PMU-A: Enhancement of National Framework for Partnerships between Public and Private Sectors for City Development Jeff Delmon World Bank September 2022
Local Government Priorities Project Lenders Government 2. Fiscal Space/ debt capacity 3. Efficiency of procurement, governance/ performance orientation 1. Demand on resources/budget limits 4. Admin procedure/ decision processes
Why Structured Investment Project Company (SPV) Lenders Shareholders Government 1. Limited recourse - No direct liability to Government or Lenders 2. Debt onbalance sheet for SPV but offbalance sheet for Government and Shareholders Project 3. Stable revenue stream securitized 4. Lower WACC given high leverage on the back of securitized revenues
(Un)Common Interests 4 Project Certainty of revenue stream Cushion in returns Political/country risks Protection in extremis Government Investor Financier Need for Government support Cost of service Quality of service Time to completion Construction risks/returns Equity returns Control of project Political/country risks (Un)common Interests in Structured Investment
Partnership SYNERGY 1 + 1 = 3
Is the Municipality Ready?
How to be the perfect partner
Municipal Private Know Your Context 8 Tool Module 1: Municipal Readiness Assessment - framework for assessing a municipality’s readiness to implement PPP Module 19: Private Sector Context - indepth discussion of private sector concerns Planning/budgeting systems, internal capacity (HR, funding), credit-worthiness, legal & institutional framework, outside assistance Distinct concerns of importance to private investors – what makes a good investment?
How to be the perfect partner
Responses to Municipal Readiness Assessment Tool Strongly agree Somewhat agree Somewhat disagree Strongly disagree Municipal Readiness Tool
Municipal Readiness Tool Statement 1 - Creditworthiness Past borrowing / timely repayment • Broadly – each transaction demonstrates commercial knowhow and financial discipline Understand fiscal systems (accounting, auditing, etc.) and standing. Key issues: • Transparency, • Accountability, and • Overall exposure (incl. PPP) • Can give comfort to PSPs and financiers • But may also represent added delay, cost, complexity PPP is a contractual commitment • PSP must trust the municipality to respect contractual obligations • Best evidence is past practice 1. Assessment of internal systems 2. Borrowing experience / history 3. Oversight on municipal borrowing / PPP 4. Contracting experience / history Creditworthiness impacts: o Private sector interest; and o Cost of financing Even if the municipality has no regular payment obligations under the PPP
Municipal Readiness Tool Statement 2 – Internal Capacity Delivering a PPP is Municipal PPP Capacity not cheap / easy, but investments pay off (e.g. VFM, limiting risks) Other Gov’t Entities (regional, nat’l) Internal Staffing Funding Extra-budgetary Support Contract Manager / Team Project Manager / Team PPP Unit Outside Consultants • Seniority and PPP experience (staff continuity, knowledge sharing) • Expertise in: technical, financial, legal, accounting, complex projects Many municipalities won’t have enough internal capacity, especially at first – • Develop HR over time (hiring, training, etc) • Expertise can be acquired by attempting PPP (“learn-by-doing”)
Municipal Readiness Tool Statement 3 – External Assistance Support Facilities Project development funding Model documents Technical assistance Cofinancing Credit enhancements Streamlined permitting / approvals Stakeholder coordination Capital grants Project roadshows • Domestic PPP units / entities (regional, national) • Domestic development banks / infrastructure funds • Regional / global MDBs and IFIs (e.g. WB, IFC) • Bilateral / multilateral donor partners Note that central PPP units may also have a role in reviewing / approving PPPs
Municipal Readiness Tool Statement 4 – Planning & Budgeting Infra development plan/strategy – clearly identified needs and priorities Multi-year capital investment planning / budgeting Accounting and contingent liability management Spatial – zoning, land use, trends and targets, credible real property ownership registry How public / transparent and well synchronized are the different plans / processes?
Municipal Readiness Tool Statement 5 – Institutional Mandate National Municipal Regional Public housing Urban transit Energy generation & transmission Airports Ports Highways Water supply Sanitation Water resources Utilities o What types of infra assets and services is the municipality responsible for? • Is responsibility exclusive or shared? o Can the municipality delegate all or parts of that mandate to a PSP? • E.g. investment, construction, operation, maintenance, tariff pricing/collection/retention o Can the municipality enter into long-term, binding contracts (e.g. past the term of chief exec)? • Any prerequisites, approvals, etc.?
