INSEAD PPPs as Policy Instruments. Abraham Akkawi November 29, 2010

Transcription

1 INSEAD PPPs as Policy Instruments Abraham Akkawi November 29, 2010

2 Content PPP Defined PPP Advantages PPP Types Public Sectors Readiness Sample PPP example in the MENA region Case Study: Mafraq-Gweifat Highway PPP Project Concluding thoughts Page 2

3 PPP Defined PPPs are legal agreements between government and private sector entities for the purpose of providing public infrastructure, community facilities, and related services. Typically the partners share risk, reward and responsibility for a shared investment Page 3

4 PPP Advantages Cost savings Speed & Timing Risk Transfer Improved Service Levels Ability to Bundle design, build, finance, operate Life Cycle Investment upfront investment minimizing ongoing cost ongoing requirement to continue investing in the facility Handback and reversion Real Estate & Development Opportunities land for development or redevelopment Page 4

5 PPP Advantages (cont.) Access to Financing (on or off balance sheet)/leveraging Innovation and specialized skills Revenue risk sharing Job Creation Construction Industry faster growth Page 5

6 PPP Types Public PPP Types Operating & Maintenance Contract (Outsourcing) Avg. Terms (yrs) Examples 5-10 Garbage Collection Parking, Park Maintenance. Risk Transfer Build-Operate-Transfer (BOT) Design-Build-Finance- Operate-Transfer (DBFOT) Airports Recreational Facilities, Hospitals Private Build, Own & Operate (BOO) Over 20 years Tourism Facilities Concessions 25+ Toll Highways Page 6

7 Why are PPPs Taking Front Stage in MENA? A need for rapid delivery of large scale and complex projects to respond to urgent requirements. Significant capital needs remain in infrastructure, education and health care, for development and for competitiveness constraints on public budgets. Availability of private capital also constrained: investors generally more risk-aware than previously and less willing to take risks in emerging markets. Efficient gains from private sector involvement are believed to be considerable. Page 7

8 Empirical Evidence Improved Project Delivery Study Non PPP Procurement PPP Procurement Cost Overrun UK 73% 22% Australia 35.3% 22% Time Overrun UK 70% 24% Australia* 25.6% 13.2% *Value-weighted Time Overrun Source : UK Study :NAO Report of 2003 UK s national Audit Office Report on PPPs Australia study ; Allen Consulting Group (University of Melbourne) Page 8

9 But Beware of Challenges of PPPs Increased complexity High transaction costs: Large tendering and contracting costs For some projects,total tendering costs can equal around 3%of total project costs as opposed to around 1%for conventional procurement. Significant legal costs in contract negotiation Skill deficit for administration Appropriate allocation of risks Public perception that critical "public assets are controlled by private sector (privatization) Good advice to structure sustainable PPPs Page 9

10 Public Sector Readiness Stakeholders Getting buy-in from stakeholders early and throughout the process will enhance the likelihood of a successful project. Must identify all affected stakeholders, internal and external to the public in order to move the project forward. Understand the roles and expectations of the stakeholders in order to properly communicate with them. Page 10

11 Public and Private Sector Readiness (cont.) Service Provider Community Viability and Deliverability of the Project There should be a natural fit between the requested services and the service providers interested in the initiative. Alternatively, the complexity of the project should be reduced. Project must provide added value to the public sector and must be structured so that the private sector can deliver it efficiently. Viability analysis assesses whether there is value-for-money. Page 11

12 Sample PPP Examples in the MENA Region Closed Deals Zayed University New Cairo Waste Water Queen Alia International Airport Under Procurement Mafraq-Ghweifat Highway Alexandria Hospital Kuwait Al- Zour IWPP Page 12

