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Public Private Partnerships in the Baltics and Europe
Vilnius, 22-23 November 2006
DAY I, TOPIC IV
Structuring and Implementing PPPs: Risk Allocation and Mitigation
1. UK/European PPP Experience and Lessons
2. Risks in PPP Projects
Scott Dickson
Senior Associate, Projects Group
Berwin Leighton Paisner LLP, London
22 November 2006
[5440725]
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1. UK/European PPP Experience
and Lessons
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History of PFI in the UK
1992: Launch of the Private Finance
Initiative by the Conservative Government
1997 to date: changes introduced by the
Labour Government, including relaunch as
Public Private Partnerships (PPPs)
Policy development now rests with HM
Treasury, including standardisation
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European takeup and globalisation
Includes Italy, France, Portugal, Germany,
Spain, Greece, Austria, Ireland,
Netherlands, Scandinavia, Hungary, Poland
Early projects – Finland (roads)
Increasing deal pipeline
Keep an eye on experience further away:
Canada, Australia, Central/South America,
South Africa, Japan
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Key drivers for PFI
Neglected and crumbling infrastructure and public
assets
Need for investment, avoiding the public balance
sheet
Failures of public procurement
Political consistency – move from public to private
Utilisation of private sector expertise
Promotion of value for money and more efficient of
use of resources
Promotion of innovation (especially design)
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Tested benefits/success of PFI
Transferred risk from the public authority to
private sector
Harnessed private sector skills and
expertise
Introduced competition into procurement of
public assets
Payment linked to performance
– deductions for unavailability and poor
performance
– incentive for private sector to deliver
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UK sector breakdown (by capital value)
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UK sectors (by capital value) – in figures
Health (21%)
Transport (18%)
Defence (15%)
Education (13%)
Scotland/Wales (13%)
Other accommodation projects (government
buildings, prisons) (12%)
Housing (4%)
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UK position today….
700 signed projects worth £46bn
500 operational projects
Standard contractual/risk positions
Commoditised market
Pipeline: Health, Defence, Transport,
Education, Housing, Waste
Market uncertainty – health projects
Growth of other sectors – defence, housing,
waste
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Consequences of UK commoditised
market….
Tight returns
Interest moved to the margins:
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bundling
long-term relationships
new structures, including not-for-profit
funding competitions
secondary market
Opportunities in Europe
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Lessons (1): development aide-mémoire
Choosing projects - sectors/assets
Assemble the right public sector team
Robust business case
Analysis and allocation of risks
Learn from early projects
Project planning and management
Legal framework in place
Standardisation/co-ordination
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Lessons (2): general
Understand the private sector
Take long term approach and sell project
flow to attract private sector
Communication with stakeholders
Deal with opposition
Promote innovation
Limit transaction costs
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2. Risks in PPP Projects
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Thinking about project risks
Risk transfer/balance sheet
vs Value for money
Analysis of risks
Specifics: Sectoral/Geographical
Funder expectations/bankability
Always open for negotiation?
vs Transaction costs
UK settled risk allocation
Private sector: risk mitigation
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Public sector – scoping the project
Full risk transfer
Pricing/Value for money considerations
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example: condition of existing buildings
impossibility of rational pricing?
risk premium too high?
consider competitive bidding environment
Approach
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methodical analysis
justifiable risk transfer
consider value for money
bankable
consistent
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Categorisation of risks, with examples
Construction
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failure of design
cost of materials
delay/incorrect time estimate
condition of site/existing buildings
change in law
Operational
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failure of perform
incorrect cost estimates
change in public authority requirements
change in law
Pure financial risks
– tax
– inflation
– insurance costs
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Risk mitigation/management
Contractual/negotiation
(inc ringfencing)
Private sector passdown
SPV management
Insurance
Senior funding
Equity funding
Decreasing
Sponsor
Appeal
Effects of secondary market/
portfolio risk spreading
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Recommendations
Public authority
Early analysis of the project risk matrix
Take soundings from funding market
Private sector
Work on risks register/internal compliance
Pricing/mitigation issues
Early discussions with insurance advisers
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Vilnius, 22 November 2006
1. UK/European PPP Experience and Lessons
2. Risks in PPP Projects
Scott Dickson
Senior Associate, Projects Group
t: +44 (0)20 7760 4392
e: [email protected]
Berwin Leighton Paisner LLP
Adelaide House
London Bridge
London EC4R 9HA
t: +44 (0)20 7760 1000
f: +44 (0)20 7760 1111
www.blplaw.com
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