1 challenges with the fundings of ppps when it comes to infrastructures: what lessons can be learned...
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Challenges with the fundings of PPPs when it comes to infrastructures:
What lessons can be learned in the caseof major projects funded outside
the government budget?
ACPAU/CAUBOMontreal, June 2006
Andrée De Serres, LL.L, MBA, Ph.D.Professor
Département Stratégie des affairesDirector, MBA program for finance executives
ESG UQAM
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Contact Information
Me Andrée De Serres, LL.L, M.B.A., Ph.D.,Professor
École des sciences de gestionUniversité du Québec à Montréal
Director, MBA program for finance executives315 Ste-Catherine East, Suite R-3555
Montreal QCH2X 3X2
Tel.: (514) 987-3000 Local 1966E-mail: [email protected]
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Introduction
Traditional Mode and PPPsEvolution of modes in the undertaking of public infrastructures
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New Context
Early 1980s : economic situation conducive to questioning the role and the involvement of the government
Debt reduction objectives First wave of reactions from the
governments Withdrawal from certain sectors of
activities Sales of assets Sales of stocks
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Second wave of reactions: to find different solutions to new capital needs
In developing new organisational models to provide public services
Objectives To transfer fincancial risks to the
private sector To transfer the debt to the private
sector To improve the quality of services
with the help of the private sector’s expertise
Alternative mode assuming and delivering the public infrastructures and services (©De Serres, 2004)
Monopole gouvernemental
Par choix ou par absence de marché privé
Entreprises du secteur privé
Modes hybrides
Sous-traitanceConcession (PPP)
ImpartitionLicence
Mise en valeur de la propriété
intellectuelle
Marché non réglementé
Marché réglementé
PPP/PFI
Co-entreprise
En régie directe
Agence Société de la Couronne
Gestion déléguée
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PPP Contracts: Risk and Funding Transfer
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Management Mode Influence And Project Funding
Evolution Funding Risk Management Sectors of activities
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Funding a new project within the limits of an organisation’s budget (©De Serres, 1999)
Gouvernement et agent public : Prise en charge et maîtrise
d’ouvrage de tous les projets
Bilan : actifs et passifsde l’ensemble des projets
Financement par prêt
Analyse de la contribution du projet à la rentabilité générale de
l’emprunteur
Demande de capitaux
Opportunité de développementAjout d’un nouveau projet intégré
au bilan et prise en charge financière
Financement par taxes, impôts et autres
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"Off Balance Sheet" Project Funding (©De Serres, 1999)
Opportunité Promoteur
Projet
Financement par fonds propres
Structuration d’une entité légale
conçue spécifiquement
à cette fin
Financement par dette
Subventions gouvernementales
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Hallmarks
Project funded inside the government budget ("in balance sheet") Perfect control but risk taking
Project undertaken by an external legal entity but under the control of the sponsor, therefore consolidated
Off balance sheet project = Lost of control: joint-venture = Risk transfer designed specifically for
that purpose = Risk transfer to the creditor
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Financial Strategy Project funding in or off balance sheet
See: Business corporate funding vs project funding
Impacts of the strategic option On the qualification of the project On the funding sources On the type of financial package
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Table: Payment of Fees by The Users (©De Serres, 1999)
Concédant :L'autorité publique accorde
la concession de service public
Concessionnaire : entité légale, privée ou publique, responsable de
l’investissement nécessaire
Usagers : paiement d’une redevance au concessionnaire
pour le droit d’usage
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Les concessions en France
In a public rule of law system favoring a special status for building and civil industry (BCI)
Concession or factoring contracts On public works with user’s fees at the central,
departmental or municipal government levels, etc Often conceded to semi-public companies
Water & sewage systems Turnpike roads
Precedents: Concession in France
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Precedents: Implementations in France
Extended right to departments, municipalities and communes in 1986
Several projects: EuroDisney Undergroung connexion between Paris
Metro and Orly Airport: Orlyval (1993) Tunnel Prado Carenage in Marseilles (1993) Toulouse Metro (1994) Boulevard Périphérique Nord, Lyon (1994) Normandie Bridge France Stadium etc.
