AN ANALYSIS FRAMEWORK FOR PUBLIC-PRIVATE PARTNERSHIPS by MOHAMED Y. WAHDAN B.Sc. Cario University, 1985 M.Sc. Florida Institute of Technology, 1991 A thesis submitted in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Civil Engineering We accept this thesis as conforming in The Faculty of Graduate Studies The University of British Columbia December, 1995 © Mohamed Y. Wahdan, 1995 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of (^ 3/ (/T L S/^nee/,'^ The University of British Columbia Vancouver, Canada DE-6 (2/88) A B S T R A C T A number of decisions confront both the public and private sectors when considering the use of a Public-Private Partnership (PPP) approach for a given project. They include: identifying the design alternatives which best satisfy public needs and the project's constraint set; what PPP approach is best suited for the alternatives selected; and, for a given PPP approach, how should risks be mitigated, residual risks assigned, and what compensation is justified. Additional decisions from a private-sector viewpoint deal with whether to pursue a proposal or not, and under what conditions should a consortium withdraw from the process. In seeking help with these decision problems, one finds that the knowledge base required is highly fragmented, little objective assessment of the pros and cons of various approaches is available, few real life experiences have been analysed and documented in the form of case studies, and, formal tools to assist with these decisions are few and invariably lack the depth commensurate with the magnitude of the commitments and risks involved. This work presents an analysis framework designed to address several of these decisions. This framework was derived based on a thorough review and analysis of the literature, a case study of the Northumberland Strait Crossing project (The Fixed Link to Prince Edward Island), and significant interaction with the B.C. Ministry of Transportation and Highways (MoTH-B.C). As part of this framework, an economic evaluation model which provides a mechanism for unifying the phases, and the cost and time consequences of the performance/risk dimensions which characterize a project is developed. This model can be used for both deterministic and probabilistic analyses, from which valuable insights dealing with the behavior of PPP projects can be drawn. They include: quantification of overall economic and financial performance as a function of different variable values; estimation of ii overall risks, their composition and probabilities of failure; bounds on rates of return; tradeoffs between rates of return and risk assignment strategies; and, the relative effectiveness of different strategies for project speed-up (e.g. fast-tracking versus construction acceleration). A hypothetical case study is used to illustrate the power of the developed framework and the diversity of issues that must be addressed for PPP projects. Key findings in this research include: - Each project is a unique case and has to be assessed based on its merits and constraints. However, documentation of the experience gained in every project, especially in terms of risks is essential for enhancing the scant knowledge base that currently exists; - In general, and given the government's capability to acquire financing at a lower price than can the private sector, BOT's could be more expensive from a user-charge perspective, unless savings can be achieved in other project inputs such as capital costs and operating and maintenance costs. However, they can be potentially viable in cases when no funds are available, or for projects that have near monopoly situations; and, - Acceleration strategies such as fast-tracking design and construction and acceleration of construction exhibit only marginal benefits. The greatest benefits of adopting these strategies are expected when penalties are imposed for untimely completion of construction. The thesis highlights some of the knowledge gaps that exist in the literature and concludes with several recommendations for further research to enhance the developed framework. iii T A B L E O F C O N T E N T S ABSTRACT .' ii T A B L E OF CONTENTS iv LIST OF FIGURES x LIST OF TABLES -xiii A C K N O W L E D G M E N T xiv 1. INTRODUCTION 1 1.1 Background : 1 1.2 Motivation 3 1.3 Objectives 5 1.4 Methodology 7 1.5 Structure Of The Thesis 8 2. LITERATURE RESEARCH 10 2.1 Chapter Objectives ....10 2.2 Chpater Structure 13 2.3 The Uniqueness Of PPP Arrangements 14 2.3.1 The PPP Spectrum 14 2.3.1.1 Fully-Public Approach 15 2.3.1.2 