Developing successful, bankable pp ps through a common language

Editor's Notes

• #5: An introduction to the PPP Guide: it’s development & purpose How the Guide creates a common standard & language for PPP projects and personnel How it supports effective stakeholder communication & engagement CP3P training and certification In this webinar I will not only discuss the guide itself but also some of the some concepts contained within.
• #6: The CP3P Book of knowledge or PPP Guide is probably the most comprehensive and detailed guide in existence today. As a World Bank sponsored document APMG and the project team of authors must be congratulated on their work and the production of this guide. It picks up on every known area of work and circumstance that impacts on the delivery of effective, sustainable and bankable PPPs. In eight chapters it works through the process for planning and developing a complex project through the procurement and contract management and expiration. But importantly it also explains the pros and cons of establishing an effective framework wiothn which the public sector can identify and hen support suitable proejcts nad which also give confidence to the private sector htat PPP proejcts will be managed in a consistent and professional manner. Throughout the guide all aspects of a PPP are considered and supported with international examples that demonstrate different PPP processes and rules that legitimately may govern PPPs in countries that have common law and civil code legal systems and at federal, state and district level. Other examples, drawn from the international community, offer both good and poor examples of PPPs and, in context where the example of a poor PPP is offered, provides a supporting commentary that ensures that the reader understand the points of failure. Whilst identifying a high level universal approach and terminology, it identifies the need for the development of specific best practice that reflect the legal traditions, business environment and economy of a jurisdiction, and a glossary which provides an international dictionary for PPP and complex procurements. Most importantly it provides the global PPP community with a common language allowing us to come together with a consistent understanding, only asking that we build and adopt best practice approaches locally using the same global language. Time and time again the guide reminds us that PPP operates in an international context and that where countries wish to attract international contractors and operators, this will be facilitated where all the parties use and speak a common language. A private sector contractor is best thought of as an individual person like you and me with the responsibility of looking after the family silver. A company is charged with looking after the company assets of the on behalf of its shareholders. At a minimum those shareholders expect to get something in return for investing their money in a company. As such, the company is seeking to work in environments where there is a certain level of security in terms of economic, business, and political certainty. it will also prefer to work in those countries where it is more readily understood and the local public sector have relevant experience and confidence in working with the private sector and better still, where having made an initial investment potentially there is a further pipeline of work that they can then bid for and potentially win, at lower additional cost than when setting up for a single or initial bid. In so doing it can defray its corporate and overhead costs over a number of projects thereby reducing the costs borne by each individual project and potentially delivering improved value for money to the public sector as a whole. The guide comprises 8 chapters Chapter 1 constitutes a comprehensive overview to PPP and together with the glossary constitutes the required learning for the CP3P foundation exam. Chapters 2 to 5 constitutes the core learning for the CP3P Preparation Exam. And Chapter 5 to Chapter 8 forms content for the Execution Exam.
• #8: AS previously mentioned Chapter One together with the glossary forms the curriculum for the CP3P foundation level examination. The chapter is an end to end guide on all you need to know about PPP if you are a senior manager, politician. It provides an overview of the PPP process from definition through to implementation. It contains many examples of differing practices in different countries and provides an understanding of the reasons for project failure and in so doing highlights what needs to be done to deliver success.
• #9: I am great advocate of finding out what constitutes a PPP in any particular jurisdiction before dismissing a particular approach as being a PPP or not. Even with regard to what we discuss today I should caveat the definition by saying that participants may be sitting in a country that defines PPPs more widely than does the guide. However like any good piece of work or research the guide focusses on what might be described as the core or perfect PPP model before considering variants and that constitute a PPP in some but not all Jurisdictions. Even after many years working on PPP projects I am surprised at the level of ignorance that still exists within the public sector in most if not all countries and even amongst consultants and advisors. Part of this arises as a consequence of the self definition by some advisors who may have had experience delivering projects and procurements in the public sector who have simply redefined themselves as PPP experts and sell their services accordingly and typically advise their clients based on their own expertise and experiences which results in the delivery of a traditional procurement contract with no recognised features of a PPP other than perhaps that the contract is long term. Only recently I was sent a list of Procurement options by an international project manager and asked to consider each for a major investment contract. These options were described as PPP options but were not. Rather they were simply a series of typical procurement options from across the Procurement Spectrum from Management contracts to Joint ventures and privatisation. None of the supporting evidence for any of the options was considered in PPP terms and it was apparent hat the PPP expert who had provided the options and analysis was not familiar with these concepts in the context of PPP. If the PPP expert had simply read Chapter one of this guide they would have produced a summary document of options that looked both professional and well informed and I would not have guessed that they were simply a rebadged procurement advisor without any definitive PPP experience. A second example was at a major UN conference where a government minister, who had previously commended PPP and the model developed in his country, actually used his speech to denounce PPP. Interestingly this was based on a specific PPP where the developer had built a hospital but failed to operate it either completely or within the terms of the contract. Having undertaken some further research it became apparent to me that there was no performance mechanism in the contract and the government was paying for a hospital without recieving a service. Of course as any professional PPP practitioner will tell you, if the contract had contained the usual risk reward approach and performance mechanism of PPP, the contactor would not have been entitled to any payment. Had the guide and CP3P qualifiaction been around at the time both the advisor and relevantt public officials could have avoided this health delivery and public relations political disaster. Lets look at each element of the definition of a PPP.
