Transcript Issues and questions for discussion in the break

PPPS: Potential Risks and Benefits
Public Private Partnerships
Mexico 14-18 May 2007
Teresa Curristine,
Budgeting and Public Expenditures Division,
Public Governance Directorate, OECD
1
Overview of Presentation
What is a PPP?
 What are the trends in developing
PPPs?
 What are the potential benefits?
 What are the potential risks?
 What factors to consider before going
down the PPP route?
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What is a PPP?
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“Public-private partnerships (PPPs) involve private sector supply of
infrastructure assets and services that have traditionally been provided
by the government.” (IMF)
“In general, the term refers to forms of cooperation between public
authorities and the world of business which aim to ensure the funding,
construction, renovation, management and maintenance of an
infrastructure of the provision of a service.” (European Commission)
“Public sector contracts to purchase quality services on a long term
basis – principally involving the construction of new infrastructure to
provide such services” (PFI – UK Government)
There is no clear agreement as to what is a PPP.
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What a PPP is not?
Outsourcing - 5 year catering contracts
 Other partnership models
 Privatization
 Franchising
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What are some key characteristics of PPPS?
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Private Execution & Financing of Public Investment
Private Provisions of Services
Private Risk
Whole-of-Life Perspective
Typically, PPPs have a design-build-finance-operate
scheme, as opposed to design-build only which is
common for traditional public investment, but there
are many other variants
Government frequently the main purchaser of
services provided
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Examples
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Highway infrastructure (roads, bridges, tunnels)
Railways
Airports
Ports
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Hospitals and health care facilities
Central accommodations
Prisons
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Water and sewage
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Trends Towards PPP
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Between 1985 – 2004 globally PPF in 2096
projects nearly $887 billion
Mainly transport 656 projects total $325 billion
2096 projects 1121 projects were completed by
2004 (AECOM 2005).
Developed countries extensive experience UK and
Australia
UK biggest player PFI deal in excess of $13
billion
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Top 10 Countries of PPP/PFI Project Finance Deals 2004 v 2003
Rank 2004 Country Value (US$m) Deals % Share
Rank 2003 Value (US$m)
Deals % Share
1
UK
13,212
81
32.6
1
14,694
59
56.7
2
Korea
9,745
9
24.1
3
3,010
3
11.6
3
Australia
4,648
9
11.5
7
611
4
2.4
4
Spain
2,597
7
6.4
2
3,275
8
12.6
5
US
2,202
3
5.4
4
927
2
3.6
6
Hungary
1,521
2
3.8
11
251
1
1
7
Japan
1,473
15
3.6
10
274
5
1.1
8
Italy
1,269
2
3.1
5
714
3
2.8
9
Portugal
1,095
2
2.7
n/a
n/a
n/a
n/a
10
Canada
746
3
1.8
n/a
n/a
n/a
n/a
Source : Dealogic, quoted in OECD (2006:57)
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What are the potential benefits?
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Increase efficiency gains and better value for money
Public sector opportunity to increase investment and
development of infrastructure projects
Bypass some of the dysfunctional aspects of traditional
procurement- better delivery on time
Maximises the use of private sector skills
Force public sector to focus on outputs from the start
Quality of service can be maintained for life of the PPP
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What are the potential risks?
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Does not necessarily improve efficiency or provide
value for money
Fails to adequately transfer risks to the private sector
Avoids disciplines of the budget process- off budget
treatment
Very complex contracts-can be difficult to get the right
balance on contract specificity
Procurement can be lengthy and costly
In long–term can be relatively inflexible structures
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Requirements for a Good PPP
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Service Quality is Contractible
Adequate Risk Transfer to Private Sector
Competition, or Incentive-Based Regulation,
Must Be Present
Good Value For Money (Efficiency gains offset
higher private borrowing costs)
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What factors to consider before going
down the PPP route?
Design issues
 Institutional capacity
 Market Issues
 Accountability Issues
 Governance Issues
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Design Issues for PPPS
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Is the project suitable to be a PPP?
Is it more efficient than providing it through traditional public
sector procurement? Will it provide Value for money?
– Do the efficiency gains outweigh the higher costs of private
capital
Is there an adequate transfer of the different types of risks to the
private contractor?
What steps can be taken to maintain fiscal discipline?
Can the current legal and regularity framework accommodate
PPPS?
