Putting the ASEAN PPP Principles into Practice Towards an ASEAN PPP Agenda ASEAN PPP Networking Forum 16 December 2014 J. Grant Hauber Principal Public-Private Partnership Specialist Southeast Asia Department ASEAN PPP Principles • • • • • • • Policy Clear and predictable framework Competent and well-resourced government PPP agency Align other gov’t processes and policies to assure good PPP implementation Competitive business environment Project Selection and Preparation • Develop a robust project pipeline to high standard • Consult with stakeholders from an early stage • Allocate risks properly • Think through consequences of risks and how to resolve Affordability and Budget Transparency Assure sustainability and affordability of each investment Transparently budget for all costs, including subsidies Take a realistic view of cost recovery from end-users Regional Considerations Develop policy with a view to cross-boarder cooperation in mind Coordinate development with neighbors Acknowledge that there are special conditions to make regional PPP projects work – as well as special benefits • • • PPP projects are being pursued in a confluence of needs Legal Financial Management • • • • • Liabilities: actual and contingent Capital Budgeting Subsidies Foreign Exchange Guarantees Tendering • • • • • • • Environmental Company Law Investment Law Contract Law Regulation, Rules • • Standards Compliance Enviro Social Legal Public Financial Mgt Safeguards PPP Competitive bidding standards Procurement Project Planning & Unsolicited Approvals Sector proposals Contracts Operations Resource Sector Operations • • • • Design standards Regulations, oversight Operations protocol Maintenance and quality requirements Resources • • • • National interests, prioritization, allocation Economy and efficiency Competing needs Scarcity • • • • Standards Compensation Rehabilitation Development Land Land Allocation Social • • • Rights Policies Use planning Planning/Approvals • • • • National and sector development plans Decision processes Efficiency, economy criteria Controls, guidance Ministerial inter-relations: PPP does not stand alone A line ministry may be responsible for project implantation, but there are many interfaces Central F/X Bank Legal Co. Law Investment Incentives BOI For Inv Cmte Revenue Financial Management Debt Mgt Contingent Liabilities Budget Subsidies Evaluation Finance Ministry PPP Project Direct Responsibility Environmental Enviro Social Ministry Land Sector Royalties Ministry Allocation Tendering Resource Sector Operations How is this all coordinated? Planning Ministry DFI Relations Planning/Approvals Ministry Cab Cmte Resources Aid Agencies Cabinet PM/ Pres. How to tackle development with private investment? • A whole-of-government approach is needed for smooth and sustainable implementation of PPPs • Need for exquisite communications… …with private sector …with civil society …and within government! • Create transparent, consistent, predictable, and certain policy • Redefine success: Be realistic and practical • Understand strengths and weaknesses – Fiscally, economically, sector-wise • Top level political support, operated by professionals Project finance lending has changed • Universal challenges – Post-GFC environment has tightened credit criteria – Increased financial sector regulation – Basel II / III capital accords • The remaining project finance lenders have exhibited different characteristics than in the past – – – – Core sectors Select countries Focus on signature deals Following relationship clients • Emergence of local lenders – Stronger countries’ banks – such as in the Philippines – have seen much greater interest in projects – Advantage: knowledge of ground realities, local currency finance Asian project finance volumes are at a trickle… • Emerging countries in Asia accounted for only 19% of Asian project finance lending in 2013 – This represents only 4% of global PF volumes – Vietnam’s 8% in Asia was a single transaction – Indian PF volumes use non-traditional PF structures, thus are have participation from domestic institutions only Source: Project Finance International 2003-2014 …and this really hasn’t changed in a long time Historic project finance volumes in emerging Asia PH M Y ID PNG LAO PH LAO LAO ID PH PH M Y ID ID TH TH ID ID LAO M Y TH PNG ID TH M Y ID TH PH M Y VN M Y ID PH LAO TH Source: Project Finance International 2003-2013 TH TH TH TH VN VN One deal, $5bn How is emerging Asia faring? Emerging Asia PF volumes are falling as a percentage of all Asia project finance lending Percent of Project Finance Market: Rest of Asia vs Global / All of Asia 90% 80% Rest of Asia vs All of Asia 70% 60% 50% 40% 30% Rest of Asia vs Global 20% 10% 0% 2003 2004 2005 2006 2007 