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PPPs and Competitiveness. PPP is above all a robust and disciplined procurement process 2.

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Presentation on theme: "PPPs and Competitiveness. PPP is above all a robust and disciplined procurement process 2."— Presentation transcript:

1 PPPs and Competitiveness

2 PPP is above all a robust and disciplined procurement process 2

3 The virus spreads... Countries with active / developing PPP programmes include: Australia, Austria, Brazil, Belgium, Bulgaria, Canada, Chile, Colombia, Cyprus, Czech Republic, Egypt, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Italy, Jamaica, Japan, Korea, Malaysia, Malta, Mexico, Morocco, Netherlands, Nigeria, Pakistan, Peru, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Taiwan, Trinidad & Tobago, Turkey, US and UK…and more… Now more than 50 countries have PPP programmes….. Countries with active / developing PPP programmes include: Australia, Austria, Brazil, Belgium, Bulgaria, Canada, Chile, Colombia, Cyprus, Czech Republic, Egypt, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Italy, Jamaica, Japan, Korea, Malaysia, Malta, Mexico, Morocco, Netherlands, Nigeria, Pakistan, Peru, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Taiwan, Trinidad & Tobago, Turkey, US and UK…and more… Now more than 50 countries have PPP programmes….. 3

4 PPP / PFI in the LAC region National PPP / PFI programme Incipient PPP / PFI programme Subnational PPP programme MIF support to PPP MIF / IDB evaluation Relevant prior experience

5 Common Sectors TransportEducation PrisonsHealth 5

6 Common Sectors (cont’d) Also Housing Housing Courts Courts Technology TechnologyAlso Housing Housing Courts Courts Technology Technology DefenceLeisure Government Offices Waste Treatment 6

7 …… and now Climate Change Mitigation & Adaptation

8 Scale of PPPs Large-scale infrastructure – Transport – Education – Health – Government Buildings – facilities management Smaller initiatives – Alliances with business partners

9 The weakness of traditional procurement Project selection often driven by political rather than social or economic priorities Project design and structuring is inadequate : modern infrastructure projects are technically, financially and institutionally complex The public sector’s negotiating capacity vis-a-vis the private sector places it at a significant disadvantage at every stage, both prior to award and during project implementation Project implementation is usually marred by significant delays and cost-overruns, which make a nonsense of the project’s projected economic viability, and, owing to inadequate risk distribution, lead to growing contingent liabilities for government The quality of the asset is often below standard, leading to high maintenance costs or even premature replacement or abandonment The quality of the projected services consequently falls well below public expectations, leading to loss of political credibility and public perceptions of cronyism between the political and private sector Poorly designed projects either find it difficult to raise finance and when they do succeed, it often comes on punitively expensive terms and conditions From the private sector’s viewpoint, badly designed projects often bring financial problems which threaten their very survival Overall, projects take longer and are delivered more unsatisfactorily than election promises made, with inevitable erosion of popular political support. Project selection often driven by political rather than social or economic priorities Project design and structuring is inadequate : modern infrastructure projects are technically, financially and institutionally complex The public sector’s negotiating capacity vis-a-vis the private sector places it at a significant disadvantage at every stage, both prior to award and during project implementation Project implementation is usually marred by significant delays and cost-overruns, which make a nonsense of the project’s projected economic viability, and, owing to inadequate risk distribution, lead to growing contingent liabilities for government The quality of the asset is often below standard, leading to high maintenance costs or even premature replacement or abandonment The quality of the projected services consequently falls well below public expectations, leading to loss of political credibility and public perceptions of cronyism between the political and private sector Poorly designed projects either find it difficult to raise finance and when they do succeed, it often comes on punitively expensive terms and conditions From the private sector’s viewpoint, badly designed projects often bring financial problems which threaten their very survival Overall, projects take longer and are delivered more unsatisfactorily than election promises made, with inevitable erosion of popular political support.

10 PPPs are not standardised internationally Each Country’s approach to PPP is: Designed to meet the policy objectives of its Government Developed to complement other public procurement and public service delivery methods Implemented according to the available public and private sector resources Adapted to local best practice and procurement context Each Country’s approach to PPP is: Designed to meet the policy objectives of its Government Developed to complement other public procurement and public service delivery methods Implemented according to the available public and private sector resources Adapted to local best practice and procurement context 10

11 Guiding Principles Project decisions – Deciding on project scope, affordability etc – Investigating the benefits of different procurement strategies Managing the procurement process to deliver the required project benefits – Good deal for the public sector – risk transfer, price etc – Timescales – Bid Costs – Institutional Capacity to deliver the procurement process Project decisions – Deciding on project scope, affordability etc – Investigating the benefits of different procurement strategies Managing the procurement process to deliver the required project benefits – Good deal for the public sector – risk transfer, price etc – Timescales – Bid Costs – Institutional Capacity to deliver the procurement process 11

