PPP Options and Structures for Infrastructure Services

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					PPP Options and Structures for
   Infrastructure Services

           Scott Jazynka
           February 26 2007
            Amman, Jordan
                   Contents
• Challenges of the sector
• Breaking the cycle
• Different contractual structures available
• Assessment of Pro’s & Con’s of each
  contractual structure
• Conclusions


                                               2
        Overview Questions:
• Do all PPP’s require handing total control of
  public services and infrastructure over to
  private contractors? Does the private sector
  have to finance everything?
• What kinds of PPP structures are most
  appropriate for my specific project?



                                                  3
         The Challenge ahead
• Chronic poor performance is the rule rather than
  the exception
• Many households lack access (especially the poor)
• Service is often discontinuous
• Poor quality service
• Inefficient service delivery
• Lack of funds for O&M and capital investment
• Critical in global environment (competition)
• Establish enabling environment (legal,
  infrastructure)

                                                      4
         Breaking the cycle
                 Poor
                Service




Low                         Insufficient
Tariff                        income




                  Low
               investment

                                           5
Techniques of Public-Private
       Partnerships
          Public Sector
   •   Corporatization
   •   Service Contracting
   •   Management Contracting
   •   Lease
   •   BOT (Concession)
   •   Divestiture/Asset Sales
        Private Incentives
                                 6
Menu of PPP Structuring Techniques
                                                                Divestiture
                                                             (Investor-Owned
         High                                                     Utility)
                                                Concession


                                     Lease
“REWARDS”
 (Returns to
 The Private
   Sector)             Management
                       Contract
                 Service
                Contract
         Low
                Low                                                   High
                              “RISK”
                  (Private Sector Investment Required)

                                                                             7
    Cabinet
              Budget
                           Corporatization                         Cabinet

                                                               Dept. of
    Treasury           Dept. of
                                                               Pub. Services
                        Public
                       Services                                     Board
Rates                                            $     Loans
                                                               Pub. Servcs. Corp
& Fees
              Users                                        Rates             Services
                                                                   Users
•    The assets (and liabilities) of a govt. department are “carved-out” into a
     corporation (expect ownership and valuation problems down the road)
•    Government is the sole shareholder and controls the Board of Directors
•    Employees are transferred from civil servants to corporate employees
•    Revenues are kept in the public corporation rather than sent to Government
     Treasury (raiding the till)
•    Accrual-based accounting allows for financial performance measurement and full
     cost-recovery analysis (“Benchmarking”)
•    Outside private lenders can finance operating and capital budgets

                                                                                      8
                   Service Contracting
                                                                   Service
       Public Services                           Pub. Services                Service
            Corp.                                   Corp.                    Contractor
     Service   Service Service                                     Fees
                                                 Service Service
        1         2       3                         1       2


•   A specific area of service is “unbundled” from the sector (i.e. billing & col-
    lections, licensing, records mgt, customer service, computer maintenance etc.)
•   A prior full cost analysis of the specific service must be performed to
    benchmark current performance levels and compare with competitive bids
    (value-for-money, affordability)
•   Private (and Public) firms competitively bid on providing the service
•   Capital requirements are usually low, if any (1-5 years)
•   Contractors are paid per unit (e.g., bill processing) or fixed amount
•   Operating efficiency is usually the principle objective
•   Good for reducing operating costs, but requires labor severance &
    redeployment investments
                                                                                      9
        Service Contracts
Advantages                    Disadvantages
•Can inject good technical    •Unlikely to improve
expertise (transfer of        performance (long
knowledge)                    term)
•Private (and Public) firms   •No funding
competitively bid on          •Labor issues are
providing the service         critical
•Maintenance, billing and
collection, cleaning
services
•Easier to implement


                                                     10
              Management Contracting
    Public Services Corp.                                       Management
                                                                Fee
           Board                                  Board
                                                                           Mgmt.
       MANAGEMENT                             MANAGEMENT                   Contractor
                                                                 Mgmt.

