1. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Procuring Public Private Partnerships (PPP) Martin Darcy Valletta, 25-26 January 2006

2. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. What is a PPP? v Can be any arrangement where the public sector works with the private sector to produce a mutually beneficial outcome. v But…generally refers to arrangements where private finance and / or management is employed in public service v Other definitions……

3. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Acronyms PSP=PSP PSP = Private Sector Participation PPI=PP I PPI = Private Participation in Infrastructure PFIP=PFI P PFIP = Privately Financed Infrastructure Projects PPP=PPP PPP = Public Private Partnerships IPP =IPP IPP = Independent Power Plant DBFO =DBFO DBFO =Design Build Finance and Operate BOO=BOO BOO=Build Own Operate BOT =BOT BOT =Build Operate Transfer ROT =ROT ROT =Rehabilitate Operate Transfer APOP=APO P APOP=Asset Procurement and Operating Program DOT / BROT / BLT / BLO / DBOM…etc……………...

4. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Old skills re-discovered v A history of private participation v After 1945 v Turning back the clock or moving forward ? v Increasing participation across Europe and the World

5. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Government or private sector? Different perspectives in different countries

6. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Why do governments bring in the private sector ? v Years of under investment mean the needs are great v To access better or wider skills v People expect more…. v greater access to services v better services v Limited scope to finance investments via the budget v Tax increases politically unpopular v Tougher legislation, for example, environmental …… BUT …!!

7. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Private sector involvement in delivering public services is almost always controversial

8. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Alleged risks... v loss of control v loss of in-house abilities and skills v inability to change v private sector will make big profits from citizens needs v resistance to foreign ownership

9. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Real risks v Unrealistic expectations (affordability, timetable, development budget) v Inability to develop and communicate objectives of involving the private sector v Poor co-ordination between government bodies - weak institutional structure v Poor project preparation v Lack of experience in PPP / Privatization v Bad advice v Insufficient bidders to provide competition v Post event issues - social, political, economic v Contract with poor change mechanisms v Legal challenge to award process

10. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Options summary

11. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Mapping PSP options to government objectives

12. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Selecting a PPP option v Key steps: v identify the problem v set objectives for private involvement v assess government/stakeholders willingness to accept the roles, duties and risks in various PPP options v consult the market – Technical Dialogue v choose the PPP option which best fits

13. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Potential Projects v Water/Sewerage v Power provision v Airports / Seaports v Highways / Bridges / Tunnels v Hospitals v Prisons and Court Buildings v Schools / Colleges / Universities v Libraries and Museums v Government Buildings (National / Municipal) v IT / IS / Telecoms v Waste Management v Car parking

14. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Requirements necessary to create private sector interest 1. At a national level v Strong political will and leadership v Clear and permissive legal framework v A skilled co-ordinating entity at the centre of government, providing support and drive v Clarity about the overall objectives for private sector involvement v Setting priorities v Awareness, education and training

15. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Requirements necessary to create private sector interest 2. At a sectoral level (the Ministry) v Commitment of the Minister v Realistic expectations v Identifying and supporting priority projects v Concentrating efforts on the priorities v Regulation where necessary

16. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Requirements necessary to create private sector interest 3. At the Project level v Clarity about the objectives of the project v The project is clearly defined, necessary and affordable v Realistic timetable and development budget v Good quality, experienced advisers v Clear support from the necessary stakeholders v Size of project v Rights of access to perform works

17. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Basic Political requirements v Orderly elections, and changes of government v Government is subject to judicial review v Independent central bank v Limited tiers of government v Sustained national policies through term and change of government

18. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Economic Environment v Currency - convertibility, liquidity, stability relative to benchmark currencies v Inflation targeting v Credit rating v Manageable debt and no debt default history v Banking system - well regulated, good capital adequacy v Transparency in Public Procurement system v Educated workforce

19. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Legal Environment v Enforceable contracts - is the authority able to enter into a concession contract? v Arbitration - International Chambers of Commerce Procedures and offshore v Appropriation of assets - is equitable reimbursement enforceable at law? v Continuity - can a political government commit future political governments? v Change of Law: v does the authority accept economic responsibility for Change of Law? v No retrospective Changes of Law. v Experience - the above seen to be done.

20. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. The Investment v O&M Contract - this is the core business of most investors. v Operational control of the business. v Design control over new assets v Clear statement of objectives from the authority - what does the authority want to achieve? v Efficiency - optimising resources ? v Risk Transfer for Operations and Construction? v Asset design and build skills? v Funding of capital expenditure ? v Receipt of funds - privatisation ? v A combination of these ?

21. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Technical Dialogue Current position is confirmed: l 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.

22. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Competitive Dialogue New procedure – where the award criterion is ‘most economically advantageous tender’ l for use in particularly complex contracts l where an authority considers that the open or restricted procedure will not allow the award of the contract l based on an inability to define the technical, financial or contractual solution to meet the needs

23. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. 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”

24. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Competitive Dialogue Authorities: l must publish a contract notice setting out the requirements, which they shall define in that notice and/or in an associated descriptive document. l can open a dialogue the aim of which is to identify and define (one or more) means best suited to satisfying their needs. l may discuss all aspects of the contract with the chosen candidates during this dialogue.

25. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Competitive Dialogue During the dialogue, Authorities: l 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. l may not reveal to the other participants solutions proposed or other confidential information communicated by a candidate without their agreement.

26. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Competitive Dialogue l The procedure can take place in successive stages in order to reduce the number of solutions to be discussed by applying the award criteria l The contract notice or the descriptive document must indicate this

27. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Competitive Dialogue l 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. l These tenders must contain all the elements required and necessary for the performance of the project. l Tenders may be clarified, specified and fine-tuned at the request of the authority. l 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.

28. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. How a PPP project is created v Three main phases 1.Project preparation and development 2.The bidding and negotiation phase 3.Implementation and operating phase

29. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. 1. Project preparation and development v Define project objectives, need and business case v Create the team (including external advisers) v Risk assessment and strategy v Technical Dialogue v Procurement strategy and realistic timetable v Develop bid evaluation criteria v Draft contract documentation v Approvals and marketing v Without proper preparation the project will probably fail (before or after award process )

30. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. 2. Procurement and negotiation v Advertisement and calls for expressions of interest v Prequalification and selection of bidders v Issue of tender documents to selected bidders v Return of bids v Evaluation of bids v Select ‘Preferred Bidder’ v Contract negotiations v Commercial / financial close v At least 12 months

31. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. 3. Implementation,Operation and Regulation v Creating a working partnership v Managing contractual obligations v Extracting the efficiencies v Delivering / improving the services v Change management

32. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Contractual Organisation Example Project Agreement Government Client Special Purpose Company Equity Long Term Debt Finance Design and Construct Contract Operating Contract Design Operating Subcontracts Financial Advisers Legal Advisers Specialist Advisers Financial Advisers Legal Advisers Construction Subcontracts Financed by Specialist Advisers Principle subcontracts

33. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Simple Funding Principles For A PPP Project using Private Finance 100% 20% 0% EQUITY Long term Borrowings More risk more equity Debt is cheaper than equity 80% Investment cost

34. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Differing Equity levels in different sectors v Power projects25-30% v Airports30% v WWT25% v Telecoms50-60% v Highways20-25% v Seaports30-35%

35. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Common Problems v Relationship failure between the parties v Problems of culture v government objectives / private sector objectives v Inability to understand the contract v Over ambition v government v private sector v Inability to manage change v Contractual ‘time-bombs’

36. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Essentials for good value projects v Strong political will and leadership v Legal and institutional framework v Transparency v Comprehensive project preparation v Open and fair competitive process v Genuine partnership

37. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Benefits to the government and citizens v Use of private finance for commercially attractive projects frees more money for social schemes v Transfers risk from governments to private business v Encourages better project management and outcomes v Quality standards and long term maintenance built into the project agreement v Brings forward investment and improvements to services

38. © OECD A joint initiative of the OECD and the European Union, principally financed by the EU. Difficult but Possible v Establish political will v Understand and communicate the economic case v Engage in Technical Dialogue v Comprehensive preparation is essential v Get outside help v Transparent and fair competition