TRANSACTION ADVISORY SERVICES

1
TRANSACTION ADVISORY SERVICES
PPP ADVISORY
Social Service Partnerships
Availability PPPs in Emerging Markets
Alistair SAWERS, PPP Advisory, Ernst Young
Project Finance
2
Overview

• Introduction
• Theory Social Service PPPs Availability
  Payments
• Description Uses
• Structures Risk allocation
• Limitations
• Practice Bajío Hospital PPS Project
• Outline
• Success Factors
• Conclusion Pitfalls from Other Transactions

3
Introduction

• Personal Experience
• UK PPP Market
• Funder First Project Financed PPP Fazakerley
  Prison
• Investor UCL Hospital refinancing
• Advisor University of Hertfordshire, UK Met
  Office
• Emerging Market PPPs
• Eastern Europe
• Latin America

4
Theory

• Social Service PPPs Availability Payments

5
Defining Public Private Partnerships

• PPP has a different meaning outside the US
• Usual form of procurement is Design Build
• Many services are contracted-out
• International use of PPP or PFI is primarily
• Design Build Finance Operate Maintain (DBFO)
• Concession structure
• Availability Performance Payments
• Social Service PPPs rarely have market risk

6
What are Social Service PPPs?

• Healthcare
• Acute Hospitals
• Specialist Units
• Community Clinics
• Education
• Universities
• Schools
• Judicial
• Courts and police stations
• Prisons and youth detention centers
• Others

7
Evolution of Social Service PPPs

• Universal use of UK model
• Focus on output specifications
• Focus on building provision
• No volume or market risk
• Hard (Facilities) Maintenance included
• Soft service inclusion varies
• User services rarely included
• Clinical, teaching, policing rarely included
• Guarding, cooking, laundry and some training
  included

8
Utilization of Social Service PPPs
? currently being studied ? Failed and
withdrawn
Please note the data is not exhaustive and new
projects are being launched all the time Source
EY data, InfraNews Project News Database as at
Sept 12th 2006
9
What are the objectives?

• Cost minimization
• Ensuring value for money
• Risk transfer
• Ensuring adequate incentives

10
How are the objectives achieved?

• Concession contract
• Availability Payments
• Performance mechanisms
• Points towards operator replacement
• Points towards overall concession termination
• Monetary deductions
• Volume payments (rare)

11
Issues for Availability Payments

• Payment mechanism
• Incentives
• Complexity
• Underlying cost of funds
• Appropriations risk
• Affordability
• Evaluation methodology
• Measuring value for money
• Shadow bid / Public Sector Comparator
• Valuing risk transfer

12
Typical Risks Transferred

• Construction
• Design
• Completion
• Funding
• Operation
• Performance
• Managing land sales/ development of vacated sites
• Risks taken by party best placed to
  manage/mitigate
• What does that mean in practice?

13
What are the Limitations?

• Complexity of payment mechanism
• Appetite for Risk
• Financeability of risks in addition to country
  risk
• Financial strength of potential operators
• Affordability
• Transaction Costs / Minimum deal size
• Legal Framework
• Napoleonic code v Precedent based
• Property rights

14
Practice

• Bajío Hospital PPS Project

15
Bajío Hospital PPS

• Location City of Leon, Guanajuato
• Capacity 184 beds
• 40 for paediatrics
• 144 for adults
• Size 24,000 sq meters
• Capital Investment USD 47.5m
• Coverage 5,000,000 inhabitants
• Medical Specialties Unit
• hemodialysis,
• short stay surgery
• rehabilitation
• oncology services

16
Bajio Concession

• 25 Year Concession operation
• 47.5m Capital Investment
• 12.3m pa payment
• Timeline
• Tender announced Mar 2005
• Awarded 9th Dec 2005
• Construction 11 months
• Completion Feb 2007

• Acciona Hospital Services selected
• 4 Bidders Domestic and International

17
Political Support

• Political Champion
• Led by Ministry of Finance
• Set up Investment Unit (PPS Taskforce)
• PPS legislation
• Support from Partnerships UK
• Issued March 2003, revised April 2004
• Additional Rules Guidelines
• 2 business case reviews (Outline final)

18
Stakeholder Support

• Consensus building
• Institutional Revolutionary Party (PRI) and
  National Action Party (PAN) support PPS
• Existing profile of Concessions
• Initial toll road concessions in 90s failed
• Highway PPS launched concurrently
• Quick wins to launch process
• Strategy to launch 3 pathfinder projects
• Pick largest projects

19
Procurement Process

• Planning
• Strategic PPS Plan
• Existing regional plan overall national upgrade
  plan
• Selection of credible advisors
• Legal White Case
• Technical Currie Brown
• Financial Ernst Young
• Marketing and building profile of transaction
• Presenting to bidding community
• Conferences

20
Selection Process

• Open and transparent process
• Lowest NPV of payments
• Acceptance of Contract terms
• Clear evaluation criteria
• Developed from business case
• Flexibility in bids versus difficulty of
  evaluation
• Chose easy evaluation simple contract
• Lowest price v best value for money

21
Payment Mechanism

• Description
• Key performance indicators
• Deductions
• Penalty points
• Issue of clarity/complexity
• Practicality of on-going monitoring

22
Impediments to Process

• Union/ stakeholder perception
• Party of the Democratic Revolution some
  opposition
• Local bureaucratic resistance
• Transaction cost/ complexity
• Affordability problem with smaller University PPS
  project
• Medical equipment -5yrs
• Interface/ training
• Maintenance/ replacement
• Termination Payment

23
Conclusion

• Pitfalls from less successful transactions

24
Pitfalls

• Transferring risks which are hard to manage
• Refurbishment of existing assets
• Volatile Land values
• Multi-site projects availability of sites
• Volume risk
• Soft services and Union agreements
• Clinical Services
• Unnecessary Complexity