Public Private Partnerships (PPP)
and
Affordable Housing
Review of PPP as a £60 billion, $90 billion industry
and its application to Affordable Housing
Presentation prepared by
David Hoicka
12
Cost
PPP Project Expenses
10
8
Prepare
6
Build
4
Maintain & Earn
"The Long Tail"
2
0
1 2 3 4 5 6 7 8 9 10 11 Years
12
UK Stanhope PFI
Copyright © David Hoicka 2007
Contents
1. What is PPP and Project Finance 3
2. PPP experience in the United Kingdom 12
3. PPP possibilities in other countries 21
4. How to set up a PPP: Practical Steps 24
2 Public Private Partnerships and Affordable Housing, by David Hoicka
1. What is PPP and Project Finance
History Of PPP & Project Finance
“Most people think of project finance as
a relatively new phenomenon, yet its
history can be traced back hundreds if
not thousands of years.”
Harvard Business School
4 Public Private Partnerships and Affordable Housing, by David Hoicka
PPP 700 Years Ago
When: 1299 (700 years ago) earliest recorded Public
Private Partnership
Who: English Crown and Florentine merchant bank
Frescobaldi
What: Finance exploration & development of silver
mine in Devon England
Payment: As much silver as Florentine Bank could
mine during one year.
5
Public Private Partnerships and Affordable Housing, by David Hoicka
How PPP Works
12
Cost
PPP Project Expenses
10 Public Private
8
Prepare Partnership (PPP)
6
Build finances building and
Maintain & Earn
4
"The Long Tail"
long-term maintenance
2
with private
0
1 2 3 4 5 6 7 8 9 10 11 Years
12
contractors
12
Cost Compare: Some
Non-Maintenance Project Expenses
10 procurements are
Prepare
8 one-time purchase,
Build
6
with use or sale.
Use Up or Sell
4
"Maintenance Not Included" Maintenance is not
2
included.
0 6 Public Private Partnerships and
1 2 3 4 5 6 7 8 9 10 11 Years
12
Affordable Housing, by David Hoicka
Why PPP?
PPP satisfies a need for off-budget finance
Need:
Government Minister wants to build schools & hospitals
Schools & hospitals are built, then maintained for years
no budget available, cannot borrow
Response:
PPP Off Budget Finance – lower government public debt, usually does
not affect government bond rating
“Rent to Own” – similarities to equipment lease
“Buy Now, Pay Later” – future years & governments pay
Use private skills and efficiencies, usually higher price
Transfer some Risks to Private Companies for a fee
(but Government retains ultimate risk)
7 Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Examples
12
Cost
PPP Project Expenses
10
8
Prepare
6
Build
4
Maintain & Earn
"The Long Tail"
2
0
1 2 3 4 5 6 7 8 9 10 11 Years
12
PPP works best to build and maintain Long-Term Assets
Long-Term Projects:
school, hospital, sewage treatment plant, bridge, gov’t office building
Long-Term Maintenance:
Includes: Hard maintenance – repair roofs, windows etc
Excludes: Soft maintenance – janitorial
Project Finance:
Payments spread over many years
Non-Recourse, Off-Budget
8 Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Project Risks
In theory, many risks are transferred to the private contractor.
Government ultimately has risk of failure or non-performance.
Some General PPP Risks:
Bankruptcy of Contractor
Poor quality work
Increased costs: (a) initially, and (b) over contract term
Cash Flow: PPP is technically “off-budget”. However, PPP
payments have to be paid. This leads to future cash flow and
budget payment constraints for government agency
Scope Changes: PPP is usually a long-term contract, sometimes 30
years. Needs can change, requiring changes in scope partway
through contract.
Financial Market Changes: interest rates, exchange rates
Staff changes: (a) in government, and (b) in contractor
9 Public Private Partnerships and Affordable Housing, by David Hoicka
Housing PPP Learning Curve
Housing PPP has its own special issues:
Advisor Knowledge. Some concerns have been expressed about
the level of advisers' understanding of housing issues. Financial and
Legal Advisers need sufficient and appropriate housing as well as PPP
expertise. [UK Office of Deputy Prime Minister, & Dept of
Communities]
Different Skills Needed. All parties involved in Housing PPPs have
had varying degrees of involvement in PPP schemes in other
markets. While this has been helpful in many respects, the fact that
everyone is bringing their understandings and expectations from
different sectors can sometimes create as many problems as it
solves. [UK Office of Deputy Prime Minister]
Not easy to translate concepts. Many assumed that it would be
easy to translate the PPP concept to housing and that PPP schemes
would be easier to complete than has been the case. [UK Office of
Deputy Prime Minister]
10 Public Private Partnerships and Affordable Housing, by David Hoicka
Housing PPP Project Risks
Housing PPP Risks:
Costs. Greatly increased costs, in some cases up to 2 to
3 times the original estimate. [UK Office of Deputy Prime
Minister]
Bidders. Number of potential bidders in the market for
Housing PPPs may be shrinking.
