PPP Arrangement in WtE Plants

Transcription

1 PPP Arrangement in WtE Plants Mikael Norrback EEP Mekong Workshop: Economics for Waste to Energy Projects on Public Private Partnership 7 November 2016, Ho Chi Minh City, Vietnam

2 2

3 Introduction Cost effective implementation of public sector investments requires careful planning and selection of the most appropriate procurement model for each project. Various procurement models exist, the basic models being funding through public sector budget or through public private partnership for investment life cycle. In each case, for decision making purposes, the public sector as procurer compares different alternatives based on offers (bids) received. Public sector as user and procurer issues requests for bids for potential PPPcounterparties. The request for bids includes description of the services to be procured avoiding such technical and other unnecessary preconditions that limit the use of innovative solutions by the construction industry in the areas of design, construction, operation and maintenance of the project asset. 3

4 Introduction, tariffs The offer for services includes long-term services to be provided to the procurer against monthly / annual payment (tariff) that may vary during the contract term based on various aspects. In order to reduce the cost of capital, the tariff may be structured to contain two elements, fixed and floating part. Fixed portion of the tariff could cover in whole or in part the debt service (interest and amortisation) of the service provider. Payment of the floating (variable) portion of the tariff is subject to availability. The procurer and service provider may also agree that part of the floating tariff depends on utilisation rate in which case service provider participates and shares such risk with the procurer. The target shall be handed over to the procurer at the end of the contract term with terms and conditions agreed between the parties. 4

5 Introduction, responsibility PPP service provider is responsible for i) planning, design, construction, service and maintenance of the project asset as well as for ii) procurement for project funding. The former relates to activities and liabilities typical for construction industry that in the PPPmodel are more comprehensive and longer (20 to 30 years) than in traditional construction contracts including planning and implementation. The tariff structure referred to above entitles the use of debt financing with competitive terms, in line with terms applicable to public sector entities as borrower. For the purposes of arranging the ownership of the asset to be constructed the constructor and investors agree on establishment of a project company together with risk allocation principles between the parties (including the procurer). Service company enters into service contracts with the construction company (consortium) and with the procurer and assumes primarily risks related to project financing, project contracts and project counterparties. The main purpose of using PPP models is to share long-term risks inherent to large infrastructure investments with private sector (construction industry and providers of funding). The contractual, financial and tariff structures make it possible to fund the investments with such terms that, to the extent possible, correspond the terms of public sector own funding. 5

6 Constraints in the Law on Scope of PPP Projects A Government wishing to implement a PPP program or arrangement has to consider before the the project development whether there are any aspects of the existing legal environment of the country that would limit the scope of the project. Such elements could be limitations on the power to delegate public services limitations on tariff increases restrictions on disconnection of consumers who fail to pay their bills vesting rights in public land/assets limitations on granting security over assets Example Finland Contracts Act, Section 36 (956/1982) (1) If a contract term is unfair or its application would lead to an unfair result, the term may be adjusted or set aside. In determining what is unfair, regard shall be had to the entire contents of the contract, the positions of the parties, the circumstances prevailing at and after the conclusion of the contract, and to other factors. 6

7 Vietnam Decree 15 on Public Private Partnerships (PPP Decree) The PPP Decree (April 10, 2015) introduces some new features that distinguish it from preceding regulations, including: It sets out a PPP project cycle that includes screening and publication of projects, reliance on a feasibility study (or project proposal for smaller projects) to determine optimal contract structure, approval of State support and competition amongst investors to win project awards; It provides basic eligibility requirements for PPP projects to assist agencies in the screening of projects; It covers a wider scope of investment sectors; It introduces new contract types based on a broad distinction between user fee type contracts and availability payment type contracts (and contemplates variations of the stipulated contract types); It does not cap the use of State participating capital for project implementation as a percentage of the total investment cost but seeks to determine the optimal use of State capital based on the project needs; It makes available financial support during project selection and development by introducing the Project Development Facility (assisted by Asian Development Bank and the French Development Agency); It contemplates the use of State support (referred to as State Investment Capital ) as form of viability gap funding (VGF) for PPP projects; It reiterates lenders' step-in rights and right to assignment; Foreign governing law may be permitted for foreign invested projects; and Foreign arbitration may be permitted for foreign invested projects. Source: World Bank 7

8 Contractual structure of a PPP Project Procurer (State/municipality) Service Agreement PPP Banks (80-90%) Loan Agreements Palveluntuottaja SPV (Service (Projektiyhtiö) Provider) Ownership Owners (Investors) (10-20%) EPC O&M Contractor (Design, construction, O&M) Structure of PPP The service is procured on a turnkey basis Essential is that the procurer is able to define the service so that the Service provider can develop the concept The service has to be well defined in the terms of reference