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A PPP contract with a lease payment by the government or its agent (©De Serres, 2005)
Concédant : l'autorité publique accorde la concession de service public
Concessionnaire / LocateurEntité privée ou publique ou mixte
Usagers : accès selon les conditions prévues par les politique sen vigueur
Contrat de PPP Contrat de bail
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Precedents In United Kingdom
PPP +: concessions and other possible agreements Private Finance Initiative (PFI) program since 1996
Gouvernment = customer Criterium: Value for money
Excellence program in public facilities building Joined-up Services Program
Adding a private mode service to an operating public organisation
Best Value Code of Practices on Workforce Matters Program
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PPP/ PFI / P4
The Private Finance Initiative (PFI) is a form of PPP but is also, principally, a form of contracting or procurement (PPPP), the hallmarks of which are:
a long term service contract between a public sector body and a private sector ‘operator’
the provision of capital assets and associated services by the operator
a single ‘unitary’ payment from the local authority which covers investment and services the integration of design, building, financing and operation in the operator’s proposals
the allocation of risk to the party best able to manage and price it
service delivery against performance standards set out in an ‘output specification’
performance related ‘payment mechanism’ an ‘off balance sheet treatment’ for the local authority so that
any investment delivered through the project does not count against borrowing consents
support from central government delivered through what are known as ‘PFI credits’
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PFI in United Kingdom: 600 New Infrastructures Since 1996
40 hospitals, 200 schools Prisons, military facilities Drinking water systems, water treatment, etc. Public transportation
London Underground Lodging, social housing and services Police stations (UK) Fire department stations (UK) Arenas, stadiums and other sport facilites
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Precedents in Canada
Highway 407 in Toronto Fredericton/Moncton Highway Highway 104 in Nova-Scotia Confederation Bridge, PEI, (a success due to a yearly
indexible 42 millions $ federal subsidies)
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Confederation Bridge (Prince-Edward Island) 1997
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Fields of Activity in Canada Online public services Drinking water and sewage systems
management Roads and bridges Hospitals Education
Schools Universities
Prisons Energy Public transportation Etc.
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Projects Under Negociation in Québec
Highways 25 and 30 Mega-hospitals Residential and long-term care
centers Montreal Symphony Orchestra
Concert Hall Etc.
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Delegation of Authorities
Nature of delegated authorities Property of assets Delegation of project management
Impact on the rules Contract procurement Governance Accountability Funding sources
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From the Delegated Authorities What can be conceded ?
Delegatus non potest delegare We can only delegate the authorities we hold
Authorities that can be delegated in as much as the law permits Design Funding Construction Operation
During the initial period On a long term
Maintenance
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Types of Contracts Concession or factoring contracts in the French or
Continental European public law Equivalent terminology of contracts in the British law:
Construction-Conception-Financement-Exploitation or Design, Build, Finance, Operate (D.B.F.O. )
Construction-Conception-Financement-Exploitation-Entretien or Design-Build-Finance-Operate-Maintain (DBFOM)
Construction-propriété-opération-transfert or Build-Own-Operate-Transfer (B.O.O.T)
Lemurs variations: Build, Operate, Transfer (B.O.T.) Build, Own, Operate (B.O.O.) Etc.
Table: Merging of transactions according to phases of activities (©De Serres, 1999)
Soumission (Première partie de
la phase de conception)
Approbation du choix des entrepreneurs
Concession de la maîtrise d’ouvrage
Contrat(s) de maîtrise d’œuvre(Deuxième partie de la phase de conception)
Approbation du choix des entrepreneurs
Phase de construction Phase d’exploitation
Contrats de fourniture et d’équipement
Contrats deconstruction
Contratd’exploitation
Contrat de maintenance
Appel d’offres
Condédent
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Ownership of Assets
Owned by governments or public agents Types of contracts
Lease or other renting contracts Delegated management contract Service or factoring contract Building contracts
Design-Bid-Build (DBB) Design-Build (DB)
Building contracts with risk sharing Construction Manager at Risk (CMR) Design-Build-Operate-Maintain (DBOM)
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Ownership of Assets Tranferred to Private
PPP Concession PPP PFI Impartition Sale and cession to private (Privatisation)
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Have objectives been met?
Financial risk transfer Financial debt transfer Cost control Cost savings
Governance and accountability Government accountability Improvement of services
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Financial Risk Transfer
Private funding leverage effect How many projects with true authority
delegation and financial responsibilty?
