Jeff Delmon FEU Financial Solutions World Bank

Why PPP? Procurement efficiency Lifecycle management Design/construction/operation management Monetizing investment profile Innovation/technology Finance New sources FDI Local financial markets

Risk Assessment Project Specific Risks  Completion Risk (engineering & construction cost / time cost control/performance/defects)  Operational Risk (technology, quality, technical & operational know-how)  Environmental and Social Risk (future liabilities, project delays, costs overruns)  Credit Risk (project leverage) “’non sovereign Risks” Country (Economy wide) Risks  Political Risk (expropriation, political violence, Gov’t breach)  Regulatory Risks (pricing formulas, right of way, currency convertibility & transfer)  Legal Environment (rule of law, judicial system, access to justice and arbitration) “’ sovereign risks” Demand Risk Demand Risk (traffic/usage) Environmental Risk Environmental Risk (past liabilities) Pricing Risk Pricing Risk (regulated and non- regulated) Financial Risk Financial Risk Inflation, interest rate and exchange rate fluctuations

Infrastructure Finance : Risk Allocation Project Company Project Company Shareholders Lenders / Bondholders Lenders / Bondholders Operator Construction Contractor Construction Contractor Granting Authority Granting Authority Purchaser Supplier Shareholder’s Agreement Concession Agreement Purchase Agreement (e.g., power purchase agreement) End-users Supply Agreement (e.g., gas supply agreement) Construction Contracts Operation & Maintenance Agreement (O&M) Regulatory, Demand & Pricing Risks Regulatory, Market and Performance Risks Completion Risks Operating Risks Residual Risks Refinancing Risks Credit Risk Political and Macroeconomic Risks Regulatory Risks Transfer & Convertibility Risks Residual Risks

Municipal or Provincial Authority Divestiture PublicMixedPrivate Joint Venture Corporatisation Public Water Co. Private Mixed Public Management of Service provider The Dynamic of PPP Control of Assets Cooperative, Twinning Service contracts Management contract, Franchizing, O&M, Performance contract BOT, BOOT, DBFO, DCMF, IPP, BOO Concession, Output contract, Outsourcing Lease contract, Affermage

Key Stages in the Procurement Cycle 1. The Investment Decision 2. Contract Tender and Award 3. Service Delivery

1. The Investment Decision Objective: To develop an affordable project that addresses the identified service need and that can be readily delivered Project Development defines the service needs, identifies potential solutions and considers the suitability of PPP delivery Project Feasibility develops the most suitable solutions and assesses their affordability, deliverability and identifies the preferred procurement method Project Development Project Feasibility 1. The Investment Decision

2. Contract Tender and Award Pre-Qualification Detailed Tender Preferred Bidder Contract Award and Financial Close 2. Contract Tender and Award Objective: To select a private partner that can work with government to implement the PPP contract Pre-Qualification identifies potential, suitable partners Detailed Tender evaluates competitive bids that are capable of delivering the services and the PPP contract Preferred Bidder identifies the preferred partner to deliver the services and the PPP contract Contract Award and Financial Close finalizes the PPP contract and any financing required

PPP Procurement  Integration of several contracts under one long-term contract  Focus on outcomes, with performance standards defining the service level and link payment to performance  Optimal risk allocation over the life of the contract  A partnering approach to the contractual relationship  A transparent, competitive process for contract award Other Procurement  Short-term contracts with one contract for each asset or service  Focus on inputs or assets often with no ongoing performance standards  Government accepts the majority of risks over the life of the contract  Contract relationship based on buyer-supplier relationship

3. Service Delivery Contract Implementation Service Delivery Review 3. Service Delivery Objective: To have the PPP contract implemented and the services delivered effectively and efficiently Contract Implementation delegates the service delivery functions to the private party who works with government to implement the PPP contract Service Delivery monitors the services being delivered to ensure they meet the service levels outlined in the PPP contract Review facilitates the continuous improvement of the PPP procurement cycle and considers the value and benefits generated

Key Challenges for Bank Projects Short listing  To maximize competition  To keep costs down Bid evaluation criteria  Key criteria are often technical and legal –  Need for more subjectivity – scoring of Contract mark-up Reasonableness of financing plan Life-cycle/innovation in technical proposal Negotiations/communications during and after bid process  BAFO and similar structures  Involvement of lenders post bid Monitoring and Supervision

Special Issues for Guarantees and FILs Guarantees Economic and... FIL Portfolio of projects Need to set rules that entity can follow without Bank approval on a project by project basis