        Employees                              Employees

•    A public corporation identifies specific priority operating problems
•    Private firms competitively bid for the right to provide management services in
     exchange for a “Management Fee”
•    The Management Contract identifies specific target operating and performance
     levels that the contractor must meet (incentives & penalties)
•    The Contractor has authority to make all operating decisions (including hiring &
     firing), Government still owns assets and makes long-term decisions
•    Contract terms usually 3 - 8 years (Limited capital investment)

                                                                                    11
   Management Contracts
Advantages                      Disadvantages
•Gains in managerial            •Gains   can be difficult to
efficiency                      enforce
•Private firms competitively    •Labor issues are
bid on providing the service    critical
•Contract identifies specific   •Government remains
target operating and            responsible for
performance levels that the     investment (no funding)
Contractor must meet            •What happens in the
(incentives & penalties)        long term?




                                                               12
                      Lease (Affermage)
                                            Board
          Board
                                                  Lease Fee
                                                               Working
        Public                                                 Capital
        Services                              Leased                       Lease
         Corp.                                 Corp.            Net      Contractor
                                                               Profits
•   Government identifies specific short-term and long-term operating problems
•   Private firms compete for the right to lease the assets from the Government in
    exchange for a lease payment fee, terms usually 8 - 15 years
•   Contract specifies performance measures and targets (incentives & penalties)
•   Lease contractor provides management, operating & maintenance decisions, spare
    parts, working capital, and keeps residual profits
•   Government maintains ownership of long-term assets, is responsible for servicing
    long-term debt, and makes long-term planning decisions.
•   Public employees become employees of the Lease Contractor
•   An alternate lease contract is when private sector leases asset or license to Gov’t

                                                                                     13
          Lease Contracts
Advantages                      Disadvantages
•Commercial risk borne by the   •Administratively
private sector, giving strong   demanding
performance incentives
                                •Government remains
•Private firms competitively    responsible for significant
bid on providing the service    investment
•Public employees become        •Labor issues are critical
employees of contractor
•Possible source of budget
revenue


                                                              14
                 BOT/BOO (Concession)
•   A Team or Consortium of private firms establish a new Project Company to
    Build-Operate-Transfer (BOT) a specific infrastructure project. The new
    project company is capitalized with equity contribution from the sponsors
•   The Project Company borrows funds from lenders. The lenders look only to
    the projected future revenue stream generated by the project and the
    Project’s assets to repay all loans.
•   The host country government usually does not provide a financial guarantee to
    lenders, nor do the sponsoring firms. “Off-Balance-Sheet” financing
                      Sponsor          Sponsor           Sponsor
                          1                2                 3
                       Equity                         Equity
    $          Loan
                                Special Purpose
Lenders                                               Concession
                                                                    Government
             Repayment
                                Project Co.
                                                      Contract
                           Rates               Public
                                               Services
                                    Users
                                                                                    15
     Build Operate Transfer
Advantages                       Disadvantages
•Good way of getting efficient   •Not a good solution if
delivery of services with        delivery mechanism is in
private investment               bad shape (BOT)
commercial risk borne by the     •Politically difficult
private sector, giving strong    •Labor issues are critical
performance incentives
                                 •Best funding option?
•Potential source of budget
revenue




                                                              16
 Build Operate Transfer - 2
Advantages                   Disadvantages
•Private firms               •Administratively
competitively bid on         demanding
providing the service        •Requires considerable
•Potential for high          commitment and
efficiency in operations     regulatory capacity
and investment
•Funding diverted to other
social services




                                                      17
                     Divestiture
                           Equity Investors
                         Invest         Dividends

Gover                                                         Provision
                              PRIVATE
nment                        OPERATOR               License
                                                              of Service
        Sale of assets

                         Repay              Loan
                                  Lenders

• Government sells assets to Private Operator
• Duration is unlimited but subject to a license and
  regulation
• Terms of license sets out obligations &
  responsibilities

                                                                           18
              Divestiture
Advantages                   Disadvantages
•Potential for high          •Requires credible
efficiency in operations     regulatory framework
and investment
                             •Politically difficult
•Private firms
competitively bid on
providing the service
•Funding diverted to other
social services