The futur of the off balance sheet funding with new commonly accepted accounting principles
Processing of Special Purpose Entity
The auditor general’s opinion Is he/she going to deal as off balance sheet
the debt engaged in a PPP?
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Cost control and financial risk transfer Are there financial risk transfers, building risks,
operation risks? Assessing long term impacts Financial risk transfer
Quid if undertaker is financially strapped Has the financial risk really been transferred? In case of bankruptcy, public funds will have to be
reinvested What if the private enterprise does not respect the
terms of the contract? If it faces financial problems? If it is sold or if it disposes of its contract? If the activities are a threat to the safety of the
population?
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Cost Savings
Is there a real cost sabving in PPPs or PFIs? Interest costs and debt are higher than government
loans Transaction costs are higher
According to studies made by Malette Firm, Résidence Saint-Charles in Quebec City, with 132 beds, would cost $56,6 millions in PPP mode and $42,2 millions in traditional mode
Their incomes are taxable They have to generate a rent for their shareholders
or sponsors
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Limitations of the risk transfer
PPP mode and off balance sheet project funding Allow to limit the impacts of bad risks In as much as there is profit sharing
For the governement Remains accountable for the unforeseen risks
and major exceptional risks Remains responsible for public interest stakes
Limitations of PPPs as optimal mode in certain sectors
Modes in taking charge of public services (©De Serres, 1999)
Monopole gouvernemental
Choix politique ou par absence de marché
Marché règlementé ou non réglementé
Secteur privé
Modes hybrides
incluant les PPP
Prise en charge : agent public
Prise en charge : secteur privé et/ou secteur public
et/ou secteur de l’économie sociale
Prise en charge :
secteur privé
Règles de gouvernance, de reddition de comptes, d’appel d’offre et de financement du
secteur public
Quelles règles ?
Règles de gouvernance, de reddition de comptes, d’appel d’offre et de
financement du secteur privé
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Governance and accountability
Public project management and public sector regulations Assuming a project inside the government
budget Project management and the public sector Open tendering rules and contract
procurement Public finance regulations Accounting principles Accountability Audit Types of contracts
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Have the other objectives been met? Improvement of services
How to measure it? Governance and accountability
Authority transfer in contract procurement Access to documents Control agency Retrieval right
Loss of power on territory management
Government accountability Technology and knowledge transfer
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Conclusion: impacts and reflexions
Complex issue with serious social and economic impacts
Deserves further thought to determine an effective and sustainable political intervention We should not blindly imitate what has been done
elsewhere in another era Several projects already have a history whose we can
assess the success or the failure Sustainable development and intergenerational
transfer First of all, we should avoid mortgaging the future of the
coming generations in transferring them our irreversible choices and the financial load associated with them
New ways adapted to our society have to be explored
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Conclusion: the advantages of the project-based funding mode
Exploiting knowledge and efficiency of the project-based funding mode Risk identification and management
methods Fragmentation in activity phases Demerging and remerging of risks
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Conclusion : the advantages of the partnership organisational mode Governance and partnership
Explore and take advantage of the partnership organisational mode An efficient organisational mode for complex
projects The partnership mode as a new production line Key element Transform potentially conflictual relations into
partnerships New organisational mode as a source of
strategic value creation
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Conclusion: Avenues of Thought for The Government
Partnerships of all types Public-private Partnerships
Allowing economies of scale in breaking the cultural isolation between ministries and various public entities
Favoring a winner’s culture Public/nfpo Partnerships
Partnerships with community businesses and social economy organisations
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Partnerships of all types (cont.)
Partnerships with public entities Semi-public company
Partnerships involving public entity employees To integrate employees and unions in the
organisational structures
Alternative modes of taking charge of and delivering public infrastructures and services (©De Serres, 2004)
Monopole gouvernemental
Par choix ou par absence de marché privé
Entreprises du secteur privé
Modes hybrides
Avec une entité publique
Avec un OBNL
Avec une entité privée
Sous-traitanceConcession (PPP)
ImpartitionLicence
Mise en valeur de la propriété
intellectuelle
Marché non réglementé
Marché réglementé
PPP/PFI
Co-entreprise
Avec une société d’économie mixte
En régie directe
Agence Société de la Couronne
Gestion déléguée
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Conclusion Change in the role of the government
Control & regulation Major needs in terms of training Major needs in terms of tools
Importance to gain civil society support when public good is concerned on the long term