2008 Rest of Asia as % of Global Source: Project Finance International 2003-2014 2009 2010 2011 2012 Rest of Asia vs Asia 2013 2014 1H PPP frameworks to the rescue? Public-Private Partnerships have become a driving force in infrastructure development in developing Asia, despite challenges • Inspired by the success of UK PFI and Australian PPPs • Target infrastructure and public service areas of high economic value and potential commercial viability • Seeks to tap the ingenuity and capital of the private sector and the efficiencies it can foster – Improves asset performance – Stretches limited state budgets – Defers ‘financing’ of state assets • Not a panacea – but they can help! – Macro and sector fundamentals are still a driver of success What are the needs? Public Sector Private Sector • Make efficient use of scarce fiscal resources • Deliver value for money from government fiscal commitments • Improve efficiency and sustainability of investments • Achieve delivery of critical public services in a timely fashion • Clear value proposition with risks they are able to directly manage • Clear policies, laws, processes • Clear bid process and realistic project specifications • Clear revenue model • Clear ability to make a profit • Create a sustainable financial investment Efficiency, Performance Clarity, Certainty 11 Global Markets National Focus PPP is the grandest of balancing acts… Government Goals Societal Needs PPP Project Investor Profits Lender Requirements 12 Technical Safeguards PPP Project Inputs Outcomes …Actually, a number of balancing acts Financial / Commercial Legal 13 Keys to success: planning and implementation • Focus on fundamentals – Details are important – technical, commercial, financial, legal, social • Balance risks – Allocate responsibility only to those who have a reasonable chance of being able to handle it • Plan for payments – If affordability is an issue for constituents, explicitly plan and budget for VGF support and subsidies • Do not shortcut process – Establish a process and persevere – ‘Emergency procurement’ or ‘fast track processes’ rarely result in equitable, transparent or sustainable results • Manage expectations – Infrastructure projects take time; early announcements of tendering and completion without delivery will lead to mistrust of the entire system – Communications are key! • Provide certainty – Predictability and longevity are the surest way to best results 14 Realities of project development • PPP must account for all project factors – Technical: Assure project built and operated to high standard – Financial: Revenue is sufficient to recovery capital, pay debt – Commercial: Value proposition attractive for investors over long term – Legal: Contracts are balanced, thorough and enforceable – Safeguards: Protect people and the environment • Risks must be identified and allocated to those able to manage them, backed by solid contracts • Projects take time for public sector to develop and create bid • Must consider commercial and financing elements of project • Projects require inputs from a broad range of professionals • Bidders require sufficient time to assemble their bids • Predictability is important 15 Project Development Funding is key to success To deliver investible projects, governments have benefitted from use of professional support, supported by dedicated project preparatory facilities/funds (PDFs) • What are they? – Dedicated funds specifically meant to pay the costs of professional advisory and consulting services – Government or independently managed for benefit of PPP units – Revolving facilities: • Winning bidder is charged a ‘development fee’ • Fee is recycled back into the PDF to support more projects • What do PDF’s support? – Enhanced project preparation • Technical • Commercial • Legal – Transparent competitive bidding processes – Advisory support from formation through financing What does PDF cover? Comprised of two primary components: – Project Development – analyze, prepare, specify, structure – Transaction Advisory – structure, document, bid, negotiate, close Technical Studies Sustainability Political Facts Desires Technical Fiction Needs Fiscal Reality Social Operating Obligation Performance Surveys Modeling Revenue requirements Industry consultation Technical Specifications Financial Structure/Support Performance Outcomes Concept Project Project Development Screening Formulation Govt Planning Project Structuring Project Development Emphasis: Defining supply/demand, defining performance requirements, created specifications, quantifying business case, studying financial economics, creating revenue model RFQ/RFP Documents Award Project Contracts Negs Finance Transaction Execution Project Financing Transaction