2 2 Case Studies of PSC VFM NW

#2.
2 Case Studies of PSC & VfM Analysis
by Ned White Institute for Public-Private Partnerships May 11, 2010

VfM, PSC & PPP Risk Analysis, May 10-21, 2010 1
Session Overview:
1. 2. 3. 4. 5. Constructing the PSC Model The Risk-Adjusted PSC Model The PPP Reference Model The Value for Money Test Background on Case Study: Partnerships Victoria, Australia & Berwick Hospital PPP
VfM, PSC & PPP Risk Analysis, May 10-21, 2010
I. Constructing the PSC Model

1. Provide a Technical Definition of the Project
Define project in terms of outputs What maintenance levels are required?
2. Calculate the Projects Direct Costs

Costs must be based on the most recent, similar public sector projects costs Capital Costs Maintenance Costs Operating Costs Other Costs (Affirmative Action, Empowerment, etc.)
3. Calculate Indirect Costs (Pub. Institutions O-head)

Management time, personnel costs, accounting & billing, legal, rent, communications & other indirect costs
I. Constructing the PSC Model

4. Calculate any Revenues
Users pay for all or part of the service Unitary fees from public sector Public sectors assets are used to generate revenue Other sources of revenue
5. Explain all assumptions used in construction of the model

Inflation (use nominal values for easy comparisons) Discount Rate (Same as Risk-Adjusted Cost of Cap. For Govt. or Treasury Bond Yield) Depreciation (PSC uses cash flow, exclude non-cash deprec.) Treatment of Assets Available Budgets & Expenditure Plans
6. Construct the PSC Model and describe its results

PSC present projects as discounted cash flows
PSC Presentation as a Discounted Cash Flow

Net Present Value NPV
Initial Investment Initial Investment (Negative) 1 1 Sum of 2 Cash 3 Flows Discounted 4 5
6-10
10
Positive Cash Flows
Year Initial Investment Revenues Operating Costs Operating Cash Flow Total Cash Flows
0 -100
10
52 -40 12 -100 12
55 -41 14 14
58 -42 16 16
61 -43 18 18
64 -44 20 20
67 -45 22 22
70 -46 24 24
73 -47 26 26
76 -48 28 28
79 -49 30 30
-120 -100 -80
Total Cash Flows: 10 Year Infrastructure Project with a 1 Year Construction Period
Cash Flow $
-60 -40 -20 0 20 40 Years 0 1 2 3 4 5 6 7 8 9 10
Year Total Cash Flows Sum of Discounted Cash Flows (Net Present Value) $110.00 $96.38 $84.02 $72.80 $62.59 $53.30 $44.84 $37.12 $30.07 $23.63 $17.74 $12.36 $7.42 $2.90 ($1.25) ($5.06) ($8.55) ($11.76) ($14.72) ($17.43) ($19.93) 13.69%
10
-100
12
14
16
18
20
22
24
26
28
30
Net Present Value at Varying Discount Rates $120.00 $100.00 $80.00

Net Present Value
Discount Rate 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0% IRR
$60.00 $40.00 $20.00 $0.00 0% ($20.00) ($40.00) Discount Rates (NOTE: NPV = 0 when Discount Rate = 13.69%)
Sum of Discounted Cash Flows (Net Present Value)
2%
4%
6%
8%
10% 12% 14% 16% 18% 20%
II. The Risk-Adjusted PSC Model:

1. Identify the risks
Best done by holding workshops of Govt. contracting agency, PFI transaction adivsor & PFI Central Unit Use existing risk identification matrixes Include all risks, even if they are not quantifiable Include risks associated objectives like affirmative action, empowerment, etc.
2. Identify the impacts of each risk

Effect (increase in costs, reduced revenues, delays, etc.) Timing (whether earlier or later in projects life) Type Severity of the consequence (break it down to sub-risks)
3. Estimate the likelihood of each risk occurring

Assumptions about risks should be reasonable & fully documented Subjective estimations of probability Statistical risk measures (Monte Carlo simulations & multiple, simultaneous risks)