Operating & Maintenance Contract 16 iv 2.3.1.3 Turnkey Development 16 2.3.1.4 Wraparound Addition 18 2.3.1.5 Lease-Develop-Operate 18 2.3.1.6 Temporary Privatization 19 2.3.1.7 Buy-Build-Operate 20 2.3.1.8 Build-Transfer-Operate 20 2.3.1.9 Build-Operate-Transfer 21 2.3.1.10 Build-Own-Operate 22 2.3.1.11 Fully Private Approach 22 2.3.2 Benefits And Disbenefits Of Public-Private Partnerships 24 2.3.2.1 Public Sector Viewpoint of Benefits/Motivations for a PPP Approach 24 2.3.2.2 Public Sector Viewpoint of Disbenefits for a PPP Approach 28 2.3.2.3 Private Sector Viewpoint of Benefits/Motivations for a PPP Approach 31 2.3.2.4 Private Sector Viewpoint of Disbenefits for a PPP Approach 32 2.3.3 BOT Form Of Procurement 35 2.3.4 Critical Success Factors For PPP Arrangements 40 2.3.5 Research Challenges 43 v 2.4 Existing Analysis Frameworks For PPP Arrangements 44 3. T H E PEI BRIDGE CASE STUDY 50 3.1 Introduction 50 3.2 Chapter Objectives & Structure 50 3.3 Background 52 3.4 Project Description • -55 3.5 Chronological Events Of The Case Study 61 3.6 Case Study Lessons 85 4. A 'PPP' ANALYSIS FRAMEWORK 92 4.1 Introduction 92 4.2 The Framework Objectives 92 4.3 Description Of The Framework 94 5. T H E ECONOMIC M O D E L 109 5.1 Background 109 5.2 Economic Model Objectives 112 5.3 Model Components 113 5.3.1 Predesign 119 5.3.2 Detailed Design 122 5.3.3 Tendering and Design Field Services 124 5.3.4 Construction 125 vi 5.3.5 Commissioning 131 5.3.6 Management During Design & Construction 132 5.3.7 Holdback Release 133 5.3.8 Loan Drawdown 133 5.3.9 Revenue Stream 137 5.3.10 Operating and Maintenance Costs 148 5.3.11 Management During the Operating Phase 150 5.3.12 Debt Servicing 151 5.3.13 Liquidated Damages/Penalties 152 5.3.14 Reversion/Salvage Value 153 5.4 Discount And Inflation Rates 154 5.5 General Model Assumptions 155 6. RISK T R E A T M E N T 158 6.1 Background 158 6.2 Risk Dimensions In PPP Projects 161 6.2.1 Cost & Time Risks 162 6.2.2 Technical Risks 163 6.2.3 Economic Risks 164 6.2.4 Financial Risks 165 6.2.5 Environmental Risks 165 vii 6.2.6 Political & Regulatory Risks 167 6.2.7 Organizational & Contractual Risks 168 6.2.8 Stakeholder Risks 169 6.3 The Risk Analysis Process 170 6.4 Criteria For Decision-Making 184 7. E X A M P L E RESULTS 188 7.1 Introduction 188 7.2 Objectives 188 7.3 The Case Study 189 7.3 1 TheBOT Scenario 190 7.3.1.1 Deterministic Analysis - BOT Approach 195 7.3.1.2 Probabilistic Analysis - BOT Approach 202 7.3.2 The Traditional Scenario 208 7.3.2.1 Deterministic Analysis - Traditional Approach 209 7.3.2.2 Probabilistic Analysis - Traditional Approach 212 8. CONCLUSIONS AND RECOMMENDATIONS 217 8.1 Summary 217 8.2 Contributions 218 8.2.1 The Analysis Framework For PPP Projects 219 8.2.2 The Economic Model 220 viii 8.2.3 The Risk Analysis Tool 220 8.3 Future Research Requirements 221 8.3.1 The Framework 221 8.3.2 The Economic Model 222 8.3.3 The Risk Analysis Tool 223 REFERENCES 224 APPENDIX A - Deterministic Model Formulation 233 APPENDIX B - Probabilistic Model Formulation 246 ix LIST O F FIGURES Figure 2.1 The Public-Private Continuum 14 Figure 2.2 Private Sector Roles in Fully-Public Approach 15 Figure 2.3 Private Sector Roles in Operating & Maintenance Contract 16 Figure 2.4 Private Sector Roles in Design-Build 17 Figure 2.5 Private Sector Roles in Wraparound Addition 18 Figure 2.6 Private Sector Roles in Lease-Develop-Operate 19 Figure 2.7 Private Roles in Temporary Privatization 19 Figure 2.8 Private Sector Roles in Buy-Build-Operate 20 Figure 2.9 Private Sector Roles in Build-Transfer-Operate 21 Figure 2.10 Private Sector Roles in Build-Operate-Transfer 21 Figure 2.11 Private Sector Roles in Build-Own-Operate 22 Figure 2.12 Simplified View of a Holistic Risk Planning Framework 47 Figure 2.13 Holistic Risk Planning Framework 48 Figure 3.1 The PEI Fixed Link Project Locale 53 Figure 3.2 The PEI Fixed Link Project Organizational Chart 60 Figure 3.3 Canadian Consumer Price Index and Prime Rates 61 Figure 3.4 Canadian Dollar Exchange Rate Versus U.S. Dollar 61 Figure 4.1 PPP Analysis Framework 96 x Figure 4.2 Risk Analysis Process For Public-Private Partnership Projects 101 Figure 4.3 Typical Overlapping, Cyclical Phases of the 'PEN-BOT' approach 108 Figure 5.1 General Project Cash Flow 113 Figure 5.2 Constant and Current Dollar Construction Expenditure Profile 126 Figure 5.3 Demand Function 142 Figure 5.4 Operating and Maintenance Costs 150 Figure 5.5 Operation and Maintenance Costs Of Existing Facility 153 Figure 6.1 Risk Analysis Process For Public-Private Partnership Projects 171 Figure 6.2 Inflation Scenarios 179 Figure 6.3 Schematic Of Probability of Failure Tests 187 Figure 7.1 Demand Function 195 Figure 7.2 Non-Linear Sensitivity Chart - On Equity - BOT Approach 197 Figure 7.3(a) NPV vs. F and A : No Penalties - BOT Approach 199 Figure 7.3(b) Time to Start of Operation : No Penalties - BOT Approach 199 Figure 7.4(a) NPV vs. F and A : Time and Cost Penalties Included - BOT Approach.. 