Planning and Managing Public Private Partnerships (PPPs) Martin Darcy Public Investment Workshop Istanbul, Turkey February 29, 2008

Life cycle of PPP projects Strategic analysis Tendering Early operational Pre-operational Implementation Contract completion Mature operational

Points to Consider from the Start PPP is a concept that can be adapted to individual project conditions It is essential to be clear about the Objective (s) 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 PPP cannot make a bad project a good one PPP should not be used as an accounting trick but as an efficient method of delivering the a Public Investment Project The Ministry of Finance must develop the necessary skills that enable it to identify contingent liabilities that can come with PPP projects Unrealistic expectations (affordability, timetable, development budget) will cause problems and, ultimately, disappointment

Strategic Assessment Output Specification Option Assessment

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

Evaluating and Selecting PPPs (1) Clarity of Objective(s) Links to published policy statements Priority setting for public investment 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 Create a ‘should cost’ model and consider the concept of ‘Optimism Bias’

Evaluating and Selecting PPPs (2) 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?

Managing Risk 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

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

Contingent Liabilities Any contractual obligation that may, if it is called up on, create a liability for the government Examples: Payments guaranteed at a minimum level Events of Termination that incur compensation costs for the government

‘Gateway Reviews’ Mandatory in the UK and aimed at improving the quality and outcomes from public investment programmes / projects To identify and prevent mistakes that may only materialise when it’s too late Gives confidence and assurance to decision makers Idea based on the concept of ‘Peer Review’ in common and widespread use in the private sector for decades. Must be independent Must not be burdensome or bureaucratic

Each Gateway…. …has a team of usually three people all independent of the outcome …team will meet for a briefing followed by the review itself. Total time and commitment usually less than two weeks per stage. …need not delay anything. They are usually run in parallel with other activities …should not be costly …produces a draft report to the senior official for comment followed by final report. …report uses a ‘traffic light ‘ system for evaluating specific issues: Green = no problem – go Amber = issue identified - proceed with caution Red = major problem identified – do not proceed without immediate remedial action

Building the Internal Capacity (1) Most observers now agree that scarce human resource in the government sector should be centralised in the case of PPP Reasons: One stop shop for policy advice and assistance for government officials The same for bidders, investors and funders Develop a critical mass of internal knowledge …..But where in the Government? Examples: Ministry of Finance Ministry of Economy Prime Minister’s Office State Planning Authority Semi-autonomous Agency Public Procurement Office

Building the Internal Capacity (2) However, if there is a real prospect of ‘dealflow’ due to the size of the sector (eg Health or Education) then it can be viable to have a PPP Unit in the Line Ministry. But not always. Must also consider the capacity of the domestic market to participate Ongoing public and media awareness and stakeholder training is essential Capacity building takes significant time and money Learn from other projects (but be careful about which ones) There are plenty of financial assistance programs out there to support capacity building

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