13 Case Study: Mafraq - Ghweifat Highway PPP Project Page 13

14 Project Background First PPP transport project in the region Design, build, operate, and finance the 327 km highway linking Mafraq to Ghweifat in the western region of the Emirate Consists of four Highway Sections: Section 1 (71 km): the Ghweifat-end of the Highway near UAE-KSA international boarders Section 2 (74 km): currently under construction and is due for completion in 2011 Section 3 (105 km): covers Tarif Ruwais Bypass Section 4 (77 km): the Mafraq-end of the Highway near the City of Abu Dhabi Page 14

15 Strategic Objectives Upgrade the highway to a standard reflecting its strategic significance as an international link to KSA and Qatar Enhance the experience for road users in terms of travel time, safety and quality of the journey Showcase a new outcome-based approach to project delivery Utilize risk allocation and commercial incentives to maximize quality and efficiency Attract world-best approach to life-cycle asset management and innovation Page 15

16 Commercial Highlights 25-year concession Private sector carries construction, financing, O&M risks Fully underwritten debt not required on submission Bids supported by detailed term sheets for not less than 25%of senior funding 51% equity in Project Company reserved for Abu Dhabi Investors Bidders to propose share of first refinancing gain Demand risk retained by DOT Unitary Charge based on lane availability and achievement of performance measures Payment from day one: Company maintains existing road and receives an immediate fixed proportion of the Unitary Charge Plus step-up in payments during construction Page 16

17 Interaction with Bidders Similar to competitive dialogue procedure used for complex projects in Europe More extensive interactive/dialogue stage important for first PPP of type in UAE Involvement of funders and funders counsel encouraged Communications with DOT in a structured, fair, transparent and confidential manner Forum to exchange ideas on innovation and value for money Assistance to Bidders with aligning proposals with project objectives Opportunities to test innovative ideas and canvass Alternative Proposals Bidders can mark up DOT s project documents Access to the site Page 17

18 Key Commercial Risk Allocation Currency risk Bidders propose the proportion of the Unitary Charge to be denominated in USD DOT will pay the entire UC in AED, with USD portion converted at prevailing exchange rate Company protected from de-pegging risk Bids maximizing the AED proportion will be favoured Inflation risk Bidders propose the proportion of the UC (subject to a cap) to be subject to indexation Inflation index is on CPI for UAE Traffic load risk Bidders should assume RFP Base Case traffic assumptions based on heavy vehicles traffic These will be verified every 5 years Differences of 20% (+/-) adjustment reflecting heavy vehicles traffic impact on O&M costs Page 18

19 Performance Standards Payments are subject to achieving technical performance standards Annual Performance Standards: based on asset condition Monthly Performance Standards: based on service delivery Availability deductions Performance deductions Service points Ratchet mechanism Payments also subject to achievement of crash reduction strategy Measured annually with adjustment made to the following year s Unitary Charge (as for Annual Performance Standards) Page 19

20 Conclusion PPPs as Innovations Instruments From the government perspective: PPP creates a space outside government machinery for innovation PPP helps inject broader sets of skills, talent, and work culture PPP assists in binging new financial resources and business capital (social networks) PPP supports in creating new industry clusters Page 20

21 Conclusion PPPs as Innovations Instruments From the private sector perspective: PPP reduces the risk of investment in new innovations for existing services and solutions PPP may also serve as drivers of innovation for the development of new services and solutions that do not exist yet. PPP allows private companies engage in large scale projects Page 21

22 Conclusion PPP Success Factors What you need to start with, commitment, need, understanding Recognition that the project is different, momentum, remove barriers and marketing Strong leadership & sponsorship, accountability, support, tools Planning & analysis is key Know the Project Profile, risk allocation, funding, influencing factors Understanding the Partnership, right partner & balance, 3 Rs: Risks, Rewards and Responsibility. Building in flexibility, provide ramp offs, revisiting, plan for change Communication, strategy, stakeholders and monitoring. Predictable PPP process (e.g. PPP unit) and PPP pipeline. Page 22

23 Abraham Akkawi Head of Infrastructure and PPP Advisory Middle East and North Africa Page 23