Municipal Readiness Tool Statement 6 – Governing Law PPP Procurement Infrastructure Sector-specific Construction Taxation Environmental Foreign investment Municipal borrowing Land acquisition Muni PPP can be subject to an array of laws covering a broad spectrum of topics o Consider if and how the legal framework governs: • Contracting (e.g. enforceability, modification, dispute resolution) • Institutional roles and mandates in infra & PPP delivery, incl. review / approval of PPP • Sectors in which PPP is/is not allowed • Support for PPPs • PPP project structures (e.g. BOT) • PPP contracts (e.g. standard terms) • Procurement and unsolicited proposals • Permitting and licensing • Corporations (e.g. formation, share transfers) • Foreign investment and expropriation • Taxation…
Is The Project Ready? Infrastructure procurement approaches – Engaging with the private sector 2/8/2023 Page 17
Responses to Project Concept Assessment Tool Strongly agree Somewhat agree Somewhat disagree Strongly disagree Project Concept Assessment Tool
Section 1 – Preliminary Considerations Project Rationale Is there a strong justification for the project? • PCN, obvious need/demand for the project, alignment with development plans/priorities, econ and social benefits, etc. • Screen out “wish-list” and residual projects – projects with a strong justification are more likely to succeed in general, and more likely to attract private sector interest Legal Basis Is there a clear legal basis for delivery as a PI? • P may be limited to certain sectors/subsectors – is private participation allowed in this type of project? • Is this type of project within the municipality’s exclusive mandate to deliver? Capex & Duration Is the estimated investment cost and duration appropriate? • Larger size / duration tend to be more attractive, and so likely to have more robust competition during procurement • Smaller, shorter projects can still make good PPPs, but preparatory costs and liabilities may be (unduly) large Preparatory Funds Is/will there be funding for needed preparatory work? • PPP project development requires time and money, but pays dividends later • Has the municipality budgeted funds or identified a source of extra-budgetary support to develop the project (e.g. feasibility studies)?
The public investment framework needs to leverage private financing systematically Projects are submitted for public funding based on little preparatory work and inconsistent screening Projects are often directly awarded, in lieu of competitive tender Delivery with state budget funds Public and private Private Preparation and competitive tendering process only applies after a decision has been made not to pursue public options Usual approach: Project identification asks first which projects should be publicly funded, then which should be funded with public and private and lastly whether to use fully private – the inverse of best practice Decisions on private financing options are made too early, before much is known about the project Need to Flip the Pyramid Choose project carefully Choose Projects Carefully
Choose partner carefully Decide which projects are to be PPP, and stick with it Don’t compromise, make them compete – no side deals! Keep it simple, not too many institutions or approvals coordination How to find the perfect partner
• Investment (capex) • Debt - kind (e.g. bank loan) & tenor/interest • Equity (RoI) • O&M - opportunity for private efficiencies? • End-users (affordability) • Off-takers • Land value • Commercial value • Gov’t payments, subsidies, grants • Location • Target population, etc. Section 2 – Financial Project Concept Assessment Tool Projections Sufficient to Support a Credible Financial Model Revenue Demand Cost Real and measurable, or hopeful? Sources + ability to credibly forecast Estimable, predictable, stable? Actual financial modelling is not expected or required at this stage
Project IRR (real/year30) Equity IRR (real/year30) ADSCR (min) LLCR (min) PV (VAT + Tax-Subsidies) 175,725 Concession life 11.04% 19.90% 2.14 3.06 30 170,000 1,000 20% 30% 6.0% Construct. cost Operation Cost Investment Equity Subsidies Interest Rate Grace Period Initial Daily Traffic Traffic Grow th Toll rate VAT incl. 20.6 4.0% 18 4 4.0% Corporate tax rate 3.7 30.0% Inflation rate Debt maturity -150,000 -100,000 -50,000 0 50,000 100,000 150,000 All figures in kUSD Revenues Shareholders account Dividends Principal Interests Taxes Operating costs Equity Debt Interest during construction Subsidies COMMENTS:
Who takes which risk? Project Specific Risks “non sovereign risks” Completion Risk (engineering & construction cost, time, performance, defects) Operational Risk (technology, quality, cost, technical & operational know-how) Environmental and Social Risk (future liabilities, project delays, costs overruns) Credit Risk (project leverage) Country (Economy wide) Risks “sovereign risks” Political Risk (expropriation, political violence, Gov’t breach) Regulatory Risks (pricing formulas, right of way, currency convertibility & transfer) Legal Environment (rule of law, judicial system, access to justice and arbitration) Offtake risk (how liberalized is the market?) Environmental Risk (past liabilities) Pricing Risk (regulated and non-regulated) Financial Risk Inflation, refinancing risk, interest rate and exchange rate fluctuations Who Takes Which Risk?
