public private partnerships (ppp) and affordable housing by david hoicka

Public Private Partnerships (PPP)

and

Affordable Housing

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PPP Project Expenses

Maintain & Earn"The Long Tail"

Cost

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Review of PPP as a £60 billion, $90 billion industry

and its application to Affordable Housing

Presentation prepared by

David Hoicka

Copyright © David Hoicka 2007

UK Stanhope PFI

Contents

1. What is PPP and Project Finance 3

2. PPP experience in the United Kingdom 12

3. PPP possibilities in other countries 21

4. How to set up a PPP: Practical Steps 24

2 Public Private Partnerships and Affordable Housing, by David Hoicka

1. What is PPP and Project Finance

History Of PPP & Project Finance

“Most people think of project finance as a relatively new phenomenon, yet its

history can be traced back hundreds if not thousands of years.”

Harvard Business School


PPP 700 Years Ago

When: 1299 (700 years ago) earliest recorded Public

Private Partnership

Who: English Crown and Florentine merchant bank

Frescobaldi

What: Finance exploration & development of silver

mine in Devon England

Payment: As much silver as Florentine Bank could

mine during one year.

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Public Private Partnerships and Affordable Housing, by David Hoicka

How PPP Works

Public Private

Partnership (PPP)

finances building and

long-term maintenance

with private

contractors

Compare: Some

procurements are

one-time purchase,

with use or sale.

Maintenance is not

included.

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Cost

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Non-Maintenance Project Expenses

Use Up or Sell"Maintenance Not Included"

Cost

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6 Public Private Partnerships and

Affordable Housing, by David Hoicka

Why PPP?

PPP satisfies a need for off-budget finance

Need:

Government Minister wants to build schools & hospitals

Schools & hospitals are built, then maintained for years

no budget available, cannot borrow

Response:

PPP Off Budget Finance – lower government public debt, usually does

not affect government bond rating

“Rent to Own” – similarities to equipment lease

“Buy Now, Pay Later” – future years & governments pay

Use private skills and efficiencies, usually higher price

Transfer some Risks to Private Companies for a fee

(but Government retains ultimate risk)

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PPP Examples

PPP works best to build and maintain Long-Term Assets

Long-Term Projects: school, hospital, sewage treatment plant, bridge, gov’t office building

Long-Term Maintenance: Includes: Hard maintenance – repair roofs, windows etc

Excludes: Soft maintenance – janitorial

Project Finance:

Payments spread over many years

Non-Recourse, Off-Budget

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PPP Project Risks

In theory, many risks are transferred to the private contractor.

Government ultimately has risk of failure or non-performance.

Some General PPP Risks:

Bankruptcy of Contractor

Poor quality work

Increased costs: (a) initially, and (b) over contract term

Cash Flow: PPP is technically “off-budget”. However, PPP

payments have to be paid. This leads to future cash flow and

budget payment constraints for government agency

Scope Changes: PPP is usually a long-term contract, sometimes 30

years. Needs can change, requiring changes in scope partway

through contract.

Financial Market Changes: interest rates, exchange rates

Staff changes: (a) in government, and (b) in contractor


Housing PPP Learning Curve

Housing PPP has its own special issues: Advisor Knowledge. Some concerns have been expressed about

the level of advisers' understanding of housing issues. Financial and Legal Advisers need sufficient and appropriate housing as well as PPP expertise. [UK Office of Deputy Prime Minister, & Dept of Communities]

Different Skills Needed. All parties involved in Housing PPPs have had varying degrees of involvement in PPP schemes in other markets. While this has been helpful in many respects, the fact that everyone is bringing their understandings and expectations from different sectors can sometimes create as many problems as it solves. [UK Office of Deputy Prime Minister]

Not easy to translate concepts. Many assumed that it would be easy to translate the PPP concept to housing and that PPP schemes would be easier to complete than has been the case. [UK Office of Deputy Prime Minister]


Housing PPP Project Risks

Housing PPP Risks: Costs. Greatly increased costs, in some cases up to 2 to

3 times the original estimate. [UK Office of Deputy Prime Minister]

Bidders. Number of potential bidders in the market for Housing PPPs may be shrinking.

Credit. Credit risk profile for housing PFIs varies considerably from that of other PFIs. Market participants must gain a clear understanding of the risks of housing PFIs and how best to mitigate them within the structure of the project [Standard & Poor‟s]

Vandalism, misuse, excessive wear & tear


2. PPP experience in the

United Kingdom

£60 Billion

$90 Billion

PPP in the UK – a History

• Privatization Margaret Thatcher

• Private Finance Initiative (PFI) John Major

• Public Private Partnership (PPP) Tony Blair

Private Finance/PPP has now grown to £60 Billion ($90 Billion) in the UK


Housing is 2.1% of £60 Billion UK PPPs

Source: HM Treasury and Partnerships UK Data through 2007

UK PPP CategoryCapital Value

(£, millions)

Value (BD,

millions)