12 Common features of PPP Programmes Applied across a broad range of sectors where major capital investment is required Based upon long-term (e.g. greater than 10 years) arrangements Private sector capital at risk to performance in the delivery of public services Fixed price, output-based contracts Optimal risk transfer to the private sector Applied across a broad range of sectors where major capital investment is required Based upon long-term (e.g. greater than 10 years) arrangements Private sector capital at risk to performance in the delivery of public services Fixed price, output-based contracts Optimal risk transfer to the private sector 12

13 Key Principles of UK PPP Contracts for Services (Private Finance Initiative - PFI) 1.Authority transfers responsibility and risk for asset / service to Contractor. 2.Contractor takes on obligations for c years. 3.Contractor designs, builds, finances, operates (DBFO), maintains asset and provides services. 4.Lenders fund Contractor on limited recourse basis. 5.Authority pays “Unitary Charge” for available / acceptable service. 6.The PPP Contract (and associated documents) must regulate a network of relationships. 1.Authority transfers responsibility and risk for asset / service to Contractor. 2.Contractor takes on obligations for c years. 3.Contractor designs, builds, finances, operates (DBFO), maintains asset and provides services. 4.Lenders fund Contractor on limited recourse basis. 5.Authority pays “Unitary Charge” for available / acceptable service. 6.The PPP Contract (and associated documents) must regulate a network of relationships. 13

14 JV vs. PPP PPS as public service facilitator Project Public SectorPrivate Sector Assets$$$ O & M ServiceProduct End User Public SectorPrivate Sector Assets $$$ O & M End User Project Service Public Service Shared Risk and Responsibility “Conflict of Interests” Public Sector retains responsibility & Optimal Risk Transfer Service Contract

15 Why embark on a PPP Programme ? Improved value-for-money procurement of public services. Reform / modernisation of public services. Contestability in delivery of public services. Antidote to short-termism in both public and private sectors. Improved transparency of costs of public services delivery. Overcome capital budget constraints. Improved value-for-money procurement of public services. Reform / modernisation of public services. Contestability in delivery of public services. Antidote to short-termism in both public and private sectors. Improved transparency of costs of public services delivery. Overcome capital budget constraints. 15

16 Comparison with Conventional Procurement Under conventional public sector procurement, expenditure is input-based: ie., the Government pays whether or not the required service is delivered Whereas: Under PPP, the public sector only pays if and to the extent the required services are delivered, year-after-year “output – based” Under conventional public sector procurement, expenditure is input-based: ie., the Government pays whether or not the required service is delivered Whereas: Under PPP, the public sector only pays if and to the extent the required services are delivered, year-after-year “output – based” 16

17 Key Drivers of Value for Money Output based contracts Whole life-of-asset costings Single point responsibility – integration / scope Innovation Competition Economies of scale Capital at risk to long term performance Risk transfer Output based contracts Whole life-of-asset costings Single point responsibility – integration / scope Innovation Competition Economies of scale Capital at risk to long term performance Risk transfer 17

18 Value for Money: Traditional Cost / Payment Pattern Value for Money: Traditional Cost / Payment Pattern 18 Payments ($) Time (Years) Construction O & M Costs Paying for “inputs” Cost Overruns Extension Delay Costs “40 %” Optimism bias Quality of Asset

19 Payment (£) Time (Years) Construction period no payment Public Sector pays for service/outputs Operational period Payment against delivery Value for Money: PPP / PFI Payment Mechanism 19

20 Benefits of Project Finance Limited recourse finance projects are more highly structured commercially than public sector or corporate financed alternatives Each party is to bear only those risks which are appropriate Only way to fund much-needed infrastructure Increased flow of inward investment Greater pool of project sponsors and associated innovation Financial and commercial know-how transfer More projects implemented Limited recourse finance projects are more highly structured commercially than public sector or corporate financed alternatives Each party is to bear only those risks which are appropriate Only way to fund much-needed infrastructure Increased flow of inward investment Greater pool of project sponsors and associated innovation Financial and commercial know-how transfer More projects implemented 20

21 Lender Due Diligence : Public Sector Ally Risk identification, assessment, allocation and sharing Environment Technical Commercial Markets Financial Insurance Legal Risk identification, assessment, allocation and sharing Environment Technical Commercial Markets Financial Insurance Legal 21

22 Benefits of Long Term Contracts Security of supply / service provision / asset availability Security of cashflow / asset allocation / utilisation Amortisation of asset capital cost over economic life – ease authority affordability Price certainty for Authority Revenue reliability for finance Raising term debt finance (maximise gearing) Investor confidence to commit with capital and resources Aids off balance sheet treatment Security of supply / service provision / asset availability Security of cashflow / asset allocation / utilisation Amortisation of asset capital cost over economic life – ease authority affordability Price certainty for Authority Revenue reliability for finance Raising term debt finance (maximise gearing) Investor confidence to commit with capital and resources Aids off balance sheet treatment 22

23 PPPs in Suriname Infrastructure – Transport Roads Regional Airports – Education Primary Schools – New Build – Refurbishment – “Wider Markets Initiatives” New uses for existing public sector assets Infrastructure – Transport Roads Regional Airports – Education Primary Schools – New Build – Refurbishment – “Wider Markets Initiatives” New uses for existing public sector assets The link between school buildings and better education


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