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Introduction to PPP in the infrastructure sector 6
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Lecture1.1
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Lecture1.2
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Lecture1.3
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Lecture1.4
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Lecture1.5
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Lecture1.6
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Chapter 2: Structuring a PPP project 5
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Lecture2.1
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Lecture2.2
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Lecture2.3
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Lecture2.4
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Lecture2.5
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Chapter 3: Financing an infrastructure PPP project 6
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Lecture3.1
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Lecture3.2
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Lecture3.3
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Lecture3.4
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Lecture3.5
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Lecture3.6
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Chapter 4 :Documenting the transaction: anatomy of a PPP concession agreement and key risk allocation issues 11
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Lecture4.1
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Lecture4.2
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Lecture4.3
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Lecture4.4
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Lecture4.5
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Lecture4.6
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Lecture4.7
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Lecture4.8
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Lecture4.9
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Lecture4.10
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Lecture4.11
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Chapter 5: Documenting the transaction: finance documents 8
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Lecture5.1
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Lecture5.2
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Lecture5.3
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Lecture5.4
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Lecture5.5
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Lecture5.6
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Lecture5.7
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Lecture5.8
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Chapter 6:Documenting the transaction: other project documents 2
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Lecture6.1
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Lecture6.2
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Chapter 7:Procurement arrangements 2
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Lecture7.1
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Lecture7.2
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Chapter 8:Introduction to key sector issues 7
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Lecture8.1
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Lecture8.2
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Lecture8.3
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Lecture8.4
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Lecture8.5
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Lecture8.6
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Lecture8.7
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Project structuring: feasibility study
A PPP project should not be pursued by the government without a suitable feasibility study having been carried out. A feasibility study should ideally:
- determine the service needs of the end users, i.e. where is the current system not serving the needs of the public;
- analyse various options for meeting those needs;
- assess general government policy goals;
- if PPP is being considered, assess the advantages and drawbacks of a PPP against a financing with public funds; and
- select the most efficient of those options that meets government policy goals.
We will consider this approach in the context of a case study of a Highway Government (“the Government”) assessing whether to procure a toll road as a PPP.
In this case, the Government prepared a feasibility study which was structured in four parts:
Part A: explores what needs to be done to improve mobility on the roads and the degree to which the roads need to be expanded to enhance economic development and job creation.
Part B: analyses potential options to meet these objectives detailed in Part A.
Part C: compares the preferred alternative established in Part B with the other alternatives available to the Government and determines which alternative is in the best interests of the public based on the goals of the Government.
Part D: reviews whether or not it is actually possible to deliver the services via a PPP.
These will be reviewed in turn:
Part A – what are the objectives?
(i) Part A of the study explores what needs to be done to improve mobility on the roads and the degree to which the roads need to be expanded to enhance economic development and job creation.
(ii) It provides a definition of the key objectives of the Government and the key service needs of the proposed toll road. For example, what traffic volumes are currently being experienced on the current road and surrounding roads. What Level of Service (LOS) is currently being achieved, and what is desired?
Level of Service means:
A: free flow. Traffic flows at or above the posted speed limit and motorists have complete mobility between lanes. The average spacing between vehicles is about 550 ft (167 m) or 27 car lengths. Motorists have a high level of physical and psychological comfort. The effects of incidents or point breakdowns are easily absorbed. LOS A generally occurs late at night in urban areas and frequently in rural areas.
B: reasonably free flow. LOS A speeds are maintained, manoeuvrability within the traffic stream is slightly restricted. The lowest average vehicle spacing is about 330 ft (100 m) or 16 car lengths. Motorists still have a high level of physical and psychological comfort.
C: stable flow, at or near free flow. Ability to manoeuvre through lanes is noticeably restricted and lane changes require more driver awareness. Minimum vehicle spacing is about 220 ft (67 m) or 11 car lengths. Most experienced drivers are comfortable, roads remain safely below but efficiently close to capacity, and posted speed is maintained. Minor incidents may still have no effect but localized service will have noticeable effects and traffic delays will form behind the incident. This is the target LOS for some urban and most rural highways.
