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Public Private Partnerships Enhancing Performance and Funding Infrastructure. ASMC’s 2009 Professional Development Institute May 28, 2009 Brad Watson, Partner, Global Infrastructure and Projects Group. Overview. Summary of P3 fundamentals

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Public private partnerships enhancing performance and funding infrastructure l.jpg

Public Private PartnershipsEnhancing Performance and Funding Infrastructure

ASMC’s 2009 Professional Development Institute

May 28, 2009

Brad Watson, Partner, Global Infrastructure and Projects Group


Overview l.jpg

Overview

  • Summary of P3 fundamentals

  • Applying P3 concepts in defense – an overview of the UK experience


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Summary of P3 Fundamentals


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What is a Public-Private Partnership?

  • A business relationship wherein the public and private sectors share:

    • Risks

    • Rewards

    • Responsibility for success or failure

  • The term “partnership” is not intended to imply a legal partnership

Accessing Private Sector Financing

Running the Service as a Stand Alone “Business”

Simple Operating Contract

Less Risk

More Risk

Transfer to the Private Sector

Transfer to the Private Sector


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Overview

  • Two fundamental requirements for a P3

    • Private sector must genuinely assume risk

    • Value for money must be demonstrated for any expenditure by the public sector

  • Achieving value for money with a P3

    • Better allocation of risk

    • Better incentives to perform

    • Integration of service needs with facility design

    • Clearer focus on respective responsibilities

    • Continuing commercial incentive

    • More potential for efficiencies

  • P3s represent a new method of delivery – a tool is needed to:

    • Demonstrate that alternative delivery is advantageous

    • Ensure that value for money is achieved from the actual RFP bids


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P3s by Sector

  • Characteristics of a sector where a P3 model might be considered:

    • “Non-core” government service

    • Definable business or cost centre

    • Limited integration with other services

    • Ability to charge user fees

    • Impact of failure relatively low

  • Characteristics of a sector where a P3 model would not likely be considered:

    • Importance of maintaining public confidence and/or safety

    • Policy control not easily imbedded in a contract

    • Impact of failure relatively high

  • Relative importance of each factor will vary by jurisdiction

Sectors where P3s have been implemented:

  • Highways, Bridges, and Rail

  • Defense

  • Airport and Air Navigation

  • Water Treatment, Transmission, and Distribution

  • Power Generation, Transmission, and Distribution

  • Gas Transmission and Distribution

  • Marine and Ports

  • Justice/Corrections

  • Hospitals and healthcare


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The Public Sector’s Interest in P3s

  • Improve efficiency in the delivery of an existing good or service:

    • Airport maintenance support equipment (Canada DoD)

    • Municipal garbage collection

  • Deliver a new good or service:

    • SH 130, Segments5&6 (Texas)

    • Alberta Schools (Canada)

    • Northwood Military Headquarters (UK)

  • Leverage existing assets for up-front value:

    • Chicago Skyway

    • Airport concessions


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Public Finance

DBB

DB

DBO

Op Contract

Segmented

Service Delivery

Combined

Service Delivery

DBFO

Full Concession

Private Finance

Contrasting P3 Business Models

  • Various forms of P3 business models exist

  • Two key dimensions

    • Delivery method – degree of service delivery segmentation

    • Financing method – degree of public vs. private sector funding


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P3 Feasibility

Design &

Construction

Implementation

Considerations

Operations &

Maintenance

Project

Feasibility

Acceptability

Legislation

Financial

Feasibility

System

Interface


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The Need for a Public Sector Comparator

  • General Definition:

    • “Hypothetical, risk adjusted, whole-life costs of a project if the project is procured traditionally.”