9 PPP Bidding Project 1. Project preparation Formal project announcement Road-show Partnering/ establishment of consortiums Construction Finance Other 2. Bid request and qualification Pre-qualification process Bid request with service definition, selection criteria and main contract principles Short listing 3. Design and bidding Design and cost estimation Financial structuring Financial modelling Financing Contract terms and conditions Binding proposals 4. Selection Comparison of bids Possible iterative rounds Nomination of preferred consortium 5. Contract negotiations Excusive negotiations for detailed terms and conditions Completion of finance agreements Financial closing 6. Construction Construction of the facility Construction supervision Business and financial reporting by the SPV to the fund Commissioning 7. Operation Service provision SPV board representation Performance and service monitoring Contract adjustments 8. Divestment/ exit Exit planning Sales process and negotiations Transfer activities

10 PPP Process PPP Process: Prequalification PQ Material Bid Preparation Discussions with Contractors Bid negotioations Agreements Financing SPV Agreements Construction Supervision Control Commercial Operation Service period Supervision of service

11 Process Definition Prequalification and Tender Process Procurement decision Construction, O&M Bids Procurement Notice Terms of Reference Financing Bids PPP Proposal (EPC, O&M and financing) Selection of bidder

12 The responsibility and tasks of the Contracting Entity Project Development Bid Phase Agreements Construction Commercial Operation Service time Initial Cost estimates Feasibility studies EIA and licenses Public Anouncements Land and concessions PQ material Procurement Notice Terms of Reference Evaluatuin of Contractors Evaluation of financing Risk assessment Service tariff Review of initial bids Defination of final ToR Defination of Final Service Agreement Evaluation of Bids Negotiations Agree on possible changes Quality of Service Possible changes Inspections Transfer of the project at end of term Development of the Service

13 Evaluation of the procurement model Issue Budget Financing PPP Basic Principle The contracting Party ( CP ) defines the technical concept and bears the financial responsibility after the guarantee period. The Contracting party receives different technical solutions from the market, buys the object as a service and allocates the financial responsibility to the service provider with a long term contract Financing of Investment Budget(tax/ public debt) Private entities (equity and debt) Project Development EPC and O&M Project Management/Schedule Contract party design and EPC contract based on specification Contract Party responsible for O&M Several options and the Contract Party can select the most feasible The Contractors develops the concept Investment costs O&M Costs Investment cost might exceed budget. Cost and quality liability with CP Possible risks usually not defined in monetary terms Possible cost overrun by contractor O&M Cost by contractor Schedule Interest during construction Responsibility with CP IDC with contractor, LDs for delay Financial impact Total cost usually open. Cost overrun covered with budget money. Guaranties given by the service provider.

14 Contract Liabilities and guarantees Agreements Contracting Party - Service Provider Service Agreement (20-30 a.) Service Provider - Contractor EPC O&M Agreement(20-30 a.) Guarantees Contracting Party (State/Municipality) Palveluntuottaja SPV (Service (Projektiyhtiö) Provider) Service Agreement (PPP) Service Provider The Project Balance sheet Contractor Balance sheet EPC Contractor (Engineering, construction O&M) O&M Agreement Possible additional guarantees Escrow Accounts Joint responsibility Bank guarantee

15 The cash flows of a PPP project and the cost of debt Contracting Party (State/ municipality Service Fee Fixed portion Variable portion (relates to availability) Debt financiers Investors EPC Contract 1. Contractor Annual payment (O&M) 1. Procurement of the Object in phases as the construction proceeds 2. Portion related to the financing structure not availability risk 3. Portion related to the financing, investors risk 4. Portion related to the financing, includes availability risk

16 Tariff structure Example Financial model example to be shown in presentation

17 Case Study As a case study the PPP WtE project in South-west Finland is presented.

18 Case Study Our suggestion of a successful implementation of a PPP Project is The Contracting party prepares a feasibility study in respect of the technical and commercial concept. The Contracting party prepares the terms for the Service Agreement Preparation of Tender documents Selection criteria Evaluation Finalising Service Agreement

19 PPP Process, Documents 1. Project Description 2. Project Description Appendix 1 Request to Participate Form 3. Invitation to Submit a Tender 4. Appendix 1 Draft Contract 5. Appendix 2 Quantities of Waste 6. Appendix 3 Waste Management Regulations.pdf 7. Appendix 4 Pick-Up Locations of Waste 8. Appendix 5 Tender form 9. Appendix 6 Comparison Price.pdf

20 Selection Criteria and evaluation The selection is usually made on both price as well as quality. If the concept is well defined price weight is usually about 80% and quality 20% Transportation costs shall be included in evaluation if bidders can propose different sites Quality is for example measured with Energy efficiency Recycling Price component includes Price for service with index formula Transportation costs Example Price evaluation Bid comparison