1 Challenges with the fundings of PPPs when it comes to infrastructures: What lessons can be learned in the case of major projects funded outside the government.

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Challenges with the fundings of PPPs when it comes to infrastructures:

What lessons can be learned in the caseof major projects funded outside

the government budget?

ACPAU/CAUBOMontreal, June 2006

Andrée De Serres, LL.L, MBA, Ph.D.Professor

Département Stratégie des affairesDirector, MBA program for finance executives

ESG UQAM

Juin 2006 ©Andrée De Serres, UQAM 2

Contact Information

Me Andrée De Serres, LL.L, M.B.A., Ph.D.,Professor

École des sciences de gestionUniversité du Québec à Montréal

Director, MBA program for finance executives315 Ste-Catherine East, Suite R-3555

Montreal QCH2X 3X2

Tel.: (514) 987-3000 Local 1966E-mail: [email protected]

http://www.fin.gc.ca/tocf/1999/finserv_f.html



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Introduction

Traditional Mode and PPPsEvolution of modes in the undertaking of public infrastructures


New Context

Early 1980s : economic situation conducive to questioning the role and the involvement of the government

Debt reduction objectives First wave of reactions from the

governments Withdrawal from certain sectors of

activities Sales of assets Sales of stocks


Second wave of reactions: to find different solutions to new capital needs

In developing new organisational models to provide public services

Objectives To transfer fincancial risks to the

private sector To transfer the debt to the private

sector To improve the quality of services

with the help of the private sector’s expertise

Alternative mode assuming and delivering the public infrastructures and services (©De Serres, 2004)

Monopole gouvernemental

Par choix ou par absence de marché privé

Entreprises du secteur privé

Modes hybrides

Sous-traitanceConcession (PPP)

ImpartitionLicence

Mise en valeur de la propriété

intellectuelle

Marché non réglementé

Marché réglementé

PPP/PFI

Co-entreprise

En régie directe

Agence Société de la Couronne

Gestion déléguée

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PPP Contracts: Risk and Funding Transfer


Management Mode Influence And Project Funding

Evolution Funding Risk Management Sectors of activities


Funding a new project within the limits of an organisation’s budget (©De Serres, 1999)

Gouvernement et agent public : Prise en charge et maîtrise

d’ouvrage de tous les projets

Bilan : actifs et passifsde l’ensemble des projets

Financement par prêt

Analyse de la contribution du projet à la rentabilité générale de

l’emprunteur

Demande de capitaux

Opportunité de développementAjout d’un nouveau projet intégré

au bilan et prise en charge financière

Financement par taxes, impôts et autres


"Off Balance Sheet" Project Funding (©De Serres, 1999)

Opportunité Promoteur

Projet

Financement par fonds propres

Structuration d’une entité légale

conçue spécifiquement

à cette fin

Financement par dette

Subventions gouvernementales


Hallmarks

Project funded inside the government budget ("in balance sheet") Perfect control but risk taking

Project undertaken by an external legal entity but under the control of the sponsor, therefore consolidated

Off balance sheet project = Lost of control: joint-venture = Risk transfer designed specifically for

that purpose = Risk transfer to the creditor


Financial Strategy Project funding in or off balance sheet

See: Business corporate funding vs project funding

Impacts of the strategic option On the qualification of the project On the funding sources On the type of financial package


Table: Payment of Fees by The Users (©De Serres, 1999)

Concédant :L'autorité publique accorde

la concession de service public

Concessionnaire : entité légale, privée ou publique, responsable de

l’investissement nécessaire

Usagers : paiement d’une redevance au concessionnaire

pour le droit d’usage


Les concessions en France

In a public rule of law system favoring a special status for building and civil industry (BCI)

Concession or factoring contracts On public works with user’s fees at the central,

departmental or municipal government levels, etc Often conceded to semi-public companies

Water & sewage systems Turnpike roads

Precedents: Concession in France


Precedents: Implementations in France

Extended right to departments, municipalities and communes in 1986

Several projects: EuroDisney Undergroung connexion between Paris

Metro and Orly Airport: Orlyval (1993) Tunnel Prado Carenage in Marseilles (1993) Toulouse Metro (1994) Boulevard Périphérique Nord, Lyon (1994) Normandie Bridge France Stadium etc.