    • Most-likely alternative approach as the reference point

    • Used to justify implementing a project using a non-traditional approach

  • Typically developed and refined throughout the transaction process

    • Broad estimates at transaction planning stage

    • Further detailed in consideration of delivery options

    • Final value for comparison with actual bids

  • Ultimately, focuses on the financial impact of rejecting the RFP bids


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Use of PSC Issues

  • Complexity and subjectivity in converting risks into dollars

  • Estimation optimism

  • Selection of the Discount Rate

  • Adjusting for information availability

  • Disclosure of PSC to bidders

  • Tendency to over-simplify and ignore other decision criteria (e.g., broader economic benefit, labour relations, safety)


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Typical Procurement

  • Determine project scope and business model

  • Issue request for qualifications

  • Evaluate and create short-list

  • Issue request for proposals

  • Evaluate and select “winner”

    • Negotiate as required

  • Achieve commercial close

  • Achieve financial close


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Basic P3 Structure

Government

Grant or Periodic Payment

Concession fee and/or Revenue Share

Equity

Debt Funders

Shareholders

Loans

Dividends

Repayments +

interest

Project Company

Overheads & Tax

Construction payments

Services

Contractor

Third Parties

Maintenance & Life Cycle payments

Maintenance and lifecycle services

MaintenanceCompany


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P3 Project Risk Profile


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Project term

Toll rates/schedule of allowable user fees

Rights to revenue

Revenue share

Technical provisions

Financing

Capacity improvements

Handback requirements

Competing facilities

Relief events

Compensation events

Force majeure

Termination provisions and compensation upon default

Insurance requirements and project security provisions

Others

Typical P3 Business Terms


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Key Lessons Learned

  • P3s do not fit all situations – careful assessment is required

  • Value for money must be demonstrated, and private entity must genuinely assume risk

  • A PSC evaluation will help to demonstrate value for money

  • Creating a business case forces the project team to clearly define a project

  • Do not underestimate the importance of achieving buy-in on all facets of a P3 project


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P3s in the UK Defense Sector


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UK Defense P3s – Overview

  • Defense has proven on one of the most varied and dynamic sectors for P3s in the UK

  • Some 49 defense P3 projects have closed in the UK over the last 12 years with a total capital value of almost £9bn out of a UK total of £53bn

  • The UK market has been driven by several key factors:

    • The checkered history of managing complex procurements to cost and time

    • Affordability issues favouring payments spread over longer periods

    • Initially, achieving off-balance sheet structures


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Total: Closed UK PFI Deals

Closed UK PFI Deals (Capital Value)

10,000

60

9,000

50

8,000

7,000

40

6,000

5,000

Total

30

£m

4,000

20

3,000

2,000

10

1,000

0

0

Total UK PFI

Total UK PFI

Total Equipment

Total Equipment

Total Accommodation

Total Accommodation

Total Training and Support

Total Training and Support

Number of Transactions

  • The graphs illustrate the number and value of closed deals to date in each of the accommodation, training & support and equipment sectors


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Types of Transactions

  • Asset based PFI transactions have been a key ingredient in UK defense P3s, but we have also seen:

    • Major programs in service-based strategic partnering

    • More recently, in “alliancing” for equipment build and “through life” support

  • The characteristics of the deals have varied greatly depending on their requirements and degree of risk transfer

  • The more standardized, lower risk programs, such as single and married accommodation projects have generally been the easiest to complete as the risk profile and requirements are easily understood

  • But the UK has successfully closed deals covering:

    • Major fixed infrastructure

    • Synthetic and live training

    • Front line equipment


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UK Defense Projects – Examples

  • Medium Support Helicopter Aircrew Training

  • UK Military Flying Training System

  • Defense Training Review Package

  • Heavy Equipment Tank Transporter

  • Strategic Sealift Service

  • Future Strategic Tanker Aircraft

  • Maritime Industrial Strategy


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Summary

  • The UK has found substantial scope for P3s in the defense sector including:

    • Equipment

    • Training

    • Facilities

    • Strategic partnering

  • Successful models have been introduced to deliver all of these types of requirement

  • Key cost, time and sustained performance benefits have been proven

  • Understanding the requirements, catering effectively for change over time and a realistic approach to risk transfer are key ingredients in any successful deal


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Contact Information:

Brad Watson

416.777.8142

bdwatson@kpmg.ca


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