have been perfect as Syria is showing great interest in PPP. The British government and service providers are concerned in this matter as many British companies are seeking to invest in Syria. “The symposium is the perfect opportunity to convey a clear understanding of the principles of PPP in Syria to those companies who are planning to invest in Syria in order to speedup establishment of projects”, said the Ambassador.
The seminar was held particularly for the introduction of the Anglo-Saxon experience in investment based on PPP principles, presented by two British experts who gave their own ideas on the subject and what PPP needs in terms of legislative and legal frameworks which may vary according to the different priorities of each country and type of project.“The Tenth Five-year Plan (FYP) (2006-2010) aims to achieve growth in the Gross Domestic Product (GDP) by 7%”, said Dr. Yaroub Bader, Syrian Minister of Transport on behalf of the al-Dardari adding that according to what has been implemented so far, Syria needs investments estimated at 1850 million SYP (40 billion USD) during this period in order to reach this figure. He pointed out that the Syrian general budget can cover about half of that amount, adding that Syria needs to encourage the private sector to contribute to the 7% growth through achieving investment inflows worth 20 billion USD to generate employment opportunities and bring added value to the national economy.
The Syrian government has raised efforts to achieve PPP in order to push forward the development process in Syria. He stressed that the private sector has great capacities but does not invest in development projects. Savings are gone to the real estate sector for fast profit gain ignoring the need to reach high economic growth rates necessary to the generations to come.In response to the above, the Syrian government has opened the opportunity for the private sector to invest in many projects such as the infrastructure sector.A PPP Committee has been established and is the legislative framework for PPP in addition to a Unit specializing in PPP affiliated to Prime Ministry to transfer the PPP vision into reality.John Jenkins, the British Ambassador to Damascus, said that timing of the workshop couldn’t have been perfect as Syria is showing great interest in PPP. The British government and service providers are concerned in this matter as many British companies are seeking to invest in Syria. “The symposium is the perfect opportunity to convey a clear understanding of the principles of PPP in Syria to those companies who are planning to invest in Syria in order to speedup establishment of projects”, said the Ambassador.
PPP associations - who they are and what they do?
Setting PPP market is not an easy task for the government when both public and also private sector lacks capacity to play its role in PPP. The establishment of a single PPP coordinating entity is commonly used worldwide in order to improve the institutional framework and allow public entities to manage PPP projects in a more efficient way. PPP units are formed in order to evaluate, coordinate and monitor the project flow across sectors, monitor the fiscal impact of the entire project flow on the national budget but also to act as a centre of excellence generating and disseminating knowledge to distinct line ministries thus strengthening their capability to partner in equal terms with their private counterparts. Moreover, PPP units act as the driving force of the governmental PPP policy as well as the single channel of communication with the project shareholders including numerous private sector companies.
However, the creation of a robust PPP market requires the set up of a mechanism which facilitates and enhances the communication between the two major counterparts: the public and the private sector. Governments often proceed with market reforms based on their own intuitions or third parties’ advice hoping to create an attractive infrastructure market for the private sector to invest in. However, very few governments seek private sector’s opinion on the functionality of the market and rarely consult with it before implementing these reforms. At the end of the day, bankers, equity investors, operators and construction companies provide limited input for and feedback upon the establishment of the PPP market in which they are expected to invest.
This is attributed to the fact that the public sector usually hesitates to enter direct discussions with private companies for the shake of transparency and in order to avoid conflicts of interest. Additionally, it is practically impossible for the implementation agency or the PPP unit to efficiently communicate with hundreds of private companies ranging from financial, legal, technical advisors to international lending institutions, constructors and operators.
In order to address this communication mismatch between the public and the private sector in the PPP market, private sector companies form panels, alliances or associations in several countries around the world. The uniting force of these PPP Associations is the common need to communicate with public counterparties on issues of project pipeline, policies and legislation but also to share knowledge and exchange ideas with their own community.
The five PPP Associations used as an example in this article are:
(1) NCPPP of US, which mission is to advocate and facilitate the formation of public-private partnerships at the federal, state and local levels, where appropriate, and to raise the awareness of governments and businesses of the means by which their cooperation can cost effectively provide the public with quality goods, services and facilities;
(2) CCPPP: the objective of the Canadian Council for Public-Private Partnerships is to foster innovative forms of cooperation between the public sector - at the municipal, regional, provincial and federal levels - and the private sector, for the benefit of all Canadians.;
(3) IFSL: was established to promote the UK-based financial services industry throughout the world,;
(4) APPP: was established for support and development of public investment and services using the PPP form in the Czech Republic; and
(5) IPA: To brink together the public and private sectors to promote partnerships in infrastructure and provide cross-industry leadership in Australia.
____________________________________________________
What are the objectives of PPP Associations? The sets of objectives can be sorted by following 4 categories:
(a) Promotion of PPPs
(b) Building PPP environment
(c) Capacity building and knowledge sharing in PPPs
(d) Communication facilitation public v private
(e) Support of vested interests of the community
Analyses of the above mentioned objectives shows quite clearly, that objectives of 5 Associations are the same in promoting PPPs, building the capacity in PPPs and facilitating the communication. The Associations that are more or less private state as their objective also support of the vested interests of the community, while the associations with mixed membership do not have this objective and private sector interest might be in a way melted away, however the association its self might be able to provide internal platform for communicating these interests to public sector if the membership is representative enough. Only Czech APPP has as its objective to influence the PPP environment and cultivation of PPP legislation, which can be explained by early stage of the PPP market and the need that private sector sees locally, which is not necessarily the case in other developed countries.
