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.

Financial Crises and Public Private Partnership by Filip Drapak

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Financial Crises and Public Private Partnership by Filip Drapak

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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).
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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.

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.

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.

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.
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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