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PPP in Hospitals - Key Characteristics

‡ Output based contracting whereby public sector usually receives an accommodation


service (ie provision and maintenance of the hospital infrastructure)
‡ Clinical services have á á but not always been excluded from the scope of services
to be provided by the private partner
‡ Payments commence only once the infrastructure service is satisfactorily provided
(availability)
‡ Private partner accepts whole life-cycle investment responsibilities for the facility
‡ Private partner usually does not own the land, only leases it from the public sector
‡ Poor performance by the private partner is penalised by withholding / deducting from
the regular (e.g. monthly) payment
‡ Very poor performance can lead to termination of the whole contract
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. ^ordability and Security o Payments
5. Risk Identiication and ^llocation
6. Commercial Interest/Bankability
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
Project Objectives, Scope and Requirements
Case Study Questions and Discussion Points

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‡ Are the objectives and scope of the project clear and stable (e.g. policy, demographics)?
‡ Are the requirements adequately expressed in terms of outputs?

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‡ Familiarity of this approach to output based contracting to the public/private sector.
‡ Reasons for excluding clinical services provided by doctors, nurses.
‡ Output specifications and longer term contract management.
‡ Managing changes
‡ Staff transfer, union issues
‡ Who is responsible and pays for decanting, for cleaning up the old site
‡ Are the old sites included as part of the transaction?
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. Risk Identiication and ^llocation
5. Commercial Interest/Bankability
6. ^ordability and Security o Payments
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
Options ^ppraisal

‡ Identiication o the preerred ÷  option


o se of a R   or R á option to assess impact of change
o Measured against delivery of service objectives, affordability and sustainability
o Assessment of costs and benefits
o Role of discount rates and optimism bias
o Combination of qualitative and quantitative factors

‡ Identiication o the preerred ÷    route


o Value for money
Options appraisal
Case Study Questions and Discussion Points

Case Study Questions:


‡ Does the document provide a clear basis for the selection of the preferred option?
‡ Is there a convincing value for money case?

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‡ Methodology for assessing costs and benefits
‡ Discount rates
‡ In-house capacity for evaluation of projects beyond simple social cost-benefit analysis
‡ Is Option 6 necessarily the best option o balancing costs and benefits
‡ Costs of changing your mind later on
‡ Qualitative and quantitative value for money analysis
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. Risk Identiication and ^llocation
5. Commercial Interest/Bankability
6. ^ordability and Security o Payments
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
Risk allocation

‡ Who?:
o investors - the private-sector
o taxpayers - through the government
o users

‡ Allocate risk to party best able to:

o control its occurrence and consequences


o assess information about the likelihood of the risk
o within context of what is likely to be commercially acceptable to the private-sector.

‡ Risk does not R  through contractual structuring


Risk ^llocation«2

‡ Plannin / Land Failure to obtain planning permission or necessary land, resulting in termination of
^cquisition Risk the project or significant variation to the service solution.

‡ Desi n Risk Design of the chosen solution does not allow the output requirements to be met,
leading to revisions in design, changes to specification or termination of project.

Risks associated with the construction phase, such as latent or construction defects,
‡ Construction Risk archaeological discoveries or unforeseen ground conditions, leading to construction
delays and cost overruns.

‡ Demand Risk Risk of fluctuations in long term demand for the service, leading to changes to
specification or termination of project.

‡ Perormance Risk Risk of not achieving performance targets set out in the output specification, leading
to poor quality service to users.

‡ Technolo y and
Risk that changes to technology render proposed solution obsolete, leading to
Obsolescence Risk
expensive changes to design/scope.
Risk ^llocation«3

Risk of higher than expected operating costs, making it more costly to deliver services
‡ Operatin Risk
to stated standard.

‡ Third Party Risk of lower than expected income from third party users, making it more costly to
Income Risk deliver services to stated standard.

‡ Residual Value Risk of fluctuations in the value of the asset associated with the service at the end of
Risk the contract, making the contract more expensive overall .

Risk of changes to legislation or regulations, making it more difficult or more


‡ Re ulatory Risk
expensive to deliver services to stated specification

Risk of inability to obtain finance to fund the project, or fluctuations in the cost of
‡ Financin Risk funds or the terms of financing anticipated at the outset o making it costlier to provide
the service.
Risk Identiication and ^llocation
Case Study Questions and Discussion Points

`  
 
‡ Which key risks do you think have not been identified?
‡ What do you think of the probability and impact of the risks?
‡ Do you think that the proposed allocation for each of the risks is sensible?

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‡ Appetite of the market for risk transfer
‡ Design risk
‡ Demand risk
‡ Payment risk
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. Risk Identiication and ^llocation
5. Commercial Interest/Bankability
6. ^ordability and Security o Payments
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
Indication o Commercial Interest

‡ Geography/sector/size

‡ Capacity of bidding market

‡ Evidence of bankable contract terms and project specification

‡ Certainty of income stream to meet contract payments

‡ Adjust scope if necessary

‡ Evidence of commercial interest through ³market sounding´


Commercial Interest and Bankability
Case Study Questions and Discussion Points

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‡ Is there stron evidence o contractor, lender and investor market interest?

