Presentation on theme: "Public-Private Partnerships"— Presentation transcript:
1 Public-Private Partnerships Neil McMonagleAugust 2010
2 America's Infrastructure Report Card (American Society of Civil Engineers, 2009)SubjectGradeCommentDrinking WaterD-$665 million in infrastructure investment required by 2020EnergyD+$2 trillion in electric utility investment by 2020RailC-$150 billion in improvements required by 2030.Roads$130 billion in infrastructure investment by 2020SchoolsD$332 billion required to bring schools into good repairWastewater$335 million in infrastructure investment required by 2020Overall GradeThe Bottom Line: America will need to spend $2.2 trillion in infrastructure investment over the next five years for the nation’s infrastructure to be ranked in “Good” condition (Overall Grade: B).
3 America's five year infrastructure funding requirements are immense SchoolsEnergy11% ($160bn)5% ($75bn)Water17% ($225bn)RoadsRail63% ($930bn)4% ($63bn)Estimated SpendingProjected Shortfall
4 Paying for infrastructure at a State and Local level Traditional Model #1:Raise TaxesHigher taxpayer burden immediatelyFull retention of revenue and operating risks by public sectorTraditional Model #2:Issue BondsDecreases funds available for other projectsRetention of financing and operating risks by public sectorAlternative Model:Public-Private PartnershipsReduces immediate impact on taxpayerMore capital available for other projectsOperating and financing risks transferred to private party4
5 What is a Public Private Partnership (PPP/P3)? Public Private Partnerships are….“A contractual agreement between a public agency and a private sector entity to share the risk and rewards of asset and service delivery – in order for projects to leverage the private sectors’ skills and funding, and provide enhanced value for money.”Around 28 US States have PPP enabling legislation, including Georgia, Texas, Michigan, Virginia, California.Projects have focused on transport infrastructure, although each State has a different approach:NY/ NJ’s Goethals Bridge is being replaced through a 30 year "Design, Build, Finance and Maintain" (DBFM) PPP contractTexas' North Tarrant Expressway and LBJ highway P3 projects use "managed lane" concepts and dynamic user tolls to control traffic flow.California's Presidio Parkway P3 is using an availability payment structure but no tolls, partly because a tolling structure would require complex agreements between regional funding partners5
6 PPP should be a true, long term partnership Public sector brings:Public interest and needInstitutional knowledge of serviceCapital resourcesBalance of commercial and public interestsSecure revenue stream and covenant?Private sector brings:Management disciplines and preventative maintenanceNew technologiesPersonnel developmentFinance and resourcesControl of risksEfficiencies through integration of design, construction, and operationsSpeed of construction – no payment until completionCost certainty
7 Basic Public Private Partnership Structure Demand / Revenue Based: The private sector controls and collects user fees which serve as their only source of revenue to service debt and generate a return (e.g. toll road PPP projects).Availability Payment: The private sector receives periodic payments over the operational contract period from the public sector if the project is available and maintained to the standard specified (e.g. non-tolled roads or social infrastructure).Shadow Payment: The public sector retains control of fare policy, but the private sector is paid based on the number of users so takes demand risk. A risk sharing approach, although pricing of risk by the private sector is questionable since they arguably cannot control demand.7
11 Potential benefits of PPP Long term contract between public sector (federal, state or municipality) and private sector for provision of capital asset and servicesTypically 20 to 40 year contracts for private sector contractor or consortium to Design, Build, Finance and Maintain (DBFM) or Design, Build, Finance and Operate (DBFO) a facility, equipment and ancillary servicesMay extend to a full concession, an economic right to operate a project on an exclusive basis for a prolonged period"Whole life cost" approach to asset provision – incorporates maintenance and mid-life refurbishmentAt the end of the contract period, the asset reverts to the public sector.Substantial proportion of payment fixed for contract lifeThe asset and services to be provided by the private sector contractor are specified in output terms by the public sector authorityThe public sector pays a single periodic contractual payment for the asset and services over the life of contractPayment by the public sector only commences when the asset and service are available, and performance regime reduces the payment if performance is below required standard. ("Payment Mechanism")Material risk transfer to private sector contractor – e.g. cost of construction cost overruns or delay borne by the private contractor, not the public sector11
12 International experience of PPP as delivery method PPP has been largely successful in improving efficiency of delivery for infrastructure across a range of sectors.The table below reflects the UK National Audit Office report on the performance of PFI (PPP) procurements (2003), and a PPP study by Allen Consulting/ University of Melbourne (2007).PPP procurementNon-PPP procurementTime over-runUK22%73%Australia12%35%Cost over-run24%70%13%26%
13 What can PPP be used for? Selected sectors – slightly different structures in each Roads, highways and street lightingToll road concessions, non-tolled roads, urban roads "from curb to curb", street lighting, traffic management systems/congestion controlEducationSchool buildings and maintenance, school IT, colleges and universities, student residences, science and research parksJusticePrisons, court facilities, police/fire/rescue stationsEnergyAll energy sectors, renewable energy facilitiesHealth (note public sector role in Europe)Primary care facilities, hospitals, medical equipment, IT systems (records projects), mental healthTransitLight rail projects, metro schemes, high speed rail, rolling stock fleetsUrban regeneration & LeisureStadiums, car parking, city security, urban regeneration
14 Different types of project attract different types of investor
15 Significant market interest and availability of private funds 15
16 PPP – part of a wider procurement toolbox PPP is not suitable for all projects – but should be considered as part of the options appraisal for major capital procurements.Recognize parameters of PPPLong contracts, so can be inflexible if material future changes in demand are likelyProcurement process can be complex.Private sector cost of capital normally higher than public cost of finance.Although high practical risk transfer can be achieved to the private sector, catastrophic risks can revert to public sector as the ultimate procurer.Should only use PPP where it offers better value for money than traditional procurement routes.
18 Conclusion: PPP as an option - not the only answer Consider the characteristics present in most successful PPP projects:Statutory and political environmentOrganized structure (public sector delivery capability, governance)Detailed Business Plan (business case to contract)Guaranteed revenue streamStakeholder supportCareful selection of partner(NCPPP's six success factors)PPP should be one of the procurement and financing options considered for capital by State and Local governments – but it needs to be evaluated against other procurement routes, and only used where it offers better value.