Credit. Credit risk profile for housing PFIs varies
considerably from that of other PFIs. Market participants
must gain a clear understanding of the risks of housing
PFIs and how best to mitigate them within the structure
of the project [Standard & Poor‟s]
Vandalism, misuse, excessive wear & tear
11 Public Private Partnerships and Affordable Housing, by David Hoicka
2. PPP experience in the
United Kingdom
£60 Billion
$90 Billion
PPP in the UK – a History
Margaret • Privatization
Thatcher
• Private Finance Initiative
John Major (PFI)
• Public Private Partnership
Tony Blair (PPP)
Private Finance/PPP has now grown to £60 Billion
($90 Billion) in the UK
13 Public Private Partnerships and Affordable Housing, by David Hoicka
Housing is 2.1% of £60 Billion UK PPPs
Capital Value Value (BD, % #
UK PPP Category (£, millions) millions) Value Projects
Transportation 20,181 15,136 33.4% 18
Hospitals & Community Health 12,069 9,052 19.9% 13
Schools 8,523 6,392 14.1% 34
Roads & Bridges 3,299 2,474 5.5% 267
Offices 2,905 2,179 4.8% 20
IT Infrastructure & Software 2,868 2,151 4.7% 74
Military Buildings 2,322 1,742 3.8% 14
Waste Management 1,535 1,151 2.5% 36
Equipment 1,457 1,093 2.4% 33
Housing 1,269 951 2.1% 16
Water & Sewage Treatment 960 720 1.6% 15
Police & Fire 717 537 1.2% 27
Street Lighting 588 441 1.0% 208
Prisons & Detention Centres 564 423 0.9% 19
Telecom 530 397 0.9% 8
Courts, Libraries & Museums 406 305 0.7% 18
Recreation 199 149 0.3% 20
Energy 113 85 0.2% 16
Grand Total 60,503 45,377 100.0% 856
Source: HM Treasury and Partnerships UK Data through 2007
14 Public Private Partnerships and Affordable Housing, by David Hoicka
Only 5% of UK PPP Social Housing Units
are Home Ownership
Rentals
Home
95%
Ownership
5%
UK PPP Social Housing Units
Rentals Home Ownership
19,612 951
95% 5%
Source: HM Treasury and Partnerships UK Data through 2007
15 Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Housing 5+ Years to Start
PPP Housing: Years until Contract Signing
London Borough of Islington Round 1
Manchester City Council 5.2 Years Avg.
Reading Borough Council
Leeds City Council
London Borough of Newham
Sandwell Metropolitan Borough…
London Borough of Camden
London Borough of Islington Round 2
Oldham Metropolitan Borough… 6 Yr Avg
Manchester City Council
Ashford Borough Council
London Borough of Lewisham
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
The average time from start of design until contract signing, is
more than 5 years. Round 2 is slower than Round 1.
About 20,000 units are scheduled to be mostly refurbished
under UK‟s Round 1 and Round 2 PFI/PPP.
16 Public Private Partnerships and Affordable Housing, by David Hoicka
UK Housing PPP – Manchester
Plymouth Grove
Remodelled Estate
• 436 homes demolished
• 663 refurbished rentals
• 660 new homes for sale
• „Green Route‟ thru town
• 3 neighbourhood parks
• new village centre, with
shops, community
facilities
• £37 million subsidy
• 3.8 years to sign contract
17 Public Private Partnerships and Affordable Housing, by David Hoicka
UK Housing PPP – Stanhope
Stanhope Regenerated
Housing Estate
• 410 homes demolished
• 312 refurbished rentals
• 144 new homes for sale
• playgrounds, footpaths
and landscaping
• new commercial centre,
with shops, community
facilities, library
• £26.7 million subsidy
• 6.2 years to sign contract
18 Public Private Partnerships and Affordable Housing, by David Hoicka
UK Transportation PPP – London Tube
London Underground
“Infraco” Contracts
£450m extra cost of private
debt over public bonds
5 years to sign contracts
2 separate maintenance and
renewal contacts for 30 years
£15.7 billion present value,
pricing review every 7½ years
PPP Costs: £90 million
success fees, £275m bidders
costs paid to winning bidders,
£180m costs to govt.
