Public-Private Partnerships

Description

Public-Private Partnerships for Infrastructure - Principles of Policy and Finance, Second Edition explains how public private partnerships are prepared, procured, financed, and managed from both the public- and private-sector perspectives. As the use of public private partnerships continues to develop world-wide, both in the area of public policy and private financing and contracting, the Second Edition of this leading textbook:

Captures and explains the latest approaches, providing a comprehensive all-round guide for those on both the public- and private-sector sides of the table
Emphasises a step-by-step approach within a comprehensive, cross-referenced format
Includes clear explanations of PPP evaluation, structuring and financing concepts for the benefit of those new to the topic: no prior knowledge is assumed or required
Provides detailed reference points for more experienced practitioners
Draws from the authors’ experience and practice in PPP markets worldwide to provide a perspective on practical application of the key underlying principles
Includes an extensive glossary of technical and financial terms used in the PPP sector

Includes more technical information and a stronger legal perspective than other books
Emphasizes a step-by-step approach within a comprehensive, cross-referenced format
Expands and updates the historical backgrounds and political contexts of public-private partnerships

Front Cover 2
Public-Private Partnerships for Infrastructure 5
Copyright Page 6
Contents 7
List of Figures 15
List of Tables 17
I. Introduction 19
- 1 Overview 21
  - Part 2: The Public-Sector Perspective 22
  - Part 3: Risk Analysis and Allocation 22
  - Part 1: Introduction 22
  - Part 4: The PPP Contract 23
  - Part 5: The Private-Sector Perspective 23
  - Part 6: Alternative Models—Summing Up 24

Front Cover 2
Public-Private Partnerships for Infrastructure 5
Copyright Page 6
Contents 7
List of Figures 15
List of Tables 17
I. Introduction 19
- 1 Overview 21
  - Part 2: The Public-Sector Perspective 22
  - Part 3: Risk Analysis and Allocation 22
  - Part 1: Introduction 22
  - Part 4: The PPP Contract 23
  - Part 5: The Private-Sector Perspective 23
  - Part 6: Alternative Models—Summing Up 24
- 2 What Are Public-Private Partnerships? 25
  - §2.1 Introduction 25
  - §2.2 Public Infrastructure and the Private Sector 25
  - §2.3 Public-Private Partnerships 26
  - §2.4 Development and Structures 29
    - §2.4.1 Concessions 29
    - §2.4.2 Franchises and Affermage 30
    - §2.4.3 Power-Purchase Agreements 30
    - §2.4.4 BOO—BOT—BTO—DBFO 31
    - §2.4.5 Project Finance 32
    - §2.4.6 Project Finance for Concessions 33
    - §2.4.7 Availability PPPs 35
  - §2.5 PPPs in the Spectrum of Public Infrastructure 38
  - §2.6 PPP Markets Worldwide 40
- 3 Cash Flow and Investment Analysis 43
  - §3.1 Introduction 43
  - §3.2 Present Value / Discounted Cash Flow 44
    - §3.2.1 Present Value 44
    - §3.2.2 Discounted Cash Flow 44
    - §3.2.3 Using Discounted Cash-Flow Calculations 45
  - §3.4 Problems with Discounted Cash Flow and Internal Rate of Return Calculations 46
    - §3.4.1 Single Discount Rate 46
    - §3.4.2 Discounted Cash-Flow Calculations and Different-Sized Projects 47
    - §3.4.3 Internal Rate of Return and Cash Reinvestment 48
    - §3.4.4 Internal Rate of Return and Different Project Lives 49
    - §3.4.5 Internal Rate of Return and Positive / Negative Cash Flows 50
    - §3.4.6 Cash Investment vs Risk 51
  - §3.3 Internal Rate of Return 46
  - §3.5 Uses in Public-Private Partnerships 51
    - §3.5.1 By the Public Sector 51
    - §3.5.4 By Lenders 52
    - §3.5.2 By Private-Sector Investors 52
    - §3.5.3 In PPP Contracts 52
  - II. The Public-Sector Perspective 53
    - 4 Policy, Legal and Institutional Frameworks 55
      - §4.1 Introduction 55
      - §4.2 Developing PPP Programmes 55
      - §4.3 Legal Frameworks 56
        
        §4.3.1 Other Laws 57
        
        §4.3.2 Contract Standardisation 57
      - §4.4 Policy Frameworks 59
        
        §4.4.1 Positive PPP Tests 60
      - §4.5 PPP Guidance 60
      - §4.6 Programme Approaches 61
      - §4.7 PPP Units 62
      - §4.8 Infrastructure Plans 64
    - 5 The Project Cycle 67
      - §5.2 The Project Cycle 67
      - §5.1 Introduction 67
      - §5.3 Phases in the Project Cycle 69
        
