Presentation on theme: "Veronica Vecchi Project Finance for public investments: which improvement margins?"— Presentation transcript:
Veronica Vecchi Project Finance for public investments: which improvement margins?
Project Finance: a definition Project Finance is a financial and managerial tool which when applied to the public sector allows private capital and know how to be utilised to construct infrastructure and provide public services. It can be defined as a financing venture of a specific economic activity, achieved by a specially constituted partnership, in which the cash flow deriving from the management represent the primary source for covering the debt (Fabozzi, Nevitt 2000).
PFI for public infrastructures Generally, the advantages that public administration can expect from project finance can be summarised as follows: gaining financial resources through equity and debt from the market; replacing bureaucratic - administrative reasoning with managerial approach, placing more emphasis on bettering the quality; gaining innovative technical solutions, developed in contexts where liberalisation of public services is more advanced; bettering the management and risk allocation, in particular regarding time and cost for construction and management performance.
Variation to theoretical model The theoretical model of PFI isnt always applicable to financing public investments, owing to: nature of public services functional allocation of public infrastructure level of demand variety of needs of diverse users Consequently Project finance operations for the development of public investments often dont have sufficient cash flow to repay investments and maintenance costs…… ….. therefore they require public funding in order to ensure the economic and financial stability of the project and consequently to encourage private participation in the project.
Typologies of projects Public projects which can be funded by project finance are classified in two main categories with reference to the users: Projects which require users to pay; Projects which require the public administration to pay.
Projects with paying users For projects which require the users to pay, a further distinction can be made according to the level of fees and prices applied: 1.Projects that have prices that ensure profit making (financially free standing ventures). 2.Projects that provide non-remunerative services, with a political or social price, which dont repay the total investment and maintenance costs (mid-remunerative projects). 3.Projects that provide free services to the users. The lack of payment on behalf of the users doesnt allow the investment and maintenance costs to be repaid.
Projects with paying PA Projects which require the public administration to pay are aimed at creating the conditions which will allow the agency/office/department to supply the service which they are in charge of. The involvement of private organisations is aimed at constructing infrastructure/building – such as public and municipal offices, hospital facilities – at the functional maintenance of the projects and to supply any support services to the core activity (the so-called accessory services). Generally, the private organisation doesnt interact with the user.
A cognitive map TYPE OF PROJECT FINANCIAL SUPPORT APPLICABLE SECTORS PROJECTS WHICH REQUIRE THE USER TO PAY A FEE Fee which ensures economic and financial balance None Parking Lots, cemeteries, incinerators, toll roads, sport facilities, shopping mall Fee which doesnt ensure economic and financial balance Shadow toll Public grant Toll roads, tunnels, cable railways, sport facilities, recreation – cultural facilities, purification plants, day care centres, day care retirements facilities, retirement villages. No fee applied to the user Shadow Toll Unsecured funds Roads, tunnels, bridges PROJECTS WHICH REQUIRE THE PUBLIC ADMINISTRATIO N TO PAY The company delivers commercial services to users, who pay a market price form them Maintenance Fee Public grant Hospitals, public buildings, schools, prisons
Map of public support
From traditional to new supporting tools The most frequently used tools are public grant, shadow tolls and maintenance fees… But there are other less common tools to support more efficiently projects, such as: Equity + subordinated debt; Property and use rights; Structural funds and JESSICA initiative; Variable fees
Equity + Subordinated debt Main benefits: If the liquidity is delivered as equity and subordinated debt, it isnt taxed by VAT (in Italy grants delivered to reduce the total cost of investment are subjected to VAT at 10% rate); The liquidity delivered as equity and subordinated debt hasnt be delivered on the basis of advancement of works: this reduces cost for the SPV and consequently for the public administration; The liquidity delivered in such a way will be reimbursed at the end of the project; The share of equity permits to perceive dividends.
Property and use rights Transferring ownership rights to non functional assets when the contract is stipulated, these can be exploited by developing new commercial activities or alienated by the project company; Transferring ownership rights of the non functional structure (substituted with the new infrastructure) only after the new investment has been implemented; Transferring the use of assets for the duration of the project for developing commercial activities, at times socially based. Property and use right have been used to implement important project of urban renewal
JESSICA An important source to support PFI venture is represented by structural funds. It is useful underline here the initiative JESSICA (Joint European Support for Sustainable Investment in City Areas) promoted by EIB and addressed to urban renewal. The objectives of JESSICA are the following ones: channelling structural funds in PPP for urban renewal ventures, which need a public financial support in order to reach the financial and economic equilibrium; reinforcing technical skills of public and private operators in the field of structured finance for public infrastructure, stimulating the matching between different financial sources – equity, debt, grants; guaranteeing an efficient, effective and flexible allocating system for public resources.
Fix towards variable fees A fixed fee ensures a definite and manageable burden and therefore doesnt require significant monitoring systems. On the other hand such an inflexible system could induce opportunistic behaviour on behalf of the private organisation, seeing that there is no incentive for efficient management. This system also has a higher risk of straying the real performance from the true performance over the mid-long term.
PA as Project Manager Behaving as a project manager means Orienting and drive the private operator through precise, clear and detailed project documentations and guide lines; Receiving comparable proposal; Reducing or eliminate the drawbacks of the formal public procedures of the tender, which is often the main cause of their long timing; Reducing transaction costs; Increasing reputation of Public Administration; Increasing negotiation power of Public Administration; Widening the competitive arena;
What to do? Assessment process: 1.assessment of the opportunity of the investment, based on the analysis of the economic and social context, the citizens needs and the current supply; 2.assessment of the feasibility of the investment, aimed at singling out the technical and managerial solutions which permit to reduce the investment costs and to empower the managerial efficiency (on the basis of alternative scenarios); 3.assessment of the financiability (the capacity to be financed) of the investment, aimed at addressing the choice of the most convenient pertinent financial tool; 4.assessment of the sustainability of the investment, aimed at singling out and minimizing the economic and financial impacts on public accounts.
The value for money of PFI Criteria for the assessment of value for money can change on the basis of the characteristics of the infrastructures: Under the hypothesis of financially free standing projects, the assessment should consider the level of tolls on the citizens. Choosing the most convenient project means applying the principle of the social value for money; Under the most frequent hypothesis of projects which require a public financial support, the assessment criteria could be represented by public sector comparator, adopted in UK experience.
… if the PFI was convenient? In the case in which PFI is convenient or in the case in which it is considered the only financial tools available (the only game in town), it is necessary to proceed with other analysis, aimed at defining: 1.the way to support the economic and financial equilibrium; 2.the negotiation margins with the private operator; 3.the impacts on Public Administration accounts.
New Culture & New Competencies Moving from a system based on a public financing system and a public direct management of services to systems based on a lighter public intervention requires the development of new competences, mainly of project management, of assessment and coordination, which represent a new frontier for the changing process that has been experimented by Public Administration since around ten years. The externalisation of the production functions cant lead to an externalisation of the governance and coordination functions, which require then the development of new and specific competences and which determine new training fields.
THANK YOU VERY MUCH FOR YOUR ATTENTION!!! For Info Veronica Vecchi Università Bocconi Istituto di Pubblica Amministrazione e Sanità Viale Isonzo 23, Milano Italy