TRANSACTION ADVISORY SERVICES PPP ADVISORY Social Service Partnerships

TRANSACTION ADVISORY SERVICES PPP ADVISORY Social Service Partnerships Availability PPPs in Emerging Markets Alistair SAWERS, PPP Advisory, Ernst & Young Project Finance 1

Overview § § 2 Introduction Theory: Social Service PPPs & Availability Payments » Description & Uses » Structures & Risk allocation » Limitations Practice: Bajío Hospital PPS Project » Outline » Success Factors Conclusion: Pitfalls from Other Transactions

Introduction § § Personal Experience UK PPP Market » Funder: First Project Financed PPP –Fazakerley Prison » Investor: UCL Hospital refinancing » Advisor: University of Hertfordshire, UK Met Office § Emerging Market PPPs » Eastern Europe » Latin America 3

Theory Social Service PPPs & Availability Payments 4

Defining Public Private Partnerships § PPP has a different meaning outside the US » Usual form of procurement is Design Build » Many services are “contracted-out” § International use of “PPP” or PFI is primarily » Design Build Finance Operate [& Maintain] (DBFO) » Concession structure » Availability & Performance Payments § Social Service PPPs rarely have market risk 5

What are Social Service PPPs? § Healthcare » Acute Hospitals » Specialist Units » Community Clinics § Education » Universities » Schools § Judicial » Courts and police stations » Prisons and youth detention centers § Others 6

Evolution of Social Service PPPs § Universal use of UK model § Focus on output specifications § Focus on building “provision” » No volume or market risk » Hard (Facilities) Maintenance included » Soft service inclusion varies § User services rarely included » Clinical, teaching, policing rarely included » Guarding, cooking, laundry and some training included 7

Utilization of Social Service PPPs ? = currently being studied = Failed and withdrawn Please note the data is not exhaustive and new projects are being launched all the time Source: E&Y data, Infra. News Project News Database as at Sept 12 th 2006 8

What are the objectives? § § 9 Cost minimization Ensuring value for money Risk transfer Ensuring adequate incentives

How are the objectives achieved? § Concession contract § Availability Payments § Performance mechanisms – Points towards operator replacement – Points towards overall concession termination – Monetary deductions § Volume payments (rare) 10

Issues for Availability Payments § Payment mechanism » » Incentives Complexity Underlying cost of funds Appropriations “risk” § Affordability § Evaluation methodology » Measuring value for money » Shadow bid / Public Sector Comparator » Valuing risk transfer 11

Typical Risks Transferred § Construction » Design » Completion » Funding § Operation » Performance § Managing land sales/ development of vacated sites § Risks taken by party best placed to manage/mitigate § What does that mean in practice? 12

What are the Limitations? § § § § Complexity of payment mechanism Appetite for Risk Financeabilityof risks in addition to country risk Financial strength of potential operators Affordability Transaction Costs / Minimum deal size Legal Framework » Napoleonic code v Precedent based » Property rights 13

Practice Bajío Hospital PPS Project 14

Bajío Hospital PPS § Location: City of Leon, Guanajuato § Capacity: 184 beds » 40 for paediatrics » 144 for adults § § Size: 24, 000 sq meters Capital Investment: USD 47. 5 m Coverage: 5, 000 inhabitants Medical Specialties Unit: » » 15 hemodialysis, short stay surgery rehabilitation oncology services

Bajio Concession § § 25 Year Concession operation § Acciona Hospital Services selected $47. 5 m Capital Investment § 4 Bidders Domestic and $12. 3 m pa payment International Timeline » » 16 Tender announced Mar 2005 Awarded 9 th Dec 2005 Construction 11 months Completion Feb 2007

Political Support § Political Champion » Led by Ministry of Finance » Set up Investment Unit (PPS Taskforce) § PPS legislation » Support from Partnerships UK » Issued March 2003, revised April 2004 § Additional Rules & Guidelines » 2 business case reviews (Outline & final) 17

Stakeholder Support § Consensus building » Institutional Revolutionary Party (PRI) and National Action Party (PAN) support PPS § Existing profile of Concessions » Initial toll road concessions in 90 s failed » Highway PPS launched concurrently § Quick wins to launch process » Strategy to launch 3 pathfinder projects » Pick largest projects 18

Procurement Process § Planning » Strategic PPS Plan » Existing regional plan & overall national upgrade plan § Selection of credible advisors » Legal: White & Case » Technical: Currie & Brown » Financial: Ernst & Young § Marketing and building profile of transaction » Presenting to bidding community » Conferences 19

Selection Process § Open and transparent process » Lowest NPV of payments » Acceptance of Contract terms § Clear evaluation criteria » Developed from business case § Flexibility in bids versus difficulty of evaluation » Chose easy evaluation – simple contract § Lowest price v best value for money 20

Payment Mechanism § Description » Key performance indicators » Deductions » Penalty points § Issue of clarity/complexity § Practicality of on-going monitoring 21

Impediments to Process § Union/ stakeholder perception » Party of the Democratic Revolution – some opposition » Local bureaucratic resistance § Transaction cost/ complexity » Affordability problem with smaller University PPS project § Medical equipment -5 yrs » Interface/ training » Maintenance/ replacement § Termination Payment 22

Conclusion Pitfalls from less successful transactions 23

Pitfalls § Transferring risks which are hard to manage » Refurbishment of existing assets » Volatile Land values » Multi-site projects – availability of sites » Volume risk § Soft services and Union agreements § Clinical Services § Unnecessary Complexity 24