Public Private Partnership

What is PPP

PPP (Public Private Partnership) is a collective name

for various relationships between public bodies and
private companies.
Traditionally the term is being used for those projects
carried out jointly by the Government and a private
company.

When PPP

Not every project is suitable for PPP outsourcing.

Most appropriate when:
The scale of project/ task is manageable
Projects/ tasks where the responsibility can be defined for a
longer period

PPP is often seen as being a solution for a lack of governmental resources

or for financing the governmental deficit

Why PPP

Bringing Added Value of optimisation of services by

a private service provider, allowing the government
to keep hold of the reins while at the same time
minimising its own involvement in the actual
execution of the work
Realising benefits from the projects earlier than
would otherwise be possible within the current
budgets, because they have been financed up front
by a private party.

PPP - Benefits
Financial Advantages
Long term assurance about the cost. Most PPP contracts
are long-term agreements with a term ranging from 20 to 30
years. Clients no longer need to provide advance financing,
but the investment sum is spread out over the term of the
project, offering long-term predictability of expenditure.
Total project costs are lower due to the optimal coordination
of design, construction, maintanance, operation and
supporting services over the contract term (life cycle
management)
Risks are placed with the parties best able to control them,
another cost-lowering factor.

PPP - Benefits
Qualitative and Operational Advantages
The client is assured of a high-quality and sustainable project
The client assumes only a general directive role, thus
requiring only a small internal project organisation mainly
limited to functional and performance specification and
contract issues. Client spends significantly less time on
technical specifications for the design and construction
process.
Timely delivery, Since the contractor effectively finances the
investment in the construction asset and only receives
payment when this is complete, this logically forms a serious
incentive for completing the construction phase in time.

PPP - Benefits
Performance Advantages
Risk allocation, both in terms of time and money, is agreed at
an early stage between the parties. The client contracts out
the services he requires according to clear and measurable
performance criteria.
If the quality of the services does not meet the agreed
performance requirement, the contractor is penalised by
reductions to his periodic payment. Contractors will therefore
make every effort to meet the agreed performance standards.

Public Private Partnership (PPP)

Models and Structures

PPP Models
New Projects
Design Design
Design
Build
Build
Build
Maintain Operate

Public Responsibility

Service Management
Contracts Contracts

Design
Build
Operate
Maintain

Build
Own
Operate
Transfer

Build
Own
Operate

Private Responsibility

Lease Concessions Divestiture

Existing Services and Facilities

Factors deciding choice of PPP Model

Objective of
Outsourcing/
PPP
Ownership of
Capital Assets

Responsibility
for Investment

Choice of
PPP Model
Assumption of
Risks

Duration of
Contract

Main Features of PPP Options

PPP Options

Service
Contracts

Management
Contracts

Lease
Contract

BOT

Concessions

Financing
Investment

Public Sector

Public Sector

Public Sector

Private Sector

Private Sector

Financing
Working
Capital

Public Sector

Public Sector

Private Sector

Private Sector

Private Sector

Contractual
Relations
with
customers

Public Sector

Private Sector
on behalf of
Public Sector

Private Sector

Private Sector

Private Sector

Private
Sector
Responsibilit
y&
Autonomy

Low

Low

Low to
Medium

High to
Medium

High

Need for
private
capital

Low

Low

Low

High

High

Financial risk
for private
sector

Low

Low

Low to
Medium

High

High

Main Features of PPP Options

PPP Options

Service
Contracts

Management
Contracts

Lease
Contract

BOT

Concessions

Duration of
Contract/
License

- 2 Years

3 5 Years

5 15 Years

15 30 Years

20 30 Years

Ownership

Public
Sector

Public Sector

Private Sector

Private then
Public Sector

Public Sector

Management

Mainly
Public
Sector

Private Sector

Private Sector

Private Sector

Private Sector

Setting Prices

Public
Sector

Public Sector

Contract or
Regulator

Public Sector

Contract or
Regulator

Collecting Bills

Public
Sector

Private Sector

Private Sector

Public Sector

Private Sector

Work Done/
Unit Price/
Lump sump

Cost Plus &

Productivity
Bonus

Proportions of
Tariff

Tariff

Tariff

Improve
Operating
Efficiency

Improve
Technical
Efficiency

Improve
Technical
Efficiency

Mobilise
Private Capital
and/ or
expertise

Mobilise
Private Capital
and / or
expertise

Mode of
Payment
Main Objective
of PPP

Inception

Feasibility
Study

Procurement

Need for change

Project team of the

client is build

Edition and
publication of tender
documents

Project study and

public consultations

Engineering, design
and financial due
diligence

Selection of qualified
bidders
Evaluation of the
bids and negotiations

Identifications of
goals and priorities

Rough risk analysis

Construction

Prior to construction,
creation of the SPV
and financial close is
reached

Operation

Operation of the
facility

Maintenance
Construction of the
infrastructure
End of contract

Awarding of the
contract

Risk in general most

efficiently borne by:

