Cooperation between public and private players in the

Cooperation between public and private players in the Swedish public real estate sector: motives and contract types ERES Conference 2009, Session 5 -K PPP Linda Andersson, +46 8 520 593 20, +46 70 318 93 20 linda. m. andersson@se. ey. com

Agenda 1 2 The concept and definition of PPP 3 PPP models and examples 4 2 Background Q & A: s

Infrastructure is the definition of our common owned public assets and utilities INFRASTRUCTURE CATEGORIES Economics Social Transport Communications Roads Bridges Tunnels Airports Rail Systems Seaports and Shipping Cargo and Logistics Centers Urban Mass Transit 3 Energy and Utilities Gas Storage and Distribution Electricity Distribution and Generation Water Supply and Wastewater Treatment Renewable Energy Cable Networks Cell Towers Wi. Fi Satellite, TV, Radio and other systems Universities Schools Hospitals Prisons Sports Stadiums and Facilities Convention Centers Public Housing Community Facilities

Swedish Public Sector is a large producer of welfare services ► ► ► 4 Public sector consumption of core services (education, healthcare etc) is about 700 billion Skr (70 billion Euro) Public real estate sector owns a lot of property assets; 90 million sqm that cost about 90 billion Skr per year to manage and own. Big impacts… How optimize property owning, that is to offer right amount of premises, to the right level of quality and to the right price? How do we transfer capital to the core business so that the quality within education and healthcare increases while the costs for FM and property management decreases? More for less? How does facility services as logistics, a sufficient indoor environment and beautiful premises support the core business and still be a driver considering the questions above? Cooperation with private companies in order o stimulate the development towards efficient solutions!

Agenda 1 2 The concept and definition of PPP 3 PPP models and examples 4 5 Background Q & A: s

Public Private Partnership (PPP) is about to reach a break through The concept of PPP ► Collaboration in building and finance of property and/or functions within the property. ► Whole chain; initiation, planning, design, building, finance, operations and maintenance of building and or/the core business, delivery of Facilities Management ► The development of PPP How do we integrate democratic tax-financed works and goals with the business of private companies (of course with profit interests)? ► Main issue In Sweden: ”Third sector” is the driver, experiences of solutions within infrastructure, culture and recreations and sport facilities. ► ► Risk allocation That party that is competent to bear a risk, do that in the best possible way at the same time as incentives are created to improve (measured by quality and costs) the processes. Win-win situations! ► ► 6 International: UK and several other countries in Europe are ahead. Thatcher initiated the process. The idea is that the private company bears the financial risk and the operational risks related to operations, maintenance and construction. The public organization bears the risk for planning and for permissions needed being granted within reasonable time-horizons. The theoretical framework is general principal/agent theory and contract theory.

A comparison between a conventional project… Public Sector State County Councils and Regions Municipalities Contract (construction) Contract (operations) Contractor Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008)) Contractor

…and a PPP-project. Public Sector State County Councils and Regions Municipalities Private sector Financier Construction company, FMcompany, , Private Equity-bolag Step 1: Owning Banks Investment banks SPV Contract (construction) Contract (operations) Contractor Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008)) Contractor Steg 2: Conduct -ing contract

Legal definition EU and its condition in Sweden 1 (2) ► Institutional PPP ► ► Companies etc. Contractual PPP ► ► Concessions PFI (Private Finance Initiative) Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008)) and Arnek M et al 2007 9

Legal definition EU and its condition in Sweden 2 (2) ► The following sections of the Swedish law has to be thoroughly analyzed when conducting a PPP-project: 1. 2. 3. 4. 5. ► ► 10 Kommunallagen (The Swedish Local Government Act) Offentlig upphandling (Law on Public Procurement) Konkurrenslagstiftningen (Law on Competition) Immaterialrätten (Law on Intellectual Property Rights) EG: s statsstödsregler (EU legislation on state support) It is common to procure a PPP-project with negotiated procurement procedure together with concession (according to LOU) ”Competitive dialogue ” may be used in certain occasions

A PPP-model is characterized by four features… Long contracts Risk allocation The role of the economic operators Private financing Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008))

A proposed definition of PPP ► Public Private Partnership, PPP, is a model for combining the resources and skills of the public and private sectors with an emphasis on value for money and delivering quality public services. The model embraces identification and valuation of all project related risks and stipulates a transfer of operational and financial life cycle risks from the public party to the private party. ► PPP suggests solutions to questions of investments in infrastructure, ownership and procurement of public services and infrastructure and conducting construction, operational and facilities management contracts. Källa: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008))

Risk- and responsibility differs between a PPP-project and a more conventional project Risk Public Party Risk Contractor Financing Planning Permissions Opinion Organisation Building Oper. /mainten. Conventional project Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish 13 contracts” (Andersson, L (KTH 2008)) Risk Public Party Risk SPV Financing Planning Permissions Opinion Organisation Building Oper. /maint PPP-Project

Cash-flow differs between a PPP-project and a more conventional project Comparison of cash-flows with different methods of procurements Cashflow in a traditional project Cashflow in a PPP-project (incl cost of financing) Source: ”Public Private Partnerships, PPP- theoretical models and an analysis of Swedish contracts” (Andersson, L (KTH 2008)) 14

PPP is a complement that evolves and educates the construction sector ► Higher efficiency and quality in public services- save tax resources and get a suitable product. ► ► ► ► 15 5 -17% average net present cost savings and 5 -10% savings in construction costs Up to 45% faster construction Better, faster and cheaper implementation, i. e. more value for money Low life cycle cost (LCC) Effective and reliable project delivery measured by time and money. Private financing more or less guarantee incentives for a higher level of quality. Low and known operations and maintenance costs. Optimal risk and- responsibility allocation

Agenda 1 2 The concept of PPP 3 PPP models and examples 4 16 Background Q & A: s

Experiences from UK ► Surplus value public sector (from Great Britain): ► ► ► 17 Long-time contract gives alternative ways of conducting and an optimization of life cycle costs. The main part of the savings is related to the risk transfer to the private company (average 17 %) BUT other kinds of incentive contracts also creates lower net costs. An early commitment by private companies increases creativity and innovation. Most common in health care, education and transport infrastructure.

Experiences from Sweden Present ► ► 18 Transport infrastructure ► Arlandabanan Social Infrastructure: ► 49 municipalities and 6 regions claim having experience from PPP-projects or similar models. ► Examples ► Sundsvall - arena ► Västerås – concert hall ► Nacka - ”Dieselverkstaden” ► Umeå – Home for elderly ► Most common with project within the area for culture and recreation ► The definition of PPP is somewhat blurred Challenges ► What are the drivers? ► How to formulate the contracts? Leasing contracts? ► How to procure a PPP-project? ► What “praxis” shoul we follow? The Anglo-Saxon or the Norwegian/Italian?

Agenda 1 2 The concept of PPP 3 PPP models and examples 4 19 Background Q & A: s

Strategic questions ► How does PPP- and BOT-solutions creates ”win-win” situations? ► ► ► ► 20 How should the contracts be formulated? How should the risks be allocated? What about the purchaser competence? Is there a market of private companies that can manage these projects? How many? Pricing models? Payment mechanisms? What does the law say? National regulations? EU? What about “competitive dialogue”? EU´s green book

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