Risk Transfer – How Much is Too Much? 25 Proper risk allocation is at the heart of a good PPP Transferring risk to the PSP (financing, construction, demand) is a key benefit to the Municipality But transfer too much risk and it may lead unduly increase the cost of capital and/or lead to project failure Project structure largely dictates the risk allocation As the PSP’s control over the project increases, so too does the amount of risk it may be asked to bear (and vice versa)
• Location identified and suitable for intended use (e.g. accessible, properly graded/zoned, utilities) • Land is owned/can reasonably be acquired, free of all encumbrances • Scope/outcomes/outputs are known and measurable (e.g. no. of persons/households served, coverage area) • Technical feasibility: projects of this type have been done before; project uses proven/tested technology • Environmental: e.g. risks to natural resources/protected lands, GHG emissions, resiliency • Social: e.g. resettlement, risks to well-being of users, workers or local population, public opposition Section 3 – Technical Project Concept Assessment Tool Site Concept E&S Key issue: technical options analyses E.g. MRT vs. BRT Early identification and plan/cost to mitigate
Section 4 – Legal Legal / Institutional Framework o What rules apply? − PPP-specific − Infra/sector-specific − Procurement Legal Prerequisites o Identify any/all: − Preparatory requirements − Approvals – local legislative, central gov’t − Licenses and permits (business, construction, environmental, etc.) Contractual Authority o Is the PPP contract enforceable? − Contracting party (e.g. municipality vs. local utility co.) − Signatory (e.g. chief exec.) − Binding long-term (i.e. past term of current chief exec.) o Lender direct agreement allowed? Tariff Authority o Legal and institutional framework for: − Pricing − Collection − Retention/use o Can any/all above be determined by PPP contract and/or delegated to PSP?
Section 5 – Miscellaneous Project Concept Assessment Tool o Is there reason to expect multiple, credible bids from potential PSPs? Similar projects completed locally / regionally / nationally Investor interactions (e.g. market consultations, discussions, known market actors) Public partner creditworthiness, incl. credit enhancement mechanisms (e.g. guarantees) Note possible negative interactions that could undermine open, competitive bidding o Are fiscal / contingent implications foreseeable and manageable? Payments Related and/or contingent activities For brownfield – plan for lost revenue Contingent liabilities (e.g. termination compensation) An obligation “confirmed by occurrence or non-occurrence of uncertain future events” Private Interest Liabilities
Innovative Funding Sources Title of Presentation 29
Funding PPP – Who Pays? 30 4. Consider public support (grants, payments, guarantees) 3. Maximize potential commercial revenues (e.g. advertising) 2. Capture a portion of any land value increase (LVC) 1. Sustainable revenues from direct beneficiaries (e.g. tariffs) Tools Module 16: Harnessing Land Value Capture Module 17: Capturing Commercial Value • Information on maximizing revenues from a PPP project Recall that someone must pay (users, taxpayers) – so allocate cost in the most equitable, sustainable manner possible
Demolishing the existing terminal building and complex and development of a modern state of the art Intercity Bus Terminal. Under operation by a private operator since 2005 after an initial construction period of 2 years with a concession period of 11 years and 5 months. Revenue streams: • Collection of “adda fees” i.e. charges payable by buses for use of terminal facilities, • Revenue from commercial rentals from shops located within Terminal complex • Other sources of revenue - sale of advertising rights, parking fees. Forecast 2000 to 3000 buses / day, actual average of 1,100 normal buses and 600 minibuses a day, about 80-100 buses are parked overnight. Some buses started operating from outside the bus terminal to avoid paying adda fee. Intercity Bus Terminal – Amritsar, India
• Private party finances and installs retrofits, operate and maintain the city’s street-lighting system for 10 years for 20,000 street lights. Total cost $ 4.8 million. IFC supported. • Public authority sets standards and specifications, monitors and verifies performance. • Payments made based on the savings realized - 90% of energy savings realized plus an Operation and Maintenance fee for each light pole • Annual savings to government of $100,000 by way of decreased energy consumption, operation and maintenance costs and emissions savings • The project needs to be large enough to be viable and to realize sufficient savings in energy. • Capacity issues at local level: government, equity investors, service providers and financiers, standardizing documents, process Bhubaneswar Street-lighting, India
