PPP International Best Practice and Regional Application Overview of Public Private Partnerships (PPPs) 23 -25 April, 2008 Tegucigalpa, Honduras Filip Drapak World Bank Institute
Why PPP • Large infrastructure gap in both developed as well as developing countries • Risk management • Project management skill • Lack of public funding available for infrastructure • Procurement efficiency
How is PPP defined? • Long term contract • Between Private and Public body • Contract contains risks that are withhold by private sector
Roles of Partners Rules of the game set up by public sector: - Legislation and regulation - Institutions - Procedures - Procurement Public partner Successful project Private partner Project inputs set up by private partner: - Design - Construction schedule and content - Maintenance schedule - Subcontractors
Types of PPP 1. Who is paying? 2. Who has a demand risk? Concession type PFI type • User pays principle • Demand risk with private partner • Public body pays on behalf of users • Demand risk with public partner Hybrid type • Shared payments between Public and User • Demand risk with private partner, public partner or shared
Contractual types of PPPs • M&O ? – long term operation and maintenance contract • DB ? – Design Build • BBO ? – Buy Build Operate • BOT – Build Operate Transfer • BOO – Build Own Operate • BOOT – Build Own Operate Transfer • DBFO- Design Build Finance Operate • Concession
How to make it a success? Meet objectives of all stakeholders Public partner Users Project Finance providers Private partner
Public sector objective • Output based delivery of infrastructure and service • Value for Money • Procurement according to regulation • Risk transfer to Private partner
Private partner objective • • • Profit Lowest possible procurement risks Reference Long term use of own capacity Risks transferred to subcontractors Projects pipeline
Financier objective • Save return of loan • Profit margin reflecting the risk • Risks not with borrower (transferred to public sector or to subcontractors)
Users objective • Low or no user fees • Transparency of tariffs and procurement • Quality of infrastructure and services
Is there a Best practise? Rules of game Capacity Political will Market capability
Political will • Demonstrated political will • Ideally not dependent on election terms • Political rationale
Rules of game • Clear procedures of project management • Public procurement legislation • • Policy and regulation Law and legislation optimisation Standardised contacts Clear tolls of avaluation
Market capacity • Availability of Experienced sponsors • Availability of reliable subcontractors • Availability of long term finance at a given risk profile • Availability of risk mitigating instrument
Capacity • Capacity (public) on national level • Capacity (public) on executive level • Institutional capacity, memory and experience • Capacity with private sector – Advisory – Project Sponsors – Financiers
What is different in PPP? • Extra costs: – For preparation and procurement – Cost of capital – Expensive debt • Benefits – Life time costing – Risk transfer – Innovation
Fiscal space • The Extent to which fiscal decisions can be made by a public body – Fiscal space is a key driver for PPPs – Successful PPPs tend to enlarge fiscal space – Fiscal space can be jeopardised by “bad” PPPs
Project Finance and PPP • Financing infrastructure using Public Debt is in terms of financing most cheapest ways, however each new debt can affect overall rating and make all debts more expensive • Project finance is most expensive way of financing projects, however its influence on overall rating and fiscal space can be limited • To accept all risks and use Project finance is the worst solution for a Government
Project Finance - Risk Analyses Risk mitigation and credit enhancement Force major risks Sovereign risks On-project risks
Construction risk • • Key risk in PPP/PFI Difficult to measure Fully transferred to Subcontractors Some issues: – site conditions, potential delays, credit rating and track record of Subcontractor, new or existing project, vulnerability of project, risks of currency and inflation, planning risks
Demand risk • • Key risk in projects that apply user fees Difficult to predict Difficult to mitigate Some issues: – Users willingness to pay, level of fees, alternatives, who is responsible if there is not demand….
What can jeopardise PPP – Tender is not competitive or transparent – Project risks are not well defined and contractually transferred – Risks are to high and can’t be mitigated – Change in political will
Thank you for your attention Filip Drapak World Bank Institute fdrapak@worldbank. org
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