Public-Private Partnerships Association of Government Accountants Fall Education Seminar Bob Childree November 2010
America's Infrastructure Report Card America s Infrastructure Report Card (American Society of Civil Engineers, 2009) Subject Grade Comment Drinking Water D- $665 million in infrastructure investment required by 2020 Energy D+ $2 trillion in electric utility investment by 2020 Rail C- $150 billion in improvements required by 2030. Roads D- $130 billion in infrastructure investment by 2020 Schools D $332 billion required to bring schools into good repair Wastewater D- $335 million in infrastructure investment required by 2020 Overall Grade D The Bottom Line: America will need to spend $2.2 trillion in infrastructure investment over the next five years for the nation s infrastructure to be ranked in Good condition (Overall Grade: B).
America's five year infrastructure funding requirements are immense Schools 11% ($160bn) Energy $35 5% ($75bn) $30 $125 $45 Water 17% ($225bn) $109 $146 Roads Rail $550 $380 63% ($930bn) 4% ($63bn) $12 $51 Water Rail Roads Schools Energy Projected Shortfall Estimated Spending
Paying for infrastructure at a State and Local level Traditional Model #1: Raise Taxes Higher taxpayer burden immediately Full retention of revenue and operating risks by public sector Traditional Model #2: Issue Bonds Decreases funds available for other projects Retention of financing and operating risks by public sector Alternative Model: Public-Private Partnerships Reduces immediate impact on taxpayer More capital available for other projects Operating and financing risks transferred to private party 4
What is a Public Private Partnership (PPP/P3)? Public Private Partnerships are. A contractual agreement between a public agency and a private sector entity to share the risk and rewards of asset and service delivery in order for projects to leverage the private sectors skills and funding, and provide enhanced value for money. Around 28 US States have PPP enabling legislation, including Georgia, Texas, Michigan, Virginia, California. Projects have focused on transport infrastructure, although each State has a different approach: NY/ NJ s Goethals Bridge is being replaced through a 30 year "Design, Build, Finance and Maintain" (DBFM) PPP contract Texas' North Tarrant Expressway and LBJ highway P3 projects use "managed lane" concepts and dynamic user tolls to control traffic flow. California's i Presidio Parkway P3 is using an availability payment structure t but no tolls, partly because a tolling structure would require complex agreements between regional funding partners 5
PPP should be a true, long term partnership Public sector brings: Public interest and need Institutional knowledge of service Capital resources Balance of commercial and public interests Secure revenue stream and covenant? Private sector brings: Management disciplines and preventative maintenance New technologies Personnel development Finance and resources Control of risks Efficiencies through integration of design, construction, and operations Speed of construction no payment until completion Cost certainty 6
Basic Public Private Partnership Structure Demand / Revenue Based: The private sector controls and collects user fees which serve as their only source of revenue to service debt and generate a return (e.g. toll road PPP projects). Availability Payment: The private sector receives periodic payments over the operational contract period from the public sector if the project is available and maintained to the standard specified (e.g. non-tolled roads or social infrastructure). Shadow Payment: The public sector retains control of fare policy, but the private sector is paid based on the number of users so takes demand risk. A risk sharing approach, although pricing of risk by the private sector is questionable since they arguably cannot control demand. 7
Developing a partnership structure 8
Many partnership models exist 9 Level of risk transfer to private sector
Different levels of risk transfer Design Construction O&M Financing Utilization Collection Construction X X X X X Design Build Maintain X X X X Design Build Operate Maintain X X X Availability Payment (Design Build Finance Operate) X X Shadow Payment (Design Build Finance Operate) X Real User Fee (Design Build Finance Operate) Risk transferred to Private Sector X Risk retained by Public Sector
Potential benefits of PPP 11
International experience of PPP as delivery method PPP has been largely successful in improving efficiency of delivery for infrastructure across a range of sectors. The table below reflects the UK National Audit Office report on the performance of PFI (PPP) procurements (2003), and a PPP study by Allen Consulting/ University of Melbourne (2007). PPP procurement Non-PPP procurement Time over-run UK 22% 73% Australia 12% 35% Cost over-run UK 24% 70% Australia 13% 26% 12
What can PPP be used for? Selected sectors slightly different structures in each Roads, highways and street lighting Education Toll road concessions, non-tolled roads, urban roads "from curb to curb", street lighting, traffic management systems/congestion control School buildings and maintenance, school IT, colleges and universities, student residences, science and research parks Justice Energy Health (note public sector role in Europe) Transit Prisons, court facilities, police/fire/rescue stations All energy sectors, renewable energy facilities Primary care facilities, hospitals, medical equipment, IT systems (records projects), mental health Light rail projects, metro schemes, high speed rail, rolling stock fleets Urban regeneration & Leisure Stadiums, car parking, city security, urban regeneration 13
Different types of project attract different types of investor Greenfield Assets Brownfield Assets Construction Phase Key Risks: Poor Design Cost Overruns Project Delays Ramp-Up Phase Key Risks: Low Revenue Operating Failures Sporadic Availability Operational Phase Key Risks: Weak Demand Operating Failures Maintenance Backlogs InvestorAppetite: InvestorAppetite: Investor Appetite: MODERATE MODERATE HIGH 14
Significant market interest and availability of private funds 15
PPP part of a wider procurement toolbox PPP is not suitable for all projects but should be considered as part of the options appraisal for major capital procurements. Recognize parameters of PPP Long contracts, so can be inflexible if material future changes in demand are likely Procurement process can be complex. Private sector cost of capital normally higher than public cost of finance. Although high practical risk transfer can be achieved to the private sector, catastrophic risks can revert to public sector as the ultimate procurer. Should only use PPP where it offers better value for money than traditional procurement routes. 16
Assessment of value for money 17
Conclusion: PPP as an option - not the only answer Consider the characteristics present in most successful PPP projects: Statutory and political environment Organized structure (public sector delivery capability, governance) Detailed Business Plan (business case to contract) Guaranteed revenue stream Stakeholder support Careful selection of partner (NCPPP's six success factors) PPP should be one of the procurement and financing options considered for capital by State and Local governments but it needs to be evaluated against other procurement routes, and only used where it offers better value. 18
Questions?
Contact Details Bob Childree Director 334-324-4481 Bob.Childree@gt.com Neil McMonagle Senior Manager 703-562-6668 Neil.McMonagle@gt.com M l