4. Estimate the cost of each risk
Risks should be costed as separte cash-flow items to allow better understanding of the costs of each risk, and how to allocate & mitigate them Multiply each risk cost by its risk probability Assess timing of each risk Cost the sub-risk for each period of the projects term Use nominal cash flow for each risk to show its present value
5. Identify strategies for mitigating risks

Change the circumstances in which the risk can occur Provide insurance against the risk Identify the costs of mitigating each risk
6. Allocate risks
For a RA-PSC model, all risks will be kept by public sector For PPP Reference model allocate risks to party best able to manage & control each risk Value for Money: Retain risks when they increase VFM

7. Construct the risk matrix
Can use existing risk matrices as guidelines Should include all risks identified at Step #1, even risks retained by public sector
8. Construct the Risk-Adjusted PSC Model:

Risk-Adjusted PSC = Base PSC + Risk
9. Preliminary analysis to test affordability

Make sure that the project is still affordable based on the PSC. If not, it may need to be restructured or de-scoped
10
III. The PPP Reference Model

A hypothetical private party bid to deliver the same specified outputs Is there a realistic opportunity for Value for Money benefits from PFI? (ie. A whole-life, riskadjusted PFI price < whole-life risk-adjusted PSC price) 1. Confirm the type of PFI/PPP Contract
Performance of a state institutional function (DBOT) Commercial use of state assets (concessions)
2. Describe PFI project structure & sources of funding

Private debt, private equity, public supports Returns to sources of funding & ratios

3. Develop core components of payment mechanism
The proposed amount of the unitary payments Whether splitting of payments (fixed + variable) Minimum performance standards & KPIs Incentives & penalities for good performance in payment structure
4.
Set and cost affirmative action & empowerment targets

Provide Affirmative Action/Empowerment Scorecard for project Estimate costs of each affirmative action/empowerment target
5.
Calculate & consolidate all costs

Identify opportunities for private sector to provide efficiencies:

Innovative designs Innovative construction Operational efficiencies
Estimate the private sectors cost of capital (higher)


6. Construct the PPP reference model & explain all assumptions
Just like the PSC model, PPP Reference Model is a discounted cash flow model PPP reference model should rely on the same assumptions as PSC on inflation, discount rates, taxes, VAT, depreciation, residual value, etc. Provide narrative explanation of the models design, construction, and key indicators/results The private sector will price the risks allocated to it through its bid prices. Risks that are still retained by the public sector (because the public sector can manage them better than the private sector can, hence increasing VFM) must still be added to the costs of the PPP Reference Model.
IV. The Value for Money Test

Value for Money (Comparing the PPP Reference Model Price with the Risk-Adjusted PSC Price) is only possible if all key assumptions and requirements of both models are identical Initial VFM Indicators are required prior to tendering:
Indicates if there is any basis for going through with an open tender, or not Provides a benchmark against which to compare private bids (what if bids are all above the PPP Reference Level?)
14
PSC Model Illustration

Construction & Operation of a new Urban Bus & Taxi Terminal & Shopping Center Project Term of 15 years Construction period of 2 years Private Contractor will design, finance, construct & maintain the Terminal, while Citys Transit Department will operate the Bus Terminal portion of the project
1. Identify Costs & Revenues

Costs Direct Capital Costs Land Acquisition & Development Design & Construction Contract Price Payment to Consultants Plant & Equipment Capital upgrade (Year 7) Capital Expenditure over project cycle Direct Maintenance Costs Maintenance & Repairs on buildings, plant & equipment Direct Operating Costs Personnel (Wages, salaries, benefits) Running Costs (water, electricity, telephones) Management Indirect Costs Project management overheads Operating overheads Administrative overheads Third Party Revenue Revenue expected Assumptions Budget Inflation Discount rate Amount 5,000,000 50,000,000 7,000,000 10,000,000 15,000,000 10,000,000 Description The market price for the land Based on recent bid for a similar construction project Legal advisors, engineers, planners, etc. Current market price for bus station equipment 3-year capital expenditure cycles (Yrs. 5, 8, & 11)
4,000,000 2,000,000 2,000,000 1,000,000 Cost of managing the project during the construction 1,000,000 project 200,000 Portion of Department's Costs attributable to new terminal 500,000 Cost of ongoing facilities and project management 7,500,000 From parking fees & retail shops (net of costs) Amount Description 20,000,000 Budget available to the Department 6.0% Assumed to increase at 6%/yr. On all costs 10.0% Assumed rate
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2. Identify Timing of Costs:

Base PSC: Cash Flow Timing Profile 0 Direct Costs Capital Costs Land Costs Design & Construction Contract Price Payments to Consultants Plant & Equipment Capital Ugrade Life-Cycle Capital Expenditure Maintenance Costs Operating Costs Wages & Salaries Running Costs Management Costs Indirect Costs Construction overhead costs Operating overhead costs Administrative overhead costs Less Third-Party Revenue 1 2 3 4 5 6 7 Year 8 9 10 11
100% 35% 45% 25%
65% 55% 75% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 33% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 33% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 33% 100% 100% 100% 100%
100%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
17
3. Base Case PSC Cash Flow Timing

Base PSC: Cash Flow Timing Profile 0 Direct Costs Capital Costs Land Costs Design & Construction Contract Price Payments to Consultants Plant & Equipment Capital Ugrade Life-Cycle Capital Expenditure Maintenance Costs Operating Costs Wages & Salaries Running Costs Management Costs Indirect Costs Construction overhead costs Operating overhead costs Administrative overhead costs Less Third-Party Revenue SUBTOTAL: BASE PSC Discount Factor: 10.00% Discounted Cash Flow Net Present Value 1 2 3 4 5 6 Year 7 8 9 10 11 5,000,000 17,500,000 3,150,000 2,500,000 34,450,000 4,081,000 7,950,000 20,073,384 4,416,144 5,049,908 5,352,902 2,524,954 2,524,954 1,262,477 2,676,451 2,676,451 1,338,226 5,259,699 6,375,392 3,187,696 3,187,696 1,593,848 6,264,385 7,593,194 3,796,597 3,796,597 1,898,299
4,494,400 2,247,200 2,247,200 1,123,600 1,000,000 1,060,000 224,720 561,800 8,427,000 2,471,920 0.83 2,042,909
4,764,064 2,382,032 2,382,032 1,191,016
5,674,076 2,837,038 2,837,038 1,418,519
6,014,521 3,007,261 3,007,261 1,503,630
6,757,916 3,378,958 3,378,958 1,689,479
7,163,391 3,581,695 3,581,695 1,790,848
238,203 595,508 8,932,620 2,620,235 0.75 1,968,621
252,495 631,238
267,645 669,113
283,704 709,260
300,726 751,815
318,770 796,924
337,896 844,739
358,170 895,424
379,660 949,149
29,150,000 1.00 29,150,000 114,956,778
47,541,000 0.91 43,219,091
9,468,577 10,036,692 10,638,893 11,277,227 11,953,861 12,671,092 13,431,358 14,237,239 2,777,449 27,433,624 3,120,742 3,307,987 8,766,164 3,716,854 3,939,865 10,440,642 0.68 0.62 1,897,035 17,034,122 0.56 1,761,578 0.51 1,697,520 0.47 4,089,480 0.42 1,576,309 0.39 1,518,988 0.35 3,659,381
Result: NPV of Base Case PSC = $114.9 m

Base Case PSC Costs, by Category

50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Costs
Direct Capital Costs Direct Operating Costs Subtotal: Base PSC
Direct Maintenance Costs Indirect Costs
19
Nominal & Discounted (10%) PSC Costs (NPV = $115 m)

50,000,000 45,000,000 40,000,000 35,000,000
Costs
30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 0 1 2 3 4 5 6 7 8 9 10 11 12
SUBTOTAL: BASE PSC
Discounted Cash Flow
NPV (@10%) of PSC = $114,956,778