%

Value

#

Projects

Transportation 20,181 15,136 33.4% 18

Hospitals & Community Health 12,069 9,052 19.9% 13

Schools 8,523 6,392 14.1% 34

Roads & Bridges 3,299 2,474 5.5% 267

Offices 2,905 2,179 4.8% 20

IT Infrastructure & Software 2,868 2,151 4.7% 74

Military Buildings 2,322 1,742 3.8% 14

Waste Management 1,535 1,151 2.5% 36

Equipment 1,457 1,093 2.4% 33

Housing 1,269 951 2.1% 16

Water & Sewage Treatment 960 720 1.6% 15

Police & Fire 717 537 1.2% 27

Street Lighting 588 441 1.0% 208

Prisons & Detention Centres 564 423 0.9% 19

Telecom 530 397 0.9% 8

Courts, Libraries & Museums 406 305 0.7% 18

Recreation 199 149 0.3% 20

Energy 113 85 0.2% 16

Grand Total 60,503 45,377 100.0% 856


Only 5% of UK PPP Social Housing Units

are Home Ownership

Rentals95%

Home Ownership

5%

Rentals Home Ownership

19,612 951

95% 5%

UK PPP Social Housing Units

Source: HM Treasury and Partnerships UK Data through 2007


PPP Housing 5+ Years to Start

The average time from start of design until contract signing, is more than 5 years. Round 2 is slower than Round 1.

About 20,000 units are scheduled to be mostly refurbished under UK‟s Round 1 and Round 2 PFI/PPP.

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London Borough of Lewisham

Ashford Borough Council

Manchester City Council

Oldham Metropolitan Borough …

London Borough of Islington

London Borough of Camden

Sandwell Metropolitan Borough …

London Borough of Newham

Leeds City Council

Reading Borough Council

Manchester City Council

London Borough of Islington

PPP Housing: Years until Contract Signing

Round 1 5.2 Years Avg.

Round 26 Yr Avg


UK Housing PPP – Manchester

Plymouth Grove Remodelled Estate

• 436 homes demolished

• 663 refurbished rentals

• 660 new homes for sale

• „Green Route‟ thru town

• 3 neighbourhood parks

• new village centre, with shops, community facilities

• £37 million subsidy

• 3.8 years to sign contract


UK Housing PPP – Stanhope

Stanhope Regenerated Housing Estate

• 410 homes demolished

• 312 refurbished rentals

• 144 new homes for sale

• playgrounds, footpaths and landscaping

• new commercial centre, with shops, community facilities, library

• £26.7 million subsidy

• 6.2 years to sign contract


UK Transportation PPP – London Tube

London Underground

“Infraco” Contracts £450m extra cost of private

debt over public bonds

5 years to sign contracts

2 separate maintenance and renewal contacts for 30 years

£15.7 billion present value, pricing review every 7½ years

PPP Costs: £90 million success fees, £275m bidders costs paid to winning bidders, £180m costs to govt.

18 to 20% returns to Infracos, premium over normal to attract private management


Other PPPs in UK

Infrastructure: airport terminal, bridges, highways, power

stations, waste to energy, wastewater treatment plants,

tram/light rail, 19 street lighting contracts

Health: new or renovate 188 hospitals & 48 clinics

Schools: 208 schools at all levels

Community: Police, fire stations, prisons, courts, libraries,

museums, government offices, sports facilities

Equipment: Medical CT and MRI Scanning System, Linear

Accelerator; Ro-Ro Ferries, Military Aircraft and

Helicopters


3. PPP possibilities in other

countries

PPPs for other countries

There are many possible PPPs for other countries which follow the PPP financial structure building and maintaining Long-Term Assets:

Power Plants, Desalination Plants, STPs. Al Ezzel independent power project, July 2004. Suez-Tractebel and

Gulf Investment Corporation. BNP Paribas (financial adviser), Freshfields Bruckhaus Deringer (legal adviser), and Mott MacDonald (technical adviser).

Hidd Power Company, January 2006. Consortium of International Power, Sumitomo Corporation and Suez-Tractebel, $600m direct loan from the Japan Bank for International Co-operation. Same advisors.

Airport Terminal, Railway Station

Bridges, Causeways, Roads, Streetlights & Signs

Hospitals, schools, libraries, government offices

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PPPs for

Public Works and Housing

Many projects match the PPP financial profile, building

and maintaining Long-Term Assets

Sewage Treatment Plant (STP) and Network

Power Plants, Water Desalination Plants

District Cooling Plant (DCP)

Bridges, Roads, Streetlights & Signs

Schools, hospitals, clinics, government buildings

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4. How to set up a PPP:

Practical Steps

Preparing a PPP

There are several steps to prepare a PPP

1. Research and prepare Outline Business Case

2. Select Financial, Legal, Technical Advisors

3. Business Plan and Financing Model

4. Prepare PPP Structure and Documents

5. Prequalification and Tender of Contractors

6. Compare estimates with actual

7. Contract Negotiations and Contract Signing

8. PPP Supervision over time


Cost of PPP Advisors

Project bureaucracy is costly for local authorities. Set up costs of £2 million were charged from PPP Programs. Legal costs can be huge as a number lawyers are involved - acting for the local authority, bidders and funders.