• The previous Mandaluyong (Philippines) Public Market was razed by fire in 1991. The lot remained idle, creating congestion, waste and flooding problems. • In the interim the Government allowed the installation of 500 open-air stalls, which caused traffic and sanitation problems. • Public Market would cost Php 100 million, ie annual outlay of more than Php 10 million. The City Government ruled out huge loans. Mandaluyong (Philippines) Public Market
• The developer provided a public market at the ground floor under the control and supervision of the City Government. The City Government in turn leases the building except the Public Market to the developer, including parking, theatres, restaurants, bowling, etc. • The project provides for a Public Market controlled and supervised by the City Government and additional income of 20 Million (instead of debt service of more than 10 million/annum) • Employment through new commercial district • Traffic, flooding, pollution and garbage problems solved. Mandaluyong (Philippines) Public Market
• In 1993, the school was in danger of closure due to an inadequate building and lack of public capital. • The old Oyster Elementary had become so cramped for space that its after-school programs were housed in a converted closet. • The school was to be closed in 1993 due to its poor condition and the lack of public funding to refurbish it. James F. Oyster School, Washington, DC
• Led by concerned parents, a PPP was formed between DC Public Schools and a national real estate development firm. They divided the school property in half to make room for a new school and a new residential development. • The District of Columbia issued a thirty-five-year, USD 11 million tax-exempt bond for the construction costs, to be repaid entirely with the revenue generated by the private apartment building. The private partner agreed to pay USD 804,000 a year for thirtyfive years to repay the bond. The school facilities included a computer lab, library, gym and classrooms designed to accommodate the school’s bilingual programme and office space. James F. Oyster School, Washington, DC
• Central business district heavily congested • Lack of parking, estimated deficit of 10,600 parking spaces, which contributed to widespread illegal parking and an area dangerous for pedestrians Parking Congestion, San Borja and San Isidro, Peru
• Creative use of space: below ground to alleviate congestion while maintaining existing assets (major thoroughfare, public park) • Funded by parking fees (plus lease of retail space in one case), CA includes revenue sharing • 30-year concession for the design, financing, construction, operation, and maintenance of a three-story underground parking area that could accommodate 822 vehicles, built along four blocks, $25m capex Parking Congestion, San Borja and San Isidro, Peru
• The Akaretler Row Houses are a cultural and historic site in Istanbul, originally built in 1875 to provide housing for prominent and high-ranking officials of the Dolmabahce Palace. • The landmark structure was owned by the Turkish Foundations, a national public sector real estate owner, and was subject to strict regulations governing its preservation. Years of efforts to redevelop failed. Akaretler House, Istanbul, Turkey
• PPP with national and local authorities with a private developer. • The private developer undertook to build a mixed- use development containing office and retail spaces, a hotel, single and multifamily units, and parking spaces, in addition to restoring the historic structures. • Government provided real estate and tourism tax incentives, joint marketing effort Arketer House, Istanbul, Turkey
Washington, D.C. needed to refurbish the almost functionally obsolete West End Library and West End Fire Station. Their renovations would be extremely costly. Library and Fire Station, Washington, DC
Source: www.dmped.dc.gov; www.dcclims1.dccouncil.us Image sources: https://alankarchmer.com/ten-arquitectos Washington, D.C. needed to refurbish the almost functionally obsolete West End Library and West End Fire Station, and develop additional, centrally located low cost housing. Their renovations would be extremely costly. D.C. was able to acquire new, modern facilities while also providing affordable housing by leveraging the air rights above the library and fire station. The high-end family sized condominiums provided additional tax revenue. D.C. awarded, through a competitive bid process, a concession to EastBanc WDC Partners. The proposal included US$149 million of investment in a new fire station and library, approximately 150 condominiums, 52 low-cost rental units, and retail space. Financial assistance was provided by D.C. to build affordable units. Library and Fire Station, Washington, DC