D: approaching unstable flow. Speeds slightly decrease as traffic volume slightly increase. Freedom to manoeuvre within the traffic stream is much more limited and driver comfort levels decrease. Vehicles are spaced about 160 ft (50m) or 8 car lengths. Minor incidents are expected to create delays. Examples are a busy shopping corridor in the middle of a weekday, or a functional urban highway during commuting hours. It is a common goal for urban streets during peak hours, as attaining LOS C would require prohibitive cost and societal impact in bypass roads and lane additions.
E: unstable flow, operating at capacity. Flow becomes irregular and speed varies rapidly because there are virtually no usable gaps to manoeuvre in the traffic stream and speeds rarely reach the posted limit. Vehicle spacing is about 6 car lengths, but speeds are still at or above 50 mi/h (80 km/h). Any disruption to traffic flow, such as merging ramp traffic or lane changes, will create a shock wave affecting traffic upstream. Any incident will create serious delays. Drivers’ level of comfort become poor.[1] This is a common standard in larger urban areas, where some roadway congestion is inevitable.
F: forced or breakdown flow. Every vehicle moves in lockstep with the vehicle in front of it, with frequent slowing required. Travel time cannot be predicted, with generally more demand than capacity. A road in a constant traffic jam is at this LOS, because LOS is an average or typical service rather than a constant state. For example, a highway might be at LOS D for the AM peak hour, but have traffic consistent with LOS C some days, LOS E or F others, and come to a halt once every few weeks.
Most design or planning efforts typically use service flow rates at LOS C or D, to ensure an acceptable operating service for facility users.
Other key objectives in the study include: (i) whether there were any major gaps in the highway network that needed to be filled for strategic reasons; (ii) there was no desire to build new roads in an intrusive manner or in a way which would encourage further urban sprawl; (iii) reduction of congestion; (iv) improving road surface quality and maintenance programmes; and (v) improving tolling technology.
(iii) Part A of the study also highlights the constraints on the Government in achieving these key service needs. This may focus on physical constraints, such as whether the Government has sufficient land to implement the road expansion scheme or would need the assistance of other authorities, or compulsory purchase powers, as well as financial constraints.
Part A – conclusion
The conclusion of Part A of the study is that the Government must increase capital expenditure to improve road quality on existing roads and improve connectivity and mobility through some new connections and road widening. This will allow the Government to improve economic conditions and promote economic development and job creation.
To accomplish these goals, the Government must:
(i) reduce its debt burden to improve the availability of funding;
(i) build new facilities more efficiently in terms of cost and timeliness (compared to existing procurement approaches);
(ii) improve its maintenance programme; and
(iii) reduce revenue leakage on existing toll roads through increased electronic toll collection penetration and better cash receipt procedures.
(b) Part B – what are the options to meet the objectives?
Part B of the study then analyses potential options to meet these objectives detailed in Part A. Part B includes:
(i) An analysis of procurement options – the study looked at the whole spectrum of procurement options from conventional procurement by the Government and a variety of PPP structures including design-build, design-build-finance, design-build-maintain, design-build-finance-maintain, design-build-finance-operate-maintain.
(ii) In the context of a private sector procurement, the benefits and disadvantages of combining certain assets in one procurement. In this case the Government had a number of existing (brownfield) toll roads – two large and two small – as well as two to three new greenfield road projects that it wished to construct.
(iii) A thorough identification of project risks, focusing on risk description and potential mitigation. This included financial viability, technical viability and permitting/land acquisition risk. The concessioning of the brownfield projects passed the risk assessment for procurement, but the greenfield roads did not as they had not yet reached a sufficient level of planning and preparation to be tendered.
