Public Private Partnerships (PPP) and Affordable Housing Review of PPP as a £60 billion, $90 billion industry and its application to Affordable Housing Presentation prepared by David Hoicka
12 Cost
PPP Project Expenses
10 8
Prepare Build
6
Maintain & Earn "The Long Tail"
4 2 0
UK Stanhope PFI
1
2
3
4
5
6
7
8
9
10
Copyright © David Hoicka 2007
11
12 Years
Contents 1. 2. 3.
4.
2
What is PPP and Project Finance PPP experience in the United Kingdom PPP possibilities in other countries How to set up a PPP: Practical Steps
3 12 21 24
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
4
Public Private Partnerships and Affordable Housing, by David Hoicka
PPP 700 Years Ago
5
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.
Public Private Partnerships and Affordable Housing, by David Hoicka
How PPP Works 12 Cost
PPP Project Expenses
ď ˝
10 8
Prepare Build
6
Maintain & Earn "The Long Tail"
4 2 0 1
12 Cost
2
3
4
5
6
7
8
9
10
11
12 Years
Non-Maintenance Project Expenses
10 8
Prepare Build
6
Use Up or Sell "Maintenance Not Included"
4 2 0
6 1
2
3
4
5
6
7
8
9
10
11
12 Years
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. 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:
7
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) Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Examples 12 Cost
PPP Project Expenses
10 8
Prepare Build
6
Maintain & Earn "The Long Tail"
4 2 0 1
2
3
4
5
6
7
8
9
10
11
12 Years
PPP works best to build and maintain Long-Term Assets Long-Term Projects:
Long-Term Maintenance:
8
school, hospital, sewage treatment plant, bridge, gov’t office building Includes: Hard maintenance – repair roofs, windows etc Excludes: Soft maintenance – janitorial
Project Finance: Payments spread over many years Non-Recourse, Off-Budget Public Private Partnerships and Affordable Housing, by David Hoicka
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:
9
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 Public Private Partnerships and Affordable Housing, by David Hoicka
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] 10
Public Private Partnerships and Affordable Housing, by David Hoicka
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 11
Public Private Partnerships and Affordable Housing, by David Hoicka
2. PPP experience in the United Kingdom
ÂŁ60 Billion $90 Billion
PPP in the UK – a History
Margaret Thatcher
• Privatization
John Major
• Private Finance Initiative (PFI)
Tony Blair
• Public Private Partnership (PPP)
Private Finance/PPP has now grown to £60 Billion ($90 Billion) in the UK 13
Public Private Partnerships and Affordable Housing, by David Hoicka
Housing is 2.1% of £60 Billion UK PPPs UK PPP Category Transportation Hospitals & Community Health Schools Roads & Bridges Offices IT Infrastructure & Software Military Buildings Waste Management Equipment Housing Water & Sewage Treatment Police & Fire Street Lighting Prisons & Detention Centres Telecom Courts, Libraries & Museums Recreation Energy Grand Total
Capital Value Value (BD, (£, millions) millions) 20,181 15,136 12,069 9,052 8,523 6,392 3,299 2,474 2,905 2,179 2,868 2,151 2,322 1,742 1,535 1,151 1,457 1,093 1,269 951 960 720 717 537 588 441 564 423 530 397 406 305 199 149 113 85 60,503 45,377
% # Value Projects 33.4% 18 19.9% 13 14.1% 34 5.5% 267 4.8% 20 4.7% 74 3.8% 14 2.5% 36 2.4% 33 2.1% 16 1.6% 15 1.2% 27 1.0% 208 0.9% 19 0.9% 8 0.7% 18 0.3% 20 0.2% 16 100.0% 856
Source: HM Treasury and Partnerships UK Data through 2007
14
Public Private Partnerships and Affordable Housing, by David Hoicka
Only 5% of UK PPP Social Housing Units are Home Ownership Rentals 95%
Home Ownership 5%
UK PPP Social Housing Units Rentals
Home Ownership
19,612 95%
951 5%
Source: HM Treasury and Partnerships UK Data through 2007 15
Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Housing 5+ Years to Start PPP Housing: Years until Contract Signing Round 1 5.2 Years Avg.
