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Public-Private Partnerships Neil McMonagle August 2010.

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Presentation on theme: "Public-Private Partnerships Neil McMonagle August 2010."— Presentation transcript:

1 Public-Private Partnerships Neil McMonagle August 2010

2 America's Infrastructure Report Card Americas Infrastructure Report Card (American Society of Civil Engineers, 2009) SubjectGradeComment Drinking WaterD-$665 million in infrastructure investment required by 2020 EnergyD+$2 trillion in electric utility investment by 2020 RailC-$150 billion in improvements required by RoadsD-$130 billion in infrastructure investment by 2020 SchoolsD$332 billion required to bring schools into good repair WastewaterD-$335 million in infrastructure investment required by 2020 Overall GradeD The Bottom Line: America will need to spend $2.2 trillion in infrastructure investment over the next five years for the nations infrastructure to be ranked in Good condition (Overall Grade: B).

3 America's five year infrastructure funding requirements are immense Roads Energy Water Rail 11% ($160bn) 5% ($75bn) 17% ($225bn) 4% ($63bn) 63% ($930bn) Schools 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/ NJs 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 6

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 8

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

10 Different levels of risk transfer

11 Potential benefits of PPP 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). 12 PPP procurementNon-PPP procurement Time over-runUK22%73% Australia12%35% Cost over-runUK24%70% Australia13%26%

13 What can PPP be used for? Selected sectors – slightly different structures in each 13 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 14

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 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. 16

17 Assessment of value for money 17

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. 18

19 Questions?

20 Contact Details Bob Childree Director Christian Fuellgraf Director Neil McMonagle Senior Manager

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