Copyright © Altra Capital Limited 2014 www.altracapital.com
Copyright © Altra Capital Limited 2014 www.altracapital.com
Executive Committee
Some useful knowledge to makes the difference between success and failure of a PPP program
Ogun 2014 Retreat 28 January 2014
John Davie
Chairman Altra Capital Limited
Visiting Professor Faculty of Business and Law, London Metropolitan University
Past Chairman UKTI PPP Sector Advisory Board
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The standard PPP route map!!
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• A method of providing public services, not simply for buying infrastructures
• It should contain
• an expectation of service improvement
• a commitment to transparency
• the dismantling of monopolies and the reform of public services
• OWNERSHIP of projects belongs to the sponsoring MINISTRY, Department or Agency
What is PPP?
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A fundamental principle behind the PPP
• PPP is intended to transform government departments from being owners and operators of assets into knowledgeable purchasers of services from the private sector
• This will ease Government cash flow if properly deployed
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Indicators Cartegena
1994 2005
No of employees per 1,000 connections 15 2.3
Percentage of domestic metering 30% 99%
Unaccounted for water 60% 41%
Hours of service / day 7 24
Response to complaints (days) 6 0.5
Some successes
Source : Water Supply and Sanitation Sector Board of the World Bank
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The single most important thing that government MUST do is
What is most important?
Which comes from using high quality experienced advisers
Provide high quality useable data and facts Prepare high quality project development work
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Government’s advisors
• Success of the programme depends on the organisation of government and its ability to use advisory services
• Strong government team
• outside expertise for • identifying internal changes necessary to meet government
objectives • recommending best way to implement change • assisting in the implementation
• PPP specialist advisers can be broadly divided into 4 types: • financial • legal • technical • project management
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• PPP is a contractual arrangement between a government entity and a private firm which incentivises the private firm to effectively and efficiently design, build, maintain and finance public infrastructure
• There are two main types:
• User-Pay PPP where the private firm takes revenue and/or demand risk
• User-Pay PPP is usually called a concession
• Annuity based PPP where the government retains those risks
• Annuity based PPP is usually called a DBFO
Two main types of PPP?
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• 100+ countries doing / contemplating PPP programmes
• comparatively low proportion of these have actually succeeded
• all countries looking at doing PPP are in competition for a limited international pool of advisors, capital and operators
• international experience has shown that certain key factors need to be in place for a successful programme to take place
• most important factor in ensuring good quality projects, which benefit the country concerned, is proper training for government officials tasked with running these PPP projects
• the NAO in UK, S&P, EU and UN have all highlighted lack of government training as a major barrier to successful PPPs which often means the public sector gets a very poor deal
Global Competition
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How important is using private sector finance?
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A snapshot of investment needs
• The UK estimates that £320 billion of investment in social and economic infrastructure will be needed over the next five years
• 70% of which will have to be sourced from the private sector
• The IFC has indicated that the Middle East and Africa regions have the lowest amount of private infrastructure investment in the world
• IMF estimates Nigeria’s infrastructure will require $14.2 billion per year over the next decade, or about 12 percent of GDP
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• Basle III effectively tripled the size of the capital reserves that the world’s banks must hold against losses
Why are banks not lending?
• Top 19 banks
• Risk-weighted assets are around $167,000,000,000,000
• Current Core Tier 1 = $3,340,000,000,000
• Basle III Core Tier 1 = $11,690,000,000,000
• An additional $8,350,000,000,000
• They do not trust each other!
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• Contracts are sufficient for getting started in PPPs – only a strong contract between the parties is needed. Putting in place the overall legal, policy and institutional framework can wait
Some Misconceptions
• PPPs are all embracing universal remedy that can be implemented all at once irrespective of the competence, knowledge and skills on the part of governments
• PPPs provide a number of infrastructure assets, roads, bridges, power plants etc., to Governments either free or little cost and no risk
• PPPs are sophisticated technical financial transactions
• Using a PPP can bring private money into public coffers and be an additional source of payment for government departments
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Equity
Equity
Fee to SPC for use of Facility
based on Performance/
Payment
Project Company (SPV)
Direct Agreement
Build/Renew/ Maintenance Costs
Construction & Maintenance
(Hard Services)
Operations (Soft Services)
Service/Operator Charge
Guarantees
Collateral or subvention
Senior Debt Loan
Agreement
Debt Repayment
Debt
Concession/ Project
Agreement
Sub-contractors Sub-contractors
Capital
Insurance Companies Debt
Insurance
Rating Agencies Debt Rating
Re-Payments
Equity and Loan Stock Post 2008 – 30% - 40% • Specialist Bank • Contractor • Operator
Equity and Loan Stock Repayment
Equity and Loan Stock Equity and
Loan Stock
Government (Awarding Authority)
They will have very competent
advisors You
need competent advisors
They have competent
advisors
Holding Company
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Key issues for banks in PPP projects
Micro
• Well defined projects; clarity on output specification
• Strong, experienced contractors
• Credible completion undertakings
• Appropriate allocation of risk reflected in payment regime
• High quality predictable cash flows – low volatility
• Alternative service providers in the event of bank’s step-in
• Adequate termination protection
• Protection from other adverse events, change in law, force majeure, insurance etc.
Macro • Legal regime permitting taking of
security and enforcement of contractual rights
• Political commitment to PPP and to specific projects
• Competition amongst construction companies
• Availability of service providers
• Availability/capacity of long-term debt market
• Availability of project equity
• Established exit route for project equity
• Transparent procurement process.
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Some lessons learnt
• Stable long term policy commitments if changes are to be made across markets
• Scrutinise the deliverability of a project before real engagement with the market
• Project Governance
• Programme delivery platforms
• Mix of mandatory procedures and support
• Proper attention paid early on to the operational phase of projects
• A view about what you want the market to look like in 5 -10 years’ time.
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The financing tool-box
Mezzanine
Low risk Medium risk High risk
Equity >20%
15-20%
<10%
Return
Senior Debt
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What is risk?
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The single most important thing that government MUST do is
Reminder - what is most important?
Provide high quality useable data and facts Prepare high quality project development work
Using high quality experienced advisers
Copyright © Altra Capital Limited 2014 www.altracapital.com
Thank You www.altracapital.com [email protected]
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