Procuring Public Private Partnerships (PPP)

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Procuring Public Private Partnerships (PPP)

• Martin Darcy
• Valletta, 25-26 January 2006

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What is a PPP?

• Can be any arrangement where the public sector
  works with the private sector to produce a
  mutually beneficial outcome.
• Butgenerally refers to arrangements where
  private finance and / or management is employed
  in public service
• Other definitions

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Acronyms

• PSP Private Sector Participation
• PPI Private Participation in Infrastructure
• PFIP Privately Financed Infrastructure
  Projects
• PPP Public Private Partnerships
• IPP Independent Power Plant
• DBFO Design Build Finance and Operate
• BOO Build Own Operate
• BOT Build Operate Transfer
• ROT Rehabilitate Operate Transfer
• APOP Asset Procurement and Operating
  Program
• DOT / BROT / BLT / BLO / DBOMetc...

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Old skills re-discovered

• A history of private participation
• After 1945
• Turning back the clock or moving forward ?
• Increasing participation across Europe and the
  World

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Government or private sector?Different
perspectives in different countries
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Why do governments bringin the private sector ?

• Years of under investment mean the needs are
  great
• To access better or wider skills
• People expect more.
• greater access to services
• better services
• Limited scope to finance investments via the
  budget
• Tax increases politically unpopular
• Tougher legislation, for example, environmental
  BUT !!

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Private sector involvement in delivering public
services is almost always controversial
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Alleged risks...

• loss of control
• loss of in-house abilities and skills
• inability to change
• private sector will make big profits from
  citizens needs
• resistance to foreign ownership

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Real risks

• Unrealistic expectations (affordability,
  timetable, development budget)
• Inability to develop and communicate objectives
  of involving the private sector
• Poor co-ordination between government bodies -
  weak institutional structure
• Poor project preparation
• Lack of experience in PPP / Privatization
• Bad advice
• Insufficient bidders to provide competition
• Post event issues - social, political, economic
• Contract with poor change mechanisms
• Legal challenge to award process

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Options summary
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Mapping PSP options to government objectives
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Selecting a PPP option

• Key steps
• identify the problem
• set objectives for private involvement
• assess government/stakeholders willingness to
  accept the roles, duties and risks in various PPP
  options
• consult the market Technical Dialogue
• choose the PPP option which best fits

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Potential Projects

• Water/Sewerage
• Power provision
• Airports / Seaports
• Highways / Bridges / Tunnels
• Hospitals
• Prisons and Court Buildings
• Schools / Colleges / Universities
• Libraries and Museums
• Government Buildings (National / Municipal)
• IT / IS / Telecoms
• Waste Management
• Car parking

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Requirements necessary to create private sector
interest

• At a national level
• Strong political will and leadership
• Clear and permissive legal framework
• A skilled co-ordinating entity at the centre of
  government, providing support and drive
• Clarity about the overall objectives for private
  sector involvement
• Setting priorities
• Awareness, education and training

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Requirements necessary to create private sector
interest

• 2. At a sectoral level (the Ministry)
• Commitment of the Minister
• Realistic expectations
• Identifying and supporting priority projects
• Concentrating efforts on the priorities
• Regulation where necessary

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Requirements necessary to create private sector
interest

• 3. At the Project level
• Clarity about the objectives of the project
• The project is clearly defined, necessary and
  affordable
• Realistic timetable and development budget
• Good quality, experienced advisers
• Clear support from the necessary stakeholders
• Size of project
• Rights of access to perform works

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Basic Political requirements

• Orderly elections, and changes of government
• Government is subject to judicial review
• Independent central bank
• Limited tiers of government
• Sustained national policies through term and
  change of government

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Economic Environment

• Currency - convertibility, liquidity, stability
  relative to benchmark currencies
• Inflation targeting
• Credit rating
• Manageable debt and no debt default history
• Banking system - well regulated, good capital
  adequacy
• Transparency in Public Procurement system
• Educated workforce

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Legal Environment

• Enforceable contracts - is the authority able to
  enter into a concession contract?
• Arbitration - International Chambers of Commerce
  Procedures and offshore
• Appropriation of assets - is equitable
  reimbursement enforceable at law?
• Continuity - can a political government commit
  future political governments?
• Change of Law
• does the authority accept economic responsibility
  for Change of Law?
• No retrospective Changes of Law.
• Experience - the above seen to be done.