199 Figure 7.4(b) Time to Start of Operation : Penalties Included - BOT Approach 199 Figure 7.5 NPV vs. F and A : Time and Cost Penalties and Costs of O & M For Existing Facility Included - BOT Approach 200 Figure 7.6 Expenditure Function for Operation and Maintenance of Existing Facility -BOT Approach.... 200 xi Figure 7.7 Profit Maximization Curves - BOT Approach 201 Figure 7.8 Probability of Failure vs. Constant Dollar Toll - BOT Approach 202 Figure 7.9 Contribution to Uncertainty in NPV On Equity - BOT Approach 203 Figure 7.10 Contribution to Uncertainty in NPV On Total Capital - BOT Approach... 203 Figure 7.11 Probability of Failure - No Uncertainty in The Demand Function - BOT Approach 204 Figure 7.12 Probability of Failure - Risk Treated Case - BOT Approach 206 Figure 7.13 Non-Linear Sensitivity Curves For Revenue Variables On Equity -Traditional Approach 210 Figure 7.14 Non-Linear Sensitivity Curves For Revenue Variables On Total Capital -Traditional Approach 210 Figure 7.15(a) Linear Sensitivity Analysis - Traditional Approach 210 Figure 7.15(b) Linear Sensitivity Analysis - Traditional Approach 210 Figure 7.16 Profit Maximization Curves - Traditional Approach 212 Figure 7.17 Probability of Failure vs. Constant Dollar Toll - Traditional Approach 213 Figure 7.18 Probability of Failure vs. Constant Dollar Toll Level - High Estimates of Risk - Traditional Approach 214 Figure 7.19 Contribution to Uncertainty In NPV On Equity - Traditional Approach.... 215 Figure 7.20 Contribution to Uncertainty In NPV On Total Capital - Traditional Approach 215 xii LIST O F T A B L E S Table 2.1 Comparative Features of BOT Projects 38 Table 2.2 Comparison of Government Incentives 38 Table 2.3 Project Sponsors - Undertakings & Responsibilities 39 Table 2.4 Public-Private Partnership Decision Support System 46 Table 3.1 Case Study Analysis Tableau 87 Table 4.1 Analysis Tableau For Project Risks Versus Phases & Performance Dimensions 102 Table 5.1 Definition of Model Parameters and Variables 116 Table 6.1 Analysis Tableau For Project Risks Versus Phases & Performance Dimensions 174 Table 7.1 Case Study Parameters - Private Sector Viewpoint 191 Table 7.2 Constant Dollar Work Package Estimates - Traditional Approach 195 Table 7.3 Data for Sensitivity Analysis (r = $1.00) - BOT Approach 197 Table 7.4 Risk Premiums (in millions) For Constant Dollar Construction Costs 205 Table 7.5 Quantitative Performance Measures For the BOT Approach 207 Table 7.6 Data for Sensitivity Analysis (r = $0.88) - Traditional Approach 209 Table 7.7 Linear Sensitivity Coefficients - Traditional Approach 211 Table 7.8 Quantitative Performance Measures For the Traditional Approach 216 xiii A C K N O W L E D G M E N T I would like to express my sincere appreciation to Dr. Alan D. Russell, my advisor, for his invaluable guidance, and support throughout the course of this research. The experience I gained working with him have made the creation of this work both rewarding and enjoyable. I would also like to thank all members of my supervisory committee Dr. W. F Caselton, Dr. F. Navin, Dr. T. Froese, and Dr. S. Pendakur for reviewing this thesis and for their constructive suggestions and criticism. Special thanks to Mr. Dave Ferguson, P. Eng. of the British Columbia Ministry of Transportation and Highways (MoTH-B.C.) for all the technical support he provided in this research. The technical and financial support from MoTH-B.C are also deeply appreciated. To my parents your love, patience, encouragement and sacrifices made my life. I owe you everything. My deep gratitude to my dear lovely wife Balsam who, in tough times and in good times, was always there for me. xiv C H A P T E R 1 - I N T R O D U C T I O N 1.1 B A C K G R O U N D The need for new and revitalized transportation infrastructure in North America and abroad is substantial and growing. And yet, governments at all levels are so deeply mired in debt, that they can no longer borrow funds and construct infrastructure in the traditional way. More and more infrastructure is being developed based on a user-pay approach. Having gone this far, the next step is to utilize Public-Private