Transcript Slide 1
Martin Darcy Examples of Successful PPP projects - how to avoid mistakes Case Studies of Three Projects PPP Seven points to remember - Always 1. There is no such thing as a PPP project intrinsically, only Public Investment Projects that may or may not be procured using a PPP methodology 2. PPP is only a concept - a marketing name that can be adapted to individual project conditions 3. It is essential to be clear about the Objective (s) of the project initiative 4. All Public Investment Projects should be subject to the same Evaluation and Appraisal methodology, whether or not they are likely to be procured as a PPP Seven points to remember - Always 5. PPP cannot turn a bad project into a good one 6. PPP should not be used as an accounting trick to defer Budgetary liabilities but as an efficient method of delivering a Public Investment Project 7. Unrealistic expectations: – – – – miracle cure for other weaknesses in the project, the sector or the wider economy affordability project schedule preparation budget will cause problems, disappointment and probably failure Case Study No. 1 City of Derry Airport Key Statistics Approximately 450k passengers per annum Some seasonal component But limited catchment area No cargo Light aircraft / training / flying club Good standard of airfield compliance and navigational aids Close to 2 x World Heritage Sites The Problems that needed to be Resolved Large subvention that consumed 11% of the City’s total budget Constant calls on capital which could not be afforded Lack of ideas to drive growth Acceptance that politicians and public officials were not the best people to run an airport Managing Stakeholders Politicians Officials Airport Staff Labour Unions Local businessmen Media Did the Airport Have a Future at all? Economic Assessment Independent Cost Benefit Analysis Peer Reviewed by non vested interests Small positive net benefit to the local economy Cross border issues (Finally Agreed) Objectives of the Owners 1. To keep the airport open for commercial flights 2. Reduce subvention short term / eliminate it long term 3. Maintain and increase number of routes and number of passengers 4. Improve commercial revenues 5. Maintain regulatory compliance at all times Market Test What the stakeholders want may not be possible There is only one way to find out….. Discuss in a non binding but transparent way which bidders might be interested in principle If the stakeholders ‘needs’ aren’t possible – walk away If the ‘needs’ are possible but the ‘wants’ aren’t – find out what might be possible Also discuss the findings with stakeholders What we found out Moderate interest in the opportunity Seen to be ‘too small’ by most operators / investors Concern about Ryanair presence A lot of speculative interest from aviation consultants / real estate developers / local businessmen How many of these were likely to make bids that would be of interest to the owners??? Owners had already agreed that unless at least three serious expressions of interest could be identified, the private sector involvement would be discounted. When there is a Management Services element Key Issues 1: Service spec and standards – say what you want Performance regime - align the service provider's financial incentives with the Authority’s objectives Employees – in the EU, the Acquired Rights Directive is likely to apply (both at the start of the contract and at the end - so, consultation, communication etc is important - often public sector employees have beneficial pensions provisions - always a sensitive issue and potentially a big issue Regulatory environment - licenses (who is the Responsible Person?) safety case and history; insurances; State Aid When there is a Management Services element Key Issues 2: Governance regime – balance to be struck between Authority’s desire to have some influence (proportionate to their economic interests) and the private sector's wish to have control over decisions so as to enable speedy decision making and protect their investment Termination events - how can you terminate a contract? When and on what grounds etc? But, importantly, think about the practicalities transitional / handover arrangements ? Compensation on termination - a possible problem depending on what capex etc the provider has invested they may require some form of compensation even where they are in breach. If bank finance is involved this will be a big issue Evaluation Criteria Procurement Structured intentionally to attract as many bids as possible, with as much flexibility as possible - with a view to short-listing three bidders. The owners were open to innovations and so did not wish to be overly prescriptive Selection of a Preferred Bidder (PB) was possible quite quickly through careful calibration of objectives and evaluation criteria The strategy was to start negotiations with a PB as early as possible to enable a workable solution to be developed – It gave us more time to discuss an appropriate legal and commercial