                                                      19
                 Range of PPP Structuring
                        Options:
                                                                                         Provide
                                                       Receive Net                       sectoral
                 Average         Provide   Provide the Income or   Provide    Legally   planning &
                 Contract       Service or   Working    cover Net Long-Term    own       regulate
PPP Structure     Term         Management    Capital      Loss     Finance    Assets      service
Service
Contract         1-5 years       Private     Public      Public     Public    Public      Public
Management
Contract         3-8 years       Private      Public    Public      Public     Public     Public
Lease           7-15 years       Private     Private    Private     Public     Public     Public
BOT           20 - 30+ years     Private     Private    Private    Private     Public     Public
BOO            in perpetuity     Private     Private    Private    Private    Private     Public
Divestiture    in perpetuity     Private     Private    Private    Private    Private     Public




                                                                                                   20
   PPP Project Structuring:
  Balancing Risks & Rewards
  Owners:                Labor
 (Operators)


                PPP
               Project     GOV’T
LENDERS


                USERS
                                 21
 So how do we choose the best
           option?
• Governments have multiple objectives for
  private sector participation:
  • technical and managerial expertise
  • improved efficiency
  • large-scale private investment in the sector
  • reduced public subsidies to the sector
  • revenues (sale of assets/concession or lease fee)
  • making the sector more responsive to consumers’
    needs and preferences
  • risk transfer


                                                        22
Implementing Change

        Implement
          Project

      PPP Project Selection



   Decision to break the cycle


                                 23
   Test, define and re-assess
• What can I get?
  • Government preferred option vs. private
    sector preferred option (Market appetite)
• What can I provide?
  • Options that yield higher benefits for
    consumers also tend to demand a higher
    level of government commitment, and a
    better prepared institutional framework

                                                24
Develop a matrix of Options vs
       Requirements
       Requirement Political    Cost-covering   Regulatory   Good
  Option           Commitment   Tariffs         Framework    Information

 Service Contract   Low          Low            Low           Low
 Management
 Contract           Moderate     Moderate       Moderate      Low

 Lease              Moderate     High           High          High

 BOT                Moderate     High           High          High

 BOO/Divestiture    High         High           High          High




                                                                           25
 ..but how do I get what I want?

• If the starting conditions are not especially
  conducive to private investment the
  government may :
   • delay the transaction, and pursue institutional and
     regulatory reforms first (Corporatization);
   • go ahead with the transaction, but be prepared to
     pay a higher price (regulate by contract); or
   • opt to “step to one side”/ lateral approach to private
     participation


                                                              26
             Conclusions - 1
• The PPP Transaction You Select Depends
  On The Type of Problem You Are Solving:
  • Need for Capital
     • BOT/BOO/Divestiture
  • Need for Expertise and Performance
     • Management Contract
  • Need for Expertise Only
     • Service Contract
  • Some or all of the above

                                            27
                Conclusions - 2
•   PPP is no panacea
•   Careful understanding of needs is required
•   Commitment required
•   Many alternatives/options exist but:
    • must “fit” with local circumstances
    • quality of preparation is critical
• There are innovative ways of getting private
  participation, even in difficult starting
  conditions

                                                 28
  Strategic Workshop Questions:
• How does one decide which PPP structuring technique
  is best-suited for an individual project?
• Which structuring technique best assures public control
  over the quality of services?
• Which structuring techniques work best to ensure the
  the needs of the poor and of low-income users are
  being met?
• What institutional frameworks are required at the
  national, provincial, and local government levels to
  both implement PPP transactions and to successfully
  monitor and regulate them through their long contract
  terms?

                                                        29
Questions?


             30
      The Institute for Public-Private Partnerships (IP3)
                                Washington | Cairo | Jakarta | Dakar

                                     Washington     Cairo
          1010 Wisconsin Avenue, NW, Suite 250      19 Ahmed El Shattoury Street
                     Washington, DC 20007 USA       Dokki, Giza, Egypt

                                   Jeff Wuorinen    Tamer Shaltout
Regional Representative, Middle East/North Africa   Program Manager, Egypt
                       E-mail: jwuorinen@ip3.org    E-mail: tshaltout@ip3.org



                          Tel: 1-202-466-8930       Fax: 1-202-466-8934

                                            www.ip3.org