Public-Private

Partnerships
(An Introduction)
University Indonesia, March 1, 2013
Ronnie Leyes, Foreign Legal Consultant
Defining PPP Projects
Section 1
A Public-Private Partnership (PPP) is a
contractual agreement between a public
body and a private sector entity. Through
this agreement, the skills and assets of
each sector (public and private) are shared
in delivering a service or facility for the use
of the general public. In addition to the
sharing of resources, each party shares in
the risks and rewards potential in the
delivery of the service and/or facility.
US National Council for Public-Private
Partnerships

Why are PPP Projects any
Different from Other
Procurement from the Public
Sector?
Involvement of the private sector in
delivering public services is common, eg.
procurement of goods or services to public
bodies:
Public body pays from its own funds,
Goods or services delivered to the public
body against scheduled payments
Public body keeps performing its public
service obligations

Procurement of goods and services
involves little or no sharing of risks

Example No. 1
The Industrial Partnership
Joint-venture company (JVC) between a
private company and a public body, often a state
owned company, eg. national grid company.

JVC in charge of building and operating a
manufacturing plant, eg. power transformers for
power grids; parts of aircrafts manufacturing;
etc.

Allows transfer of technology, local employment,
costs efficiencies.

Required by local content regulation, offset
programs.


Example No. 1
The Industrial Partnership
State-
Owned
Company
Private
Investor
Joint-
Venture
Manufacturin
g
Company
Equity, License,
Expertise
Dividends, fees
Equity,
Personnel
Products,
Dividends
Example No. 2:
The UK Private Finance Initiative (1992)
(1)
Private partner in charge of designing, building,
financing and operating a public facility for the
benefit of a public body:
Eg. hospitals, schools, prisons, etc.
Include services to the building (energy, water,
sanitation, etc) and
Services to its occupiers (laundry, catering, etc).

The private investor will set up a Project Company
(or special purpose vehicle ) and contribute
equity and loan stocks.

The Project Company will procure bank loans and
undertake the construction work and management
and maintenance.


Example No. 2:
The UK Private Finance Initiative (1992)
(2)
The public body will pay a unitary charge
for the services upon commencement of
operation.

The unitary charge will create a revenue
stream during management period
allowing the Project Company to be
repaid of
its initial financing costs
operational costs and
dividends for investors

Example No. 2:
The UK Private Finance Initiative (1992)
(3)
Public Body
Private
Investor
Project
Company
Constructin
g and
Operating
Public
Facility
Equity,
Loan
Stocks
Unitary
Charge
Service
s
Commercial
Banks
Dividends
Financing
Construction
Repayment
on Operation
Example No.3:
Public Service Devolution Agreements
(1)
The public body devolves the management of a
public service to a private company whose
revenue will depend upon the operating results
of the service
Used to develop railways, electricity grids and
drinking water networks since the 19
th
France

Concession Agreement:
The Project Company will make the initial investment
and operate the service at its own risks and
expenses according to specifications.
The private companys income comes directly or
indirectly from the service users.
Usually 20 to 30 years term (until repayment of initial
investment).


Example No.3:
Public Service Devolution Agreements
(2)
Service Management Agreement:
The private company is entrusted with maintaining and
operating existing assets leased out by the public body
against a fee.
All or part of the renewal or expansion costs will be
shouldered by the private company.
The private company will be compensated through direct
collection of fees from users.
Usually shorter than concessions (7 to 10 years)

Public body may also devolve service to
private company but collect the fees from
the users and pay a fee to the private
company.

Example No.3:
Public Service Devolution Agreements
(3)
Devolving
Authority
Private
Operator
(Exclusive
Right)
Concession
Agreement
Service
Availability
Periodic
Fee
Public
Service
Users
Fees
Commercial
Banks
financing
Construction
and
Refurbishme
nt
Conclusion: Sharing of Risks and
Rewards between Private and
Public Sectors (1)
Risk of not being repaid of the capital initially
made available and for the interest; currency
risks, etc.
Financial
risks
Risk of delayed completion of the works, costs
overrun,
construction quality, external negative effects
including environment, etc.
Construction
risks
Risk of receiving no return on the equity invested
into the PPP project
Private
investor risks
Risk of the public facility being wholly or partially
unavailable for operational reasons (unplanned
maintenance) or
otherwise not meeting key performance
indicators, etc.
Availability
risk
Risk of no income from operation due to lack of
demand for the service
Commercial
risks
state nationalization, war, sovereign decision to
stop the project, insolvency of a state-own
company, change in law
Political
risks
Conclusion: Sharing of Risks and
Rewards between Private and
Public Sectors (2)
Financing PPP Projects
Section 2
The Several Sources of
Financing
Public financing of
infrastructure projects
Financing by the investor (or
project sponsor)
Project finance mechanisms
Public Financing of PPP
Projects
Financing sourced from taxpayers
money or issuance of debt
Money injected through equity, loan or
subsidy allocation
Public finance is generally cheaper than
private finance (sovereign debt)
Scarcity of resources, budgetary
constraints and competition between
many projects

Public Financing of
Infrastructure Projects
Project Company
Private Investor
Public Sector Entity
National or International
Bond Markets
Taxpayers
Loan
or
subsid
y
Equity
Initial capital
expenditure made by
the public sector
PPP
Agreement
World Bank,
Development Banks,
Bilateral Agencies
Private Investors Financing of
PPPs
Private investors own funds will make up all
or part of the project companys equity

Private investor may also borrow the funds
required for capital expenditure

Loan agreement secured on the companys
existing and projected assets and cash flows

Private investors overall liability and risk
exposure will probably be high, ie.
bankruptcy risk