Advisory Emphasis: Documenting project requirements in contracts and bidding specifications/criteria, firming up the financial structure and supports, implementing tendering, negotiating, closing Financial Close Dreams PPP – a balance of responsibilities Private Sector Public Sector 1 • Prefeasibility • PPP Scope? • Public linked projects? Identify • Pre-bid opportunity assessment • Form Consortium – SHA 2 Develop 3 Land Acquisition 5 • • • • • • • Prelim design, costing Performance specifications Land requirements • 4 Social / enviro impacts Conference • Financial modeling • Revenue model • Contract formation • • • Obtain land free and clear • ahead of issuing RFP Prepare 6 Retain consultants, counsel Develop approach to project Design and specifications Implementation plan Financial modeling Supplier/contractor tendering Financier approach Develop 7 9 Evaluate 8 Bid Award Negotiate 10 Gov’t Support Monitor 13 Finance 11 Arrange Implement 12 18 Redefine “Success” There are many interim steps on the way to a completed program. These need to be communicated internally and externally to demonstrate the work that went into progress. Each of these can be considered a ‘success point’ Policy • • • • Prioritized investment plan for sector Announce competitive bid strategy – end of ‘MOU era’ Institutional management changes, processes, evolution Sector regulations – Tariff and finances – Performance • Quality of power, reliability • Energy efficiency – Standards • Design • Dispatch Projects • Issue of tender packages – Means work went into prioritization, preparation • • • • • Bid award Financial Close Start of construction Start of operations Annual performance review Use Development Partner TA and loan projects as a means to help accomplish these success points. Link them to an overall ‘story’ of evolution on a path to success ADB supports sustainable PPPs around the region ADB has been supporting development of PPP frameworks, institutions, and support funds across our member countries Framework / Policy Project Devel Fund Risk Management Bangladesh ✔ ✔  Cambodia  India ✔ ✔ ✔   Indonesia  ✔ ✔   Laos   Myanmar   Philippines ✔ ✔ Thailand ✔  Vietnam   Country           ✔ = Advanced Stage  = Currently Developing ADB Assistance to Member Countries on PPP Education Energy Health Transport Airports Water Agri-busi. – Working with 7 ASEAN countries on national PPP frameworks – Organized $100s of millions of Project Development Funding How can ADB help? ADB can provide assistance to both public and private sectors along the project development timeline – and beyond ONE Public Private Regional Departments Private Sector Operations Dept Investment Environment • Policies • Processes • Institutions • Sector Reform • Corporatization • Regulation Project Level Supporting Project Investors • Project Development Funding • Direct Project Lending • Enabling Project Finance − Sovereign loans − Guarantee supports • Commercial Risk Guarantees − 25% of project cost or $250m − 25% of project cost or $400m • Equity ADB complements the universe of capital Financial Close Commence Operations Capital Markets Institutional Investors Private Equity & Infrastructure Funds Mezzanine Capital For For Governments Governments Commercial Lenders (original financing) ADB Loans Commercial Lenders (take-out financing) ADB guarantees EXIMs, Multilateral/Bilateral Development Agencies TA RFP Respondent Equity Investment RFP Respondent Development Spend PDF Government Agency Early-stage 22 Mid-stage Late-stage Project Development Lifecycle For Projects TA = Technical Assistance PDF = Project Development Facilities (for Govts) Formula for success in PPP • Upfront quality – Project selection – Project preparation • Honesty to one’s self – What is the true fiscal and operational realities of your sector? Your finances? – Would I put my own money into this? • Making it happen – Select only technically and financially qualified parties – Reasonable and appropriate time for bid preparation – Transparent and objective tendering • Assuring it delivers – Monitor construction and testing – Enforce contractual performance • Patience! Thank you J. Grant Hauber Principal Public-Private Partnership Specialist Southeast Asia Department T: +632 683 1707 E: ghauber@adb.org Countries are not all viewed the same by investors • In general we have seen strengthening of credit quality in almost all markets over the past two years • Credit default swaps have tightened to reflect ratings Country Rating CDS (S&P / Moody’s) (bps, 10-yr) Not Rated n/a Cambodia B / B2 - Indonesia BB+ / Baa3 200 Lao PDR Not Rated n/a Malaysia A- / A3 138 Myanmar Not Rated n/a Philippines BBB / Baa3 140 Singapore AAA / Aaa - Thailand BBB+ / Baa1 140 Vietnam BB- / B1 250 Brunei