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The Investment

• OM Contract - this is the core business of most
  investors.
• Operational control of the business.
• Design control over new assets
• Clear statement of objectives from the authority
  - what does the authority want to achieve?
• Efficiency - optimising resources ?
• Risk Transfer for Operations and Construction?
• Asset design and build skills?
• Funding of capital expenditure ?
• Receipt of funds - privatisation ?
• A combination of these ?

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Technical Dialogue

• Current position is confirmed
• Before launching a procedure for the award of a
  contract, contracting authorities may, using a
  technical dialogue, seek or accept advice which
  may be used in the preparation of specifications,
  provided such advice does not have the effect of
  precluding competition.

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Competitive Dialogue

• New procedure where the award criterion is
  most economically advantageous tender
• for use in particularly complex contracts
• where an authority considers that the open or
  restricted procedure will not allow the award of
  the contract
• based on an inability to define the technical,
  financial or contractual solution to meet the
  needs

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Competitive Dialogue

• Definition
• Competitive Dialogue is a procedure in which
  any economic operator may request to participate
  and whereby the contracting authority conducts a
  dialogue with the candidates admitted to the
  procedure, with the aim of developing one or more
  suitable alternatives capable of meeting its
  requirements, and on the basis of which the
  chosen candidates are invited to tender

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Competitive Dialogue

• Authorities
• must publish a contract notice setting out the
  requirements, which they shall define in that
  notice and/or in an associated descriptive
  document.
• can open a dialogue the aim of which is to
  identify and define (one or more) means best
  suited to satisfying their needs.
• may discuss all aspects of the contract with the
  chosen candidates during this dialogue.

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Competitive Dialogue

• During the dialogue, Authorities
• shall ensure equality of treatment among all
  tenderers. In particular, they shall not provide
  information in a discriminatory manner which may
  give some tenderers an advantage over others.
• may not reveal to the other participants
  solutions proposed or other confidential
  information communicated by a candidate without
  their agreement.

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Competitive Dialogue

• The procedure can take place in successive stages
  in order to reduce the number of solutions to be
  discussed by applying the award criteria
• The contract notice or the descriptive document
  must indicate this

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Competitive Dialogue

• When the dialogue has been concluded and the
  participants have been informed, authorities ask
  the candidates to submit their final tenders on
  the basis of the solution or solutions presented
  during the dialogue.
• These tenders must contain all the elements
  required and necessary for the performance of the
  project.
• Tenders may be clarified, specified and
  fine-tuned at the request of the authority.
• However, this cannot involve changes to the basic
  features of the tender or the call for tender, if
  this is likely to distort competition or have a
  discriminatory effect.

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How a PPP project is created

• Three main phases
• Project preparation and development
• The bidding and negotiation phase
• Implementation and operating phase

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1. Project preparation and development

• Define project objectives, need and business case
• Create the team (including external advisers)
• Risk assessment and strategy
• Technical Dialogue
• Procurement strategy and realistic timetable
• Develop bid evaluation criteria
• Draft contract documentation
• Approvals and marketing
• Without proper preparation the project will
  probably fail (before or after award process )

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2. Procurement and negotiation

• Advertisement and calls for expressions of
  interest
• Prequalification and selection of bidders
• Issue of tender documents to selected bidders
• Return of bids
• Evaluation of bids
• Select Preferred Bidder
• Contract negotiations
• Commercial / financial close
• At least 12 months

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3. Implementation,Operationand Regulation

• Creating a working partnership
• Managing contractual obligations
• Extracting the efficiencies
• Delivering / improving the services
• Change management

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Contractual Organisation Example
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Simple Funding Principles For A PPP Project
using Private Finance
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Differing Equity levels in different sectors

• Power projects 25-30
• Airports 30
• WWT 25
• Telecoms 50-60
• Highways 20-25
• Seaports 30-35

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Common Problems

• Relationship failure between the parties
• Problems of culture
• government objectives / private sector objectives
• Inability to understand the contract
• Over ambition
• government
• private sector
• Inability to manage change
• Contractual time-bombs

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Essentials for good value projects

• Strong political will and leadership
• Legal and institutional framework
• Transparency
• Comprehensive project preparation
• Open and fair competitive process
• Genuine partnership

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Benefits to the governmentand citizens

• Use of private finance for commercially
  attractive projects frees more money for social
  schemes
• Transfers risk from governments to private
  business
• Encourages better project management and outcomes
• Quality standards and long term maintenance built
  into the project agreement
• Brings forward investment and improvements to
  services

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Difficult but Possible

• Establish political will
• Understand and communicate the economic case
• Engage in Technical Dialogue
• Comprehensive preparation is essential
• Get outside help
• Transparent and fair competition