Partnerships (PPP), such as the Build-Operate-transfer (BOT) approach, for acquiring needed infrastructure. This approach, or one of its variations such as BTO (Build-Transfer-Operate), has the attraction that it can be "off-balance sheet" for the government, thus not hampering its already diminished borrowing capacity for other needs. Another attraction, at least in theory, is that the risks of development and operation can be transferred to the private sector. However, this sector wishes to be compensated for such risks through discount rates (equity returns) that are substantially higher than the social discount rate used by governments when evaluating such projects. The argument of the private sector is that they can be more efficient than the government in constructing infrastructure, both in terms of speed and cost of delivery, through the use of modern project management tools, design and process innovation, and adopting more flexible modes of project procurement. Thus, it can earn the higher discount rate with little or no extra cost to the user. The validity of this argument bears close scrutiny, and it provides some of the motivation for the research described in this thesis. 1 Introduction In a recent report made by the World Bank on PPP for infrastructure in general and BOT in particular, the following statement summarizes the current situation for alternative procurement modes "The slow implementation of BOTs partly reflects their newness but also indicates more fundamental obstacles. First, few countries have regulatory systems well-developed enough that definitions of rights and obligations of private investors and the state can be straightforward. Contract negotiations generally occur in a black box with an abundance of gaps and ambiguities. And, the BOT arrangement is still so rare that replicable models do not exist. Each country has a unique environment, partly because of the unique character of each deal, and partly because details are often secret. Changes of government can further complicate matters. So transaction costs in these projects are relatively large." In fact, in the same report BOT was recognized as one of the high priority areas for research in the World Bank agenda for the 1990's. The report emphasizes that the potential for BOT schemes suggests the need for more research on them, in light of their apparent popularity, and recommends that a new area for research should cover technical, institutional and political ways of extending competitive markets and also the possibilities of private sector participation (Israel, 1992). The emphasis in this thesis is on transportation infrastructure projects. Nevertheless, some of the findings in this research are broadly applicable to other types of infrastructure. The thesis presents an analysis framework designed to address several of the decisions which confront both the public and the private sectors when assessing the suitability of such projects for a PPP approach. As part of this framework, an aggregated yet realistic economic model of the development process of public infrastructure is developed to be used for both deterministic 2 Introduction and probabilistic analyses, from which valuable insights dealing with the behavior of PPP projects can be drawn. 1.2 M O T I V A T I O N The success of Eurotunnel in raising $1.72 billion in equity funds recently for the Channel Tunnel project has inspired world-wide interest in BOT schemes. In recent years, there has been an ever growing trend for governments at all levels to expand the private sector's role in undertaking major public investments, particularly in infrastructure projects, including financing these projects. This has meant that governments look to the private sector to finance projects using the project's income stream. But the task is not easy since the developer, on the one hand, has to pursue the project in an environment full of risks and uncertainties, which leaves him exposed to significant losses including opportunity costs throughout all phases of a project. Typically, there are great risks involved in such projects, there is no guarantee of profit, often there is no guarantee of revenues, and usually the capital investment is both large and relatively long term (Tiong, 1990a). The government, on the other hand, cannot withdraw or adopt a passive role. It has to ensure the right political and commercial environments in which to advance the project. A number of prerequisites are required such as strong government support, a stable currency, a stable