London Borough of Islington Manchester City Council Reading Borough Council Leeds City Council London Borough of Newham Sandwell Metropolitan Borough… London Borough of Camden London Borough of Islington Oldham Metropolitan Borough… Manchester City Council Ashford Borough Council London Borough of Lewisham 0.0
16
Round 2 6 Yr Avg
1.0
2.0
3.0
4.0
5.0
6.0
7.0
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. Public Private Partnerships and Affordable Housing, by David Hoicka
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 • • • • • •
17
Public Private Partnerships and Affordable Housing, by David Hoicka
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 • • • •
18
Public Private Partnerships and Affordable Housing, by David Hoicka
UK Transportation PPP – London Tube London Underground “Infraco” Contracts
19
£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
Public Private Partnerships and Affordable Housing, by David Hoicka
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 20
Public Private Partnerships and Affordable Housing, by David Hoicka
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.
22
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 Public Private Partnerships and Affordable Housing, by David Hoicka
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
23
Public Private Partnerships and Affordable Housing, by David Hoicka
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 25
Public Private Partnerships and Affordable Housing, by David Hoicka
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
26
Public Private Partnerships and Affordable Housing, by David Hoicka
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 27
Public Private Partnerships and Affordable Housing, by David Hoicka
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. # Projects 50
40 30
20
PPP Funding Sources Bond Funding Corporate Funding Bank Funding
10 0
28
Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Participants and Advisors This next section lists current major PPP participants and advisors: 1. 2. 3. 4. 5. 6.
29
Equity Capital Investors Project Bank Lenders Financial Advisors Legal Advisors Technical Advisors Construction Contractors
Public Private Partnerships and Affordable Housing, by David Hoicka
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. Equity Investors (# Projects) Leveraged PPP Capital Value (£ millions) Innisfree (12) Equion/John Laing (8) RBS (7) Skanska (3) Balfour Beatty (5) Bank of Scotland (12) HSBC (3) Bilfinger Berger (5) AMEC (2) Barclays (10) 30
0
200
400
600
800
1,000
1,200
Public Private Partnerships and Affordable Housing, by David Hoicka
PPP Project Bank Lenders This chart details the top ten UK PPP lenders between 2004 and 2007 to bank-financed projects. PPP Project Capital Value (ÂŁ millions)
Bank Lenders (# Projects)
Bank of Scotland (17) SMBC (13) RBS (9) Dexia (16) NIB Capital (13) DEPFRA (6) EIB (5) Bank of Ireland (7) Barclays (13) Lloyds TSB (3) 0
31
200
400
600
800
1,000 1,200 1,400
Public Private Partnerships and Affordable Housing, by David Hoicka
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. Financial Advisors (# Projects)
PPP Project Capital Value (£ millions)
Price W Cooper (52) KPMG (22) Deloitte (26) Grant Thornton (25) Investec (4) Ernst & Young (20) Macquarie (6) Quayle Munro (11) Abros (6) Robson Rhodes (15) 32
0
500
1,000
1,500
2,000
2,500
Public Private Partnerships and Affordable Housing, by David Hoicka
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. Legal Advisors (# Projects)
PPP Project Capital Value (ÂŁ millions)
Pinsent Masons (26) Addleshaw G. (21) CMS Cameron (7) Shepherd & W. (11) Dundas & Wilson (8) Denton Wilde (9) Bevan Brittan (17) Eversheds (15) Wragg and Co. (8) Nabarro Nathan. (10) 0
33
500
1,000
1,500
2,000
2,500
Public Private Partnerships and Affordable Housing, by David Hoicka
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. Technical Advisors (# Projects)
PPP Project Capital Value (ÂŁ millions)
Mott Macdonald (19) Turner & Towns. (17) Cyril Sweett (12) Davis Langdon (7) EC Harris (15) Faithful & Gould (9) WS Atkins (6) Currie & Brown (10) Gleeds (9) Appleyards Cons. (4) 0
34
500
1,000
1,500
2,000
2,500
Public Private Partnerships and Affordable Housing, by David Hoicka
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 ÂŁ8.1bn, being 63% of the total available UK PPP market data. Therefore, just over a third of projects have construction contractors outside the top ten. PPP Project Capital Value (ÂŁ millions)
Construction Co. (# Projects)
Carillion (13) Balfour Beatty (11) Skanska (4) AMEC (6) Bovis (3) KBR (1) Laing O'Rourke (4) Taylor Woodrow (1) Costain (5) Interserve (5) 0
35
200
400
600
800 1,000 1,200 1,400 1,600
Public Private Partnerships and Affordable Housing, by David Hoicka