(iv) Results of market soundings – the market sounding exercise with potential investors, operators and contractors showed a healthy interest for the projects. Operators and long-term institutional investors (such as pension funds) showed more interest in the concessioning of the existing brownfield projects with existing track records. Construction contractors, as expected, showed more of an interest in investing in the new build schemes. The market sounding also revealed investor concerns as to whether the concession would be let on market standard terms and with a sensible, index-linked tolling regime.
(v) A recommended path forward.
Part B – conclusion
Part B concludes that a PPP delivery model broken into four phases is the most effective way for the Government to achieve its goals.
The first and second phase would involve the concession of existing revenue-generating toll roads to generate the resources needed to maintain those facilities and to provide some capital to support the building of subsequent phases.
The next two phases would involve the concession of two new toll roads.
This phasing allows the Government to maximise immediate-term value, mitigate the need for additional debt and accelerate construction of the highway system, producing jobs and economic development.
This phasing was in line with the feedback from investors for deal size expressed in the market sounding exercise.
Part C – is the preferred option in the best interests of the public?
Part C of the study then compares the preferred alternative established in Part B with the other alternatives available to the Government and determines which alternative is in the best interests of the public based on the goals of the Government.
Part C also quantitatively evaluates the various delivery models that can be deployed by the public with the preferred PPP alternative.
Value for money analysis
This section may involve a value for money analysis.
This kind of analysis can help to identify whether a PPP delivery option actually provides value as compared to traditional delivery methods (which are termed the Public Sector Comparator or PSC) on both a quantitative and qualitative basis.
A PPP project is likely, on the face of it, to be more expensive than a project procured directly by the public sector due to the typically higher cost of finance and the complexity of the project structure, increasing transaction costs, and the increased risk allocation. The PPP project will however involve a material risk transfer to the private sector and the value for money analysis will aim to assess whether the factors listed here are likely to result in a longer-term net benefit to the public sector. The analysis will include weighting the assumed public sector cost with the likely downside costs experienced on similar transactions procured in that sector in a traditional manner, such as delays, cost overruns and disputes. If the total weighted public sector cost exceeds the anticipated PPP price by a material amount, then the PPP route may be favoured.
In the UK, post-transaction audits have borne out that PPP projects can generate significant savings compared to the public sector comparator model, although it should be borne in mind that the public sector comparator price is only a hypothetical figure.
It must also be noted that, at project preparation stage, the assumed PPP price is also a hypothetical figure based on a desktop analysis of how costs and risks will play out against the assumed risk allocation.
Part C – conclusion
In this case, the conclusion of Part C is that the assumed value of the PPP approach would significantly exceed traditional procurement, generating millions of dollars in benefits.
Obviously, once the private sector bids are received and evaluated, the PPP framework may require a re-assessment of the best price against the public sector comparator to confirm that the proposed PPP contract will indeed represent value for money.
Part D – is it possible to deliver the project as a PPP?
Although Part C determined that the project should be delivered through a public-private partnership, Part D of the study reviews whether or not it is actually possible to deliver the services via a PPP.
In other words, while the PPP delivery option may deliver greater value for money than a traditional procurement, it may not be affordable in terms of public funding constraints.
At the present time, the Highway Government has a significant amount of debt in relation to the existing toll roads that must be taken over, so the value paid by the private party for the existing toll roads must ideally be sufficient to cover this.
Other tests in Part D include ensuring a suitable accounting treatment of the project (for example, to keep the project off balance sheet) and considering the project’s budgetary impact.
Part D – conclusion
Fortunately, Part D of the study concludes that a PPP delivery route passes all required affordability thresholds.
A PPP model would not appear to trigger any negative budgetary impact given that the first phase will result in a significant upfront payment to the Government.
The likely quantum of the upfront payment to the Government (based on the future revenue stream available to bidders from the existing toll roads) should exceed the accounting value of the assets, and the risk allocation to the private sector is sufficient to ensure that the contingent risks of the project stay off balance sheet.
Finally, the PPP transaction must ensure that the upfront private sector payment exceeds the amount of Government’s debt on the existing toll roads.
Assuming this, the projects in the contemplated package can and should be carried out under the PPP model.