economic system, and considerable cooperation between the government and private sector institutions (Tiong, 1990a). Notwithstanding the complexity of identifying and assessing PPP projects, infrastructure projects, being usually large and capital intensive, are particularly difficult to analyze. Yaworsky and Russell (1991) suggest that despite the range of available risk assessment 3 Introduction methods and techniques, significant aspects of the lack of large projects success may be attributed to shortcomings in current identification, assessment and management processes. Jaafari and Schub (1990) also indicated that many project failures are related to inadequacies in risk planning and control processes. Large engineering projects present a particular challenge from a planning and organizational perspective, and are characterized by structural complexities and a high degree of environmental uncertainty (Yeo, 1982; Tatum & Fawcett, 1986). The lack of success of construction projects, particularly large ones, has induced organizations such as the World Bank (1988) to call for broader risk analysis and more deliberate efforts at risk management. Therefore, there is a demonstrated need for the government as well as the private sector for an analytical tool with which to be able to identify the potential projects suitable for PPP, the risks involved, the best fit in the PPP spectrum and roles and responsibilities for each sector. The knowledge base required for undertaking this task is highly fragmented. Little objective assessment of the pros and cons of various procurement approaches is available, few real life experiences have been analyzed and documented in the form of case studies, and formal tools to assist in the decision-making process are very few and invariably lack the depth commensurate with the magnitude of the commitments and risks involved. In addition to the foregoing, an expressed interest by the Ministry of Transportation and Highways in British Columbia (MoTH- B.C.) in this research at its early stages has helped sharpen the focus and provided an excellent opportunity to observe and participate in the decision process for a major project. 4 Introduction While the emphasis in this research is on PPP in general, which includes Build-Operate-Transfer, discussion will be focused on BOT for much of this thesis. Other members of the PPP spectrum will be defined later in the following chapter. 1.3 O B J E C T I V E S In PPP projects the private sector is expected to assume new and extended roles including ones which have been traditionally assumed by the public sector. Invariably, accompanying these additional roles are risks and skills with which the traditional design and construction sectors have limited experience. It thus comes as a surprise to many of the participants in a BOT venture the additional risk exposure that government wishes them to assume. In many cases, their first instinct is to try and pass the risks back to the government, while maintaining the rates of return warranted by assuming greater responsibilities and risks. This can complicate significantly the negotiation of a concession agreement and, in the extreme, make it infeasible. Currently, implementing PPP approaches for procurement of public infrastructure projects is hardly treated in the literature in any objective way. Lacking is a robust analysis framework with which to examine the potential of PPP projects, identify the risks involved, and investigate the implications of various risk assignments among participants. Therefore, the objectives sought for this research are set to fill this knowledge gap. These objectives are: 1) To develop a quantitative/qualitative analysis framework that will assist both the private and the public sectors to develop insights into the anatomy of the project being analyzed. This is particularly essential to : 5 Introduction 1.1) Assess the suitability of an infrastructure project for a PPP mode of procurement as opposed to the traditional one; 1.2) If suitable, identify the PPP mode (s) which best match the project's profile, and identify roles and responsibilities for each sector; 1.3) Identify the magnitude of risks involved; and 1.4) Investigate some of the assertions made in the literature. For example, the benefits of adopting implementation strategies such as fast-tracking the design and construction phases and accelerating construction. 