A PPP contract with a lease payment by the government or its agent (©De Serres, 2005)

Concédant : l'autorité publique accorde la concession de service public

Concessionnaire / LocateurEntité privée ou publique ou mixte

Usagers : accès selon les conditions prévues par les politique sen vigueur

Contrat de PPP Contrat de bail


Precedents In United Kingdom

PPP +: concessions and other possible agreements Private Finance Initiative (PFI) program since 1996

Gouvernment = customer Criterium: Value for money

Excellence program in public facilities building Joined-up Services Program

Adding a private mode service to an operating public organisation

Best Value Code of Practices on Workforce Matters Program


PPP/ PFI / P4

The Private Finance Initiative (PFI) is a form of PPP but is also, principally, a form of contracting or procurement (PPPP), the hallmarks of which are:

a long term service contract between a public sector body and a private sector ‘operator’

the provision of capital assets and associated services by the operator

a single ‘unitary’ payment from the local authority which covers investment and services the integration of design, building, financing and operation in the operator’s proposals

the allocation of risk to the party best able to manage and price it

service delivery against performance standards set out in an ‘output specification’

performance related ‘payment mechanism’ an ‘off balance sheet treatment’ for the local authority so that

any investment delivered through the project does not count against borrowing consents

support from central government delivered through what are known as ‘PFI credits’


PFI in United Kingdom: 600 New Infrastructures Since 1996

40 hospitals, 200 schools Prisons, military facilities Drinking water systems, water treatment, etc. Public transportation

London Underground Lodging, social housing and services Police stations (UK) Fire department stations (UK) Arenas, stadiums and other sport facilites


Precedents in Canada

Highway 407 in Toronto Fredericton/Moncton Highway Highway 104 in Nova-Scotia Confederation Bridge, PEI, (a success due to a yearly

indexible 42 millions $ federal subsidies)


Confederation Bridge (Prince-Edward Island) 1997


Fields of Activity in Canada Online public services Drinking water and sewage systems

management Roads and bridges Hospitals Education

Schools Universities

Prisons Energy Public transportation Etc.


Projects Under Negociation in Québec

Highways 25 and 30 Mega-hospitals Residential and long-term care

centers Montreal Symphony Orchestra

Concert Hall Etc.


Delegation of Authorities

Nature of delegated authorities Property of assets Delegation of project management

Impact on the rules Contract procurement Governance Accountability Funding sources


From the Delegated Authorities What can be conceded ?

Delegatus non potest delegare We can only delegate the authorities we hold

Authorities that can be delegated in as much as the law permits Design Funding Construction Operation

During the initial period On a long term

Maintenance


Types of Contracts Concession or factoring contracts in the French or

Continental European public law Equivalent terminology of contracts in the British law:

Construction-Conception-Financement-Exploitation or Design, Build, Finance, Operate (D.B.F.O. )

Construction-Conception-Financement-Exploitation-Entretien or Design-Build-Finance-Operate-Maintain (DBFOM)

Construction-propriété-opération-transfert or Build-Own-Operate-Transfer (B.O.O.T)

Lemurs variations: Build, Operate, Transfer (B.O.T.) Build, Own, Operate (B.O.O.) Etc.

Table: Merging of transactions according to phases of activities (©De Serres, 1999)

Soumission (Première partie de

la phase de conception)

Approbation du choix des entrepreneurs

Concession de la maîtrise d’ouvrage

Contrat(s) de maîtrise d’œuvre(Deuxième partie de la phase de conception)

Approbation du choix des entrepreneurs

Phase de construction Phase d’exploitation

Contrats de fourniture et d’équipement

Contrats deconstruction

Contratd’exploitation

Contrat de maintenance

Appel d’offres

Condédent


Ownership of Assets

Owned by governments or public agents Types of contracts

Lease or other renting contracts Delegated management contract Service or factoring contract Building contracts

Design-Bid-Build (DBB) Design-Build (DB)

Building contracts with risk sharing Construction Manager at Risk (CMR) Design-Build-Operate-Maintain (DBOM)


Ownership of Assets Tranferred to Private

PPP Concession PPP PFI Impartition Sale and cession to private (Privatisation)


Have objectives been met?

Financial risk transfer Financial debt transfer Cost control Cost savings

Governance and accountability Government accountability Improvement of services


Financial Risk Transfer

Private funding leverage effect How many projects with true authority

delegation and financial responsibilty?

The futur of the off balance sheet funding with new commonly accepted accounting principles

Processing of Special Purpose Entity

The auditor general’s opinion Is he/she going to deal as off balance sheet

the debt engaged in a PPP?


