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2 2 Case Studies of PSC VFM NW
2 2 Case Studies of PSC VFM NW
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
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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
Total Cash Flows: 10 Year Infrastructure Project with a 1 Year Construction Period
Cash Flow $
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
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%)
VfM, PSC & PPP Risk Analysis, May 10-21, 2010 7
Sum of Discounted Cash Flows (Net Present Value)
2%
4%
6%
8%
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
VfM, PSC & PPP Risk Analysis, May 10-21, 2010 9
10
4.
5.
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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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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%
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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
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
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
Costs
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Costs
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
Technology Risk: Risk that technical inputs may fail to deliver required output specifications, or technological advances may render current technology obsolete.
VfM, PSC & PPP Risk Analysis, May 10-21, 2010 22
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
VfM, PSC & PPP Risk Analysis, May 10-21, 2010 23
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
15%
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
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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
0 1,500,000 0 0 1,500,000
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NOTE: NPV of Base PSC =$114.9 m NPV of Additional Risks = 54.8 m (47.7%)
VfM, PSC & PPP Risk Analysis, May 10-21, 2010 26
20,000,000
Costs
15,000,000
10,000,000
5,000,000
10
11
12
13
14
15
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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
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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
5. Final Negotiation
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2004 Review of 8 early PPP projects revealed average savings (VFM) was 9% against the Risk-Adjusted PSC
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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
VfM, PSC & PPP Risk Analysis, May 10-21, 2010
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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
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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
VfM, PSC & PPP Risk Analysis, May 10-21, 2010 39
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%
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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.
VfM, PSC & PPP Risk Analysis, May 10-21, 2010 41
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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
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Questions?
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