• #15: Apart from providing a good and relatively straight forward definition of that consitutes a PPP for the purposes of this guide, the chapter also uses supporting diagrams and illustrations.
• #16: Syllabus topic 02-10 concerns the various ways in which PPPs can be subdivided into different types or variations. The Guide discusses the following types or variations: we can distinguish between PPPs on the basis of the source of funds for the private party's revenues. This gives us the distinction between user pays PPPs and government pays PPPs. A second way of distinguishing between different types of PPPs is by considering the ownership of the PPP company, or the special purpose vehicle as it's often known. We can have conventional PPPs with 100% private ownership, institutional PPPs that might be wholly or partly publicly owned with the public party controlling the PPP company, and other joint ventures that are partly publicly owned but with the private sector control of the PPP company. A third way to make a distinction is on the basis of the scope or object of the contract. There are infrastructure PPPs, focused on long-term infrastructure developed and management. There are integrated PPPs, focused on both infrastructure and the services delivered using the infrastructure, and there are operating and maintenance or service PPPs, where the focus is on service delivery and not on infrastructure development. A fourth distinction is on the basis of the financing involved. From this perspective we can say that there are conventional PPPs with 100% private finance and co-financed PPPs involving both public and private finance. The fifth set of variations identified in the Guide are those based on past use of the infrastructure. If we take an investor’s perspective, for example, we might say that there are greenfield projects, these being new infrastructure for which there is no existing history of demand or usage, Brownfield projects involving the management of existing infrastructure in which there is a known history of demand or usage, and yellow field projects in which there is a combination of both existing infrastructure and new development.
• #17: The guide considers the whole PPP lifecycle It defines six phases Identifying and screening as a PPP Appraising and preparing the project contract Structuring and dragting tender and contract Tender and award Managing Contract – developing and commissioning Managing contract – operating, maintaining and handing back
• #18: Each of these phases is covered in a specific chapter.
• #19: Within the individual chapters it drills down into each element.
• #22: Communication Strategy During the Screening Phase, but not only then, successful PPP projects often make a specific effort to communicate the results of the various steps of the PPP process, as well as the decisions made during the phase, to the general public and to those specific groups with a particular interest in the project. This communication strategy is very important the promotion of engagement and gaining support softening any opposition to the project. It is therefore important to design a communication plan at an early stage of the screening exercise, describing the general strategy to be adopted, and it should be implemented by a dedicated and experienced communications team. Newsletters, meetings, committees and educational events are all ways to improve the publics perception of a PPP. The communication plan should include the following information. The identification of all the interest groups to which communication should be directed; An explanation of the main concepts to be communicated, drawing from the basic elements of the project such is its outcomes, the need it tries to meet, and the people it tries to serve; The identification of the media used to reach the groups identified; The main characteristics of the communication pieces, preferably specific to each group identified; The identification of the people inside the project team who should be considered as the prime source of information for the general public; and The description of a basic strategy for maintaining good relationships with the press. The successful implementation of the communication plan can significantly reduce the political risks which large infrastructure projects are typically subject to, and replace negativity and opposition with the overall stakeholder support necessary for deliver an effective procurement later on in the PPP process. It is amazing how quickly a private sector company will walk away from a project if it perceives that participation in a procurement and potentially delivery as a supplier will generate negative publicity with associated impact on futire sales.
• #23: The guide clearly sets out indicative contents structure and scope of the various reports that need to be developed and presented in order to gain sign off at each particular phase in the development, procurement and deliver of a PPP project. For example with regard to the screening report produced at the end of the screening phase it states that It is good practice to complete a report containing at least the following sections before entering the full appraisal process and, specifically, before committing staff and/or hiring advisors. It identifies the following elements Executive summary and recommendations; Project description: Outline of technical solution. Needs/benefits of the project and suitability of the solution proposed; PPP suitability: Justification for the use of a PPP process; Affordability: Economic and financial pre-analysis; Legal and regulatory issues; Readiness of the project and its status, including stakeholder identification; Information availability; and Outline of the project management plan. Appendix A to this chapter sets out an example of an outline for a screening report.
