PUBLIC PRIVATE PARTNERSHIPS PPP

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PUBLIC PRIVATE PARTNERSHIPS(PPP)

• The Role of Financial Personnel
• Pre and Post PPP Contract
• presented to
• Association of Government Accountants,
• Montgomery Chapter - Montgomery, Alabama
• By
• Edward G. Kamnikar Troy University Montgomery
• March 13, 2008
  

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INTRODUCTION

• Financial Personnel
• Privatization / Devolution
• Infrastructure / Facilities
• Government vs. Private Sector
• Performance Reporting
• Benchmarks
• Capital Needs
• The Texas Ranger Arrives (PPP)

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Todays Program Outline

• Todays Seminar Purpose Is To Provide
  Participants with
• - Background and History of PPP
• - Working Definition of PPP
• - PPP Terminology
• - PPP Tools for Analysis and Review
• - PPP Best Practices Found in Selected EU
  Countries
• - Accountants and Auditors Methodology for
  PPP Analysis
• Regarding Asset Stewardship and Oversight

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Today's Seminar Schedule

• 100 PM Seminar Begins
• 200 PM Break (15 minutes)
• 315 PM - Break (15 minutes)
• 430 PM - Q A and Participants Inputs
• 500 PM - Seminar Ends

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Selected EU States
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Seminar Outline

• History of Privatization/PPP
• Definition and Elements of a PPP
• EU Observations and Practices
• Business Tools and Business Plans
• Financial Steward and Oversight

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Seminar Outline (continued)

• Selected EU States, Best Practices
• Selected Best Practices Recommendations
• Financial Analytical Tools
• Current USA PPP Contracts
• Summary

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Brief History of Privatization and PPP

• 18th and the 19th Century
• Bridges, Ferries and Roads
• Civil War
• Railroads
• National Park(s)

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History The 20 and 21st Century

• Bureaucracy and Growth
• Wagners Law
• Hoover Dam
• TVA
• Toll Roads, Toll Bridges and Turnpikes
• Interstate Highways
• Public Transportation
• Privatization and PPP

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Definition of a PPP

• A contractual agreement between public and
  private sector partners that allows more private
  sector participation and /or ownership than a
  traditional method of public sector procurement.
• PPP agreements define an expansive set of
  relationships from relatively simple contracts to
  very complicated shared ownership issues and
  technical arrangements.

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Definition of a PPP (continued)

• Partnership Refers to
• A form of structured cooperation expressed in a
  binding agreement
• for the construction or the purchase of
  infrastructure assets for there exploitation
• with shared risk, costs, benefits, resources, and
  responsibilities.

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Definition of a PPP (continued)

• Examples
• Alabama toll bridges
• Alabama auto ferry
• Chicago Skyway
• Indiana toll road
• California toll road
• Colorado NW toll road
• Texas SW Corridor

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Definition (continued) - Elements of a PPP

• Usually a Business agreement
• Formal contract with concessions (tolls)
• Terms, 30 to 99 years
• Risk Sharing
• Profit Sharing ?
• Assets Maintenance Requirements
• Shadow concessions (tolls)
• Construction terms
• Financing terms

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Financial Stewardship and Oversight

• Stewardship
• The act of managing personal property or
  financial affairs as an agent of another or
  others.
• Oversight
• The supervision or watchful care of assets.

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Financial Stewardship Best Outcomes

• Financial Stewardship begins before contract
  initiation and includes
• - best value for citizens from investment
• - establish partners have the where-with-all
• - evaluation of assets and asset sale, proposal
  costs, project risk, adequacy of risk
  sharing
• - and follow-up project monitoring and
  reporting with pre-determined audit methods and
  procedures

November 6, 2009
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Financial Oversight (Monitoring)

• Financial Oversight includes the audit practices
  during contract and post-contract periods
  involving evaluation of work performed
• use of project costing standards, distribution of
  profits or revenues for concessions
• compliance with contract provisions and
• an evaluation of overall price and quality of
  services delivered.

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Financial Stewardship (continued)

• Working Definition (Auditors)
• Financial Stewardship those audit practices
  prior to contract initiation that include
• Establishing the integrity of Business Plans
• Best value for money at the lowest overall cost
• Improving the value and quality of the project
• Reducing the time to complete the project
• Life-Cycle Costing

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Financial Stewardship (continued)

• Working Definition (Auditors)
• Financial Oversight the establishment of an
  audit program during contract implementation to
• Monitor the effective and efficient use of funds
• Evaluate all areas relating to financial
  integrity, costs, quality and project delivery
  and
• Ensure compliance with contract provisions
• Evaluate profit or revenue sharing contract
  elements

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EU Observations and Practices

• General Background
• Deficit limits, 3 of GDP,
• and Debt limits, 60 of GDP
• Seamless Inter-country Highway and Rail Network.
• - Public Private Partnerships (PPP) to meet
  infrastructure needs

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Observations Audit Environment

• European Audit Environment
• Independent audit at the national level of
  government
• Internal audit at the agency level

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Observations Audit Environment

• Audit Standards follow ISA by IFAC
• Internal Audit Standards follow IIA
• Best Practices INTOSAI ( International
  Organizations of Supreme Audit Inst.
• EUROSAI - European Organization of Supreme
  Audit Institutions

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France

• Meeting with the French Audit Agency at the
• top of the Grand Arche

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Ireland

• A presentation from the Office of the
  Comptroller and Auditor General and from the
  National Roads Authority in Ireland.