London Housing

Preparing a 30-year PPP contract is costly for both authorities and bidders. Generally even in todays more settled UK PPP Market, which is infinitely more mature and experienced, procuring authorities can expect to spend at a minimum £250,000 on external advisers for even the most simple of schemes. I would generally expect the successful bidder to spend about double what the public sector spends.

UK Office of Deputy Prime Minister, & UK Department of Communities


Governmental PPP Offices

Many international governments have established PPP

Advisory Offices (similar to PMO Project Management

Offices), to assist PPP organization, e.g.

UK – Partnerships UK, HM Treasury

British Columbia, Canada

Victoria, Australia

Korea

Portugal

South Africa (“scant impact on infrastructure deals”)

Philippines (“some success”)

Jamaica (“little success”)

Bangladesh (“little success”)

Source: World Bank Report on PPP in Infrastructure Around the World, September 2007


PPP Size and Financial Structure The UK Treasury has determined that PPP funded projects need to be large

enough in capital value to ensure that the transaction costs of procurement are not disproportionately large. All UK PPPs must now be larger than £20m ($30m).

The chart shows that most PPP project funding is bank debt. Bond finance

appears only the largest transactions. Corporate finance is only appropriate

for the smallest projects.

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PPP Funding Sources

Bond FundingCorporate FundingBank Funding

# Projects


PPP Participants and Advisors

This next section lists current major

PPP participants and advisors:

1. Equity Capital Investors

2. Project Bank Lenders

3. Financial Advisors

4. Legal Advisors

5. Technical Advisors

6. Construction Contractors


PPP Equity Capital Investors This chart shows the top ten initial equity investors in UK PPP project companies

between 2004 and 2007.

The chart is ordered in terms of the total capital value (£m) of the projects in which

they are involved, multiplied by the proportion of the equity contributed by each

investor. The Capital Value shown is the total project capital value, not the amount of

each investor‟s actual cash investment.

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Barclays (10)AMEC (2)

Bilfinger Berger (5)HSBC (3)

Bank of Scotland (12)Balfour Beatty (5)

Skanska (3)RBS (7)

Equion/John Laing (8)Innisfree (12)

Leveraged PPP Capital Value(£ millions)

Equity Investors (# Projects)


PPP Project Bank Lenders

This chart details the top ten UK PPP lenders between 2004

and 2007 to bank-financed projects.

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Lloyds TSB (3)

Barclays (13)

Bank of Ireland (7)

EIB (5)

DEPFRA (6)

NIB Capital (13)

Dexia (16)

RBS (9)

SMBC (13)

Bank of Scotland (17)

Bank Lenders (# Projects) PPP Project Capital Value(£ millions)


PPP Financial Advisors This chart details the top ten UK PPP financial advisors over last 3 years.

The most active advisor has been PricewaterhouseCoopers, followed by the

other members of the “Big Four” and also Grant Thornton and with Robson

Rhodes in sixth position. The advisors listed in positions seven to ten are

investment banks or boutique advisory firms.

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Robson Rhodes (15)

Abros (6)

Quayle Munro (11)

Macquarie (6)

Ernst & Young (20)

Investec (4)

Grant Thornton (25)

Deloitte (26)

KPMG (22)

Price W Cooper (52)

Financial Advisors (# Projects) PPP Project Capital Value(£ millions)


PPP Legal Advisors

The following chart details the top ten UK PPP legal advisors. It shows that the largest law firms are largely absent from the PPP market now, although they are present on some of the larger transactions.

0 500 1,000 1,500 2,000 2,500

Nabarro Nathan. (10)

Wragg and Co. (8)

Eversheds (15)

Bevan Brittan (17)

Denton Wilde (9)

Dundas & Wilson (8)

Shepherd & W. (11)

CMS Cameron (7)

Addleshaw G. (21)

Pinsent Masons (26)

Legal Advisors (# Projects) PPP Project Capital Value(£ millions)


PPP Technical Advisors

This chart details the top ten UK PPP technical advisors between 2004 and 2007.

In general, fee rates for technical advisors are a little lower than for legal and

financial advisors.

0 500 1,000 1,500 2,000 2,500

Appleyards Cons. (4)

Gleeds (9)

Currie & Brown (10)

WS Atkins (6)

Faithful & Gould (9)

EC Harris (15)

Davis Langdon (7)

Cyril Sweett (12)

Turner & Towns. (17)

Mott Macdonald (19)

Technical Advisors (# Projects) PPP Project Capital Value(£ millions)


PPP Construction Contractors

The following chart details the top ten UK PPP construction contractors . These ten

contractors cover projects with a total capital value of £8.1bn, being 63% of the total

available UK PPP market data. Therefore, just over a third of projects have

construction contractors outside the top ten.

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Interserve (5)

Costain (5)

Taylor Woodrow (1)

Laing O'Rourke (4)

KBR (1)

Bovis (3)

AMEC (6)

Skanska (4)

Balfour Beatty (11)

Carillion (13)

Construction Co. (# Projects) PPP Project Capital Value(£ millions)


public private partnerships (ppp) and affordable housing by david hoicka

Real Estate

deputy prime

partnerships

ppp project

project finance

david hoicka

total capital

uk office

streetlights