• #24: Again in the appraisal phase the Guide is clear about the studies that need to be undertaken in order to ensure that the output at the end o f the phase is comprehensive and reflects an accurate position with regard to rhe likely success of failure of the project in the procurement market place and leading to the green light (go ahead) decision. The next slide identifies the typical feasibility and technical studies that need to be undertaken at this time.
• #25: At the core are the technical requirements financial model and preliminary contract structure that provides the basis for the scope, cost and pricing This could be perceived as the engine room that will be continually updated as the project scope, contract structure and technical requirements are refined. The engine room will also be impacted on as the various feasibility studies and assessments progress. For example if the affordability assessment demonstrates a viability gap ie a gap between cost and income generation, the scope may be amended to lower the cost or the contract amended to introcuce governmental support inte form of grants or loans.
• #26: Critically it is important to ensure that every aspect of the price/cost and risk analysis together with potential support is considered and covered. This slide demonstrates the comprehensive nature of the guide coving eah element inturn wirth a simple supporting statement in each case.
• #27: The guide considers the need to employ or retain Advisors as required at each stage of the process. It divides the capabilities necessary for an appraisal process can be divided into five main groups. Technical: In charge of the project’s design, with expertise in the type of infrastructure that is the subject of the contract; and Expertise in the technical aspects of the services involved. Environmental: In charge of environmental impacts; should provide relevant expertise/ experience in environmental analysis. Economic: Expertise in economic appraisal, preferably in the same sector/ infrastructure or service type. Financial: Expertise in financial analysis in the field of user-paid or government-paid PPPs, preferably in the same sector/infrastructure or service type and also knowledge of financing similar PPP projects (when the government needs to develop a bankable structure); and Expertise in contract risk structuring and payment mechanisms, preferably in the same sector/infrastructure or service type. Legal: Expertise in public law/ administrative framework; and Experience in drafting PPP contracts.
• #29: Chapter 7 Comprises 2 parts
• #32: The guide also identifies different time frames for similar projects in developed and EMOD countries. This of course depends on the strength of local financial markets, political stability and economic change
• #33: As highlighted in chapter 1.8.2 of the PPP Guide, there are a number of risk factors related to not having a framework. PPP frameworks address those risks and increase the likelihood that PPPs will succeed. Increasing the capability of government agencies to deliver PPPs: PPP projects may be developed by various agencies across the government. Each of these agencies may be an expert in its own sector – for example, in highway development, or water service provision. However, most agencies will not be experts in PPPs. If each agency has to learn how to do PPPs on its own, learning costs will be high, as will the risk of mistakes. Codifying standard practices in a framework reduces learning costs and the risk of mistakes. Codification and standardization makes it easier for skills developed on one project to be transferred to another project in another sector; Providing a structured way of reconciling disparate objectives Delivering a PPP project typically requires co-operation between numerous government agencies and private firms, all with competing objectives. A PPP framework helps in managing expectations, training, and skills development. This not only helps to establish a common objective between stakeholders, but also improves the longevity of the PPP program (in particular by establishing new mindsets); Making sure that whole-of-government risk is limited: Sector agencies developing PPPs will focus on delivering a project that will work well for the sector. However, they may be less alert to other risks which are more important at a whole-of-government level. These risks include government reputation and fiscal risks. A good framework will build in processes and responsibilities for identifying and mitigating such risks;   Generating market interest: A key factor for a successful PPP is a competitive procurement process. Competition helps drive down price and promote innovation. A good PPP framework can be an effective way of communicating the quality of the PPP program to the market, as well as the government’s commitment to potential investors. Thus, a PPP framework can make PPP projects more attractive by increasing competition. PPP frameworks can also reduce investors’ perception of risk, making it more likely that projects can be privately financed. PPP projects delivered by governments with transparent PPP processes and effective oversight will be perceived as less risky; and Facilitating probity and oversight of the PPP program: As with any important government program, independent oversight and evaluation are desirable. Having clear processes, decision making criteria, and allocation of responsibilities makes such oversight more effective. Clarity about what officials should do makes it easier to assess if they did what they were supposed to do. Clarity about objectives makes it easier to assess if those objectives are being achieved. If things are going wrong, a clear and well documented framework makes it easier to learn lessons from the experience. Evaluators of the program can distinguish between whether the officials are following the framework and the framework needs to be improved, or whether the problem is that officials did not follow the framework. If the problem seems to be with the framework itself, having a well-documented framework can make it easy to see which particular parts of it need to be changed (see section 1.9 for more on oversight of PPPs). Many PPP projects developed in the absence of a PPP framework have gone wrong.
