Public-Private Partnerships Neil McMonagle August 2010.

Public-Private Partnerships

Neil McMonagle

August 2010

America's Infrastructure Report Card

America’s Infrastructure Report Card(American Society of Civil Engineers, 2009)

Subject Grade Comment

Drinking Water D- $665 million in infrastructure investment required by 2020

Energy D+ $2 trillion in electric utility investment by 2020

Rail C- $150 billion in improvements required by 2030.

Roads D- $130 billion in infrastructure investment by 2020

Schools D $332 billion required to bring schools into good repair

Wastewater D- $335 million in infrastructure investment required by 2020

Overall Grade D

The Bottom Line: America will need to spend $2.2 trillion in

infrastructure investment over the next five years for the nation’s infrastructure to be ranked in “Good” condition

(Overall Grade: B).

America's five year infrastructure funding requirements are immense

Water Rail Roads Schools Energy

$380

$550

$51

$12

$45

$30

$125

$35

$146

$109

Roads

Energy

Water

Rail

11% ($160bn)

5% ($75bn)

17% ($225bn)

4% ($63bn)63% ($930bn)

Schools

Estimated Spending

Projected Shortfall

Paying for infrastructure at a State and Local level

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What is a Public Private Partnership (PPP/P3)?

Public Private Partnerships are….“A contractual agreement between a public agency and a private

sector entity to share the risk and rewards of asset and service delivery – in order for projects to leverage the private sectors’ skills and funding, and provide enhanced value for money.”

• Around 28 US States have PPP enabling legislation, including Georgia, Texas, Michigan, Virginia, California.

• Projects have focused on transport infrastructure, although each State has a different approach:

• NY/ NJ’s Goethals Bridge is being replaced through a 30 year "Design, Build, Finance and Maintain" (DBFM) PPP contract

• Texas' North Tarrant Expressway and LBJ highway P3 projects use "managed lane" concepts and dynamic user tolls to control traffic flow.

• California's Presidio Parkway P3 is using an availability payment structure but no tolls, partly because a tolling structure would require complex agreements between regional funding partners

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PPP should be a true, long term partnership

Public sector brings:

• Public interest and need

• Institutional knowledge of service

• Capital resources

• Balance of commercial and public interests

• Secure revenue stream and covenant?

Private sector brings:

• Management disciplines and preventative maintenance

• New technologies

• Personnel development

• Finance and resources

• Control of risks

• Efficiencies through integration of design, construction, and operations

• Speed of construction – no payment until completion

• Cost certainty

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Basic Public Private Partnership Structure

• Demand / Revenue Based: The private sector controls and collects user fees which serve as their only source of revenue to service debt and generate a return (e.g. toll road PPP projects).

• Availability Payment: The private sector receives periodic payments over the operational contract period from the public sector if the project is available and maintained to the standard specified (e.g. non-tolled roads or social infrastructure).

• Shadow Payment: The public sector retains control of fare policy, but the private sector is paid based on the number of users so takes demand risk. A risk sharing approach, although pricing of risk by the private sector is questionable since they arguably cannot control demand.

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Developing a partnership structure

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Many partnership models existL

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Different levels of risk transfer

Design Construction O&M Financing Utilization Collection

Construction X X X X X

Design Build Maintain X X XX

Design Build Operate Maintain X X X

Availability Payment (Design Build Finance Operate) X X

Shadow Payment (Design Build Finance Operate) X

Real User Fee (Design Build Finance Operate)

Risk transferred to Private Sector

X Risk retained by Public Sector

Potential benefits of PPP

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International experience of PPP as delivery method

PPP has been largely successful in improving efficiency of delivery for infrastructure across a range of sectors.

The table below reflects the UK National Audit Office report on the performance of PFI (PPP) procurements (2003), and a PPP study by Allen Consulting/ University of Melbourne (2007).

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PPP procurement Non-PPP procurement

Time over-run UK 22% 73%

Australia 12% 35%

Cost over-run UK 24% 70%

Australia 13% 26%

What can PPP be used for?Selected sectors – slightly different structures in each

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Roads, highways and street lighting

Toll road concessions, non-tolled roads, urban roads "from curb to curb", street lighting, traffic management systems/congestion control

Education School buildings and maintenance, school IT, colleges and universities, student residences, science and research parks

Justice Prisons, court facilities, police/fire/rescue stations

Energy All energy sectors, renewable energy facilities

Health (note public sector role in Europe)

Primary care facilities, hospitals, medical equipment, IT systems (records projects), mental health

Transit Light rail projects, metro schemes, high speed rail, rolling stock fleets

Urban regeneration & Leisure

Stadiums, car parking, city security, urban regeneration

Different types of project attract different types of investor

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“Greenfield” Assets

ConstructionPhase

• Key Risks:• Poor Design• Cost Overruns• Project Delays

• Investor Appetite:

Ramp-UpPhase

• Key Risks:• Low Revenue• Operating Failures• Sporadic Availability

• Investor Appetite:

Operational Phase

• Key Risks:• Weak Demand• Operating Failures• Maintenance Backlogs

• Investor Appetite:

MODERATE MODERATE HIGH

“Brownfield” Assets

Significant market interest and availability of private funds

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PPP – part of a wider procurement toolbox

• PPP is not suitable for all projects – but should be considered as part of the options appraisal for major capital procurements.

• Recognize parameters of PPP Long contracts, so can be inflexible if material future changes in demand

are likely Procurement process can be complex. Private sector cost of capital normally higher than public cost of finance. Although high practical risk transfer can be achieved to the private sector,

catastrophic risks can revert to public sector as the ultimate procurer.

• Should only use PPP where it offers better value for money than traditional procurement routes.

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Assessment of value for money

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Conclusion: PPP as an option - not the only answer

Consider the characteristics present in most successful PPP projects: Statutory and political environment Organized structure (public sector delivery capability, governance) Detailed Business Plan (business case to contract) Guaranteed revenue stream Stakeholder support Careful selection of partner(NCPPP's six success factors)

PPP should be one of the procurement and financing options considered for capital by State and Local governments – but it needs to be evaluated against other procurement routes, and only used where it offers better value.

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Questions?

Contact Details

Bob [email protected]

Christian [email protected]

Neil McMonagleSenior [email protected]