Cost control and financial risk transfer Are there financial risk transfers, building risks,

operation risks? Assessing long term impacts Financial risk transfer

Quid if undertaker is financially strapped Has the financial risk really been transferred? In case of bankruptcy, public funds will have to be

reinvested What if the private enterprise does not respect the

terms of the contract? If it faces financial problems? If it is sold or if it disposes of its contract? If the activities are a threat to the safety of the

population?


Cost Savings

Is there a real cost sabving in PPPs or PFIs? Interest costs and debt are higher than government

loans Transaction costs are higher

According to studies made by Malette Firm, Résidence Saint-Charles in Quebec City, with 132 beds, would cost $56,6 millions in PPP mode and $42,2 millions in traditional mode

Their incomes are taxable They have to generate a rent for their shareholders

or sponsors


Limitations of the risk transfer

PPP mode and off balance sheet project funding Allow to limit the impacts of bad risks In as much as there is profit sharing

For the governement Remains accountable for the unforeseen risks

and major exceptional risks Remains responsible for public interest stakes

Limitations of PPPs as optimal mode in certain sectors

Modes in taking charge of public services (©De Serres, 1999)


Choix politique ou par absence de marché

Marché règlementé ou non réglementé

Secteur privé

Modes hybrides

incluant les PPP

Prise en charge : agent public

Prise en charge : secteur privé et/ou secteur public

et/ou secteur de l’économie sociale

Prise en charge :

secteur privé

Règles de gouvernance, de reddition de comptes, d’appel d’offre et de financement du

secteur public

Quelles règles ?

Règles de gouvernance, de reddition de comptes, d’appel d’offre et de

financement du secteur privé


Governance and accountability

Public project management and public sector regulations Assuming a project inside the government

budget Project management and the public sector Open tendering rules and contract

procurement Public finance regulations Accounting principles Accountability Audit Types of contracts


Have the other objectives been met? Improvement of services

How to measure it? Governance and accountability

Authority transfer in contract procurement Access to documents Control agency Retrieval right

Loss of power on territory management

Government accountability Technology and knowledge transfer


Conclusion: impacts and reflexions

Complex issue with serious social and economic impacts

Deserves further thought to determine an effective and sustainable political intervention We should not blindly imitate what has been done

elsewhere in another era Several projects already have a history whose we can

assess the success or the failure Sustainable development and intergenerational

transfer First of all, we should avoid mortgaging the future of the

coming generations in transferring them our irreversible choices and the financial load associated with them

New ways adapted to our society have to be explored


Conclusion: the advantages of the project-based funding mode

Exploiting knowledge and efficiency of the project-based funding mode Risk identification and management

methods Fragmentation in activity phases Demerging and remerging of risks


Conclusion : the advantages of the partnership organisational mode Governance and partnership

Explore and take advantage of the partnership organisational mode An efficient organisational mode for complex

projects The partnership mode as a new production line Key element Transform potentially conflictual relations into

partnerships New organisational mode as a source of

strategic value creation


Conclusion: Avenues of Thought for The Government

Partnerships of all types Public-private Partnerships

Allowing economies of scale in breaking the cultural isolation between ministries and various public entities

Favoring a winner’s culture Public/nfpo Partnerships

Partnerships with community businesses and social economy organisations


Partnerships of all types (cont.)

Partnerships with public entities Semi-public company

Partnerships involving public entity employees To integrate employees and unions in the

organisational structures

Alternative modes of taking charge of and delivering public infrastructures and services (©De Serres, 2004)


Par choix ou par absence de marché privé

Entreprises du secteur privé

Modes hybrides

Avec une entité publique

Avec un OBNL

Avec une entité privée

Sous-traitanceConcession (PPP)

ImpartitionLicence

Mise en valeur de la propriété

intellectuelle

Marché non réglementé

Marché réglementé

PPP/PFI

Co-entreprise

Avec une société d’économie mixte

En régie directe

Agence Société de la Couronne

Gestion déléguée


Conclusion Change in the role of the government

Control & regulation Major needs in terms of training Major needs in terms of tools

Importance to gain civil society support when public good is concerned on the long term

1 Challenges with the fundings of PPPs when it comes to infrastructures: What lessons can be learned in the case of major projects funded outside the government.

Documents

france slide

funding transfer slide

bail slide

creditor slide

balance sheet project

new project

droit dusage slide

impts et autres slide