2) Develop a framework that can assist in crafting a request for proposal and negotiating a concession agreement of PPP projects. A particularly unique characteristic of all PPP projects is their prolonged life cycle. Therefore, a carefully prepared concession agreement between all parties involved, which clearly stipulates their respective roles and responsibilities throughout the different project phases is extremely vital to the success of such projects. Any unforeseen events, default of one party or another, failure to account for shortfalls or windfalls in revenues, significant errors in the estimates, etc. can jeopardize the project's outcome if not considered in a pre-emptive fashion. Thus, an important objective for this work is to develop a tool which allows the analyst to examine an array of different scenarios and different project constraints at its early stages. This ability is extremely useful, especially while crafting/responding to a request for proposal and negotiating terms and conditions of the concession agreement. 6 Introduction 1.4 M E T H O D O L O G Y A comprehensive review of the literature was performed as it relates to issues of risk assessment and risk management in construction projects, BOT intricacies and peculiarities, adoption of alternative modes of procurement in construction projects including the benefits and disbenefits of each approach, and case studies. In undertaking this task, the prime goal was to identify knowledge gaps, develop an understanding of the PPP process from its early stages through to the implementation phase, and assess the means with which the sought objectives can be achieved. Pursuit of these objectives was done largely through developing a robust economic evaluation/investment model which embraces all phases of the project life-cycle, and provides a mechanism for unifying the phases and the cost, time and scope consequences of the performance/risk dimensions which characterize a project. As a fundamental prerequisite to this work, the different risk categories likely to affect a project are analyzed. In so doing, a structured approach was developed which builds on extracting experts views on particular risk categories and their respective positive or negative impact on the different project parameters. In particular, cost & time, technical, environmental, economic, financial, political and regulatory, organizational & contractual, and stakeholder risks are addressed in this research. The moment analysis technique and the principles of engineering economics were employed to formulate a Net Present Value (NPV) model, with which robust analyses can be conducted and useful insights drawn. As formulated, the economic model has at least two advantages. First, it is an explicit mathematical formulation which facilitates developing insights into the deterministic and 7 Introduction probabilistic behavior of a project as a direct function of key input variables, by producing approximate results given their uncertain estimates. Second, it allows the analyst to maintain a global perspective on a project. In addition, an invaluable opportunity existed early in this research to participate in a study initiated by the Ministry of Transportation and Highways in British Columbia (MoTH-B.C). As part of this study the developed framework was employed to analyze an on-going bridge replacement/rehabilitation project in British Columbia - Canada. The objective was to examine its suitability for a BOT process as well as other PPP approaches. The extensive interaction with M o T H personnel and the project team has contributed significantly to developing a better understanding for the decision-making process from its initial stages. In the course of this study, several templates for the project process were prepared to simulate and compare traditional versus PPP approaches. They were made for generic projects as well as for the specific bridge project. The benefits and disbenefits for adopting PPP as opposed to the traditional approach were also investigated from the perspective of both the public and the private sectors. Finally, the case for and the case against PPP for that particular project was examined. Much of this work has directly contributed to the objectives of this research and their pursuit. 