Key added values of PPP Associations:
PPP Associations are clearly private sector demand driven. Private companies only support (by dedicating finance and time) PPP Associations when they see added value in the performance and input that association can deliver to their industry on a market or they see a lot of value in association member services.
How they reach their objectives? What are their means?
PPP Associations are using as a tools to reach their objectives following activities:
Conducting objective research on key issues that influence the effective use of partnerships
- Providing communication Forums
- Compilation of a resource library on PPP issues and projects
- An annual conference and regional events on a wide variety of PPP topics
- Informative newsletters (Public-Private Bulletin) on activities, news and issues discussed at the national conference
- Workshops and seminars that allow participants to share innovative ideas and solutions through a national network
- Sponsored publications, including research papers, case studies, guidelines, opinion surveys and national inventories on key public-private partnership subjects
- Annual Awards of successful PPP projects
- Web side based applications informing members community of PPP happenings and transactions coming to market
- Producing and publishing successful PPP Case studies
However, the creation of a robust PPP market requires the set up of a mechanism which facilitates and enhances the communication between the two major counterparts: the public and the private sector. Governments often proceed with market reforms based on their own intuitions or third parties’ advice hoping to create an attractive infrastructure market for the private sector to invest in. However, very few governments seek private sector’s opinion on the functionality of the market and rarely consult with it before implementing these reforms. At the end of the day, bankers, equity investors, operators and construction companies provide limited input for and feedback upon the establishment of the PPP market in which they are expected to invest.
This is attributed to the fact that the public sector usually hesitates to enter direct discussions with private companies for the shake of transparency and in order to avoid conflicts of interest. Additionally, it is practically impossible for the implementation agency or the PPP unit to efficiently communicate with hundreds of private companies ranging from financial, legal, technical advisors to international lending institutions, constructors and operators.
In order to address this communication mismatch between the public and the private sector in the PPP market, private sector companies form panels, alliances or associations in several countries around the world. The uniting force of these PPP Associations is the common need to communicate with public counterparties on issues of project pipeline, policies and legislation but also to share knowledge and exchange ideas with their own community.
The five PPP Associations used as an example in this article are:
(1) NCPPP of US, which mission is to advocate and facilitate the formation of public-private partnerships at the federal, state and local levels, where appropriate, and to raise the awareness of governments and businesses of the means by which their cooperation can cost effectively provide the public with quality goods, services and facilities;
(2) CCPPP: the objective of the Canadian Council for Public-Private Partnerships is to foster innovative forms of cooperation between the public sector - at the municipal, regional, provincial and federal levels - and the private sector, for the benefit of all Canadians.;
(3) IFSL: was established to promote the UK-based financial services industry throughout the world,;
(4) APPP: was established for support and development of public investment and services using the PPP form in the Czech Republic; and
(5) IPA: To brink together the public and private sectors to promote partnerships in infrastructure and provide cross-industry leadership in Australia.
____________________________________________________
What are the objectives of PPP Associations? The sets of objectives can be sorted by following 4 categories:
(a) Promotion of PPPs
(b) Building PPP environment
(c) Capacity building and knowledge sharing in PPPs
(d) Communication facilitation public v private
(e) Support of vested interests of the community
Analyses of the above mentioned objectives shows quite clearly, that objectives of 5 Associations are the same in promoting PPPs, building the capacity in PPPs and facilitating the communication. The Associations that are more or less private state as their objective also support of the vested interests of the community, while the associations with mixed membership do not have this objective and private sector interest might be in a way melted away, however the association its self might be able to provide internal platform for communicating these interests to public sector if the membership is representative enough. Only Czech APPP has as its objective to influence the PPP environment and cultivation of PPP legislation, which can be explained by early stage of the PPP market and the need that private sector sees locally, which is not necessarily the case in other developed countries.
Key added values of PPP Associations:
PPP Associations are clearly private sector demand driven. Private companies only support (by dedicating finance and time) PPP Associations when they see added value in the performance and input that association can deliver to their industry on a market or they see a lot of value in association member services.
How they reach their objectives? What are their means?
PPP Associations are using as a tools to reach their objectives following activities:
Conducting objective research on key issues that influence the effective use of partnerships
- Providing communication Forums
- Compilation of a resource library on PPP issues and projects
- An annual conference and regional events on a wide variety of PPP topics
- Informative newsletters (Public-Private Bulletin) on activities, news and issues discussed at the national conference
- Workshops and seminars that allow participants to share innovative ideas and solutions through a national network
- Sponsored publications, including research papers, case studies, guidelines, opinion surveys and national inventories on key public-private partnership subjects
- Annual Awards of successful PPP projects
- Web side based applications informing members community of PPP happenings and transactions coming to market
- Producing and publishing successful PPP Case studies
Subscribe to:
Posts (Atom)