Alternate Models For

Alternate Models ForPublic Private Partnership(PPP)Submitted by :Devina Yadav (2013ITES009)Pooja Dwivedi(2013ITES016)Submitted to:Dr. Gyan PrakashWhat Is PPP?Public Private PartnershipAdopted internationally across Europe and worldwideA public-private partnership is a contractual agreement between public and private sector partners, allows more private sector participation than is traditional. Many forms of a partnership between public and private sectors depending on the political environment, the nature of the assets and the level of private sector participation.

PPP Model Benefits Disadvantages1).Bring in private capital and make projects affordable2). Budgetary certainty and avoiding soft budgetary constraint3). Whole life costing and synergies of integration of DBF and M4). Maximise use of private sector skills5). Public sector only pays when services delivered 6).Quality of service has to be maintained7).Accountability8). Ensures that assets are properly maintained 9).Strong Customer Service orientation

1).Long term relatively inflexible structures2). Procurement delays and high procurement costs3). Loss of management control by the public sector4).Private sector has higher cost of finance5). Does not achieve absolute risk transfer6). Requires public sector capacity and skills that may not be available7). Potential for negative public reaction to profit and controlSerial No.Models1.Conventional Procurement2.Public Delivery Organisation3.Alliancing4.Hybrid PPP5.Joint Ventures6.Concessions7.Scottish Hub Initiative8.Not For Profit Distribution (NPD) Model9.The Scottish Futures Trust (SFT)10.Regulated Asset Base (RAB)Conventional Procurement

Conventional procurement accounts for 90% of UK infrastructure spending. However, those looking for new models rarely mean we should resort to conventional procurement, although it is underpinned by a series of standard contracts, is well understood across public and private sectors, is easier to procure and has absorbed many of the lessons of PFI (hence its use in the BSF programme).SIPs (systematic investment plan) exist at present in the LIFT (local implementation financial trust) and Local Education Partnership environment and were evolving wider remits before the Coalition came to power. They are arrangements between the public and private sectors to address a series of infrastructure projects over time. However, they are underpinned either by PFI or conventional procurement as the means of investment and therefore do not represent a new infrastructure model at all (whatever their other merits).

Public Delivery OrganisationUnder this approach, a public body procures a public delivery organisation (the integrator) to manage the procurement of underlying assets and services and integrate them to provide a service to the public body. However, like the SIP, it is a procurement model not an infrastructure model and unlike the SIP there are few live examples.AlliancingAn alliancing approach involves two or more parties who share risks and rewards to enable the successful delivery of joint objectives, (Infrastructure Procurement: delivering long term value).Unlike most other PPP models, risk is generally retained by the public sector.Hybrid PPP

Hybrid PPP is less a distinct model than a willingness to move away from the rigour of SoPC4 and the previously narrow Treasury approach to PFI risk transfer. Hybrid PPP is a model, which shares the characteristics of some of the other approaches but where there are some new features,for examplenew sources of funding. Of all the models, Hybrid PPP would appear to offer the greatest potential for development into a varied menu of infrastructure choices. Indeed, what Osborne is now offering appears to be simply a type of hybrid PPP. However, let us be under no illusion. The structure will only work if there is either a public sector income stream or the asset is free standing and affordable based on user charges (like toll roads or bridges).Hybrid PPP With many PFI projects coming on to the governments balance sheet this might be considered an attractive approach, particularly if it can successfully distance itself from classic PFI. Elements could include:shorter contract terms;milestone payments;less equity;government guarantees;new sources of finance including unwrapped bonds and pension funds; anda move away from no service, no fee.Joint VenturesJoint ventures cover a multitude of relationships. There is of course nothing new about such joint ventures. However, the fate of the Wider Markets Initiative would seem to indicate that this is unlikely to be a panacea. Local Asset Backed Vehicles (LABVs) are particularly in vogue but it seems unlikely that this model will be applicable everywhere.ConcessionsTheNational Infrastructure Plan 2011states that the Government will actively explore the use of concession models such as the concession to run High Speed 1 which was sold recently. However, for concessions to work they either need a revenue stream from users or a government underwritten revenue stream like PFI. The government is looking at a concession for the A14 which is likely to look rather similar to the M6 Toll Road, which of course has a PFI structure.Scottish Hub InitiativeThe Hub initiative was set up by the Scottish Executive in 2006 following the success of the Building Schools for the Future (BSF) and the NHS Local Improvement Finance Trust (LIFT) programmes. The Hub initiative was developed in conjunction with Partnerships UK. The objectives of the initiative include:The provision of enhanced local services by increasing the scale of jointservice delivery between community planning partners across Scotland.The delivery of a sustained programme of investment through the development of long-term strategic partnerships between local authorities. To establish more efficient and sustainable investment for the public sector.The ability to share learning between the public and private sectors to improve procurement strategy.The delivery vehicle for this type of procurement is the local hub company and was designed to operate in much the same way as the Local Education Partnership (LEP) or LIFT company; forming partnerships between local authorities, Partnerships UK and private investors. Unlike the BSF and NHS LIFT initiatives in England, the proposed hub initiative was not intended to be specialized to deliver projects in a particular sector e.g. NHS or education. Instead, it was hoped that the hub model would be flexible to meet needs of the community, which would choose from a range of contracting routes dependent on the characteristics of the project in hand. Scottish Hub InitiativeThese contract types include:Lease plus Agreements: these types of contracts leave the sole responsibility for design, construction, insurance, repair and maintenance of the asset in question to one landlord, to whom a rent is paid for services, leaving the user with a fully maintained hassle free facility. This type of agreement is somewhat similar to the Design, Build, Finance and Operate (DBFO) model. Conventional Design and Build Contracts: this type of contract may offer the most VFM in some projects e.g. refurbishment projects.

