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Why PPP

PPP International Best Practice and Regional Application Overview of Public Private Partnerships (PPPs) 23-25 April, 2008 Tegucigalpa, Honduras Filip Drapak World Bank Institute. Why PPP. Large infrastructure gap in both developed as well as developing countries Risk management

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Why PPP

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  1. PPP International Best Practice and Regional ApplicationOverview of Public Private Partnerships (PPPs)23-25 April, 2008Tegucigalpa, HondurasFilip DrapakWorld Bank Institute

  2. Why PPP • Large infrastructure gap in both developed as well as developing countries • Risk management • Project management skill • Lack of public funding available for infrastructure • Procurement efficiency

  3. How is PPP defined? • Long term contract • Between Private and Public body • Contract contains risks that are withhold by private sector

  4. Roles of Partners • Rules of the game set up by public sector: • - Legislation and regulation • Institutions • Procedures • Procurement Successful project Public partner Private partner • Project inputs set up by private partner: • - Design • Construction schedule and content • Maintenance schedule • Subcontractors

  5. Types of PPP 1. Who is paying? 2. Who has a demand risk? Concession type PFI type • User pays principle • Demand risk with private partner • Public body pays on behalf of users • Demand risk with public partner Hybrid type • Shared payments between Public and User • Demand risk with private partner, public partner or shared

  6. Contractual types of PPPs • M&O ?– long term operation and maintenance contract • DB ?– Design Build • BBO ?– Buy Build Operate • BOT – Build Operate Transfer • BOO – Build Own Operate • BOOT – Build Own Operate Transfer • DBFO- Design Build Finance Operate • Concession

  7. Public partner Project Finance providers Users Private partner How to make it a success? Meet objectives of all stakeholders

  8. Public sector objective • Output based delivery of infrastructure and service • Value for Money • Procurement according to regulation • Risk transfer to Private partner

  9. Private partner objective • Profit • Lowest possible procurement risks • Reference • Long term use of own capacity • Risks transferred to subcontractors • Projects pipeline

  10. Financier objective • Save return of loan • Profit margin reflecting the risk • Risks not with borrower (transferred to public sector or to subcontractors)

  11. Users objective • Low or no user fees • Transparency of tariffs and procurement • Quality of infrastructure and services

  12. Is there a Best practise? Rules of game Capacity Market capability Political will

  13. Political will • Demonstrated political will • Ideally not dependent on election terms • Political rationale

  14. Rules of game • Clear procedures of project management • Public procurement legislation • Policy and regulation • Law and legislation optimisation • Standardised contacts • Clear tolls of avaluation

  15. Market capacity • Availability of Experienced sponsors • Availability of reliable subcontractors • Availability of long term finance at a given risk profile • Availability of risk mitigating instrument

  16. Capacity • Capacity (public) on national level • Capacity (public) on executive level • Institutional capacity, memory and experience • Capacity with private sector • Advisory • Project Sponsors • Financiers

  17. What is different in PPP? • Extra costs: • For preparation and procurement • Cost of capital • Expensive debt • Benefits • Life time costing • Risk transfer • Innovation

  18. Fiscal space • The Extent to which fiscal decisions can be made by a public body • Fiscal space is a key driver for PPPs • Successful PPPs tend to enlarge fiscal space • Fiscal space can be jeopardised by “bad” PPPs

  19. Project Finance and PPP • Financing infrastructure using Public Debt is in terms of financing most cheapest ways, however each new debt can affect overall rating and make all debts more expensive • Project finance is most expensive way of financing projects, however its influence on overall rating and fiscal space can be limited • To accept all risks and use Project finance is the worst solution for a Government

  20. Project Finance - Risk Analyses Risk mitigation and credit enhancement Force major risks Sovereign risks On-project risks

  21. Construction risk • Key risk in PPP/PFI • Difficult to measure • Fully transferred to Subcontractors • Some issues: • site conditions, potential delays, credit rating and track record of Subcontractor, new or existing project, vulnerability of project, risks of currency and inflation, planning risks

  22. Demand risk • Key risk in projects that apply user fees • Difficult to predict • Difficult to mitigate • Some issues: • Users willingness to pay, level of fees, alternatives, who is responsible if there is not demand….

  23. What can jeopardise PPP • Tender is not competitive or transparent • Project risks are not well defined and contractually transferred • Risks are to high and can’t be mitigated • Change in political will

  24. Thank you for your attention Filip Drapak World Bank Institute fdrapak@worldbank.org

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