Rationale for PPPs Jennifer Hara February 8, 2017 Director, PPP Services Institute for Public Private Partnerships

Who Is IP3? The Institute for Public Private Partnerships (IP3) Founded in 1994. Global Leader in education (capacity building) and training in economic, financial, and government reform. The key driver for IP3 is to help government find innovative solutions to public service delivery. We have trained over 35,000 officials from 175 countries. Provide consulting services in economics, regulation, law, finance, management, PPPs, procurement, negotiations. Clients include national and local governments, international donor agencies, and private sector companies.

What are PPPs? A long-term agreement between a government entity and a private company for the provision of, a public service. The private company receives a revenue stream—from government budget allocations, from user charges, or a combination—dependent on the availability and quality of the contracted service. The private company must generally make an investment in the venture and assume risks assumed by government under traditional procurements options. In addition to budget allocations, the government may make further contributions, (land, guarantees, rights of way etc.). At the end of the PPP contract, the assets normally revert to government ownership.

Advantages and Challenges of PPPs Greater accountability Shift of risk to parties best able to manage risks More predictability in gov’t expenditures More resources available for other public activities Lower life cycle costs Improved quality in public services Considerable upfront analysis and due diligence required Technical capacity in public sector Complexity of procurement, contracts and project management Managing fiscal risks Financing packages

What are the objectives of PPPs? PPPs must deliver a public services over a relatively long period of time. PPPs are focused on OUTPUTS not INPUTS. Essential first Step—What are we trying to achieve? PPPs must be developed within each region’s political and business culture – no one size fits all.

How to define outputs for PPPs Be SMART—What is the project expected to deliver? Define KPIs that are measurable and verifiable. Ensure that the contract fully reflects the KPIs. Include procedures to monitor the KPIs. Avoid vague and unclear concepts. Use benchmarks that align with gov’t policies. Understand the tradeoffs between outputs and costs — Don’t ask for the moon…

Where are PPPs used? PPPs are identified with normally large projects, but some less costly projects can use PPP structures.

Why use PPPs (vs. traditional procurement)? Reform and modernize the delivery of public services. Better Value for Money in the procurement of public services. Insert more competition into the delivery of public services. Avoid thinking short term about problems that require long term solutions (whole life cycle costing of infrastructure). Introduce more transparency in the costs and delivery of public services. Increase levels of accountability for delivery of public services.

Misconceptions or truths? ‘PPPs are a gimmick which is applied to give the private sector guaranteed profits with no accountability--- ‘PPPs are more costly than traditional public sector funded projects because the public sector can borrow at lower rates of interest than private companies--- ‘PPPs hamstring the government and prevent it from implementing as environmental and safety policies and protections for organized labor--- ‘PPPs don’t give the affected communities and other stakeholders sufficient opportunities to air their grievances or affect the structure of the project and its deliverables--- ‘In PPP transactions, government officials are at a competitive disadvantage vis a vis their private sector counterparts who are generally more knowledgeable about the technical and financial aspects of the project ---

Types of PPPs Service Contracts Management Contracts Design-Build Design-Build-Operate-Maintain Build Operate Transfer Build Own Operate Design Build Finance Operate Concession

Range of PPP Structuring Options

Traditional Public Procurement vs. PPP Procurement Puts power plant construction contract out to tender Identifies new power plant as policy priority Designs power plant and develops specifications Makes budget allocation or raises loan for capital costs Builds power plant according to specifications Maintains and operates power plant Defines required standards of power plant quality over time Puts power plant PPP out to tender Designs power plant, identifies lenders and contractors Maintains and operates power plant over contracted period Makes regular payments if power plant meets contracted standards Puts power plant maintenance contract out to tender Repairs power plant according to specifications Government Private Contractors Design, specification and financing Construction Manages power plant construction Maintenance Private Contractor Traditional Public Procurement PPP

General Lessons P3s do not suit every type of infrastructure investment. Public Sector skills are very difficult to retain. P3 Programs are better than one off deals. Standardization in process is critical. Quality control processes are essential. Project selection is key (selecting projects that best fit the P3 model). Public sector procurement and negotiation capabilities need to be strong. Successful P3s involve meaningful and realistic risk transfer. There is a minimum viable size for P3 projects.

General Lessons Some projects may be too large and complicated to be successfully procured as P3s. The policy focus for P3 promoters should always be on value for money. Procuring agencies should not lose sight of long-term affordability, both to government and to users, when considering P3 programs. Investments designated for P3 arrangements need to be fit with a country’s growth and development strategy. Efforts are needed to improve the underlying investment climate, including the transparency and predictability of the regulatory regime. Successes in the area of infrastructure P3 projects require perseverance and long term commitment by governments.

Key Questions for PPP Identification Benefits: Will the PPP unambiguously result in improved access to services, better quality, and greater efficiency? Cost-Recovery: Is there a clearly identifiable revenue stream? In what currency is it denominated? Demand: Is there a proven demand for the service, and is it measurable from past records? Stakeholders: Which stakeholders will be affected by the PPP project (consumers and labor are critical)? Dialog vs. Dictation Public Capacity: Is the public sector clearly committed to “steering instead of rowing,” and does it have the institutional capacity to monitor, regulate, and commit to the partnership long-term? Labor: Will new investments create new employment or would the PPP likely require reduction of overstaffing? Technology: Is it tried, tested, and proven?

P3 Best Practices – 20 Actions to Consider P3 Best Practices – What to Ask P3 Best Practices – 20 Actions to Consider Understand the enabling environment for P3s in the target market  Be aware of political interference risks and societal expectations Ensure that local partners are reputable Understand the expected deliverables/expectations – early discussions on design, planning, cost, operations etc. Complete a comprehensive due diligence process - make sure that there are open transparent information flows and that all information is released Hire local where needed, hire global when innovation is needed Verify revenue projections – are they verifiable, feasible, sustainable – what are the currency exchange risks Complete a comprehensive risk assessment and development a mitigation process strategy Ensure that risk is allocated correctly and appropriately Remember you are entering a marriage of (in)convenience - long term, contractually binding   Institute for Public Private Partnerships (IP3) http://www.ip3.org

P3 Best Practices – 20 Actions to Consider P3 Best Practices – What to Ask P3 Best Practices – 20 Actions to Consider Ensure that insurance responsibilities are correctly and appropriately allocated and are affordable  Assess institutional capacity of you and your partners – hire appropriate technical staff/consultants to fill gaps Establish a balanced financial partnership that has clearly defined expectations regarding loan responsibilities and revenue responsibilities Have reasonable expectations – they differ between the public and private sectors Educate the public sector and banks (in undeveloped P3 markets) about P3s P3s are not philanthropy – nor are they free money! Every project is different – use international best practices as a starting point Sell innovation – P3 projects are not necessarily cheaper, but are more likely to deliver as there are financial incentives for them to be run efficiently Unsolicited proposals are risky – should only be attempted in a climate of transparency If P3 opportunity seems too good to be true – then it should be avoided   Institute for Public Private Partnerships (IP3) http://www.ip3.org

Summary: PPPs are a marriage! You and your P3 partner are working together for a common goal – or should be! Make sure you share project objectives before you sign the agreement Remember you primary objectives, what do you (the government) want from this agreement? Transferred Risk = Higher Costs PPPs require careful attention and planning.

Questions? Jennifer Hara Jennifer.Hara@tetratech.com