Scottish Hub InitiativeNot For Profit Distribution (NPD) ModelThe NPD model was introduced with the objective of addressing political concerns over PFI/PPP procurement. One of the key features is the reinvestment of any surpluses back to the community, for example via charity. Instead of distributing dividends the Board of Directors of the Special Purpose Vehicle (SPV) donate any surpluses to the charity.NPD was designed to be a variant existing model which built on knowledge and experience in existing PFI/PPP structures and makes use of standardized documentation.The partnership required amongst equity players in the SPV is intended to improve stakeholder acceptability and participation. The NPD model has been applied on a few projects in the education and health sectors in Scotland (Cuthbert and Cuthbert, 2008).Whilst there are completed deals, a number of existing PFI/PPP market participants have concerns which require to be addressed before taking part in NPD type projects.These include: The barring of profit distribution and limitation of equity upside to the private sector contractor reduces the incentive for the contractor to beat performance targets. There is clear evidence that some contractors are choosing not to bid for such contracts due to these limitations.Not For Profit Distribution (NPD) ModelThe governance structure utilized in the NPD structure involves public sector representation on the Board of the SPV. The dilution of control is potentially problematic to private sector funders who may ultimately bear the financial risks created by the Boards decisions.The NPD structure suggests a reluctance to allow the private sector to use refinancing as a method of extracting financial return. Refinancing arguably is a necessity within an efficient capital structure, and should be recognized as such by public sector project sponsors. The refinancing clauses already in place in standard documentation allow for any gain to be shared with the public sector.Not For Profit Distribution (NPD) ModelThe Scottish Futures Trust (SFT)The SFT was developed as an alternative mechanism for channelling public and private capital into infrastructure investment programmes and projects in Scotland. The SFT is expected to be a private limited company that is representative of Scottish public interest, supporting delivery of national and local infrastructure plans. It is a company that will run on non-profit distributing (NPD) principles, obtaining its funding through bonds and other various commercial financing instruments (at a lower rate than the borrowing rate for PFI schemes). Much like the PFI/PPP schemes, the SFT plan on undertaking the following range of functions: Provision of assets and services to public authorities in Scotland. Provision of private finance to those who provide public services.The development of a centre of expertise for best practice, advice and supportfor public authorities for the planning and delivery of these projects.Provision of a forum for public and private sector engagement.

The Scottish Futures Trust (SFT)

structure of the Scottish Futures Trust; Source: scottish Government (2008)The suggested benefits include (Scottish Government, 2008):Substantial savings per annum (estimated to 100-150 million) of tax payers money, which could be better invested in the countrys capital infrastructure and services. The provision of a centre of expertise for advice and support to the public sector with regards to the delivery of projects.The provision of lower cost of funding for projects than the current PFI/PPP models.The provision of greater additionality for public service facilities in infrastructure through private investment Investment in infrastructure through the SFT to benefit future generations and not burden them. This is on the basis that all assets will be owned by the public sector and taxpayers and not just leased from a private consortium.Regulated Asset Base

The utilities and rail sectors, unlike social infrastructure, have been generally financed by means of a regulated asset base (RAB). The RAB for a specific utility comprises all assets at the point of privatisation together with all capital expenditure since then which is protected by a duty on the relevant regulator to finance the functions of the business including the RAB through adjustments to user charges. There has been a lot of pressure over the last few years to extend the RAB model beyond the utilities and rail sector, given it enables development at a lower cost of capital. However, theNational Infrastructure Plan 2011now rules this out even for the strategic roads network where it appears to be something of a no-brainer (if it was done in a cost-neutral manner). The Cook Report, A fresh start for the Strategic Road Network, published in November 2011, while pointing to a more detached relationship between the Highways Agency and the Department for Transport, is consistent with this position and shies away from radical conclusions as far as funding is concerned. Dieter Helm, the leading advocate of the RAB concept, will be disappointed.

The RAB(Regulated Asset Base) ModelOne crucial difference between the RAB model and PPPs is that the former requires the presence of an independent regulator which, under directives from the government, seeks to ensure that companies act in a socially optimal wayUnder the RAB model, investors are allowed to earn revenues which cover three elements.An allowance for the depreciation of the RAB over time, calculated according to established regulatory techniques (i.e, a return of capital invested). Depreciation is calculated with reference to asset lives and can be straight line, front-loaded or backloaded according to the preference for the recovery of sunk costs over time. The choice of depreciation profile is NPV-neutral, but can be altered to reflect the allocation of risk between the company and customers, inter-generational equity, and efficient capacity utilisation.A return to investors based on the value of the RAB (i.e, a return on capital invested). This has typically been calculated by multiplying the RAB by a weighted average cost of capital (WACC) (i.e, an average of the cost of equity and the cost of debt). The WACC is intended to reflect the opportunity cost of the investments made by the investor.The forecast level of operating expenditure (OPEX) associated with the day-to-day operation of the network. These are compensated on a pay-as-you-go basis.

The RAB (Regulated Asset Base) Model

The Regulated Asset Base ModelReferenceAlternative ways of financing infrastructure investment Potential for novel financing models Discussion Paper No. 2012-7 Prepared for the Roundtable on: Public Private Partnerships for Funding Transport Infrastructure: Sources of Funding, Managing Risk and Optimism Bias (27-28 September 2012) Oxera Consulting Ltd Andrew Meaney and Peter Hope Oxford, United Kingdom,OECD/ITF September 2012.Wamuziri, S (2010) Alternative models for procurement of major infrastructure projects in Scotland.In: Egbu, C. (Ed) Procs 26th Annual ARCOM Conference, 6-8 September 2010, Leeds, UK, Association of Researchers in Construction Management, 1009-1018.Thank You