March 2021 Presented by Philip J Kelly Why do Governments Choose PPP More expenditure now to be paid for later Payments by Govt and Users start when project operates Private financing excluded from Govt debt ID: 1027702
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1. Where and When to Use PPP March 2021Presented by: Philip J Kelly
2. Why do Governments Choose PPP?More expenditure now to be paid for laterPayments by Govt and Users start when project operates Private financing excluded from Govt debtUser payments excluded from Govt expenditure / revenueTime gap before Government payments appear in budget
3. PPP - Higher Cost of Private Debt?Lower interest rate on public debt is because Govt can increase taxes or lower expenditure to pay obligations if neededThe social cost of these Govt options are not reflected in the interest rateCost of Government funds should not be the discount rate for private sectorCost of capital for a real or financial investment reflects the market price assessment of risksPoor contract design can be a source of higher private sector debt e.g. imposing excessive demand risk on private partner SPV in a fixed duration contract
4. PPP from Country’s ViewpointDo not base PPP decisions on fiscal illusion, statistical and accounting treatmentPresent Value (PV) fiscal impact of PPP and conventional provision of public infrastructure is the sameUser and Govt payments during life of project pay for investment (funding pays for financing)Value for money For update on VFM Assessing Value for Money: An Updated Guide to Infrastructure Ontario’s Methodology
5. Fiscal AccountingGovernment FundingUser Fee FundingPublic ProvisionPPPPublic ProvisionPPPNowIssue 100 in debt“Save” 100 in debtNowIssue 100 in debt“Save” 100 in debtNowSpend 100 on infrastructureSpend 100 on infrastructureNowSpend 100 on infrastructureSpend 100 on infrastructureFutureCollect 100 in taxesCollect 100 in taxesFutureCollect 100 in user feesGive up 100 in user feesFuturePay 100 to bondholdersPay private partner SPV 100FuturePay 100 to bondholdersPrivate Partner SPV collects 100 user fees
6. Private Participation and Government Capacity Private participation already involved in designing, constructing, operating public provision projectsImproved Govt capacity and capability is needed for PPP with complex financing, relationships, incomplete and long contractsPrivate Participation of itself does not overcome weak Govt capacity and capabilitySub-national capacity and capability is important for PPP in municipalities and States
7. Public Provision: Weak IncentivesGovt multiple objectives and principles Fiscal accounting practices do not monitor performance Earnings do not reward employees and owners Legislation constrains hiring, purchasing and contracting practices Organization structure, size, management set by public administration rules and practices and not efficiency
8. Impact of Weak IncentivesInfrastructure assets are poorly maintainedAnnual budgets emphasise new construction over maintenancePoor design and construction increases cost of maintenanceQuality of service low Poor project selectionDemand overstated, costs and building times underestimatedPolitical decisions and poor planning build white elephants
9. PPP Incentives to PerformSPV – Government agreementSPV clear mission and dedicated management teamSPV decides design, build, finance, maintain, operate to satisfy output specificationsBundling implementation reduces life-cycle costs and improves maintenance where there is strict KPI performance measurement Delivery on time as no payment until operating and better project management keeps costs down
10. PPP – Sources of Efficiency GainRisk allocation principle to optimise project value – who bears, manages, mitigatesContract design: bundling, life cycle costs, maintenance, strict performance measurementFinancing and monitoring by private finance providers and no revenues until operatingPolitical economy - less chance of non-viable projectLimit scope for renegotiations e.g. Present Value of Revenue
11. Ideal Systems are RareLevel of appraisal depends on capital value of projectSelect priority projects for public investment plan – objectives and criteriaScreening tool for PPP for projects or bundle of projects above a certain value e.g. US$20mMCA, CBA and VFM Analysis (qualitative as well as quantitative): ToolkitsPublic Sector Comparator often not availableInformation often unavailable, inaccurate, out of date
12. Analysis and Capital Value of Projects Illustrative Example (not a Recommendation) of Projects subject to different forms of appraisal. projects with a capital value of less than say US$500,000: simple appraisal process projects with a capital value of between US$0.5-5m: single stage appraisal process projects with a capital value of US$5-20m: initial and detailed appraisal and multi-criteria analysisall projects greater than US$20m examine for PPP suitability, initial and detailed appraisal and cost-benefit analysis
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14. Tools to Assess Whether to Implement Project as PPP Harvard Kennedy School of Government basic tool for decision makers when to use PPP while designed for USA it is a useful initial checklist https://www.p3guide.com/ Difficult to build social cohesion, culture, climate resilience, wealth redistribution and other elements into CBA. World Bank Investment Prioritization Framework combines social-environmental and financial-economic data into two indices to compare sector projects http://pubdocs.worldbank.org/en/844631461874662700/16-04-23-Infrastructure-Prioritization-Framework-Final-Version.pdf World Bank Project Screening Tool https://library.pppknowledgelab.org/documents/5421/download World Bank PFRAM 2.0 PPP Fiscal Risk Assessment Model and Guide https://library.pppknowledgelab.org/documents/5782/download https://library.pppknowledgelab.org/documents/5783/downloadEPEC Project Preparation Status Tool https://www.eib.org/epec/EPEC-PPPprep-EN.xlsm UNESCAP PPP Qualitative VFM and other tools https://ppp.unescap.org/
15. PPP Record Sub-Saharan Africa (SSA)54 SSA Countries 2010-2019Projects: 240 reached financial closeInvestment: US$53bn Average Investment per project: US$220mNigeria Projects: 9 Investment: US$5.2bn Average Investment US$550mNigeria: Largest projects: Onne Port expansion 2013 US$2.9bn, Azura Edo Power: US$880m, Lagos Free Zone Port US$1bnNigeria: Other projects: 4 municipal treatment disposal plants investment range US$4 to 110m
16. PPP Projects & Sectors SSA 2010-19240 projects 75% (180) Energy, 11% transport (road, rail, port) 5% each ICT and Muni Waste, 2% water and sanitation similar breakdown in investment valueNigeria 3 port projects out of 9 accounted for 78% of investment, 2 energy projects 18% of investmentIn Europe transport is biggest PPP sector mostly roads but health and education are also significant but PPP is a small proportion of total infrastructure investmentPrivate financing of infrastructure is low in developed and developing countries and efforts are being made to increase it
17. Three Pillars Seven Workstreams: Roadmap to Infrastructure as Asset Class and Private Financing1. Greater Standardisation2. Improve Project DevelopmentContractual StandardisationFinancial StandardisationProject PreparationBridging the Data Gap3. Improve Investment Environment for InfrastructureFinancial Engineering, Risk Allocation & MitigationRegulatory Frameworks and Capital MarketsQuality Infrastructure