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Saudi mega transport and infrastructure projects
1. Saudi Mega Transport and Infrastructure Projects
18 September 2013
Social Infrastructure sector- Regional best practices
involving the private sector in PPPs, BOT or Outsourcing
2. Confidential – All Rights Reserved – Ernst & Young 2013
Contents
Section Page
1 Public Private Partnerships Principles 2
2 Different Delivery Models 5
3 Public Private Partnership Principles
4 Affordable & Social Housing Sector 8
5 The Educational Sector 9
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4. Confidential – All Rights Reserved – Ernst & Young 2013
Background
The need for social infrastructure is in continuous increase
► Fast growing nations in the middle east
► Awareness of social needs increased after the Arab Spring
Need to optimize the social accommodation supply
► Limited budgets
► To avoid unnecessary costs in the procurement and operations of the social accommodation
► Not enough housing to meet either the existing populations requirements or the expanding population growth.
► The pressing need is for affordable housing for mid to low income Saudis.
► The cost and responsibility of primary infrastructure development.
The new trend of achieving the most form the private sector expertise
► Creativity
► Enhanced experience/credentials in the sector
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2 Different Delivery Models
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Examples of Different Delivery Models
► We have set out below a short commentary on commonly used delivery
models that are used for developing major Infrastructure Projects:
Design-Bid-Build (DBB)
Design-Build (DB)
Public-Private Partnerships (PPP)
► Design-Bid-Build (DBB): traditional model, which is the most commonly used
delivery model
► Design-Build (DB): could be considered as an innovative option which is being
increasingly used
► Public-private Partnership (PPP): considered as an innovative procurement
option and is also becoming more widely used, it may include both models
involving demand risk transfer to the service provider and can include or
exclude the provision of external financing
Key characteristics of DBB model:
► Separate contracts for design and construction
► Contractor selection usually based entirely on the lowest cost
► Design documents are 100% complete in advance of the construction contract tender
Key characteristics of DB model:
► Single contract for design and construction
► Contractor selection based on technical merit and price
► Schedule allowing for overlapping design and construction
► Contractor expected to provide a lump sum fixed price and to commit to delivery schedule
Key characteristics of PPP (DBFOM) model:
► Single contract for design, construction, financing and operation & maintenance
► Risks are assigned based on each party able to manage them
► Contractor responsible for life-cycle cost optimization of the asset
► Private finance can (if required) be provided in form of equity and debt
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Benefits of Different Delivery Models
Category Characteristics DBB D&B PPP
Schedule Shortest Schedule
Delivery Schedule Certainty
Cost Cost Certainty
Lowest Tender Price
Early Cost Estimates
Whole Life Efficiency
Quality High Quality Assets
High Quality Service for users
Sustainability Overall sustainability of project
Partnership Delivering Innovation
Dealing with technical complexities
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PPP: Potential benefits
Public Private Partnerships could be used be used to help resolve the issues of:
► Attracting private sector interest in mid to low income housing;
► Innovation and quality of design and construction of new housing; and
► Attracting long term private finance into the sector.
PPP’s provide good value for money when there is:
► Major capital investment program (efficiencies of scale savings)
► Private sector has knowledge and expertise to deliver services
► Requirements/services can be specified as ‘outputs’
► Facilities and services can be costed (whole life basis)
► Procurement costs are not disproportionate
► Technology is not susceptible to fast-paced change
► Incentives for the private sector to perform can be established
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3 Public Private Partnership Principles
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Public Private Partnership Defined
PPP are “legal agreements” between government and private sector
entities for the purpose of providing public infrastructure,
community facilities, and related services.
Typically the partners share risk, reward and responsibility – for a
shared investment
(Not all Projects are suitable to be delivered as PPP, Partners could be public sector or
not-for-profit and PPP are only one of the tools in the tool box)
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Typical PPP Project’s Structure
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The Government
The Concession
Agreement
Project Co.
(SPV)
Lenders
(Debt)
Shareholders
(Equity)
Design & Construction
Operations &
Maintenance
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The Concession Agreement
► The output specification sets the service outputs required. Moreover the assets
Handover Requirements specify the asset condition at the end of concession term
prior to handing over the asset back to the Government.
