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1 Challenges with the fundings of PPPs when it comes to infrastructures: What lessons can be learned in the case of major projects funded outside the government.

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Presentation on theme: "1 Challenges with the fundings of PPPs when it comes to infrastructures: What lessons can be learned in the case of major projects funded outside the government."— Presentation transcript:

1 1 Challenges with the fundings of PPPs when it comes to infrastructures: What lessons can be learned in the case of major projects funded outside the government budget? ACPAU/CAUBO Montreal, June 2006 Andrée De Serres, LL.L, MBA, Ph.D. Professor Département Stratégie des affaires Director, MBA program for finance executives ESG UQAM

2 Juin 2006©Andrée De Serres, UQAM2 Contact Information Me Andrée De Serres, LL.L, M.B.A., Ph.D., Professor École des sciences de gestion Université du Québec à Montréal Director, MBA program for finance executives 315 Ste-Catherine East, Suite R-3555 Montreal QC H2X 3X2 Tel.: (514) Local

3 3 Introduction  Traditional Mode and PPPs  Evolution of modes in the undertaking of public infrastructures

4 Juin 2006©Andrée De Serres, UQAM4 New Context  Early 1980s : economic situation conducive to questioning the role and the involvement of the government  Debt reduction objectives  First wave of reactions from the governments Withdrawal from certain sectors of activities  Sales of assets  Sales of stocks

5 Juin 2006©Andrée De Serres, UQAM5 Second wave of reactions: to find different solutions to new capital needs  In developing new organisational models to provide public services  Objectives To transfer fincancial risks to the private sector To transfer the debt to the private sector To improve the quality of services with the help of the private sector ’ s expertise

6 Alternative mode assuming and delivering the public infrastructures and services (© De Serres, 2004) Monopole gouvernemental Par choix ou par absence de marché privé Entreprises du secteur privé Modes hybrides Sous-traitance Concession (PPP) Impartition Licence Mise en valeur de la propriété intellectuelle Marché non réglementé Marché réglementé PPP/PFI Co-entreprise En régie directe Agence Société de la Couronne Gestion déléguée

7 7 PPP Contracts: Risk and Funding Transfer

8 Juin 2006©Andrée De Serres, UQAM8 Management Mode Influence And Project Funding  Evolution  Funding  Risk Management  Sectors of activities

9 Juin 2006©Andrée De Serres, UQAM9 Funding a new project within the limits of an organisation’s budget (©De Serres, 1999) Gouvernement et agent public : Prise en charge et maîtrise d’ouvrage de tous les projets Bilan : actifs et passifs de l’ensemble des projets Financement par prêt Analyse de la contribution du projet à la rentabilité générale de l’emprunteur Demande de capitaux Opportunité de développement Ajout d’un nouveau projet intégré au bilan et prise en charge financière Financement par taxes, impôts et autres

10 Juin 2006©Andrée De Serres, UQAM10 "Off Balance Sheet" Project Funding (©De Serres, 1999) Opportunité Promoteur Projet Financement par fonds propres Structuration d’une entité légale conçue spécifiquement à cette fin Financement par dette Subventions gouvernementales

11 Juin 2006©Andrée De Serres, UQAM11 Hallmarks  Project funded inside the government budget ("in balance sheet") Perfect control but risk taking  Project undertaken by an external legal entity but under the control of the sponsor, therefore consolidated  Off balance sheet project = Lost of control: joint-venture = Risk transfer designed specifically for that purpose = Risk transfer to the creditor

12 Juin 2006©Andrée De Serres, UQAM12 Financial Strategy  Project funding in or off balance sheet See: Business corporate funding vs project funding  Impacts of the strategic option On the qualification of the project On the funding sources On the type of financial package

13 Juin 2006©Andrée De Serres, UQAM13 Table: Payment of Fees by The Users (©De Serres, 1999) Concédant : L'autorité publique accorde la concession de service public Concessionnaire : entité légale, privée ou publique, responsable de l’investissement nécessaire Usagers : paiement d’une redevance au concessionnaire pour le droit d’usage

14 Juin 2006©Andrée De Serres, UQAM14 Les concessions en France  In a public rule of law system favoring a special status for building and civil industry (BCI)  Concession or factoring contracts On public works with user’s fees at the central, departmental or municipal government levels, etc  Often conceded to semi-public companies  Water & sewage systems  Turnpike roads Precedents: Concession in France

15 Juin 2006©Andrée De Serres, UQAM15 Precedents: Implementations in France  Extended right to departments, municipalities and communes in 1986  Several projects: EuroDisney Undergroung connexion between Paris Metro and Orly Airport: Orlyval (1993) Tunnel Prado Carenage in Marseilles (1993) Toulouse Metro (1994) Boulevard Périphérique Nord, Lyon (1994) Normandie Bridge France Stadium etc.

