1 T RANSACTION ADVISORY S ERVICES PPP ADVISORY Social Service Partnerships Availability PPPs in Emerging Markets Alistair SAWERS, PPP Advisory, Ernst & Young Project Finance

2 Overview Introduction Theory: Social Service PPPs & Availability Payments » Description & Uses » Structures & Risk allocation » Limitations Practice: Bajío Hospital PPS Project » Outline » Success Factors Conclusion: Pitfalls from Other Transactions

3 Introduction Personal Experience UK PPP Market » Funder: First Project Financed PPP – Fazakerley Prison » Investor: UCL Hospital refinancing » Advisor: University of Hertfordshire, UK Met Office Emerging Market PPPs » Eastern Europe » Latin America

4 Theory Social Service PPPs & Availability Payments

5 Defining Public Private Partnerships PPP has a different meaning outside the US » Usual form of procurement is Design Build » Many services are contracted-out International use of PPP or PFI is primarily » Design Build Finance Operate [& Maintain] (DBFO) » Concession structure » Availability & Performance Payments Social Service PPPs rarely have market risk

6 What are Social Service PPPs? Healthcare » Acute Hospitals » Specialist Units » Community Clinics Education » Universities » Schools Judicial » Courts and police stations » Prisons and youth detention centers Others

7 Evolution of Social Service PPPs Universal use of UK model Focus on output specifications Focus on building provision » No volume or market risk » Hard (Facilities) Maintenance included » Soft service inclusion varies User services rarely included » Clinical, teaching, policing rarely included » Guarding, cooking, laundry and some training included

8 Utilization of Social Service PPPs ? = currently being studied = Failed and withdrawn Please note the data is not exhaustive and new projects are being launched all the time Source: E&Y data, InfraNews Project News Database as at Sept 12 th 2006

9 What are the objectives? Cost minimization Ensuring value for money Risk transfer Ensuring adequate incentives

10 How are the objectives achieved? Concession contract Availability Payments Performance mechanisms – Points towards operator replacement – Points towards overall concession termination – Monetary deductions Volume payments (rare)

11 Issues for Availability Payments Payment mechanism » Incentives » Complexity » Underlying cost of funds » Appropriations risk Affordability Evaluation methodology » Measuring value for money » Shadow bid / Public Sector Comparator » Valuing risk transfer

12 Typical Risks Transferred Construction » Design » Completion » Funding Operation » Performance Managing land sales/ development of vacated sites Risks taken by party best placed to manage/mitigate What does that mean in practice?

13 What are the Limitations? Complexity of payment mechanism Appetite for Risk Financeability of risks in addition to country risk Financial strength of potential operators Affordability Transaction Costs / Minimum deal size Legal Framework » Napoleonic code v Precedent based » Property rights

14 Practice Bajío Hospital PPS Project

15 Bajío Hospital PPS Location: City of Leon, Guanajuato Capacity: 184 beds » 40 for paediatrics » 144 for adults Size: 24,000 sq meters Capital Investment: USD 47.5m Coverage: 5,000,000 inhabitants Medical Specialties Unit: » hemodialysis, » short stay surgery » rehabilitation » oncology services

16 Bajio Concession 25 Year Concession operation $47.5m Capital Investment $12.3m pa payment Timeline » Tender announced Mar 2005 » Awarded 9 th Dec 2005 » Construction 11 months » Completion Feb 2007 Acciona Hospital Services selected 4 Bidders Domestic and International

17 Political Support Political Champion » Led by Ministry of Finance » Set up Investment Unit (PPS Taskforce) PPS legislation » Support from Partnerships UK » Issued March 2003, revised April 2004 Additional Rules & Guidelines » 2 business case reviews (Outline & final)

18 Stakeholder Support Consensus building » Institutional Revolutionary Party (PRI) and National Action Party (PAN) support PPS Existing profile of Concessions » Initial toll road concessions in 90s failed » Highway PPS launched concurrently Quick wins to launch process » Strategy to launch 3 pathfinder projects » Pick largest projects

19 Procurement Process Planning » Strategic PPS Plan » Existing regional plan & overall national upgrade plan Selection of credible advisors » Legal: White & Case » Technical: Currie & Brown » Financial: Ernst & Young Marketing and building profile of transaction » Presenting to bidding community » Conferences

20 Selection Process Open and transparent process » Lowest NPV of payments » Acceptance of Contract terms Clear evaluation criteria » Developed from business case Flexibility in bids versus difficulty of evaluation » Chose easy evaluation – simple contract Lowest price v best value for money

21 Payment Mechanism Description » Key performance indicators » Deductions » Penalty points Issue of clarity/complexity Practicality of on-going monitoring

22 Impediments to Process Union/ stakeholder perception » Party of the Democratic Revolution – some opposition » Local bureaucratic resistance Transaction cost/ complexity » Affordability problem with smaller University PPS project Medical equipment -5yrs » Interface/ training » Maintenance/ replacement Termination Payment

23 Conclusion Pitfalls from less successful transactions

24 Pitfalls Transferring risks which are hard to manage » Refurbishment of existing assets » Volatile Land values » Multi-site projects – availability of sites » Volume risk Soft services and Union agreements Clinical Services Unnecessary Complexity