Introduction to

Public Private Partnerships

By
Ammar Al-Khafaji & Salih Al-Jumaili
 What is PPP?
 Public Private Partnership
 Many forms of a partnership between public and private sectors
depending on the political environment, the nature of the assets and
the level of private sector participation.
 Adopted internationally across Europe and worldwide

Design- Build-
Build-
Design- Design- Build- Own-
Design- Own-
Build- Build- Operate Operate
Build Operate
Maintain Operate - -
Maintain Maintain

Public Responsibility Private Responsibility

Service Managemen Lease Concession Divestiture

Contracts t contracts

Existing Services and Facilities

What is a PPP?

 There is no one model for PPP. There are many

possibilities.
 PPP is not a defined procurement model with a common
understanding across the world. When a project is
described as a PPP, do not make assumptions as to what
that means!
 PPP is not simply a means of accessing private. Many
forms of PPP involve no capital investment by the private
sector.
 Different models of PPP have gained popularity in
different jurisdictions.
 When reference is made to PPP, people are generally
referring to private finance models so that is what we will
focus on today.
PPP is not…..

 PPP is not the same as EPC Contracting (it requires a

fundamentally different approach).
 PPP is not EPC Contracting with some additional tasks
(it requires a fundamentally different approach). If
approached in a compartmentalised way, you will be
at a disadvantage.
Sectors where PPP has been
successful

 PPPs have been successful in many sectors where

service outputs can be described objectively and are
capable of verification.
 PPPs are suitable for both primary and social
infrastructure although in emerging markets generally
limited to primary infrastructure (power, water and
transportation).
 Not suitable where technology is likely to change
rapidly over the life of the contract (so PPPs in the IT
sector are generally not considered to have been
successful).
Key Features of a “Good” PPP
Project

 A contractual arrangement between the public

sector and a private entity to provide a public service
(not an asset) based on:
 Substantial risk transfer to the private sector;
 An output specification stating the desired output quality
and quantity;
 Performance related rewards (payment depends on
standards being met); and
 Whole life costing (a balance between construction and
maintenance costs).
How to Identify PPP
Opportunities
 Many PPP projects are “solicited” government projects
advertised in official journals or gazettes.
 Some are “unsolicited” if legal framework allows.
Unsolicited market opportunities are:
 difficult to identify remotely;
 require on the ground market knowledge
 Many PPPs are announced and only some of them
proceed (particularly true in Asia).
 Less is more.
Factors Influencing PPP Model
Success
 The 3 Ps – “pipeline, pipeline and pipeline”.
 Integration with the fiscal management of the jurisdiction.
 Strong institutional framework (including a strong PPP unit
and the necessary legal framework).
 An influential “champion” and political support essential
(as line ministries are comfortable with traditional
procurement)
 A suitable regulatory environment and competent
regulators.
 Macro fiscal management that accounts for
contingencies and operational costs.
 Good concession design (duration of concessions).
 Ability of bidders to respond to opportunity.
 Why use a PPP model?
Advantages
 Bring in private capital and make projects affordable.
 Budgetary certainty and avoiding “soft budgetary
constraint”.
 Whole life costing and synergies of integration of DBF
and M
 Maximise use of private sector skills
 Public sector only pays when services delivered
 Quality of service has to be maintained
 Accountability
 Ensures that assets are properly maintained
 Strong Customer Service orientation
 Why use a PPP model?
Disadvantages

 Long term relatively inflexible structures

 Procurement delays and high procurement costs
 Loss of management control by the public sector
 Private sector has higher cost of finance
 Does not achieve absolute risk transfer
 Requires public sector capacity and skills that
may not be available
 Potential for negative public reaction to profit and
control
How to invest in a PPP
project?
 Necessary to determine where in the contractual
matrix you want to enter the market.
 It is possible to fulfil more than one role.
 Common for international contractors to undertake
EPC work and invest in the Project Company.
 If investor and contractor:
 the potential for conflict of interest must be managed
 the expectations of international partners will be for
arms length relationships.
 Relative “value” of contracting and investing has
been a significant driver of change for European
Contractors.
Understand market specific
risks
 Relief Events and Compensation Events – very limited
protection and significant risk transfer compared to
“standard” EPC contracting
 Caps on liability high
 Performance security robust
 Change in Law
 Indexation
 Fit for purpose
 Return as an investor often linked to matters that may
feel outside your control
Understand Sector Specific Risks -
Demand
 Standard & Poor study shows significant
optimisation bias. Of 32 projects studied, traffic was
on average only 70% of the forecast.
 Traffic forecasting by lenders proved to be more
accurate (traffic was 82% of their forecast)
 “Measuring inaccuracy in traffic demand
forecasting” looked at 210 projects over 30 years
and showed rail projects overestimated demand
by an average of 106%. Roads performed better
but 1 in 4 projects still overestimated by more than
40%.
 Willingness to pay may also present a difficulty
particularly if there is no history of payment for the
service (particular problem for water sector but also
can apply to transport).
How to submit a winning
tender?
 Whole life cost NPV/lowest tariff so;
 ensure that risk is assumed by the party best able to
manage it (assumption of risk by equity is generally
expensive and represents poor value for money).
 ensure that risk is priced once only. Integration of the
legal, financial and technical advisers is essential.
 Be careful to understand affordability criteria and
evaluation criteria (as well as any underlying
weighting).
 Understand that in many jurisdictions transferring risk
back to the public sector will either lead to
disqualification or a risk weighting whereby the
Employer will add the cost (estimated by him) to your
price.
Thank you for your attention