1.5 S T R U C T U R E O F T H E THESIS The following chapter lays out the findings of the literature research on the subject area. It examines the various members of the PPP spectrum, summarizes the benefits and disbenefits of adopting PPP from the perspective of both the public and the private sectors, and overviews related previous works. Chapter 3 presents a case study on the Northumberland 8 Introduction Strait Crossing BOT project. This study is presented to serve two specific purposes. First, to identify the ingredients of a typical PPP project and highlight the associated risks and uncertainties. Second, to lay the groundwork for the proposed framework and demonstrate its ability to handle such risks and uncertainties. Both of these two chapters contribute to an understanding of the dimensions of the problem at hand and provide support for the objectives sought in this research. Based on the findings described in these chapters, an overview of the proposed framework is presented in Chapter 4. It embraces the entire PPP process and includes identifying the motives of both the public and the private sectors to engage in such a process, and concludes with signing the concession agreement and finally its implementation. Chapter 5 describes the objectives for an economic model and details of the model developed to respond to them. Chapter 6, presents a tool for assessing potential project risks. It consists of a structured approach for producing the input values which will be directly used in the economic model explained in Chapter 5. Chapter 7 then presents selected results for a hypothetical project to illustrate some of the diverse and significant issues that have to be addressed when assessing a project's suitability for a PPP approach. This hypothetical project is abstracted from the on-going bridge replacement/rehabilitation project mentioned earlier. Finally, the thesis concludes with a description of the contributions of this work, and suggested areas for further research. 9 C H A P T E R 2 - L I T E R A T U R E R E S E A R C H 2.1 C H A P T E R O B J E C T I V E S The objectives sought in this chapter are to summarize the relevant findings in the literature about Public-Private Partnership (PPP) approaches, and benefits and disbenefits from the perspectives of the public and the private sectors. In so doing the need for a structured process to qualitatively and quantitatively analyze such projects is demonstrated. Current analysis frameworks and their major shortcomings are also reviewed. While there is a host of both macro and micro issues concerning PPP, emphasis in this research is on the latter. That is, the views sought in the literature are those pertaining to the investment and risk analysis of a project from both public and private sector perspectives in so far as they are directly attributable to the project's cash flows, and can be expressed in the form of quantitative models. Thus, it is not intended in this research to provide an economist's or planner's perspective on the appropriate roles for government in the economy, nor does it dwell on benefit/cost analysis issues, etc. In particular, this research will concern itself with developing quantitative and qualitative tools to assist in assessing the applicability of a project for a PPP procurement approach and for determining the most equitable distribution of roles and risks among participants. Throughout this research, an assumption is made that the project to be analyzed corresponds to a new facility either to replace an already existing one, or a new green field project. In either case it will be a user-pay facility. 10 Literature Research An extensive literature search was conducted in order to identify: • the spectrum of public-private partnership approaches, and their pros and cons from both public and private sector perspectives; • literature pertaining to the essential ingredients for a project to be a good candidate for a public-private partnership approach, including critical success factors; • the risks and their allocation associated with different public-private partnership arrangements; • intricacies and peculiarities of a specific form of PPP mode of procurement, namely BOT; • literature pertaining to existing and proposed qualitative and quantitative analysis frameworks for PPP projects, for use in selecting the PPP arrangement best suited to a particular project, and assisting in negotiating the terms of a concession agreement; and, • case studies. The starting point is a definition of PPP as set forth in the paper by Reijniers (1994): "Bringing about, maintaining, managing and operating provisions and activities by means of a project-wise approach by the public and private sectors, starting from a joint risk acceptance as regards estimated costs and expected returns, aimed at the joint realization of commercial and social objectives." The value of this definition lies in the recognition that both sectors assume risks, contrary to the view of some that PPP's are useful mechanisms for off-loading all risk to the private sector, and that a complex agenda of objectives exist. Each party in this onerous and long process has its own objectives that could be and often are very different from all the others. 