Jukka Luukkanen

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Financing, Risks and Economic Incentives in PPPs
Jukka Luukkanen Copenhagen, 18 November 2004
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Main Characteristics of PPPs

1. Risk-sharing between public and private sectors
2. Long-term relationship between parties
3. Ultimate responsibility in public sectors hands

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Main Characteristics of PPPs
Utilising private sector skills for public sector
services via

• Contracts for services, not procurement of assets
• Output, not input, specifications
• Payments related to service delivery
• Whole life approach to design, build and operation

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PPP value for money

• Optimal risk allocation
• Cost/time discipline
• Competition
• Innovation
• Optimal lifecycle costs

• Complexity - transaction costs
• Financing costs

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Risk allocation
Risks should be borne by the party, which is best
able to control them. Sharing risks is not a
goal in itself but a way to achieve efficiency
and quality as well as to create correct
disciplines and incentives to achieve optimal
outcome. There are certain risks that are best
managed by the Government and to seek to transfer
these risks would either not be viable or not
offer value for money to the public sector.
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Typical PPP structure
Government customer
Operation
Finance
Construction Investor
Equity and sub-debt
Special purpose project company
Procuring Authority
Services
Operator investor
Unitary payments
Debt finance
3rd party equity
Construction Contractor
Operator
Debt funders
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Improved project delivery under the PFI
PFI experience Previous experience
(2002 NAO census) (1999
Government survey) Exceeds price agreed
22 73 at contract Late to public
sector 24 70 Over 2 months late 8
Source UK National Audit Office
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Classification of PPP assets
Will government make most payments to the
partner?
PPP is private investment
No
Yes
Yes
Will the partner bear most construction risks?
Will the partner bear the availability risk?
Yes
No
No
Will the partner bear the demand risk?
Yes
PPP is government investment
No
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Must for successful PPPs

• Public Sector Political Commitment
• Focused, dedicated and experienced public sector
  team PPP Task Force
• Clear legal and institutional framework
• Transparent competitive procurement
• Realistic risk sharing

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Address 100, Boulevard Konrad Adenauer, L-2950
Luxembourg Contact Jukka Luukkanen, Structured
Finance and PPPs Tel [phone] Fax
352-4379-7398 E-mail j.luukkanen_at_eib.org
http//www.eib.org