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‡ Depth o local contractor market
o Quality o market soundin
o Comparability o previous projects
o Size and experience o local contractors
o Project mana ement and acility mana ement expertise
‡ Expected availability o lon -term limited recourse inancin
o Expected returns on equity and debt
o Lon term interest rate and orei n currency hed in
o Terms and conditions that lenders and equity providers typically require or
the risks involved
o Credible risk transer to investors
‡ Quality o advisers
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. Risk Identiication and ^llocation
5. Commercial Interest/Bankability
6. ^ordability and Security o Payments
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
^ordability

‡ Who will pay for the project and how?

‡ The cost to deliver the specified requirements


o Contractor¶s charges reflected in a ³unitary charge´
o Capital expenditures
o Operating expenditure
o Cost of capital/debt
o Risks
vs
‡ The funds / assets available
o Feasibility / Willingness of users to pay
o Credibility of long term public sector payment obligations
o p-front capital grants / public assets
^ordability
Case Study Questions and Discussion Points

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‡ Is the project affordable?
‡ Can the authority pay its contribution and what are the risks for the authority?

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‡ †se o sensitivities in the analysis
‡ Risks around sale o land
‡ Inclusion o transaction and lon term authority monitorin costs
‡ Existence o bankable lon term payment obli ations to satisy the investors and
lenders
‡ Parliamentary approvals!!
‡ Reliability, relevance and sensitivity o car parkin income
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. Risk Identiication and ^llocation
5. Commercial Interest/Bankability
6. ^ordability and Security o Payments
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
Example: project overnance structure
Project preparation team and requirements
Case Study Questions and Discussion Points

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‡ In there evidence in the case study that a credible and well resourced team is in place to
manage the project?
‡ Are credible and experienced advisers available and appointed?

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‡ Project management arrangements used to date in PPP pathfinder projects
‡ Commitment and availability of Project Owner and Project Manager
‡ Stability of project team o who is leading on the site sale?
‡ Clarity of roles
‡ Adequacy of budgets
‡ Size and effectiveness of the Project Board o ability to meet and take decisions
‡ Delegation
‡ Track record and experience of external advisers o local auditing firm
‡ Depth of the external adviser market
‡ Procurement processes and budgets enabling appointment of the right advisers
‡ How will the contract be managed in the long term?
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. Risk Identiication and ^llocation
5. Commercial Interest/Bankability
6. ^ordability and Security o Payments
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
Commitment o Sponsors/†sers
Case Study Questions and Discussion Points

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‡Who are the key stakeholders?
‡How effective is the stakeholder management process?

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‡Identification of Project sponsors
‡Stakeholder management and communication process
‡Who does the IEIG report to?
‡Evidence of stakeholder commitment
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. Risk Identiication and ^llocation
5. Commercial Interest/Bankability
6. ^ordability and Security o Payments
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
Statutory Processes

‡ Ensure that statutory processes (planning, public enquiry, consultation) have been considered
and the timetable incorporates any implications that compliance to statutory process may
entail.

‡ Ensure that risk of compliance with statutory processes is properly shared with private sector

‡ Statutory Processes must be consistent with: Timetable, Risk Allocation


Statutory Processes
Case Study Questions and Discussion Points

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‡Have all the important approvals been identified /obtained to deliver the project as a PPP?

Discussion Points:
‡Site or land ownership issues
‡ Is land title likely to be an issue? Who normally deals with this?
‡Local authority¶s capacity to award and enter into long-term contracts
‡Other key statutory obligations which might pose problems (e.g. archaeological concerns)
‡ Required collateral infrastructure (e.g. roads, power, water, waste) in place
‡Development of contractual documents
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. Risk Identiication and ^llocation
5. Commercial Interest/Bankability
6. ^ordability and Security o Payments
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
En a in with the Private Sector: Commercial Strate y

‡ Manage the PPP supply market (to generate interest, understand constraints,
familiarise with procurement process and manage expectations)
‡ Determine achievable share of whole-life project risks
‡ Determine the scope of the competition (e.g. Information Management &Technology)
‡ Determine the number of competitors
‡ Design the nature of the competition
(process and timing)
‡ Determine the bidder requirements
Procurement Process
Case Study Questions and Discussion Points

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‡ What is your view on the proposed tender phase time-table
‡ What needs to have been done and in place before the tendering phase?
‡ Will there be reasonable competition for this project?

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‡ Requirements of local procurement law
‡ Developing evaluation criteria - balancing a fast and transparent bidder selection process
with selection of the right long term solution
‡ Raising awareness of the project, PIMs
‡ Bid bonds
‡ Who bears bid costs?
‡ Short List vs. Long List after Pre-qualification document /PQQ
‡ nsolicited proposals
‡ Participation of national companies
^ enda

1. Outline Business Case


2. Project Objectives, scope and requirements
3. Options appraisal and selection
4. Risk Identiication and ^llocation
5. Commercial Interest/Bankability
6. ^ordability and Security o Payments
7. Project Preparation Team and requirements
8. Commitment o sponsors/users
9. Statutory Process and ^pprovals
10. Tender Process
11. Role o Development Finance Institutions
Role o Development Finance Institutions
Case Study Questions and Discussion Points

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‡Is DFI finance likely to important for the project?
‡Does the availability of DFI funding look likely?

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‡Involvement of DFIs (how and when)
‡ se of DFI term sheets during the tender phase
‡Role of DFIs in developing long term finance
‡Role of DFIs as an ³honest broker´
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