16 Juin 2006©Andrée De Serres, UQAM16 A PPP contract with a lease payment by the government or its agent ( ©De Serres, 2005) Concédant : l'autorité publique accorde la concession de service public Concessionnaire / Locateur Entité privée ou publique ou mixte Usagers : accès selon les conditions prévues par les politique sen vigueur Contrat de PPPContrat de bail

17 Juin 2006©Andrée De Serres, UQAM17 Precedents In United Kingdom  PPP +: concessions and other possible agreements  Private Finance Initiative (PFI) program since 1996 Gouvernment = customer Criterium: Value for money  Excellence program in public facilities building  Joined-up Services Program Adding a private mode service to an operating public organisation  Best Value Code of Practices on Workforce Matters Program

18 Juin 2006©Andrée De Serres, UQAM18 PPP/ PFI / P4 The Private Finance Initiative (PFI) is a form of PPP but is also, principally, a form of contracting or procurement (PPPP), the hallmarks of which are: a long term service contract between a public sector body and a private sector ‘operator’ the provision of capital assets and associated services by the operator a single ‘unitary’ payment from the local authority which covers investment and services the integration of design, building, financing and operation in the operator’s proposals the allocation of risk to the party best able to manage and price it service delivery against performance standards set out in an ‘output specification’ performance related ‘payment mechanism’ an ‘off balance sheet treatment’ for the local authority so that any investment delivered through the project does not count against borrowing consents support from central government delivered through what are known as ‘PFI credits’

19 Juin 2006©Andrée De Serres, UQAM19 PFI in United Kingdom: 600 New Infrastructures Since hospitals, 200 schools Prisons, military facilities Drinking water systems, water treatment, etc. Public transportation  London Underground Lodging, social housing and services Police stations (UK) Fire department stations (UK) Arenas, stadiums and other sport facilites

20 Juin 2006©Andrée De Serres, UQAM20 Precedents in Canada  Highway 407 in Toronto  Fredericton/Moncton Highway  Highway 104 in Nova-Scotia  Confederation Bridge, PEI, (a success due to a yearly indexible 42 millions $ federal subsidies)

21 Juin 2006©Andrée De Serres, UQAM21 Confederation Bridge (Prince-Edward Island) 1997

22 Juin 2006©Andrée De Serres, UQAM22 Fields of Activity in Canada  Online public services  Drinking water and sewage systems management  Roads and bridges  Hospitals  Education Schools Universities  Prisons  Energy  Public transportation  Etc.

23 Juin 2006©Andrée De Serres, UQAM23 Projects Under Negociation in Québec Highways 25 and 30 Mega-hospitals Residential and long-term care centers Montreal Symphony Orchestra Concert Hall Etc.

24 Juin 2006©Andrée De Serres, UQAM24 Delegation of Authorities  Nature of delegated authorities  Property of assets  Delegation of project management Impact on the rules  Contract procurement  Governance  Accountability  Funding sources

25 Juin 2006©Andrée De Serres, UQAM25 From the Delegated Authorities  What can be conceded ? Delegatus non potest delegare We can only delegate the authorities we hold  Authorities that can be delegated in as much as the law permits Design Funding Construction Operation  During the initial period  On a long term Maintenance

26 Juin 2006©Andrée De Serres, UQAM26 Types of Contracts  Concession or factoring contracts in the French or Continental European public law  Equivalent terminology of contracts in the British law: Construction-Conception-Financement- Exploitation or Design, Build, Finance, Operate (D.B.F.O. ) Construction-Conception-Financement- Exploitation-Entretien or Design-Build-Finance- Operate-Maintain (DBFOM) Construction-propriété-opération-transfert or Build-Own-Operate-Transfer (B.O.O.T) Lemurs variations:  Build, Operate, Transfer (B.O.T.)  Build, Own, Operate (B.O.O.)  Etc.

27 Table: Merging of transactions according to phases of activities (©De Serres, 1999) Soumission (Première partie de la phase de conception) Approbation du choix des entrepreneurs Concession de la maîtrise d’ouvrage Contrat(s) de maîtrise d’œuvre (Deuxième partie de la phase de conception) Approbation du choix des entrepreneurs Phase de construction Phase d’exploitation Contrats de fourniture et d’équipement Contrats de construction Contrat d’exploitation Contrat de maintenance Appel d’offres Condédent

28 Juin 2006©Andrée De Serres, UQAM28 Ownership of Assets  Owned by governments or public agents  Types of contracts Lease or other renting contracts Delegated management contract Service or factoring contract Building contracts  Design-Bid-Build (DBB)  Design-Build (DB) Building contracts with risk sharing  Construction Manager at Risk (CMR)  Design-Build-Operate-Maintain (DBOM)

29 Juin 2006©Andrée De Serres, UQAM29 Ownership of Assets Tranferred to Private  PPP Concession  PPP PFI  Impartition  Sale and cession to private (Privatisation)

30 Juin 2006©Andrée De Serres, UQAM30 Have objectives been met?  Financial risk transfer Financial debt transfer Cost control Cost savings  Governance and accountability Government accountability Improvement of services

31 Juin 2006©Andrée De Serres, UQAM31 Financial Risk Transfer  Private funding leverage effect How many projects with true authority delegation and financial responsibilty?  The futur of the off balance sheet funding with new commonly accepted accounting principles  Processing of Special Purpose Entity  The auditor general’s opinion  Is he/she going to deal as off balance sheet the debt engaged in a PPP?

