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Public Private Partnerships in the Infrastructure Sector

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  • Public Private Partnerships in the Infrastructure Sector
CoursesealsPublic Private Partnerships in the Infrastructure Sector
  • Introduction to PPP in the infrastructure sector 6

    • Lecture1.1
      What is PPP and how is the concept defined? 30 min
    • Lecture1.2
      The growth of PPP from an historical perspective 30 min
    • Lecture1.3
      The concept of privatisation in the context of PPPs 30 min
    • Lecture1.4
      Conventional procurement and PPP procurement 30 min
    • Lecture1.5
      Examples of PPP reform 30 min
    • Lecture1.6
      Summary of key characteristics and criteria of PPPs 30 min
  • Chapter 2: Structuring a PPP project 5

    • Lecture2.1
      Structuring a PPP project 30 min
    • Lecture2.2
      Project structuring: feasibility study 30 min
    • Lecture2.3
      PPP economics 30 min
    • Lecture2.4
      PPP economics 30 min
    • Lecture2.5
      Alternative PPP structure: rail project case study 30 min
  • Chapter 3: Financing an infrastructure PPP project 6

    • Lecture3.1
      Sources of financing for an infrastructure PPP project 30 min
    • Lecture3.2
      What is Project Finance? 30 min
    • Lecture3.3
      Drawbacks of using project finance in infrastructure PPP transactions 30 min
    • Lecture3.4
      Structure 30 min
    • Lecture3.5
      Key parties 30 min
    • Lecture3.6
      Timeline for financing an infrastructure PPP project 30 min
  • Chapter 4 :Documenting the transaction: anatomy of a PPP concession agreement and key risk allocation issues 11

    • Lecture4.1
      Scope and term of a PPP Concession Agreement 30 min
    • Lecture4.2
      Construction period obligations 30 min
    • Lecture4.3
      Operation period obligations 30 min
    • Lecture4.4
      Payment regimes 30 min
    • Lecture4.5
      Supervening events 30 min
    • Lecture4.6
      Termination and compensation 30 min
    • Lecture4.7
      Liability and insurance 30 min
    • Lecture4.8
      Dispute resolution 30 min
    • Lecture4.9
      Government controls 30 min
    • Lecture4.10
      Government support obligations 30 min
    • Lecture4.11
      Additional terms and conditions 30 min
  • Chapter 5: Documenting the transaction: finance documents 8

    • Lecture5.1
      Core finance documents 30 min
    • Lecture5.2
      Equity arrangements 30 min
    • Lecture5.3
      Impact on the concession agreement 30 min
    • Lecture5.4
      Direct Agreements 30 min
    • Lecture5.5
      Security 30 min
    • Lecture5.6
      Enforcement and insolvency 30 min
    • Lecture5.7
      Involvement of multilateral development banks (MDBs), development finance institutions (DFIs) and export credit agencies (ECAs) 30 min
    • Lecture5.8
      Government shareholder arrangements 30 min
  • Chapter 6:Documenting the transaction: other project documents 2

    • Lecture6.1
      Construction contract, O&M contract and interface issues 30 min
    • Lecture6.2
      Sub-contract risk pass-down 30 min
  • Chapter 7:Procurement arrangements 2

    • Lecture7.1
      A typical PPP timetable 30 min
    • Lecture7.2
      Unsolicited proposals 30 min
  • Chapter 8:Introduction to key sector issues 7

    • Lecture8.1
      Road projects 30 min
    • Lecture8.2
      Urban rail projects 30 min
    • Lecture8.3
      Freight rail projects 30 min
    • Lecture8.4
      Airport projects 30 min
    • Lecture8.5
      Port projects 30 min
    • Lecture8.6
      Accommodation projects 30 min
    • Lecture8.7
      Glossary 30 min

    Examples of PPP reform

    As mentioned previously, the PPP model has been used extensively in the UK and is not without public criticism from many corners. In 2012 the government started to try and reform the PPP model, changing the previous PFI model into “PF2”, to address some of the perceived problems.
    In reality, the vast majority of the contract structure was to remain the same, but certain areas were subject to reform as shown in the table below.
    Since PF2 was introduced, however, the level of public procurement has dropped significantly through the PPP route with very few new projects having been initiated through this model.
    Most recently, on 29 October 2018, the Conservative government announced that it would scrap centrally-funded PFI/PF2 as a means of procuring projects going forward, although there would always be a place for some form of PPP projects (the implication being those which do not require central government grant funding). Since most people consider that private finance is essential for the government to continue to deliver its infrastructure requirements, time will tell what approach the UK government adopts moving forward.