4. Risk Identification
Design & Construction Risk
The Risk that the construction of the physical assets is not completed on time, on budget or to specification Cost overruns: Increase in construction costs assumed in the base PSC model Time overruns: Increase in construction costs assumed in the base PSC model due to delay in construction schedule (May include costs of interim solution) Upgrade Costs: Increase in costs if planned facility is not sufficient and additional capacity must be added
Operating Risk: risk that required inputs cost more than anticipated, inadequate quality, or unavailable Performance Risk: risk that services may not be delivered to specification & PPP Risk Analysis, May 10-21, 2010 VfM, PSC 21
Risk Identification (Contd.)

Maintenance Risk:
General Maintenance Risk: Risk of higher than anticipated maintenance costs in general area of facility (assumed to be 25% of facility) Bus Terminal Area Maintenance Risk: Risk of higher than anticipated maintenance costs for patient area of facility (assumed to be 75% of facility)
Technology Risk: Risk that technical inputs may fail to deliver required output specifications, or technological advances may render current technology obsolete.
5. Risk Valuation
Based upon a similar project undertaken recently, the following probabilities show that the actual Construction costs, in relation to the base PSC model:
Are less than base PSC by 5% = 5% likelihood Are the same as the base PSC = 15% likelihood Exceed base PSC by 10% = 40% likelihood Exceed base PSC by 15% = 25% likelihood Exceed base PSC by 25% = 15% likelihood
Risk Valuation
Percentage Effect on PSC Base Cost Assumption Cost Overrun Risk 50,000,000 Below base PSC No Change from base PSC Overrun: Likely Overrun: Moderate Overrun: Extreme Time Overrun Risk (% of D&C Cost) 50,000,000 No time overrun Overrun: Likely (1 Year) Overrun: Moderate (1.5 Years) Overrun: Extreme (2 Year) Impact of Risk (in Costs) Likelihood of Risk Occurring (%) Value of the Risk
-5% 0% 15% 30% 40%
-2,500,000 0 7,500,000 15,000,000
5% 10% 50% 20%
-125,000 0 3,750,000 3,000,000 3,000,000 9,625,000
20,000,000 15% Total Cost Overrun Risk
0% 10% 15% 20%
15%
0 2,500,000 1,875,000 1,000,000 5,375,000
5,000,000 50% 7,500,000 25% 10,000,000 10% Total Cost Time Overrun Risk
Upgrade Cost Risk (% of Project Cycle Capital Exp.) 10,000,000 Below Base PSC -5% 0% No change from Base PSC 15% Overrun: Likely Overrun: Moderate 30% Overrun: Extreme 40%
-500,000 5% 0 10% 1,500,000 50% 3,000,000 20% 4,000,000 15% Total Cost of Upgrade Cost Risk
-25,000 0 750,000 600,000 600,000 1,925,000
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Risk Valuation
Operating Cost Risk (% of Direct Operating Costs) 5,200,000 Below Base PSC No change from Base PSC Overrun: Likely Overrun: Moderate Overrun: Extreme -5% 0% 15% 30% 40% -260,000 5% 0 25% 780,000 40% 1,560,000 25% 2,080,000 5% Total Cost of Operating Risk -13,000 0 312,000 390,000 104,000 793,000
Performance Risk (Underperformance = 5 m/Year) 5,000,000 No deviation 0% Overrun: Likely 100% Overrun: Moderate 0% Overrun: Extreme 0%
0 5,000,000 0 0 Total Cost of Underperformance Genaral Maintenance Risk (25% of Annual Maintenance Costs) 1,000,000 Below Base PSC -5% -50,000 No change from Base PSC 0% 0 Overrun: Likely 15% 150,000 Overrun: Moderate 30% 300,000 Overrun: Extreme 40% 400,000 Total Cost of Maintenance Bus Terminal Area Maintenance Risk (% of 20% of Annual Maintenance Costs) 3,000,000 Below Base PSC -5% -150,000 No change from Base PSC 0% 0 Overrun: Likely 45% 1,350,000 Overrun: Moderate 75% 2,250,000 Overrun: Extreme 120% 3,600,000 Total Cost of Patient Area Maintenance
70% 30% 0% 0% Risk
0 1,500,000 0 0 1,500,000
5% 25% 40% 25% 5% Risk
-2,500 0 60,000 75,000 20,000 152,500
5% 15% 45% 25% 10% Risk
-7,500 0 607,500 562,500 360,000 1,522,500
25
6. The Timing of Risk Costs

