PUBLIC PRIVATE PARTNERSHIPS UK EXPERIENCE AND IMPLEMENTATION IN BRAZIL

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PUBLIC PRIVATE PARTNERSHIPSUK EXPERIENCE AND
IMPLEMENTATION IN BRAZIL

• James Vickers
• james.vickers_at_cliffordchance.com
• Florianópolis, 12 August 2004

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Clifford Chance

• International Firm
• PPP Experience
• Public Private Finance Awards 2004
• Clifford Chance voted Best Legal Advisor
• Leading PPP practice in all key European
  jurisdictions
• São Paulo Office

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Clifford Chance PPP Experience

• A Modell, Germany acted for advisory consortium
  to Federal Ministry for Transport, Construction
  and Housing in developing legal framework for
  expansion of several motorway sections from four
  to eight lanes
• Franco-Spanish High Speed Rail advising the
  Franco-Spanish Intergovernmental Commission in
  relation to high speed rail connection between
  Barcelona and Montpellier
• Jay Street Development, Brooklyn Court House
  advised in connection with the US600m
  construction of accommodation one of the
  largest PPP transactions in New York State
• University, Abu Dhabi advising the Government
  on the concession for a new US750 million
  university and related facilities

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Overview

• Development of PPP in the UK and the rest of
  Europe
• Typical Structures and Funding Sources
• Key issues
• Implementation of PPP in Brazil
• Conclusion

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Policy Background

• PPP was launched in the UK during a recession in
  1992
• Part of its appeal was off-balance sheet public
  accounting treatment
• As the UK economy recovered and analysis of PPP
  became more searching, value for money or VfM
  became the primary argument for PPP

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Facts and Figures for UK PPP

• Approximately 50 billion of PFI/PPP capital
  investment since 1992
• Over 600 PPP contracts have been signed
• 275 projects are now operational
• Approximately 4 billion of new projects in
  procurement
• PPP represents 11 of UK total public sector
  investment during 1998-2004

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Facts and Figures (cont.)

• Few areas have been off limits to UK PPP policy
  makers
• PPP is delivering

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PPP Internationally

• PPP schemes are being implemented in
• PPP policies and schemes are being actively
  studied in

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Typical PPP Structure

• A long term (20-40 years) contract between a
  public body and the PPP contractor (usually a
  Special Purpose Vehicle)
• Design, finance and construction/refurbishment of
  project assets is responsibility of PPP
  contractor
• PPP contractor also provides services from the
  project assets over the contract term
• Public body pays a performance adjusted fee
  during service period, and may also contribute
  assets (e.g. land or exploitation rights)
• Asset returns to ownership and control of public
  body following termination/expiry of PPP contract

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Typical PPP Structure (cont.)
PUBLIC ENTITY
CONCESSION CONTRACT
SPONSOR EQUITY
INSURERS
SPV
SURPLUS REAL ESTATE DISPOSAL
THIRD PARTY EQUITY INVESTORS
INVESTORS
DEVELOPER
OPERATION MAINTENANCE
CONSTRUCTION
MEZZANINE FUNDERS
BONDS GUARANTEES
EQUIPMENT SUPPLY
SUBCONTRACTOR 1
SUBCONTRACTOR 3
SURETIES GUARANTORS
DESIGNERS
SENIOR FUNDERS (BANK/BOND)
SUBCONTRACTOR 2
DUE DILIGENCE ADVISERS
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Funding

• Typically, 80-90 senior debt
• 10-20 equity / junior debt
• Mezzanine debt
• Funders due diligence a key feature of project
  document negotiations
• SPV structure clean lending
• Termination and step-in, Lender Authority
  direct agreement

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Key Issues (1) Pricing Mechanism

• The pricing mechanism used will depend on many
  factors including political, economic and
  strategic factors
• In road PPPs there have been a number of
  different payment mechanisms used including
• Real tolls
• Shadow tolls
• Availability Payments

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Key Issues (2) Insurance

• Insurance is an important element in most PPP
  projects
• The level and scope of the insurance will depend
  on the particular asset/nature of the PPP project
• Methods of managing insurance risk include
• Risk Sharing Mechanism
• Benchmarking insurance

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Key Issues (3) Refinancing

• Refinancing opportunities due to reduced levels
  of risk following construction completion
• Market Developments in UK with respect to
  refinancing gains
• Sharing of refinancing gains
• Exceptions
• Disposals of Junior Capital
• Base Case Refinancings

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Key Issues (4) Termination and Compensation

• Typical grounds for termination
• Authority Default/Voluntary Termination
• Contractor Default
• No fault termination - force majeure
  uninsurability
• Compensation on termination
• Market value tests for Contractor Default
• Exceptions in certain sectors

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Implementation of PPP in Brazil

• Key to success
• Legal and Regulatory Requirements
• Political Support
• Identification of PPP Projects
• Procurement Issues
• Management of PPP Projects
• Contractual Arrangements