Public Financing of
Infrastructure Projects
Project Company
Private Investor
Public Sector Entity
Commercial Bank
Loan
Loan or
subsidy
Equity
PPP
Agreement
Initial capital
expenditure made by
the private sector with
a loan secured over
the private investors
assets and cashflows
Project Finance Scheme
Project company will borrow the funds
required by the initial capital expenditure

Lenders expect security and repayments
over the future assets and cash flows

Non recourse or limited recourse from the
lender to the project sponsors, ie. off-
balance sheet commitments for the
sponsors

The project will have to be bankable, ie.
risks allocation, expected cash flows, etc
will be scrutinized by the lender

Project Finance Scheme
Project Company
Private Investor
Public Sector Entity
Commercial Bank
Loan
Equity
PPP
Agreement
Initial capital
expenditure made by
the project company
through non-recourse
or limited recourse
financing
Non or limited
recourse
Other Financing Issues and
Technics
Recourse to domestic and international
equity markets (issuing shares)

Recourse to the bond markets (issuing
debt securities)

Credit enhancement mechanisms, eg.
guarantees, insurances, etc.
Sovereign guarantee for creditworthiness of
off-takers (power plants, water treatment
plants, etc)

Delivering PPP Projects
Section 3
Appointing the Private partner:
Brief overview of the
procurement process (1)
Competition for the market as opposed to
competition in the market (Edwin
Chadwick)
Procurement process for PPP may be
governed by the procurement law for goods
or services or by a specific legislation, eg.
in France 1992 law on local governments
Prior approval from the relevant public
authorities, eg. parliament, local
government, etc.
Appointing the Private partner:
Brief overview of the
procurement process (2)
Procurement routes may vary, eg. in the
European Union open, restricted,
negotiated and competitive dialogue

Steps of PPP procurement:
Prepare the tender (role of private partner,
contractual arrangement, procurement route
etc.)
Bid evaluation committee and criteria for
scoring bids
Negotiations with the bidders on risks
allocation, payment mechanism, draft contracts,
etc.

Overview of the Project
Documents
PPP Agreement (eg. Offtake Agreement,
Power Purchase Agreement,
Concession, BOT Agreement, etc)
Engineering, Procurement and
Construction Contract (EPC Contract)
Operation & Maintenance Contract
Site Lease
The actual content of the project
documents will contribute to determine
whether the project is or not bankable

PPP Schemes for Power Plants,
Water Treatment Plants and
Similar Projects.
Public Sector
Entity, eg.
National Power
Company,
Regional Water
Companies,
etc.
EPC
Contractor
O&M
Contractor
Project
Company
Offtake
Agreement
or Power
Purchase
Agreement
Offtake Agreement
Long term contract for the sale to a
public utility of all or part of the
production capacity of the plant
Eg. Power Purchase Agreement, Water
Supply Agreement, etc.
Often more than just a contract of sale:
Deal with the construction of the plant and
possibly the fuel supply
Utilities outsourcing, tolling, eg. water
treatment agreement
Key Issues of Offtake
Agreements
Clear-cut provision on the start of
commercial operation
Liquidated damages for delay and
unavailability
Payment structure should cover the Project
company cost whether the plant is actually
used or not (Take or Pay)
Fee adjustments based on price indices,
exchange rates, etc
Exceptional circumstances, eg hardship,
change in law, force majeure
PPPs Schemes for Highways or
Water or Other Commodities
Distribution
Public Sector
Entity, eg.
Road and
Transport
Authority,
Regional Water
Companies,
etc.
EPC
Contractor
O&M
Contractor
Project Company
Landlords,
Public Services
Users
Concession
Agreement
Connection,
Supply,
Waste
Collection,
etc.
Concession Agreement
Long term agreement
Grants an exclusive right within a
territory, eg. water supply, waste
management, urban transportation,
highway operation etc.
Lease of existing assets, eg. distribution
grid, water distribution pipes, collection
vehicles, etc. for operation
Requires construction of new facilities,
eg. higway, new fleet of vehicles, water
network expansion, etc. and
maintenance of existing assets




Key Issues of Concession
Agreements
Key performance indicators: number of new
connections, tones of collected waste, quality of
services, etc.
Compensation from the public body or tariffs
collected from users
Fees paid to the public body against the leased
assets and territory
Fee adjustments based on performance
Transfer of skills and knowledge to local partners
and bulic bodys personnel, eg. maintenance, fee
collection, etc.
Concession agreement subject to new
procurement at the end of term



EPC Agreement
Project Company will enter into one
single Turnkey construction
agreement for the plant or facilities

Aim at having a single point of
responsibility and limiting time and
costs overruns

Overview of EPC Agreements
Project
Company/Employer
EPC
Contractor
Equipment
Supplier
Civil Works
Subcontracto
r
Design
Subcontracto
r
Consultant
Key Issues of EPC
Agreements
Back-to-back principle with the Offtake
Agreement (time for completion, commercial
operation, etc.)
Lump sum agreement for a ready-to-operate
plant or facility whatever the exact amount of
works involved
Payments according to milestones matching
the loan drawdown schedule
Liquidated damages for delay and failure to
meet key performance indicators
Contractors other liability exclusions and
limitations, eg. overall cap and consequential
damages
O&M Agreements
Different approach to O&M:
Performed in-house by the Project Company as
operator
Specialist operator hired as O&M contractor
O&M shared with Maintenance contractor
Scope of O&M may include renewal of
equipment and facilities and procurement of
fuel and other raw materials
Operators fee structure may be fixed or
based on measurement
Key performance indicators in the provision of
services (availability, debit, etc.) and the
assets maintenance
Site Lease

Project site made available to the
Project Company depending on the
country legislation
Public body should identify and
acquire the land prior to tendering out
PPP projects
Project Company may be required to
pay for the land made available to it
Thank You