The Timing of Risk Costs RISK 0 Design & Construction Risk Cost Overrun Time Overrun Upgrade Cost Total Design & Construction Risk 0 Operating Risk Performance Risk Maintenance Risks: General Maintenance Risk Bus Term. Area Maint. Risk Total Maintenance Risks 0 Technology Risk Sub-Total 0 Discount Factor 10.00% 1.00 Discounted Cash Flow 0 Present Value of Risk 54,863,216 1 3,570,875 2 7,029,523 1,881,250 8,910,773 3 0 3,493,750 3,493,750 944,476 1,786,524 181,630 1,813,322 1,994,952 0 8,219,701 0.75 6,175,583 4 0 0 0 1,001,144 1,893,715 192,528 1,922,121 2,114,649 0 5,009,509 0.68 3,421,562 5 6 7 8 3,570,875 0 2,576,084 2,576,084 1,061,213 2,007,338 204,079 2,037,448 2,241,528 0 7,886,163 0.62 4,896,687 0 1,124,886 2,127,779 216,324 2,159,695 2,376,020 0 5,628,684 0.56 3,177,245 0 1,192,379 2,255,445 229,304 2,289,277 2,518,581 0 5,966,405 0.51 3,061,709 3,068,158 3,068,158 1,263,922 2,390,772 243,062 2,426,634 2,669,696 0 9,392,547 0.47 4,381,692
0 3,570,875 0.91 3,246,250
0 8,910,773 0.83 7,364,275
NOTE: NPV of Base PSC =$114.9 m NPV of Additional Risks = 54.8 m (47.7%)
7. The Risk-Adjusted PSC

Risk Adjusted PSC Direct Capital Costs Direct Maintenance Costs Direct Operating Costs Indirect Costs Less - Third Party Revenue Subtotal: Base PSC Risk Value Total Cash Flows Discount Rate 10.00% 1.00 0.91 Discounted Cash Flows 29,150,000 46,465,342 Present Value or RA-PSC 169,820,042 0 1 2 3 28,150,000 46,481,000 0 0 0 0 4,494,400 4,764,064 0 0 5,618,000 5,955,080 1,000,000 1,060,000 786,520 833,711 0 0 8,427,000 8,932,620 29,150,000 47,541,001 2,471,922 2,620,238 0 3,570,875 8,910,773 8,219,701 29,150,000 51,111,876 11,382,695 10,839,940 0.83 9,407,186 0.75 8,144,207 4 0 5,049,908 6,312,385 883,734 9,468,577 2,777,453 5,009,509 7,786,962 5 6 7 8 24,489,528 0 0 5,259,699 5,352,902 5,674,076 6,014,521 6,375,392 6,691,128 7,092,596 7,518,151 7,969,240 936,758 992,963 1,052,541 1,115,694 10,036,692 10,638,893 11,277,227 11,953,861 27,433,629 3,120,748 3,307,994 8,766,172 7,886,163 5,628,684 5,966,405 9,392,547 35,319,793 8,749,432 9,274,398 18,158,719 0.56 4,938,826 0.51 4,759,233 0.47 8,471,176
0.68 0.62 5,318,600 21,930,812
NPV (@10%) of RA-PSC = $169,820,042

Timing & Costs of Risks

25,000,000
20,000,000
Costs
15,000,000
10,000,000
5,000,000
10
11
12
13
14
15
Total Design & Construction Risk Operating Risk Technology Risk
Total Maintenance Risks Performance Risk Sub-Total
28
CASE: Partnerships Victoria