► The payment mechanism determines how the Government will remunerate the SPV,
balancing positive and negative financial incentives to meet the output specification
and the performance region based on clear prescribed KPIs along with agreed
performance threshold levels.
► Contractual remedies in the form of warning notices, step-in and termination rights
underpin incentives to perform.
Output specification &
Handover Requirements
Performance regime
Payment mechanism
Performance
Contractual remedy
Main Elements of the Concession
Agreement
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Risk Type Mitigation
Pre-completion ▶ Cost over-runs
▶ Delays
a) Fixed price turnkey contracts
b) Warranties/penalties/incentives
c) Fixed project specification
d) Strong contractors
Post-completion ▶ Revenue forecasts
▶ Revenue build-up
▶ Operating costs
▶ Management failure
a) Committed supply contracts
b) Committed off-take contracts
c) Strong operators
d) Performance guarantees
Technical ▶ Performance
▶ Environmental
▶ Safety
a) Warranties
b) Proven technologies
c) Public consultation and approval
Financial ▶ Structure: debt//equity ratio, e.g. 75/25
▶ Structure: return on capital
▶ Structure: risk/reward ratio
▶ Foreign exchange
▶ Debt service cover ratio
▶ Taxation
a) Equitable ROE (e.g. 15-20%)
b) Acceptable cover ratios (e.g. 1.5-2.0)
c) Escrow reserve accounts
d) Dividend constraints
e) Loan syndication
f) Insurance/financial derivatives
g) Standby funding arrangements
Legal ▶ Regulatory framework
▶ Concession law
a) Experienced lawyers
b) Clear, simple documents
Political ▶ Regime stability
▶ Force majeure
▶ Political intervention
a) Clear regulatory regime
b) Investment insurance
c) IFI support
Sample Public Private Partnership Risk Matrix
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Typical PPP Cost and Revenue Profile
16TimeOverruns
Estimated Running Cost
Running Cost Overruns
Cost
Overruns
Estimated
Capital
Cost
Construction
Phase
Operation &
Maintenance Phase
Conventional public
Procurement
0 5 10 15 20
Payments
Payment based on usage
Payment based on availability
No payments
until
facilities
ready
Construction
Phase
Operations & Maintenance
Phase
PPP procurement
0 5 10 15 20
Payments
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Potential Benefits of Public Private Partnership
► Improving financial risk sharing since risks are negotiated to rest with the party who is
best to manage them.
► Facilitating and incentivizing project implementation on time and within budget.
► Optimizing capital, infrastructure services and maintenance expenditure over project life.
► Make the cost of services more visible.
► Allow government agency to focus on functions where it has a comparative advantage (i.e.
Policy, guidelines and oversight).
► Using innovative design, operation and financing structures.
► Improving management of operational risks, thereby reducing risk provisioning costs
► Allowing for synergies between participating organizations.
► Improved timeliness and adherence to specifications in delivery of infrastructure and related
services.
► Improved quality in delivery of post-construction services.
► Improving the reach of infrastructure facilities
► Access and securing specialized skills & technology that may not be available in public
sector.
► Facilitate the deployment of more public facilities by the private sector.
► Address infrastructure and service gaps more quickly than under traditional public
procurement.
► Provide for a predictable assets and service quality levels at end of contract period, through
handover specifications.
Improved Service Levels
Reduced Costs (Value for Money)
PPPs: An Effective and Efficient Service Delivery Model
Public Private Partnerships could be used be used to help resolve the issues of:
► Attracting private sector interest in mid to low income housing, develop education programs and assets, and providing third party finance;
► Quality of design and construction.
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4 Affordable & Social Housing Sector
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Common challenges in the Affordable Housing sector
Supply Demand
Priceincrease
Affordabilitydecline
Housing & Planning laws
not in place
Some uncertainty of land
ownership
Private Land not being
developed for housing Speculative land holding
Housing finance not readily
accessible to all households
Finance not as readily available
to residential developers
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What is the Government and Private Sector’s role?
Private Sector needs to bring:
► Innovative Construction Solutions.
► Efficiencies of Delivery.
► Deliver real homes in vibrant neighborhoods.
► Develop unique identities and facilitate social integration.
► Integrate whole life considerations into design.
► Design Energy Efficiency into Housing Units.