Types of Risk

Legal and Political

Risk

All Risk

Government

Demand Risk

Commercial Risk

Demand side
operation Risk

Private partner
(government may
provide guarantee
to mitigate Risk

Supply side
operation Risk

Private partner

Construction
Risk

Private partner

Supply Risk

Project Stakeholders differ in their:

Objectives
Functions throughout the project life cycle
Risk perception, willingness and capability

Project
Stakeholders

PPP
risk management

Project Life
Cycle

Stage-specific risk profile at different project

stages:
Amount of risk expense
Capability to influence risk
Consistency of revenue

Sub-processes differ in:

Risk
management
process

Organisational and operational requirements

The extend of available information and
data
Applicability of reasonable methods and
techniques

Pre - Qualification
Objectives & priorities; Defining of PPP Service
Technical, Economic, Commercial, Financial, Environmental
reviews;
Pre-feasibility study & Project Information Memorandum;
Bid evaluation criteria determined;
Prequalification notice issued

Tendering
Preparation of bid documents and contracts;
Preparation for detailed Information Memorandum for lenders;
Issue request for bids to Pre - qualifiers

Formation of SPC
Detailed negotiations on concession, PPA, FSA, etc.;
SPC formation and equity allocation;
Approve licences, taxation regime, etc.
Negotiate Government Undertakings
Concessionaire negotiates loan agreements

Financial Closure
Complete all necessary documentation and conditions
precedent

Typical Timeline

PreQualification

2-3 Months

Tendering

3-6 Months

Formation of
SPC

Financial
Closure

Negotiations

3 Months

Total Time : 14 27 Months

3-9 Months

3-6Months

PPP Financing

PPP Financing Principles

Private Investors apply their own funds only to a minor
portion of the projects.
Most of the funding would be provided by financiers
Commercial banks and international financial institutions.
Projects Bankability ability to attract funding is one of the
key issues to be resolved by both the public and the private
sectors.
Non Bankable projects are not PPP feasible.

Bankable PPP Projects

Certain
Cash
Flow

Public
Guarantees

Bankable
PPP
Projects

Step-in
Provisions

Security

Output
Specification

Service
Delivery

Payment
Mechanism

Performance
Monitoring

PPP Financing Approaches

Resource (Corporate) Financing: Lenders look to existing
corporate cash flow and a corporate guarantee of the borrowers
obligations
Non-Resource (Project) Financing: Lenders rely exclusively on a
projects cashflow and assets to obtain repayment of loans; not on
the corporate balance sheet and profits
Limited Resource (Project) Financing: Lenders look initially to a
projects cash flow and assets to obtain repayment of loans

Pros/ Cons of Project Finance

Advantages

Disadvantages

Protects and attract sponsors

Efficiently and comprehensively
allocates project risks
Lessens political risks
Improves creditworthiness of
project and chances of fundings

Inherently complex
Higher development cost (time
and money) for government
Likewise, very significant bidding
costs for sponsors
Committed equity required

Funding Options

Debt

Equity

Bankable
PPP
Projects

Grants
Subsidies

Guarantees

Factors Impacting Project Financial Structure

PPP
Project
Financial
Structure

Project Cycle
& Cash Flows

Capital Requirements and cash flows vary depending

on the stage of project development. The initial capital
structure (high equity or costly debt) can be refinanced
through cheaper debt once construction risk is over.

Taxes

Taxes can impact cost of capital and earnings. Interest

on debt if tax deductible can significantly reduce the
cost of debt capital and hence there is an incentive for
the sponsor to use debt instead of equity.

Financial Risk
& Flexibility

Too much of debt in a project with fluctuating cash

flows may have problems of meeting debt covenants.
Also some flexibility ought to be maintained in case
unforeseen situations demanding additional funding.

Cost of Capital

Actual cost of capital is also factored into decision

making process. Though cost of debt is generally
lower than equity, it depends on risk & recourse and
timing.

PPP Project Financial Structuring

Capital Investment

Developing
Cash Flow
Model

Capital Cost Estimation

Capital Structure
Operating Cost

Assumptions

Revenue Stream

+ Ve : Proceed to Analysis of Financial Indicators

- Ve : Change Assumptions
DSCR

Analysis of
Financial
Indicators

NPV, IRR & Pay Back

ROE
Ratio Analysis

Acceptable : Proceed to Sensitivity Analysis

Not Acceptable : Change Assumptions

Sensitivity
Analysis

Concessional Life

Facility Usage Projections

Length of construction period

Inflation Rates

Structure and cost of capital

Interest Rates

Thank You