        §5.3.2 Phase 2: Project Definition and Options Appraisal 69
        
        §5.3.3 Phase 3: Project Economic Assessment and Selection 69
        
        §5.3.1 Phase 1: Needs Assessment 69
        
        §5.3.4 Phase 4: Procurement Review 70
        
        §5.3.5 Phase 5: Procurement Preparation 71
        
        §5.3.6 Phase 6: Procurement 71
        
        §5.3.7 Phase 7: Construction 73
        
        §5.3.8 Phase 8: Operation 73
        
        §5.3.9 Phase 9: Hand Back 73
      - §5.4 Quality-Control Reviews and Approvals 73
      - §5.5 The Five-Case Model 74
    - 6 Public-Sector Project Management 77
      - §6.1 Introduction 77
      - §6.2 Project Governance 77
        
        §6.2.1 Project Board 78
        
        §6.2.2 Project Director and Project Team 78
      - §6.4 External Advisers 79
        
        §6.4.1 Financial Adviser 81
        
        §6.4.2 Legal Adviser 82
        
        §6.4.3 Technical Adviser 82
        
        §6.4.4 Other Specialist Advisers 83
        
        §6.4.5 Lead Transaction Advisers 84
        
        §6.4.6 Advisory Costs 84
      - §6.3 Rôle of the PPP Unit 79
      - §6.5 Stakeholder Management 84
    - 7 Assessing Needs, Project Definition and Selection 87
      - §7.1 Introduction 87
      - §7.2 Needs Assessment 88
      - §7.3 Project Definition and Options Appraisal 89
        