18 to 20% returns to Infracos,
premium over normal to
attract private management
19 Public Private Partnerships and Affordable Housing, by David Hoicka
Other PPPs in UK
Infrastructure: airport terminal, bridges, highways, power
stations, waste to energy, wastewater treatment plants,
tram/light rail, 19 street lighting contracts
Health: new or renovate 188 hospitals & 48 clinics
Schools: 208 schools at all levels
Community: Police, fire stations, prisons, courts, libraries,
museums, government offices, sports facilities
Equipment: Medical CT and MRI Scanning System, Linear
Accelerator; Ro-Ro Ferries, Military Aircraft and
Helicopters
20 Public Private Partnerships and Affordable Housing, by David Hoicka
3. PPP possibilities in other
countries
PPPs for other countries
There are many possible PPPs for other countries which
follow the PPP financial structure building and maintaining
Long-Term Assets:
Power Plants, Desalination Plants, STPs.
Al Ezzel independent power project, July 2004. Suez-Tractebel and
Gulf Investment Corporation. BNP Paribas (financial adviser),
Freshfields Bruckhaus Deringer (legal adviser), and Mott MacDonald
(technical adviser).
Hidd Power Company, January 2006. Consortium of International
Power, Sumitomo Corporation and Suez-Tractebel, $600m direct
loan from the Japan Bank for International Co-operation. Same
advisors.
Airport Terminal, Railway Station
Bridges, Causeways, Roads, Streetlights & Signs
Hospitals, schools, libraries, government offices
22 Public Private Partnerships and Affordable Housing, by David Hoicka
PPPs for
Public Works and Housing
Many projects match the PPP financial profile, building
and maintaining Long-Term Assets
Sewage Treatment Plant (STP) and Network
Power Plants, Water Desalination Plants
District Cooling Plant (DCP)
Bridges, Roads, Streetlights & Signs
Schools, hospitals, clinics, government buildings
23 Public Private Partnerships and Affordable Housing, by David Hoicka
4. How to set up a PPP:
Practical Steps
Preparing a PPP
There are several steps to prepare a PPP
1. Research and prepare Outline Business Case
2. Select Financial, Legal, Technical Advisors
3. Business Plan and Financing Model
4. Prepare PPP Structure and Documents
5. Prequalification and Tender of Contractors
6. Compare estimates with actual
7. Contract Negotiations and Contract Signing
8. PPP Supervision over time
25 Public Private Partnerships and Affordable Housing, by David Hoicka
Cost of PPP Advisors
Project bureaucracy is costly for local authorities. Set up
costs of £2 million were charged from PPP Programs. Legal
costs can be huge as a number lawyers are involved - acting
for the local authority, bidders and funders.
London Housing
Preparing a 30-year PPP contract is costly for both
authorities and bidders. Generally even in todays more
settled UK PPP Market, which is infinitely more mature and
experienced, procuring authorities can expect to spend at a
minimum £250,000 on external advisers for even the most
simple of schemes. I would generally expect the successful
bidder to spend about double what the public sector spends.
UK Office of Deputy Prime Minister, & UK
Department of Communities
26 Public Private Partnerships and Affordable Housing, by David Hoicka
Governmental PPP Offices
Many international governments have established PPP
Advisory Offices (similar to PMO Project Management
Offices), to assist PPP organization, e.g.
UK – Partnerships UK, HM Treasury
British Columbia, Canada
Victoria, Australia
Korea
Portugal
South Africa (“scant impact on infrastructure deals”)
Philippines (“some success”)
Jamaica (“little success”)
Bangladesh (“little success”)
Source: World Bank Report on PPP in Infrastructure Around the World, September 2007
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Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Size and Financial Structure
The UK Treasury has determined that PPP funded projects need to be large
enough in capital value to ensure that the transaction costs of procurement
are not disproportionately large. All UK PPPs must now be larger than
£20m ($30m).