     

    Issue Perceived Problem Key Proposals
    Equity Finance

     

    Insufficient Public-Private collaboration

    Excessive gains by equity providers

    Government to take an equity stake on all projects

    Part of equity to be subject to a funding competition (DROPPED)

    Transparency Lack of transparency and accountability Broadened regarding obligations, including levels of equity return
    Procurement

     

    Skills deficit in local procurement

    Procurement timetables too long

    Procurement to be routed through new centralised procurement units

    Ensuring greater preparedness before launching tender and introduction of an 18 month cut-off

    Service Provision Lack of flexibility “Soft” services (cleaning, catering etc) to be removed and “call-off” provisions introduced for minor maintenance etc.
    Risk Allocation Inefficient risk transfer Take certain risks back to public sector to avoid private sector pricing inefficiently for these
     Debt Finance Lack of competitive long-term debt finance Implementation of various measures to increase the credit rating of the project to encourage institutional investors/pension funds to participate
    Value for Money

    and Efficiency

    Perceived inefficiency in the PFI model Implementation of periodic reviews and requirement to tender proposals for continuous improvement

    (a)        PPP reform in Scotland and Wales

    In two devolved administrations within the UK, use is being made of a different reform called the “Non-Profit Distributing” or “NPD” model, although it could be used anywhere in the UK. It is an alternative funding structure for PPP projects that would previously have been carried out under the PFI.

    The NPD model resolves various perceived problems associated with PFI. The key difference is that the concessionaire’s shareholders are entitled to recover a fixed return on their investment – effectively a margin on their subordinated debt – but if a greater profit is made than this agreed rate (for example, due to reduced market costs) the concessionaire does not keep the excess but must return it to the government. This addresses the “windfall” profit concern.

    (b)        PPP reform in Latin America

    In Latin America, the PPP model has been subject to different drivers and issues, some of which are depicted in the diagram below, prepared by the Argentinian Ministry of Finance in 2018 to outline their approach their new PPP roads programme.

    For example, the risks of currency devaluation, government covenant and construction completion risk have all been addressed in the new Argentinian PPP programme by the following approach:

    (i)         When individual works milestones are completed (e.g. each 10km of road), the concessionaire is awarded a “payment title”, which is fully transferable and entitles the bearer to a series of fixed payments in US dollars over a 10 year period.

    (ii)        These payments are to be guaranteed by a ring-fenced PPP trust fund, which has the benefit of certain funding guarantees from central government, which can be enforced by beneficiaries.

    (iii)       The beneficiary is entitled to the series of payments regardless of the outcome of the remainder of the project.

    This approach allows for different funders to be involved: short-term funders over a smaller amount taking completion risk, and longer-term lenders over a longer amount taking no completion risk but only central government covenant risk, which in turn could be mitigated by political risk insurance or export credit guarantees.

    Each of the other risks listed in the diagram were also addressed in an up-front and transparent manner by the Argentinian government, with a view to encouraging more international bidders to participate. In the first round of six PPP roads projects, the Government received over 30 bids from six different consortia, which demonstrated a healthy engagement with the process.

    SUMMARY OF KEY POINTS
    PPP reform

    • The UK Government reformed the PPP model extensively to address some of the perceived problems and public criticism of the model, changing the PFI model into “PF2”.
    • The vast majority of the contract structure remained the same but certain areas were subject to reform, such as: the insufficient public-private collaboration in terms of equity finance, the lack of transparency and accountability, the skills deficit in local procurement and the length of procurement timetables, the lack of flexibility in the provision of services, the inefficient allocation and transfer of risk and the lack of competitive long-term debt finance. The new model was little-used, and more recently the UK Government has announced it will be abandoning PFI (centrally-funded PPP schemes) as a form of procurement.
    • In Scotland and Wales, a new model called the “Non-Profit Distributing” or “NPD” model was introduced which is an alternative funding structure for PPP projects.
    • In Latin America, the PPP model has been subject to different drivers such as contract length, transparency risk, risk of currency devaluation, government covenant and construction completion risk, etc. However, these perceived problems have also been addressed in the new Argentinian PPP programme.

     

    Prev Conventional procurement and PPP procurement
    Next Summary of key characteristics and criteria of PPPs

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