        §7.3.1 Project Definition and Scope 89
        
        §7.3.2 Options Appraisal 90
      - §7.4 Assessing Project Economic Viability 91
        
        §7.4.2 Benefit-Cost Analysis 92
        
        §7.4.1 Identifying Benefits and Costs 92
        
        §7.4.3 Public-Sector Discount Rate 93
        
        §7.4.4 Economic Rate of Return 94
      - §7.5 Scope of the PPP 94
        
        §7.5.1 Packaging Smaller PPPs 95
      - 8 The PPP Decision—Value for Money 97
        
        §8.1 Introduction 97
        
        §8.2 The Concept of ‘Value for Money’ 98
        
        §8.3 Quantitative VfM Assessment and the Public-Sector Comparator 99
        
        §8.3.2 The PSC Calculation—Risk Adjustment 101
        
        §8.3.1 The PSC Calculation—the ‘Raw’ PSC 101
        
        §8.3.3 The PSC Calculation—Optimism Bias 102
        
        §8.3.4 The PSC Calculation—Competitive Neutrality 102
        
        §8.3.5 Should the PSC be Updated? 103
        
        §8.3.6 Should the PSC be Disclosed to Bidders? 103
        
        §8.5 Comparison of the PSC and PPP Options 104
        
        §8.4 The PPP Option 104
        
        §8.6 Problems With Quantitative Analysis 105
        
        §8.6.1 Credibility of Risk Adjustments 105
        
        §8.6.2 Discount Rate 105
        
        §8.6.3 Comparing Like with Like 108
        
        §8.7 Benefit of the Quantitative Approach 109
        
        §8.8 Qualitative Analysis 110
        
        §8.8.1 Motivations for Using a PPP 110
        
        §8.8.2 Criteria for Choosing the PPP Route 111
        
        §8.8.3 VfM of the PPP Process 113
        
        §8.8.4 Difficulties with the Qualitative Approach 114
        
        §8.9 Integrating VfM Assessment in the Procurement Process 114
        
        §8.9.1 Stages in VfM Assessment 114
        
        §8.9.2 VfM Assessment Guidance 115
        
        §8.9.3 Responsibility for VfM Assessment 116
        
        §8.9.4 Importance of Project Preparation and Competition to Ensure VfM 116
        
        9 The PPP Decision—Affordability, Budgeting and Reporting 117
        
        §9.1 Introduction 117
        
        §9.2 Affordability 118
        
        §9.2.1 The Affordability Illusion 118
        
        §9.2.2 Affordability and Availability PPPs 119
        
        §9.2.3 Affordability and Concessions 121
        
        §9.2.4 Affordability and VfM 122
        
        §9.3 Budgeting for PPPs 122
        
        §9.3.1 Long-Term PPP Spending Commitments 123
        
        §9.3.2 Dealing with Off-Balance-Sheet PPPs in the Budget System 123
        
        §9.3.3 Credibility of Future Budget Appropriations 124
        
        §9.3.4 Budgeting for Contingent-Payment Commitments 124
        
        §9.3.5 PPP Affordability Caps 125
        
        §9.4 Financial Accounting and Statistical Reporting 127
        
        §9.4.1 Financial-Accounting Standards 127
        
        §9.4.2 Financial Accounting—The Control Principle 128
        
        §9.4.3 Financial Accounting for Guarantees 129
        
        §9.4.4 Statistical Reporting 129
        
        §9.4.5 Eurostat 130
        
        §9.5 Other Forms of Reporting 131
        
        §9.6 Final Observations 131
        
        10 PPP Procurement 133
        
        §10.1 Introduction 133
        
        §10.2 Objectives of the Procurement Process 133
        
        §10.3 Preparing for Procurement 134
        
        §10.4 Market Sounding and Commercial Assessment 135
        
        §10.5 Procurement Procedures 136
        
        §10.6 The Bidding Process 138
        
        §10.6.1 Pre-Qualification 138
        
        §10.6.2 Bid Documents 140
        
        §10.6.3 Communication With Bidders 141
        
        §10.6.4 Running a Competitive-Dialogue Process 142
        
        §10.6.5 Bid Evaluation 143
        
        §10.6.6 Affordability of Bids 145
        
        §10.6.7 Commercial Viability 146
        
        §10.6.8 Post-Bid Negotiation 146
        
        §10.6.9 Bid Award 147
        
        §10.7 Other Procurement Issues 148
        
        §10.7.1 Non-Conforming Bids 148
        
        §10.7.2 Bid Consortium and Other Changes 148
        
        §10.7.5 Unsolicited Proposals 149
        
        §10.7.3 Bonding 149
        
        §10.7.4 Payment of Bid Costs 149
        
        §10.8 Due Diligence 151
        
        §10.8.1 Project Design 151
        
        §10.8.2 Subcontracts 152
        
        §10.8.3 Financing 152
        
        §10.8.4 Financial Close 153
        
        III. PPP Risk Analysis and Allocation 155
        
        11 Risk Analysis—Theory and Methodologies 157
        
        §11.1 Introduction 157
        
        §11.2 Identifying Risks 158
        
        §11.3 Valuing Risks 159
        
        §11.4 Risk Allocation 160
        
        §11.5 How Lenders Perceive Risks in PPPs 162
        
        §11.6 The Risk Register 163
        
        §11.6.1 Categories of Risks 164
        
        §11.6.2 Risk Mismatching 166
        
        §11.7 Risk Interdependencies 166
        
        §11.8 Contracting Authority’s Requirements 167
        
        12 Risk Allocation—Construction Phase 169
        
        §12.1 Introduction 169
        
        §12.2 Project Site 170
        
        §12.2.1 Site Acquisition 170
        
        §12.2.2 Ground Condition 171
        
        §12.2.4 Environmental Impact and Related Risks 172
        
        §12.2.3 Planning and Permits 172
        
        §12.2.5 Archæology and Fossils 173
        
        §12.2.6 Access, Rights of Way and Easements 173
        
        §12.2.7 Connections to the Site 174
        
