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Public-Private Partnerships

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Presentation on theme: "Public-Private Partnerships"— Presentation transcript:

1 Public-Private Partnerships
Neil McMonagle August 2010

2 America's Infrastructure Report Card
(American Society of Civil Engineers, 2009) Subject Grade Comment Drinking Water D- $665 million in infrastructure investment required by 2020 Energy D+ $2 trillion in electric utility investment by 2020 Rail C- $150 billion in improvements required by 2030. Roads $130 billion in infrastructure investment by 2020 Schools D $332 billion required to bring schools into good repair Wastewater $335 million in infrastructure investment required by 2020 Overall Grade The 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
Schools Energy 11% ($160bn) 5% ($75bn) Water 17% ($225bn) Roads Rail 63% ($930bn) 4% ($63bn) Estimated Spending Projected Shortfall

4 Paying for infrastructure at a State and Local level
Traditional Model #1: Raise Taxes Higher taxpayer burden immediately Full retention of revenue and operating risks by public sector Traditional Model #2: Issue Bonds Decreases funds available for other projects Retention of financing and operating risks by public sector Alternative Model: Public-Private Partnerships Reduces immediate impact on taxpayer More capital available for other projects Operating and financing risks transferred to private party 4

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 contract Texas' 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 partners 5

6 PPP should be a true, long term partnership
Public sector brings: Public interest and need Institutional knowledge of service Capital resources Balance of commercial and public interests Secure revenue stream and covenant? Private sector brings: Management disciplines and preventative maintenance New technologies Personnel development Finance and resources Control of risks Efficiencies through integration of design, construction, and operations Speed of construction – no payment until completion Cost 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

8 Developing a partnership structure

9 Many partnership models exist
Level of risk transfer to private sector 9

10 Different levels of risk transfer

11 Potential benefits of PPP
Long term contract between public sector (federal, state or municipality) and private sector for provision of capital asset and services Typically 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 services May 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 refurbishment At the end of the contract period, the asset reverts to the public sector. Substantial proportion of payment fixed for contract life The asset and services to be provided by the private sector contractor are specified in output terms by the public sector authority The public sector pays a single periodic contractual payment for the asset and services over the life of contract Payment 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 sector 11

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 procurement Non-PPP procurement Time over-run UK 22% 73% Australia 12% 35% Cost over-run 24% 70% 13% 26%

13 What can PPP be used for? Selected sectors – slightly different structures in each
Roads, highways and street lighting Toll road concessions, non-tolled roads, urban roads "from curb to curb", street lighting, traffic management systems/congestion control Education School buildings and maintenance, school IT, colleges and universities, student residences, science and research parks Justice Prisons, court facilities, police/fire/rescue stations Energy All energy sectors, renewable energy facilities Health (note public sector role in Europe) Primary care facilities, hospitals, medical equipment, IT systems (records projects), mental health Transit Light rail projects, metro schemes, high speed rail, rolling stock fleets Urban regeneration & Leisure Stadiums, 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

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 PPP Long contracts, so can be inflexible if material future changes in demand are likely Procurement 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.

17 Assessment of value for money

18 Conclusion: PPP as an option - not the only answer
Consider the characteristics present in most successful PPP projects: Statutory and political environment Organized structure (public sector delivery capability, governance) Detailed Business Plan (business case to contract) Guaranteed revenue stream Stakeholder support Careful 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.

19 Questions?

20 Contact Details Bob Childree Director 334-324-4481
Christian Fuellgraf Neil McMonagle Senior Manager

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