Victoria: 2nd Largest Australian State, by economy & population (pop. = 5.0 million) Plans to spend $A 3.2 Billion ($US 2.3 Billion) on public infrastructure 2006 2010 Prior history of individual PPPs & BOTs in 1980s to finance public projects Off Balance Sheet, and seek to avoid public borrowing limits, but little risks transferred to private sector (significant offtake guarantees) 1990s, however, State sought to maximize risk transfer to private sector, but some projects could not be sustained (too risky) June, 2000: New Partnerships Victoria Policy Adopted VfM, PSC & PPP Risk Analysis, May 10-21, 2010 29
Partnerships Victoria Policy, 2000

A more balanced policy to integrate sustainable private investment into public infrastructure Primary goal of providing Value for Money in the public interest Does not assume that the private sector is necessarily more efficient at building & operating infrastructure assets Requires estimating and recognizing whole-life costing for projects Emphasizes Optimal Risk Transfer to private sector, instead of Maximal Risk Transfer
PPP is not another bucket of money for projects PPP does not avoid public funding procedures PPP does not get projects & public liabilities Off the Balance Sheet PPP is not just about building new things PPP is not privatisation PPP does not suit all projects & service delivery needs (goal of just 10% of all public investment projects) PPP is one option for procuring and delivering needed services PPP IS about delivering services, and not just about financing & building Overarching goal is providing Value for the Publics Money
Partnerships Victoria - Principles
Partnerships VictoriaPPP Models & Publications

June, 2000: Partnerships Victoria Policy June, 2001:
Partnerships Victoria Practitioners Guide Risk Allocation & Contractual Issues Guide Public Sector Comparator Technical Note
June, 2003: Contract Management Framework July, 2003:

Public Sector Comparator Supplementary Technical Note Use of Discount Rates
June, 2005: Standard Commercial Principles

All are FREE and available for Download at www.partnerships.vic.gov.au
Major Steps in Developing Partnerships Victoria Projects
33
Partnerships Victoria PPP Process

1. Business Case
Assess the PFI Potential & Commence PSC
2. Funding Approval
Review preliminary PSC Funding approval signals bankability to private investors & lenders
3. Expressions of Interest
Formally notify private market about the project Define timetables & deadlines Confirm the level of market interest Allow potential bidders to comment on proposed project structure Shortlist at least 3 bidders
4. Project Brief (Request for Proposals)

Formal Govt. commitment to project Detailed Project information & requirements for bidders Bid evaluation criteria & process
5. Final Negotiation
Partnerships Victoria Projects

