© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Selecting and Designing Concession / PPP Projects Martin Darcy United Kingdom « Concessions and Public-Private Partnerships » Ankara, March 2008

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Points to Consider from the Start l PPP is a concept that can be adapted to individual project conditions l It is essential to be clear about the Objective (s) l There is no such thing as a PPP project intrinsically, only Public Investment Projects that may or may not be procured using a PPP methodology l PPP cannot make a bad project a good one l PPP should not be used as an accounting trick but as an efficient method of delivering the a Public Investment Project l The Ministry of Finance must develop the necessary skills that enable it to identify contingent liabilities that can come with PPP projects l Unrealistic expectations (affordability, timetable, development budget) will cause problems and, ultimately, disappointment

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Life cycle of PPP projects Strategic analysis Tendering Early operational Pre-operational Implementation Contract completion Mature operational

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU The Importance of Selecting Good Projects l Capital investment is vital l Good projects: create economic benefits and growth create confidence in a country create value for money solutions thus minimising tax-take l Bad projects: create ongoing liabilities for many years big projects = big risks failure is often high profile: nationally and internationally can undermine investor confidence in the country can make the good projects unaffordable

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU How Poor Quality Projects Happen l Poor Objective Setting l Weak Option Appraisal l Inadequate Cost/Benefit Analysis (CBA) l Political rather than economic decisions l Poor Identification of recurrent costs l Under estimation of Capital costs l Inability or unwillingness to hire appropriate expertise l Fear of peer review l Lack of transparent and fair procurement processes l All summarised by the phrase: ‘poor preparation’

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Issues to Consider 1 l Does the proposed project reflect the current policy environment of the government? l Is there political support? l Are the objectives of the proposed project clear and easy to communicate? l Have the project governance arrangements been agreed? l Skills and capacity (and funds to pay for it all)

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Issue to Consider 2 l Have all the options for realising the objectives been identified and evaluated? l How do you test the capital cost estimates? l How do you identify the recurrent costs? l Is the proposed project affordable to the State / to the Ministry’s budget l What is the likely impact on the National Debt?

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Issues to Consider 3 l Have all the Risks to the Project been identified? l Have the ‘worst case’ costs been evaluated and considered? l What other factors could influence the outcome? l Who are the stakeholders in the project? l Are project delivery times realistic? l Is there likely to be a competitive market to allow a healthy procurement process?

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Strategic Assessment Government Policy Public Investment Program Public Investment Project Conventional Procurement PPP / PFI / BOT etc Public Investment Project Public Investment Project Output Specification Option Assessment

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Common Challenges in Evaluating PPP Opportunities l Ensuring there is a market demand for the proposed investment l Understanding Investor and Lender Requirements l Insufficient bidders to provide competition l Establishing the correct governance structure l Sourcing appropriate skills in order to pursue a PPP project l Political rather than Economic choices place the outcome at risk l Not all investment projects are suitable for PPP in terms of: Type of investment opportunity (sector) Size of investment

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Evaluating and Selecting PPPs (1) l Clarity of Objective(s) l Links to published policy statements l Priority setting for public investment l Create an Outline Business Case that can be adapted as the project progresses. Use Cost Benefit Analysis to assess the value of the project. This allows comparison with other projects competing for scarce resource l Create a ‘should cost’ model and consider the concept of ‘Optimism Bias’

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Evaluating and Selecting PPPs (2) l Questions: Is there a competitive market? Does the Contracting Authority have the skills and capacity to deliver the project? Does this sector of the market enjoy a good track record? What precedents are there for this type of PPP, nationally and internationally? Where can lessons be learned? Are the stakeholders to the proposed PPP project fully supportive? What are the motivations for investigating the use of PPP for this project? Will bidders be given freedom to achieve the objectives of the investment using their own initiative? If so, what will be the award criteria?

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Managing Risk l Simple Principles: Each identified risk must be accepted by the party best able to manage (or to bear) the risk Those risks that neither party can manage – use insurance to cover the risk Transferring unrealistic risks to the private sector is a risk in itself Transferring risks to the private sector that it cannot manage will cost more – they will charge a premium for managing the risk

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Simple Funding Principles For A PPP Project 100% 25% 0% EQUITY Long term Borrowings More risk more equity Debt is cheaper than equity 75% Investment cost Note: Illustrative Example Only

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU Contingent Liabilities l Any contractual obligation that may, if it is called up on, create a liability for the government l Examples: Payments guaranteed at a minimum level Events of Termination that incur compensation costs for the government

© OECD A joint initiative of the OECD and the European Union, principally financed by the EU PPPs - Lessons learned l Political will and visible support is essential. l A clear, permissive and flexible legal framework is necessary l The necessary supporting institutional structures need to be in place (‘Public Public Partnership’) l Consider the cost of hiring experienced advisers as a positive investment in the outcome of the project l Full and adequate preparation is essential. Without it, the project will probably fail