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Transferable Risks
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Construction: design problems; costs
overruns; project delays
Financial: variability in interest rates &
exchange rates
Performance: availability of an asset &
quality of service
Demand: ongoing need for services
Residual Value: future market price
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Risk Transfer & Financing Costs
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In theory, risk transfer should not affect financing
costs
– Cost of capital should depend only on project
risks
But, since governments can spread risks across
taxpayers, private sector borrowing usually costs
more than government borrowing
“The key issue is whether PPPs result in
efficiency gains that more than offset higher
private sector borrowing costs.” (IMF)
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Assessing Risk Transfer
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Very Difficult
– Legal complexity of PPP contracts
– Implications of renegotiations
– Guarantees, explicit & implicit
– Ex Post risks for providers of essential
services & those too big to fail
Very Important
– Basically determines whether PPPs are more
efficient & effective
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Legislative Framework
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Importance of having framework
– Lack of adequate framework a factor in rating agencies
country ratings
– Can affect market appetite to bid for or finance projects
Problems with Definition of PPPs
National laws can impose restrictions
– For example national law impose complex
requirements for sub-contracting (Germany)
Restrictions on ability of local or regional governments to
contract (Czech republic)
Public finance law restricts long –term budgetary
commitments (Poland)
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Countries with Legislative Framework
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Examples of European countries with
comprehensive legislative framework: Ireland,
Spain, Poland and Turkey
Other countries e.g. South Africa and Chile,
Australia at state level
Comprehensive legislation being drafted or sector
specific legislation: Belgium, France, Greece,
Portugal, Czech Republic, and Latvia
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Legal Framework:
For example Chile Concessions Law of
1991
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Establishes nature of concessions
Creates competitive biding process
Specfies conflict resolution procedures
Special purpose company
With authorization, transferable
Breach of contract: end of concession and
rebidding
Step in rights provision for creditors
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Legislative framework for example South
Africa
– National and provincial PPPs: Treasury Regulation
16, issued 2004 to PFMA (1999).
– National Treasury PPP Practice Notes that
constitute the PPP manual of the PPP unit
– Municipal PPPs: Municipal Public-Private
Partnership Regulations, issued 2005 to Municipal
Finance Management Act (2003)
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Institutional capacity
Does the public sector have the necessarily
technical expertise and trained staff to design,
negotiate and monitor these contracts?
 How will the public sector maintain the necessary
institutional memory and staff over the long term?
 What are the advantages of a PPP unit?
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What can a PPP unit Achieve?
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Promotes Credibility with the Market
Promotes Projects to the Market
Co-ordination of public bodies
Can be the promoter of initiatives eg legal guidance
documentation
Can bring in new knowledge, skills, mindset and
experience
Can check proposed projects for errors
Advice and support to project sponsors
Can approve projects
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EU Countries with PPP Units 2005
Active PPP unit involved in PPP promotion
Austria, Ireland, Netherlands, UK
 PPP unit in progress or existing in purely
consultative capacity
Denmark, France, Germany, Italy, Portugal
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For example: The role of the South African
dedicated PPP unit
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Main functions: Ensure affordability, value for
money and sufficient risk transfer
In line with international best practice:
– Main drivers of value for money: risk transfer
and competition
– Prerequisite for value for money is affordability
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PPP unit in South African Nat Treasury has two broad
tasks:
– Provide technical assistance to government
departments, provinces and municipalities
– Provide Treasury Approvals during pre-contract
phases
Initiative, ultimate management of and accountability
regarding PPP agreements originates and rests with
individual government departments and provinces
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Market Issues
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Is there a competitive supplier markets?
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Will a competitive market be maintained
over the long-term?
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What can be done to avoid over-reliance on
a single supplier in a sector?
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Accountability Issues
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Are PPPS accounted for in a transparent manner
on the government books?
What are safe guards in the tending procedures
and process to avoid bias or corruption?
What impact does it have on transparency to
citizens?
– Public access to information – commercially
sensitive contracts
– Impacts on citizens’ redress
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Criteria for Scoring PPPs Off Budget
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UK
– Demand: service payments must be dependent on
future need for services
– Residual Value: asset must be transferred at true
economic value
– No guarantees of private liabilities
Eurostat: PPPs are non-government assets if private
partner bears both:
– Construction risk and,
– Demand or Performance risk
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More on PPP Accounting
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No internationally accepted accounting standard
has been developed to reflect varying degrees of
risk transfer
Country practices differ substantially
Classifying PPPs as either public or private fails
to recognize risk sharing
A more appropriate treatment might be to reflect
the range of fiscal costs & risks, but few, if any,
accounting (let alone budget) systems can handle
this treatment
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Governance Issues
What are the political considerations of
failure? Will the public always hold the
minister responsible?
 How will these contracts limit the budget
flexibility and policy potions of future
political administrations?
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It is important to get it right
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Good projects:
– create economic benefits and growth
– create confidence in a country’s economy
– create value for money solutions thus minimising taxtake
Bad projects:
– create ongoing liabilities for many years
– big projects = big risks
– failure is often high profile: nationally and
internationally
– can undermine investor confidence in the country
– can make the good projects unaffordable
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Conditions to create a good quality PPP
Programme
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Political Support
Clear legal framework and guidance
Institutional co-ordination
New skills and new mindset
Decide on a case by case bases
Projects that have:
– Clear objectives
– Clear boundaries
– Clear links to stated policy objectives
– Clearly defined and understood risk strategy
Previous experience – what will/won’t work
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To PPP or Not To PPP
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Service Quality is Contractible
 Focus on end result, not means of delivery
 Clearly specify outputs & performance
standards
Public Sector Comparator
Value For Money
 No presumed advantage to private or public
sector
 Refined project appraisal & prioritization
process
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To PPP or Not To PPP
Fiscal Implications Properly
Accounted & Reported
 Pay For Performance
 See www.partnerships.vic.gov.au
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Conclusion
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Should be considered along with traditional public
sector procurement and other MTM and financing
sources
Fundamental question -does it provide better value
for money?
Everything rests on adequate design and risk
transfer
Even then accountability, transparency, and
governance issues must be considered
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