The chart shows that most PPP project funding is bank debt. Bond finance
appears only the largest transactions. Corporate finance is only appropriate
for the smallest projects.
# Projects
50
40 PPP Funding Sources
30 Bond Funding
Corporate Funding
20
Bank Funding
10
0
28
Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Participants and Advisors
This next section lists current major
PPP participants and advisors:
1. Equity Capital Investors
2. Project Bank Lenders
3. Financial Advisors
4. Legal Advisors
5. Technical Advisors
6. Construction Contractors
29 Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Equity Capital Investors
This chart shows the top ten initial equity investors in UK PPP project companies
between 2004 and 2007.
The chart is ordered in terms of the total capital value (£m) of the projects in which
they are involved, multiplied by the proportion of the equity contributed by each
investor. The Capital Value shown is the total project capital value, not the amount of
each investor‟s actual cash investment.
Equity Investors (# Projects) Leveraged PPP Capital Value
(£ millions)
Innisfree (12)
Equion/John Laing (8)
RBS (7)
Skanska (3)
Balfour Beatty (5)
Bank of Scotland (12)
HSBC (3)
Bilfinger Berger (5)
AMEC (2)
Barclays (10)
0 200 400 600 800 1,000 1,200
30 Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Project Bank Lenders
This chart details the top ten UK PPP lenders between 2004
and 2007 to bank-financed projects.
Bank Lenders (# Projects) PPP Project Capital Value
(£ millions)
Bank of Scotland (17)
SMBC (13)
RBS (9)
Dexia (16)
NIB Capital (13)
DEPFRA (6)
EIB (5)
Bank of Ireland (7)
Barclays (13)
Lloyds TSB (3)
0 200 400 600 800 1,000 1,200 1,400
31 Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Financial Advisors
This chart details the top ten UK PPP financial advisors over last 3 years.
The most active advisor has been PricewaterhouseCoopers, followed by the
other members of the “Big Four” and also Grant Thornton and with Robson
Rhodes in sixth position. The advisors listed in positions seven to ten are
investment banks or boutique advisory firms.
Financial Advisors (# Projects) PPP Project Capital Value
(£ millions)
Price W Cooper (52)
KPMG (22)
Deloitte (26)
Grant Thornton (25)
Investec (4)
Ernst & Young (20)
Macquarie (6)
Quayle Munro (11)
Abros (6)
Robson Rhodes (15)
0 500 1,000 1,500 2,000 2,500
32
Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Legal Advisors
The following chart details the top ten UK PPP legal advisors.
It shows that the largest law firms are largely absent from the
PPP market now, although they are present on some of the
larger transactions.
Legal Advisors (# Projects) PPP Project Capital Value
(£ millions)
Pinsent Masons (26)
Addleshaw G. (21)
CMS Cameron (7)
Shepherd & W. (11)
Dundas & Wilson (8)
Denton Wilde (9)
Bevan Brittan (17)
Eversheds (15)
Wragg and Co. (8)
Nabarro Nathan. (10)
0 500 1,000 1,500 2,000 2,500
33 Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Technical Advisors
This chart details the top ten UK PPP technical advisors between 2004 and 2007.
In general, fee rates for technical advisors are a little lower than for legal and
financial advisors.
Technical Advisors (# Projects) PPP Project Capital Value
(£ millions)
Mott Macdonald (19)
Turner & Towns. (17)
Cyril Sweett (12)
Davis Langdon (7)
EC Harris (15)
Faithful & Gould (9)
WS Atkins (6)
Currie & Brown (10)
Gleeds (9)
Appleyards Cons. (4)
0 500 1,000 1,500 2,000 2,500
34 Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Construction Contractors
The following chart details the top ten UK PPP construction contractors . These ten
contractors cover projects with a total capital value of £8.1bn, being 63% of the total
available UK PPP market data. Therefore, just over a third of projects have
construction contractors outside the top ten.
Construction Co. (# Projects) PPP Project Capital Value
(£ millions)
Carillion (13)
Balfour Beatty (11)
Skanska (4)
AMEC (6)
Bovis (3)
KBR (1)
Laing O'Rourke (4)
Taylor Woodrow (1)
Costain (5)
Interserve (5)
0 200 400 600 800 1,000 1,200 1,400 1,600
35 Public Private Partnerships and Affordable Housing, by David Hoicka