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Legal and Regulatory Requirements

• A pre-requisite to the successful implementation
  of a PPP framework is the preparation of a clear
  legal and regulatory framework. Relevant areas
  of concern include

• Legal capacity of the state to enter into
  contract
• Legislation allowing private sector involvement
• Currency conversion and transfer and profit
  repatriation rules
• Dispute settlement procedures
• Planning permission, environmental and licence
  requirements
• Development of institutional structures

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Political Support

• Any Government seeking to implement a PPP
  framework will need to take account of political
  factors
• A number of vested interests may be adversely
  effected by the introduction of a PPP framework
  with competitive tendering
• It is important that there is collective
  political commitment and a unified approach
• Politicians should assist in promoting cultural
  change

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Identification of PPP Projects

• It is likely that the first PPP projects in a
  country will be closely scrutinised and the
  government should give careful consideration to
  the initial projects that will be implemented by
  PPP to ensure that such projects are suitable in
  all respects
• The Government should undertake a detailed review
  of the costs and benefits of private sector
  involvement and the actual financing requirements
  and compare such private sector involvement to
  more traditional public sector alternatives
• Suitability, appropriateness, cost, ability to
  implement and manage the project should all be
  considered
• An early high profile success can help to secure
  popular and institutional acceptance of PPP.
  Conversely, early failures can damage and delay a
  PPP initiative

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Procurement Issues

• Experience in the UK has shown that procurement
  often results in conflict and, in certain
  circumstances, failure of the PPP process
• The government must ensure that there is
  transparency and equality of treatment in all
  stages of the procurement process
• The procurement process should be managed as
  efficiently as possible
• Governments should note that high costs of
  competitive tendering and the uncertainty of
  contract award can reduce the likelihood of
  private sector involvement and effective
  competition

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Management of PPP Projects

• On-going contract and partnership management
• Steps should be taken to ensure that an effective
  relationship is developed with the private
  sector, so that the public sector is able to
  effectively negotiate and manage long term
  contracts with the private sector
• The public sector should ensure that a PPP
  contract is managed by a dedicated team -
  preferably by staff who have historic knowledge
  of the project agreements and who have been
  involved in the on-going negotiations
• On-going monitoring of the project by public and
  private sector parties is crucial to ensure that
  the level of service delivered by the private
  sector is consistent with the agreed performance
  criteria
• Such monitoring and measurement of performance
  and overall transparency is also vital to ensure
  accountability and acceptance of shadow tolls

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Management of PPP Projects (cont.)

• The organisation and management of PPP projects
  needs to be efficient and streamlined. The
  experience of jurisdictions with developed PPP
  markets in Europe suggests that the establishment
  of a special purpose authority which is charged
  with the implementation of the project can
  contribute significantly to the successful
  implementation and management of a PPP project
• The special purpose authority can assume
  responsibility for contact with all parties
  including funders, consultants, and other
  government departments

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Contractual Arrangements

• Advisors
• All participants should ensure that they obtain
  comprehensive financial and legal advice in
  relation to all aspects of the project
• Key Contractual Provisions
• Based on the experience in the UK, key clauses
  for the project agreements relate to the
  compensation payable on termination, remedies in
  the event that the project completion date is
  delayed, step-in rights and the regime which
  governs the ability of the government or the
  private sector to propose changes to the service
  requirement/delivery

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Contractual Arrangements (cont.)

• Standardisation of project agreements
• In the UK, a number of the key contractual
  provisions that are required in any PPP project
  have been standardised, taking account of the
  early experience of PPP project implementation.
• This standardisation is intended to promote a
  common understanding of the allocation of the
  main risks associated with a PPP project to
  allow consistency of approach and pricing across
  a range of projects and to reduce the time and
  costs of negotiation by enabling all parties to
  agree to a range of areas without need for
  extensive negotiations.
• Contractual standardisation is a key step in
  developing a successful PPP programme and in
  enabling smaller PPP projects to be a viable
  proposition.

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Conclusion

• Value for Money results in the UK suggest that
  that PPP programmes should develop successfully
  in Brazil
• Significant time should be spent creating the
  right environment for PPP prior to its
  implementation
• Governments should be realistic in their
  expectations PPP is not a magic answer but
  one of a range of structures which can be used to
  assist the public sector
• Any PPP programme is likely to require
  significant time to develop. It took the UK seven
  years to get into first gear
• But important lessons can be learnt from the
  experiences of European nations who have followed
  this route

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Contact Details

• James Vickers
• Clifford Chance
• Rua Helena, 260
• 6º andar, Vila Olímpia,
• São Paulo
• 04552-050
• Brazil
• Tel. [phone]
• E-mail james.vickers_at_cliffordchance.com
• www.cliffordchance.com/uk/practice-areas/ppp