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Observations Audit Environment

• Similarities with the USA
• - Compliance
• - Performance
• - Finance/internal control
• - Project/special issues
• - Advisory services

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Selected EU Practices Accountants and Auditors

• Robust Business Plans (Model)
• - Return on Investment
• - Present Value Techniques or
• - Capital Budgeting
• Concessions
• Estimated Revenues and Costs
• Audit Techniques and Controls
• Performance Audits
• Compliance Audits
• Value for Money Process

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Business Plans/Model

• A business model is a business plan.
• A clearly written document that identifies the
  business, it products, its goals and its
  objectives. A plan is developed for each capital
  investment and includes, but is not limited to
• Goals
• Objectives
• Cost
• Financing
• Contribution to the overall organization
• Expected Returns (financial, social, risk
  analysis, expected returns).
• A business plan should incorporate Robust
  financial analysis using present value and
  internal rate of return.

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EU Practices (continued)

• CONTACTS (England)
• National Audit Office
• Director
• Audit Principal
• Value for Money Director
• Manager, Public Private Partnerships
• Highways Agency
• Internal Audit
• Centre for Excellence
• Operational Policy Division
• Safety Standard Research
• Engineering

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Value for Money Model

• Key Questions
• Is this the best price
• Is it worth the
• Can we afford it

• Assessment Method
• Cost Comparison
• Cost Benefit Analysis
• Affordability Test

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EU Practices (continued)

• CONTACTS (Ireland)
• - Project Manager
• Head of Program Management
• Head of PPP Network Tolling
• Department of Finance
• Public Private Partnership Officer
• Office of the Comptroller and Auditor General

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EU Practices (continued)

• Contracts (Portugal)
• Corporation for all Enterprises Operations
• Auditors involved at planning stages
• Super profits sharing
• Internal Financial Consultants

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Government Enterprise Operations
For-Profit-Corporation

• All public enterprise operations are common stock
  corporations.
• Stock held by one public conglomerate
  corporation.
• Administered by a Board of Directors that appoint
  the corporate officers.
• Profit are transferred to the State via corporate
  dividends.
• Performance measured/compared to private sector.

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EU Practices (continued)

• Robust Business Plans
• Value For Money (VFM) Audits
• Non-financial audits to measure the
• Effectiveness,
• Economy,
• Efficiency
• Life Cycle Auditing

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EU Practices (continued)

• Business Planning Models
• Project vision statement
• Project mission statement
• Project objectives
• Financial modeling
• Alternative delivery systems
• Return on investment (pv/irr)
• Satisfying the public at the best price
• Super profit addressed

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Super Profits

• Super profit are profits earned on a PPP
  contract that are more than could be earned in
  the private sector, given the project risk
  environment.

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EU Practices (continued)

• SUMMARY
• Extensive use of Value for Money (VFM) audits
• Robust Business Plans
• Capital Budgeting before PPP contract signed
• Accountants and Auditors involved at process
  start
• Life-Cycle auditing
• Concessions auditing

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RecommendationsHuman Resource Issues

• Accountants and Auditors KSAs (knowledge,
  skills, abilities)
• New requirements
• Training for current staff

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Accounting and Financial KSAs

• Ability to understand and apply the following
• Managerial Accounting Techniques
• FASB, GASB, GAGAS, IIA Standards
• Capital Budgeting Techniques of PV IRR to
  industry appropriate situations
• Complex Financial Plan Modeling
• Prepare complex robust business models

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RecommendationsConcessions

• New contract language needed
• Terms/Tolls/Traffic Counts
• Profit Sharing / Revenues
• Shadow Tolls
• Shadow Tolls out of favor

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RecommendationsCapital Project Costing

• Use of capital budgeting techniques IRR and PV
• Discount rate selection government capital
  financing rate
• Preparing project comparables

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RecommendationsCapital Project Bid Selection

• Audit and finance personnel involved with bid
  preparation, project costing, and bid approval
• Use of robust business and financial modeling in
  development of the project
• Only use PPP if it makes business sense
• Establish partners where-with-all

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RecommendationsContract Terms/Clauses

• Clear, concise, and complete
• Contract life / Finance or Sale
• Clearly define and assign risk, private vs.
  public

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Contract Life

• What is the purpose of the PPP?
• Financing of Capital Needs?
• Outright Sale of Public Assets?
• Public/Private Joint Venture?
• Who shares the risk, public or private?
• Contract could be revisited every 7 years?
• What would be the normal finance period?

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RecommendationsContract Terms/Clauses

• Refinancing profits are shared
• Avoid super profits
• Incorporate revenue or profit sharing
• to maintain citizen/constituency support

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RecommendationsContract Terms/Clauses

• Revenues of any sort or Traffic counts and toll
  charges are clearly established for the length of
  the contract.
• State and preferably National tolling systems
  should be inter-operational for citizens use as
  well as to enhance the audit function

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RecommendationsAudit Techniques Processes

• Revenues of all kind and traffic counts should be
  in real time with verifiability for both the
  government and concessionaire
• Audit objectives need to be established for each
  stage of the major project procurement process

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RecommendationsAudit Techniques Processes

• Auditing oversight requires a concise, clear and
  comprehensive contract
• Compliance and Performance audits will be
  conducted throughout the project life cycle

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Selected USA PPP INITIATIVES

• Chicago Skyway
• Indiana Toll Road
• Colorado NW Parkway
• Virginia Pocahontas Parkway
• Texas SW Corridor
• California Toll way
• Bridges in Alabama
• Auto Ferry at Fort Morgan

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Lessons Learned ??

• Contract Term not complete
• Unlimited or Super Profits for Private Partner
• Contract Renewal or Revisit, absent
• Shadow Tolls provide little or no advantage
• Exclude Competition
• Failure to negotiate contracts with the private
  sector with the same tools that are used by them!
• Failure to train public employees or hire
  professionals

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• Q and A