Lessons Learned and Project Summaries Project Summaries 98 Projects - Brief Summary - Key Lessons Learned Sectors Countries - Transportation: Multi-modal, Railways, Busses, Airports, Ports, Tunnels and Bridges - Water & Sanitation: Water Supply, Water Treatment, Solid Waste Management - Information and communication Technologies - Public Markets - Food Infrastructure - Public Parking - Government and Judicial Facilities - Sporting, Cultural and Tourism Venues - Energy: Heating Supply, Renewable Energy; Street Lighting - Urban Redevelopment - Affordable Housing - Education - Health Care: Hospitals and Clinical Services Afghanistan Australia Bhutan Brazil Canada China Colombia Croatia Djibouti France Germany Honduras India Indonesia Ireland Italy Kenya Kosovo Mexico Nigeria Palestine Peru Philippines Poland Portugal Romania Russia Singapore South Africa Rep. Korea Spain Tanzania Turkey Uganda United Kingdom United States
Thank you! Jeff Delmon [email protected] Municipal Public-Private Partnerships Framework. www.worldbank.org/ppplrc • Delmon, Jeffrey, Private Sector Investment in Infrastructure: Project Finance, PPP Projects and PPP Programs (4ed., Kluwer International, 2021) • Delmon, Jeffrey, Public Private Partnerships in Infrastructure: An Essential Guide for Policymakers, pp. 200 (2ed, Cambridge University Press, 2017) • Delmon, Jeffrey, Public Private Partnership Programs: Creating a framework for private sector investment in infrastructure (Kluwer International 2014).
PMU-A: Enhancement of National Framework for Partnerships between Public and Private Sectors for City Development Jeff Delmon World Bank September 2022
Municipal PPP Framework • Guidance Note • 20 Modules • 100 Project Summaries www.thegpsc.org www.worldbank.org/ppplrc Page 46 Modules: 1 Municipal Readiness 2 Project Concept Assessment Tool 3 Sample Project Concept Note 4 Feasibility Study 5 Managing Consultants 6 Sample Consultant ToRs 7 Procurement 8 Sample RFQ 9 Sample RfP for Single-Stage Bid Process 10 Sample RfP for Two-Stage Bid Process 11 Sample Municipal PPP Agreement 12 Contract Management 13 Capacity Building 14 Communication Strategy 15 Sector Issues 16 Harnessing Land Value Capture 17 Capturing Commercial Value 18 Community Engagement 19 Private Sector Context 20 Summary Practical Advice for Decision Makers
Bus operations Maintenance, petrol, bus parking Hotel, restaurants, cafes Commercial facilities – warehouses, chillers Transit hub – modes, logistics, efficiency Advertising, residential, office space, parking, entertainment, solar generation Public services – post office, tax office Green space, public facilities What is a Bus Terminal?
• Finance and install solar photovoltaic panels on the rooftops of public buildings and connect to grid. Total cost of $ 9 million for a population served: 12000 • Public Authority provides access to rooftops of public buildings; facilitates Power Purchase Agreement (PPA); monitors performance standards • The local power distributor buys the power according to the PPA and tariff set through bid. • Emissions savings of 6000 tonnes • Multiple agreements needed: rental agreements with residential owners and with public entities; • No standardized documents – for example appropriate rental agreements for renting rooftop space had to be developed from scratch for this project. Gandhinagar Rooftop Solar, India
• Savings to government of $ 6 million due to reduction in wastage and retention of grain quality. • The project needs to be of a size sufficient to ensure coverage of all costs and reasonable returns to the investor over a reasonable period of time without unreasonably increasing the tariff level. • Standard contract document for silos needed. • Financing is difficult to come by even with availability payments. • The project consists of 4 fully equipped silos of 12500 MT each for a total capacity of 50000 MT, to store grain for the government food subsidy operations. • The private party is also responsible for procuring land for the project. • 30 year concession period. Total cost of $ 7 million • The Authority is responsible for making payments based on fixed and variable charges. It is also responsible for setting standards and specifications, monitoring and verification of performance, and contract management. Punjab Grain Silos, India
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