11 Literature Research Reijniers (1994) points out that the interests of the public sector deal with: • legislation, regulation and authorities • political opinion and political influence • democratic decision-making processes • the minimization of risks • the realization of a social goal, while the interests of the private sector are directed at • achieving returns on the invested funds • daring to take business risks • having to anticipate market and competitive developments • realizing a corporate goal. The differences in these objectives, and in the working cultures of the public and private sectors - i.e. "there is a difference in management approach; there is a difference in the perception of risks and their consequences; there is a difference in decision-making processes; and there is a difference in the opinion about the time factor (Reijniers, 1994)"- can create significant tensions between the public and private participants in a project, and in some instances, can make the perceived benefits of a PPP arrangement unattainable. Recognition of the respective strengths of each sector, identification of potential risks and their relative magnitude, and an allocation of responsibilities that reflect these strengths to manage risks when negotiating the terms of a PPP arrangement may be viewed as factors critical to the success of a PPP project. 12 Literature Research 2.2 C H A P T E R S T R U C T U R E This chapter is composed of two consecutive and interrelated sections, each of which contributes to developing an appreciation of the uniqueness of the problem addressed in this research and an understanding of the knowledge gaps that currently exist in the literature. The first section highlights the unique characteristics of PPP arrangements in contrast with the traditional approach, and despite the demonstrated need, the lack of analytical frameworks that assist in evaluating and negotiating such projects. A brief overview of the different PPP approaches is given including definition of the salient characteristics of each arrangement, and identification of roles of the private sector. This is followed by a summary of the relevant findings in the literature as they pertain to the general motives and perceived benefits/disbenefits in adopting a PPP approach versus a traditional one, from the viewpoints of both the public and private sectors. The paucity of the literature dealing with such arrangements is further illustrated by examining the current knowledge base about a specific form of PPP arrangements, namely BOT. A summary of the viewpoints of various authors as to the critical success factors for a successful PPP undertaking is then made, which illuminates the skills that the proponents of PPP projects must possess. This section then concludes with a commentary on knowledge gaps and research challenges. The second section, recognizing the dimension of the problem and the objectives of this research, focuses on existing attempts to address them and indicates their relevant strengths and weaknesses, thus providing important background to this thesis. An overview of current and emerging state-of-the-art analysis frameworks and supporting tools designed to assist 13 Literature Research decision-makers in assessing the advantages and disadvantages of adopting a PPP approach for a specific project, and in determining the most appropriate PPP mode is provided. 2.3 T H E UNIQUENESS O F PPP A R R A N G E M E N T S 2.3.1 The PPP Spectrum Various PPP forms exist, in which the roles and the risks shared by all parties involved vary considerably. Contingent upon the distribution of these roles and risks among the project participants, different and completely novel project perspectives may arise. Both sectors in this case will have to demonstrate great skills and creativity to be able to manage new situations with which they are unfamiliar, and most importantly, negotiate at the outset, terms and conditions that best suit their abilities and expectations. In practice, there is a quasi-continuum of contracting or procurement forms which encompasses the full spectrum from a fully-public approach or traditional approach, to a fully-private approach. This continuum is depicted in Figure 2.1. Fully Public 0