► Financing solutions (including PPP, BOT).
► Financially strong and proven sponsors and developers.
► Experienced operators and maintainers.
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What is the Government and Private Sector’s role?
Private sector support.
► Government to partner with private sector to increase the provision of infrastructure and housing versus the land ready for development.
► Instruments to encourage the private sector to invest include PPP’s BOT’s etc.
► Government – A facilitator, creating the right legal and regulatory framework to facilitate private sector and charity involvement, a commissioner of services.
► Private Sector – Assume the responsibility of providing housing stemming from the expansion and development of financial investment and construction markets.
► Charities – In cooperation with both Government and Private Sector create new support mechanisms for those who cannot access the market via the private
sector.
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5 The Educational Sector
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HighlyCentralizedDecisionMaking
TraditionalPublicEducationSystems
ResourcesdonotFlowtoEducation
improvements
Allocation of students to schools is state controlled
Top down control over curriculum & resources
Inspection focuses on compliance rather than performance
Teacher’s creativity is discouraged
Curriculum updates based on rigid schedule
State provided educational material and resources
State assigned teachers and principals
Little authority given to school admin to influence school performance
Resources primarily used to support large number of staff
Salary increments to unqualified teachers consume budget increases
Old deteriorating school infrastructure
Overcrowded classrooms
Lack of professional development for teachers
Lack of advanced technologies and communication facilities
Lowqualityeducationwithhighresourcedrainage
PrivateSectorParticipationinPublicEducation
ImprovedResourceUtilizationHigherAutonomyinDecisionMaking
Improved training and development systems
Improved classroom availability
Provision of advanced technologies
Salary increments are performance and qualification based
School manages allocation of resources to maximize benefit
Improved infrastructure
More authority given to school admin to enable competition
School provided material and resources
School management’s involvement in teachers recruitment & selection
Curriculum updates based on priority needs and global developments
Encourages innovative teaching techniques
Schools’ management involvement on curriculum setting
Periodical performance measurement for school and students
Parental choice of schools (Encourages competition among schools)
ImprovedEducationqualityandresourceutilization
Traditional Systems vs. Private Participation
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Contracting Form Description Examples
Management contracts Government contracts with private sector to manage an existing public service/set of services using public
infrastructure. Staff are employed by the public sector.
► Contract schools, United States
► PPPs for public schools management, Abu Dhabi
► Independent schools, Qatar
Operational contracts Government contracts with a private provider to manage an existing public service/set of services using
public infrastructure. Staff are employed by the private sector.
► Contract schools, United States
► Colegios en Concesión (Concession Schools), Colombia
► Fe y Alegría, Latin America/Spain
Service delivery
Contract / Vouchers - Subsidies
Government contracts with the private sector to deliver a specified service/set of services using private
infrastructure. Vouchers are common delivery tools this model
► Government Sponsorship of Students in Private Schools, Côte d’Ivoire
► Alternative Education, New Zealand
► Educational Service Contracting, Philippines
Auxiliary/professional
Services contracts/ Affiliations
arrangements /
Non core services
Auxiliary / professional services: Government contracts with the private sector to undertake education-related
functions such as school review, schooling improvement or curriculum development.
Non core services: Private sector provision of services such as student transportation, catering, student dorms,
facilities cleaning, Information technology infrastructure etc
► Contracting out Local Education Authority functions, United Kingdom
► Pitágoras Network of Schools, South America
► Sabis Network of Schools, Middle East/Europe/North America
Infrastructure provision
contracts
Government contracts with the private sector for the provision of educational infrastructure. Contracts can
involve finance, design, construct, and long term maintenance
► Private Finance Initiative, United Kingdom
► New Schools’ Project, Australia
► Public–Private Partnerships (P3) for Educational Infrastructure, Canada
► Offenbach and Cologne Schools Projects, Germany
► Montaigne Lyceum, Netherlands
Models and International Examples of PPPs in Education
Hybrids of the above models are used to produce ultimate solutions that fit local contexts
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Contact Us
Abraham Akkawi
Head of Infrastructure & PPP Advisory Services – Middle East
Ernst & Young
Phone: + 971 2 417 4556
Mobile (UAE) : + 971 50441 8830
Email - abraham.akkawi@ae.ey.com
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