• #34: As highlighted in chapter 1.8.2 of the PPP Guide, there are a number of risk factors related to not having a framework. PPP frameworks address those risks and increase the likelihood that PPPs will succeed. Increasing the capability of government agencies to deliver PPPs: PPP projects may be developed by various agencies across the government. Each of these agencies may be an expert in its own sector – for example, in highway development, or water service provision. However, most agencies will not be experts in PPPs. If each agency has to learn how to do PPPs on its own, learning costs will be high, as will the risk of mistakes. Codifying standard practices in a framework reduces learning costs and the risk of mistakes. Codification and standardization makes it easier for skills developed on one project to be transferred to another project in another sector; Providing a structured way of reconciling disparate objectives Delivering a PPP project typically requires co-operation between numerous government agencies and private firms, all with competing objectives. A PPP framework helps in managing expectations, training, and skills development. This not only helps to establish a common objective between stakeholders, but also improves the longevity of the PPP program (in particular by establishing new mindsets); Making sure that whole-of-government risk is limited: Sector agencies developing PPPs will focus on delivering a project that will work well for the sector. However, they may be less alert to other risks which are more important at a whole-of-government level. These risks include government reputation and fiscal risks. A good framework will build in processes and responsibilities for identifying and mitigating such risks;   Generating market interest: A key factor for a successful PPP is a competitive procurement process. Competition helps drive down price and promote innovation. A good PPP framework can be an effective way of communicating the quality of the PPP program to the market, as well as the government’s commitment to potential investors. Thus, a PPP framework can make PPP projects more attractive by increasing competition. PPP frameworks can also reduce investors’ perception of risk, making it more likely that projects can be privately financed. PPP projects delivered by governments with transparent PPP processes and effective oversight will be perceived as less risky; and Facilitating probity and oversight of the PPP program: As with any important government program, independent oversight and evaluation are desirable. Having clear processes, decision making criteria, and allocation of responsibilities makes such oversight more effective. Clarity about what officials should do makes it easier to assess if they did what they were supposed to do. Clarity about objectives makes it easier to assess if those objectives are being achieved. If things are going wrong, a clear and well documented framework makes it easier to learn lessons from the experience. Evaluators of the program can distinguish between whether the officials are following the framework and the framework needs to be improved, or whether the problem is that officials did not follow the framework. If the problem seems to be with the framework itself, having a well-documented framework can make it easy to see which particular parts of it need to be changed (see section 1.9 for more on oversight of PPPs). Many PPP projects developed in the absence of a PPP framework have gone wrong. The Dabhol Plant in Maharashtra, described in box 2.3, is a case study in which the inexperience of an agency and the lack of a PPP framework contributed to the inappropriate delivery of a PPP project.
• #35: An excellent example drawn from chapter 2 of the guide is illustrated in BOX 2.3: A PPP project without a Framework The Dabhol Plant in Maharashtra project ended unsuccessfully for both the government and the private promoter because decisions were unstructured and poorly governed, leading to an outcome that was not in the public interest. Enron led the project, and the contractual terms included the creation of a corporate vehicle, the Dabhol Power Corporation (DPC). The DPC was to construct the power plant in two phases and sell power to the Maharashtra State Electricity Board (MSEB) under a 20 year take-or-pay contract. The contract was backed by both a state government guarantee and a counter- guarantee by the federal government. In 2001, after the first phase was completed, the MSEB did not meet its financial obligations given the high energy purchase price under the Power Purchase Agreement (PPA). The DPC attempted to call in its guarantees, but the federal government refused to make such payment on the basis of alleged technical breaches. It was not until 2004 that settlements were made. Dabhol Step Identification of a project By a private party on its own initiative. Better approach From an integrated sector plan that shows the most economic set of investments to achieve sector objectives. Selection of a private party Better approach By negotiation with a single proponent. Through competitive processes to discover which firm is the best party by scoring against a set of defined and rational criteria. Appraisal Advice by the World Bank that the project was unaffordable was disregarded. Better approach Projects that are not affordable will not proceed. Contractual agreement Negotiation based on a draft prepared by the private party. Better approach Contract developed by the government based on an optimal allocation of risks between parties.
• #36: In summary A good project will Engage experienced practitioners to manage, deliver, work alongside or mentor local staff Have good simple, documented and easily understood processes At least externally use terminology that is consistent with that used and understood across the global marketplace Clear approval and stakeholder management processes Be clearly signposted and communicated to all stakeholders Engage in communication and education with dissenters and the public Respond to a need that improves or maintains services Form part of a pipeline Share risk appropriately Seek to limit exposure to potential bidders to unusual and unmanageable local risks Engage with the marketplace and identify and engage all stakeholders