32 Juin 2006©Andrée De Serres, UQAM32 Cost control and financial risk transfer  Are there financial risk transfers, building risks, operation risks?  Assessing long term impacts  Financial risk transfer  Quid if undertaker is financially strapped  Has the financial risk really been transferred?  In case of bankruptcy, public funds will have to be reinvested What if the private enterprise does not respect the terms of the contract? If it faces financial problems? If it is sold or if it disposes of its contract? If the activities are a threat to the safety of the population?

33 Juin 2006©Andrée De Serres, UQAM33 Cost Savings  Is there a real cost sabving in PPPs or PFIs?  Interest costs and debt are higher than government loans  Transaction costs are higher  According to studies made by Malette Firm, Résidence Saint-Charles in Quebec City, with 132 beds, would cost $56,6 millions in PPP mode and $42,2 millions in traditional mode  Their incomes are taxable  They have to generate a rent for their shareholders or sponsors

34 Juin 2006©Andrée De Serres, UQAM34 Limitations of the risk transfer  PPP mode and off balance sheet project funding  Allow to limit the impacts of bad risks  In as much as there is profit sharing For the governement  Remains accountable for the unforeseen risks and major exceptional risks  Remains responsible for public interest stakes  Limitations of PPPs as optimal mode in certain sectors

35 Modes in taking charge of public services ( ©De Serres, 1999) Monopole gouvernemental Choix politique ou par absence de marché Marché règlementé ou non réglementé Secteur privé Modes hybrides incluant les PPP Prise en charge : agent public Prise en charge : secteur privé et/ou secteur public et/ou secteur de l’économie sociale Prise en charge : secteur privé Règles de gouvernance, de reddition de comptes, d’appel d’offre et de financement du secteur public Quelles règles ? Règles de gouvernance, de reddition de comptes, d’appel d’offre et de financement du secteur privé

36 Juin 2006©Andrée De Serres, UQAM36 Governance and accountability  Public project management and public sector regulations Assuming a project inside the government budget Project management and the public sector Open tendering rules and contract procurement Public finance regulations Accounting principles Accountability Audit Types of contracts

37 Juin 2006©Andrée De Serres, UQAM37 Have the other objectives been met?  Improvement of services How to measure it?  Governance and accountability Authority transfer in contract procurement Access to documents Control agency Retrieval right  Loss of power on territory management  Government accountability  Technology and knowledge transfer

38 Juin 2006©Andrée De Serres, UQAM38 Conclusion: impacts and reflexions  Complex issue with serious social and economic impacts  Deserves further thought to determine an effective and sustainable political intervention We should not blindly imitate what has been done elsewhere in another era Several projects already have a history whose we can assess the success or the failure  Sustainable development and intergenerational transfer First of all, we should avoid mortgaging the future of the coming generations in transferring them our irreversible choices and the financial load associated with them  New ways adapted to our society have to be explored

39 Juin 2006©Andrée De Serres, UQAM39 Conclusion: the advantages of the project-based funding mode  Exploiting knowledge and efficiency of the project-based funding mode Risk identification and management methods Fragmentation in activity phases Demerging and remerging of risks

40 Juin 2006©Andrée De Serres, UQAM40 Conclusion : the advantages of the partnership organisational mode  Governance and partnership Explore and take advantage of the partnership organisational mode  An efficient organisational mode for complex projects  The partnership mode as a new production line  Key element  Transform potentially conflictual relations into partnerships New organisational mode as a source of strategic value creation

41 Juin 2006©Andrée De Serres, UQAM41 Conclusion: Avenues of Thought for The Government  Partnerships of all types Public-private Partnerships  Allowing economies of scale in breaking the cultural isolation between ministries and various public entities  Favoring a winner’s culture Public/nfpo Partnerships  Partnerships with community businesses and social economy organisations

42 Juin 2006©Andrée De Serres, UQAM42 Partnerships of all types (cont.) Partnerships with public entities  Semi-public company Partnerships involving public entity employees  To integrate employees and unions in the organisational structures

43 Alternative modes of taking charge of and delivering public infrastructures and services (© De Serres, 2004) Monopole gouvernemental Par choix ou par absence de marché privé Entreprises du secteur privé Modes hybrides Avec une entité publique Avec un OBNL Avec une entité privée Sous-traitance Concession (PPP) Impartition Licence Mise en valeur de la propriété intellectuelle Marché non réglementé Marché réglementé PPP/PFI Co-entreprise Avec une société d’économie mixte En régie directe Agence Société de la Couronne Gestion déléguée

44 Juin 2006©Andrée De Serres, UQAM44 Conclusion  Change in the role of the government Control & regulation Major needs in terms of training Major needs in terms of tools  Importance to gain civil society support when public good is concerned on the long term


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