Partnerships Victoria Projects
# 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Size (NPV) Name Sector ($A Millions) Victorian County Court Public Facilities $195.0 Casey Hospital Health Care $115.0 Docklands TV & Film Studio Public Facilities $8.7 Wodonga Wastewater Water & Enviro. $32.5 Echuca Wastewater Water & Enviro. $51.5 Correctional Facilities Public Facilities $275.0 Mobile Data Network Info.& Comm. Tech. $85.0 Southern Cross Station Transport $309.0 Enviro Altona Water & Enviro. $20.3 Metropolitan Mobile Radio Info.& Comm. Tech. $120.0 Emergency Alerting System Info.& Comm. Tech. $100.0 Mitcham Frankston EastLink Transport $2,500.0 Royal Women's Hospital Health Care $364.0 Royal Melbourne Showgrounds Public Facilities $108.0 Melbourne Convention Centre Public Facilities $367.0 North Ballarat Reclaimed Water Water & Enviro. $50.0 Term 20 25 20 10 25 25 5 30 10 7 7 39 25 25 25 15 VFM Savings N/A 9.0% N/A N/A 28.0% Status Construction Complete Construction Complete Construction Complete Construction Complete Construction Complete Construction Complete 11.0% Construction Complete 5.0% Contract Signed 6.0% Contract Signed Contract Signed Contract Signed Contract Signed Contract Signed Contract Signed Contract Signed Contract Signed
2004 Review of 8 early PPP projects revealed average savings (VFM) was 9% against the Risk-Adjusted PSC
Scale: Minimum of $A10 million ($A 50m - $A100 m is better) ($US 35m - $75m) Key Performance Indicators: Measureable service outputs Risk Transfer: Clear opportunities to transfer risks (construction, completion & operation) Term: Long term of contract (15 30 yrs.) Innovation: Project allows opportunities for private sector to innovate in designing, building, financing, and operating projects Market Appetite: clear indications that there are experienced private developers interested in these contracting opportunities
Partnerships Victoria Project Selection Criteria:
36
Partnerships Victoria Lessons Learned
The first stage, the Business Case, is the most important opportunity to establish a projects clear strengths, or to stop unsuitable projects from advancing Focus on the projects clear, stated objectives throughout the process Clear output specifications are essential for an effective project development process PPP Procurement processes are complex and timeconsuming Contract signing is the beginning, not the end. PFI Contract management requires more legal & commercial resources than assumed Multiple Public Sector parties to a PFI make governance very challenging PFI processes must be flexible to learn lessons of experience and to adapt & improve
PPP Analysis Case Study: Berwick (Casey) Hospital Victoria, Australia
38
Berwick (Casey) Hospital PFI
The need for a new, large multi-service community hospital in Berwick region of Melbourne first identified in early 1990s First BOT tender announced in 1999 for new 150bed hospital. Required contractor to both build and to staff & operate the hospital. Preferred bidder, Ramsay, and next preferred, Catholic Mercy Health tried to negotiate contracts, unsuccessfully (2001). Reportedly, bids were too low to cover construction costs Second attempt initiated in 2001 under the new Partnerships Victoria Policy of 2000. The first hospital PFI attempted under the new PFI framework
April December, 2001: Victorias Human Services Dept., with assistance from Partnerships Victoria, hires PPP transaction advisors (under separate contracts) to prepare & manage competitive PPP tendering Berwick Hospital PFI Transaction Advisor Costs $ Australian Percent
PPP Legal Advisors PPP Financial Advisors PPP Design & Construction Advisors PPP Hospital Technical Advisors PPP Procurement Director PPP Probity Auditor Total $599,600 $788,550 $159,300 $492,700 $567,000 $101,410 $2,708,560 22.1% 29.1% 5.9% 18.2% 20.9% 3.7% 100.0%
40
PPP Transaction Advisors
Hospital PPP Structure

Facility to be privately designed, constructed, financed & maintained for 25 years. Publicly staffed & operated. State provided the land. Summary of Performance Standards & Capabilities:
A public community hospital providing in-patient medical, surgical and obstetric services, ambulatory care and emergency care, mental health and sub-acute services There will be a total of 224 beds The pre and post-acute care & outpatient services will include;
Womens Health Community Mental Health Chronic Illness Management Administration/Discharge Planning Hospital in the Home
The hospital will also have 4 operating theatres, an emergency department, pharmacy, pathology and library/education services.
The Finished Facility, Oct., 2004
42
PPP Tendering Chronology

November 5, 2001: Revised PPP Tender announced November 29, 2001: Interested Bidders Conference December 13, 2001: EoIs Due. 10 consortia submit February 13, 2002: 3 consortia short-listed
1. 2. 3.
Progress Health (ABN-AMRO, Multiplex, Honeywell); Berwick Partnership (Deutsche Bank, Theiss, Tempo Services); & Public Health Infrastructure Consortium (Babcock & Brown, Leightons, Honeywell).
March, 2002: RFP released June, 2002: Bids Due Sept., 2002: Preferred Bidder Announced Progress Health October, 2002: PPP Contract signed November, 2002: Financial closure reached & construction begins September 2004, construction completed on-time (22 months), on-budget
Berwick Hospital PPP Structure