        §12.2.8 Protesters 174
        
        §12.2.9 Disposal of Surplus Land 175
        
        §12.3 Construction 175
        
        §12.3.1 Construction Subcontract 176
        
        §12.3.2 Construction Subcontractor 177
        
        §12.3.3 Price Adjustments 179
        
        §12.3.5 Delay in Completion 181
        
        §12.3.4 Revenue Risk during Construction 181
        
        §12.3.6 Failure to Meet Output Specifications 182
        
        §12.3.7 Contingency Reserve 182
        
        §12.4 Construction Liquidated Damages and Security 183
        
        §12.4.1 Liquidated Damages 183
        
        §12.4.2 Termination of the Construction Subcontract 184
        
        §12.4.3 Security 185
        
        §12.5 Risks for the Construction Subcontractor and Contracting Authority 186
        
        §12.5.1 Construction Subcontractor: Payment Risk 186
        
        §12.5.2 Contracting Authority: Completion Risk 187
        
        §12.6 Design 187
        
        13 Risk Allocation—Operation Phase 189
        
        §13.2 Demand 189
        
        §13.1 Introduction 189
        
        §13.3 Network 192
        
        §13.4 Revenue Payment 193
        
        §13.5 Availability and Service Quality 194
        
        §13.6 Operating Expenses—FM/O&M Costs 194
        
        §13.7 Other Operating Expenses 196
        
        §13.8 Continuity of Service 197
        
        §13.9 Interface Risks 197
        
        §13.10 Political Risks 198
        
        14 The Rôle of Insurance 201
        
        §14.2 Insurance Brokers and Advisers 201
        
        §14.1 Introduction 201
        
        §14.3 Construction-Phase Insurances 202
        
        §14.3.2 Delay in Start-Up (DSU) 203
        
        §14.3.1 Contractor’s All Risks 203
        
        §14.3.4 Force Majeure 204
        
        §14.3.5 Third-Party Liability 204
        
        §14.3.3 Marine All Risks/DSU 204
        
        §14.3.6 Other Insurances 204
        
        §14.4 Operation-Phase Insurances 204
        
        §14.4.5 Third-Party Liability 205
        
        §14.4.3 Contingent BI 205
        
        §14.4.1 All Risks 205
        
        §14.4.4 Increased Cost of Working 205
        
        §14.4.2 Business Interruption (BI) 205
        
        §14.5 Deductibles 205
        
        §14.6 Lenders’ Requirements 206
        
        §14.7 Contracting Authority’s Requirements 207
        
        §14.8 Control of Insurance Proceeds 208
        
        §14.10 Insurance-Premium Cost Risk 209
        
        §14.9 Contracting Authority-Provided Insurance 209
        
        §14.12 Uninsurability 210
        
        §14.11 Unavailability of Insurance Terms 210
        
        IV. The PPP Contract 213
        
        15 Service-Fee Payment Mechanism 215
        
        §15.1 Introduction 215
        
        §15.2 Contracting for Outputs 215
        
        §15.3 Service-Fee Payment Structure 217
        
        §15.3.1 Contract Tenor 217
        
        §15.3.2 Payment Profile 218
        
        §15.4 Start Date for Payments 219
        
        §15.4.1 Service Availability Date 219
        
        §15.4.2 Revenue During Construction 219
        
        §15.4.3 Delay in Completion 220
        
        §15.5 Usage-Based Payments 221
        
        §15.5.1 Toll Levels 222
        
        §15.5.2 Limiting Revenues 223
        
        §15.5.3 Initial Payment to the Contracting Authority 226
        
        §15.5.4 Shadow Tolls 227
        
        §15.5.5 Penalties 227
        
        §15.6 Availability-Based Payments 228
        
        §15.6.1 Unavailability 229
        
        §15.6.2 Service Quality 231
        
        §15.6.3 Calibration 232
        
        §15.6.4 Operational Gearing 233
        
        §15.6.5 Unitary Nature of Payment 233
        
        §15.6.6 Indexation of Service Fees 234
        
        §15.6.7 Value Testing 234
        
        §15.6.8 Dealing with Subcontractors 235
        
        §15.6.9 Other Performance Measurements 236
        
        §15.7 Mixed Usage and Availability Payments 236
        
        §15.8 Third-Party and Secondary Revenues 237
        
        16 Changes in Circumstances 239
        
        §16.1 Introduction 239
        
        §16.2 Compensation Events 240
        
        §16.2.1 Economic Balance 240
        
        §16.2.2 Contract Changes 242
        
        §16.2.3 Contract Changes and the Lenders 244
        
        §16.2.4 Contract Changes and Procurement 244
        
        §16.2.5 Contracting Authority’s Risks 245
        
        §16.2.6 Change in Law 246
        
        §16.3 Excusing Causes 247
        
        §16.4 Relief Events 248
        
        17 Termination 251
        
        §17.1 Introduction 251
        
        §17.2 Early Termination: Default by the Project Company 251
        
        §17.2.1 Repayment of Outstanding Debt 254
        
        §17.2.2 Depreciated Cost of Assets 254
        
        §17.2.3 Estimated Fair-Market Value 255
        
        §17.2.4 Adjusted Base-Case Calculation 255
        
        §17.2.5 Auction of the PPP Contract 257
        
        §17.2.6 Caps and Floors 258
        
        §17.2.7 Hybrid Approaches 258
        
        §17.2.9 A Realistic View 259
        
        §17.2.8 Default During the Construction Phase 259
        
        §17.3 Contracting-Authority Default or Optional Termination 259

Author's affiliation

E. R. Yescombe: YCL Consulting, London UK. Edward Yescombe i
Edward Farquharson: Principal Advisor, European PPP Expertise Centre

Principles of Policy and Finance

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Author's affiliation