solution; the downside was that postPB, some of the competitive tension had been removed Post - PB stage - timeline had been planned for 3 months - not met! Negotiations ran through to September 2010(6 month overrun) - due largely to public sector delays around labour issues, although private sector negotiations were also slow. Issues during Negotiation Performance regime and payment mechanism - this was a performance based contract, incentivizing the Service Provider (SP) to deliver results through financial levers. Needed to ensure that the SP was contractually committed (and incentivized) to achieving the Council's key strategic objectives, specifically that of reducing subvention - this was a specific Key Performance Indicator (KPI) Labour Issues - tricky to resolve - largely political not commercial. This required quite extensive negotiation due to sensitivity / political context. Time was lost because of this. Insurances - the interplay between the relative insurances and covered risks and the extent of SP liability for issues such as Health & Safety, required careful consideration Termination - issues around linkage of default (in a KPI based contract) arose but issues required to be settled around ability of Authority to step-in to take over SP's obligations temporarily, and the hand-over arrangements upon termination Was everyone satisfied with the outcome? Traffic improving New routes announced Small scale investment plans underway Derry City Council can plan its Budget with more certainty Employees feel more comfortable about their future So far……..objectives being achieved but early days Case Study 2 Water and Waste Water Infrastructure Northern Ireland Motivation for the Projects EU Directives Scale of overall investment needs Water reform and lack of internal implementing resource Options Mix of public and private sector investment New build or renovate Greenfield or existing sites Low technology or new technology Preferred Solution Publicly financed investment only to the limit of the public sector’s ability to implement effectively Private sector investment would deliver the rest estimated at €350m of €1.4bn total Private sector investment programme (PPP Programme) broken into two major multi-site procurements: Drinking Water projects – named ‘Project Alpha’ Waste Water projects – named ‘Project Omega’ Project Alpha - Objectives To provide 50% of Northern Ireland’s drinking water capacity To achieve quality standards compliant with EU Drinking Water Directive To achieve the above to meet legal deadline Water Treatment – Project Alpha 5 Existing sites Estimated €200m of investment No land acquisition issues Few planning difficulties anticipated One procurement process for all five projects Issues during Preparation – Project Alpha The most attractive and bankable structure had ‘balance sheet’ issues; this led to a major crisis of confidence amongst some stakeholders Raw water data Raw water consistency Sludge management Project Alpha Implementation Schedule May 2003 – Inception January 2004 – Project Launch May 2004 – Call for competition May 2006 – Financial Close (ahead of schedule by 3 months) September 2007 – construction work completed ahead of schedule Outcomes – Project Alpha Winning bid = €70m capital cost saving over initial engineers estimates Whole life savings of 19% Project procured 3 months ahead of schedule Claimed by the advisers to be a ‘World Record’ time for a major infrastructure financing Waste Water – Project Omega Renovation / new build and rationalisation with investment requirement estimated at €150m Three key geographical areas with multiple projects (13 sites) One procurement process for everything Rationalisation element gave great scope for innovation No preconceptions about which technical solutions to use Several bankable templates were already in existence Project Omega Issues during Preparation Stage Sludge management Trade effluents Infiltrations Flow and Composition base data Planning issues concerning some sites Land acquisition required on at least one site Project Omega Issues During Procurement Stage Urgent investment need requiring an Advance Works Contract – high risk strategy for Authority Reform of the Northern Ireland Water Service – ‘the Authority’ The sale of the Preferred Bidder to a private equity consortium Inadequate leadership from senior management at Preferred Bidder Project Omega Implementation Schedule Advisers appointed January 2004 OJEU December ’04 Preferred Bidder appointed January ‘06 Financial Close March ‘07 Project Omega – Outcomes Project signed one month later than forecast 11% improvement in whole life vfm compared to the Public Sector Comparator Construction on Schedule Represented the successful conclusion of a major PPP Programme Main Lesson Learned on the Entire Programme Investment in thorough evaluation and good preparation pays back through good results in: On time delivery Value for money Avoidance of legal challenges VA MULTUMIM PENTRU ASCULTARE