25 year PPP contract term NPV of Cost to Govt. = $115,000,000 (disc. @ 8.65%) Value for Money savings of PPP calculated at 9% = $11.4 million Berwick Hospital PFI contract, 206 pages, plus 260 pp. of attached schedules (KPIs) Copies of all Partnerships Victoria PPP project contracts & agreements are available for download (Free) at:
http://www.tenders.vic.gov.au/CA256AEA00206A7D/webpages/PublicContractsFrameset?Open
44
Berwick Hospital PPP Lessons Learned

PPP was used to after 2 previous awards of BOT contracts for the hospital had failed. Separating the D-B-F-M functions from Staffing & Operating made the project simpler to analyze, to structure, to contract & to finance: Procurement period of just 11 months (from announcement to contract signing) was very quick. Financial Closure within just 2 months (bankable) A new, clear policy, PPP tools & guidelines, and qualified PPP transaction advisors were critical to a smooth, efficient & competitive procurement Transaction did achieve important Value for Money savings of 9% ($A 11.4 million = $US 8.3 m)
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#2.

2 Case Studies of PSC & VfM Analysis

by Ned White Institute for Public-Private Partnerships May 11, 2010

VfM, PSC & PPP Risk Analysis, May 10-21, 2010

I. Constructing the PSC Model

2. Calculate the Projects Direct Costs

3. Calculate Indirect Costs (Pub. Institutions O-head)

I. Constructing the PSC Model

5. Explain all assumptions used in construction of the model

6. Construct the PSC Model and describe its results

PSC Presentation as a Discounted Cash Flow

Positive Cash Flows

-120 -100 -80

-60 -40 -20 0 20 40 Years 0 1 2 3 4 5 6 7 8 9 10

VfM, PSC & PPP Risk Analysis, May 10-21, 2010

Net Present Value at Varying Discount Rates $120.00 $100.00 $80.00

10% 12% 14% 16% 18% 20%

II. The Risk-Adjusted PSC Model:

2. Identify the impacts of each risk

3. Estimate the likelihood of each risk occurring

II. The Risk-Adjusted PSC Model:

5. Identify strategies for mitigating risks

II. The Risk-Adjusted PSC Model:

8. Construct the Risk-Adjusted PSC Model:

9. Preliminary analysis to test affordability

VfM, PSC & PPP Risk Analysis, May 10-21, 2010

III. The PPP Reference Model

2. Describe PFI project structure & sources of funding

III. The PPP Reference Model

Set and cost affirmative action & empowerment targets

Calculate & consolidate all costs

Innovative designs Innovative construction Operational efficiencies

Estimate the private sectors cost of capital (higher)

III. The PPP Reference Model

IV. The Value for Money Test

VfM, PSC & PPP Risk Analysis, May 10-21, 2010

PSC Model Illustration

1. Identify Costs & Revenues

VfM, PSC & PPP Risk Analysis, May 10-21, 2010

2. Identify Timing of Costs:

100% 35% 45% 25%

VfM, PSC & PPP Risk Analysis, May 10-21, 2010

3. Base Case PSC Cash Flow Timing

4,764,064 2,382,032 2,382,032 1,191,016

5,674,076 2,837,038 2,837,038 1,418,519

6,014,521 3,007,261 3,007,261 1,503,630

6,757,916 3,378,958 3,378,958 1,689,479

7,163,391 3,581,695 3,581,695 1,790,848

238,203 595,508 8,932,620 2,620,235 0.75 1,968,621

29,150,000 1.00 29,150,000 114,956,778

47,541,000 0.91 43,219,091

Result: NPV of Base Case PSC = $114.9 m

Base Case PSC Costs, by Category

Direct Capital Costs Direct Operating Costs Subtotal: Base PSC

Direct Maintenance Costs Indirect Costs

VfM, PSC & PPP Risk Analysis, May 10-21, 2010

Nominal & Discounted (10%) PSC Costs (NPV = $115 m)

30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 0 1 2 3 4 5 6 7 8 9 10 11 12

SUBTOTAL: BASE PSC

Discounted Cash Flow

NPV (@10%) of PSC = $114,956,778

Risk Identification (Contd.)

-5% 0% 15% 30% 40%