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  • PPP Operating Models for Public Authorities: key specifications and best practices

    By Jean-Francis Strayer / 23 March 2016 / Comments

    In our last blog, we examined the planning and procurement stages for Public and Private Partnerships (PPPs) up to financial close – and how projects can make the transition into the operations phase.

    Both public and private partners work together to secure the various sources of funds required to move projects into construction. Whilst the private partner’s role is clearly set out in the Partnership Agreement (PA), the public partner’s role after financial close may seem less obvious, but it is just as important to the success of the PPP.

    In this blog, we will be examining ways the Public authority can ensure a smooth transition into the construction phase.

    Public authority PPP operating models in a nutshell

    The primary objective of the operating model for the public authority is to ensure the risks that were meant to be transferred to the private partner are monitored and addressed, generating the value for money originally sought at financial close. Unlike operating models for private entities, the public authority doesn’t need to worry about debt coverage ratios, return targets and reserve accounts. However, public authorities nevertheless have specific responsibilities that require attention throughout the partnership agreement.

    Operating models for public authorities are structured as a project management tool with the ability to receive periodical inputs (e.g. annual inflation data, performance tracking, traffic or demand updates) and to produce outputs supporting the authorities’ decisions (asset performance report, payment request, approvals of change orders, etc.). The model’s objectives are:

    • Keep the private partner accountable
    • Make timely and accurate service payments for the availability of the asset
    • Monitor performance and ensure penalties are enforced
    • Monitor demand or traffic throughput and apply any revenue sharing mechanisms

    Whether the PPP includes Operations or Maintenance components (DBFM and DBFOMs), or the procurement only plans for design and construction, with or without construction financing  (DB, BF, DBFs) including any kind of demand risk, the public authority will need a dedicated operations team to manage their end of the partnership.

    Top 5 specifications for Public Authority operating models

    1. Periodic updates and Performance tracking

    • The initial objective of the public authority’s operating model is to determine the exact Availability Service Payment (ASP) due to the private partner. In order to be effective, the operating model should allow for key inputs (e.g. CPI and indexation) to be updated periodically, moving from a “forecast” approach to an “actuals” approach, showing variations with the forecast along with trial balances where applicable.
    • Depending on the complexity of the transaction, the public authority model could allow for more complex updates (e.g. traffic, demand or tariff risk) and the model should include a more comprehensive reporting for these demand variations. This monitoring of demand variations can become essential, especially in cases where the public authority will bear all or part of the demand risk for the asset (e.g. Light Rail Transit, student housing or toll roads).
    • Performance tracking is another essential periodic update that falls under the responsibility of the Public authority. The Authority will need to apply payment deductions to the ASP based the tracking of the private partner’s performance focussing on everything that might go wrong.
    • Based on the tracking of the private partner’s performance, the Authority will apply payment deductions to the ASP (e.g. number of potholes on the road, number of beds were not available in a hospital, number of units available in a student housing project, etc.).

    2. Invoice reconciliation

    • Based on the variety of input updates and potential payment deductions, the tracking and processing of invoices issued by the private partner can become a tedious task for some P3s.
    • The operating model should include an invoice reconciliation function that can be used when the Public Authority receives an invoice from the private partner (e.g. ASP, Facilities Management charges, etc.).
    • The Public authority operating model should then allow the confirmation of invoice amounts before proceeding with the payment and help the Authority to justify any changes the payment schedule.

    3. Internal and external reporting

    • One key aspect of a well-designed Public authority operating model is the ability to easily prepare periodic reports showing a range of data in a customised dashboard or summary sheet. Such a model should allow for a high-level presentation of key indicators in the form of a snapshot of the project’s current status in NPV and nominal dollars as well as a detailed view for more in-depth analysis.
    • Users will then be able to easily produce customised output sheets for archiving and reporting purposes, such as supporting a request for payment to Treasury board or a summary update to the Board of Directors.

    4. Project management tool used for on-boarding a project team

    • Going forward, the Operating Model becomes a key element of the Public Authority’s project management activities. It helps to explain the payment mechanism and related project finance calculations to new team members and offers a historical perspective on the project as it captures all of the past periods as well as the remainder of the forecast.

    5. Portfolio model

    • Public authorities will generally need to manage a pipeline of PPP projects which will all inevitably enter into operations.
    • Each project will have its own operating model. However, in order to easily manage the multiple projects the Authority will need a portfolio model.
    • The portfolio model allows extraction of critical information from the individual operating models and easily aggregates sensitive outputs in a standalone report showing the overall performance of all PPPs in operations.

     

    The design and development of operating models

    The following conceptual diagram provides an overview of the starting point of any modelling engagement the Operis team would be engaged on. Using a template model and after thorough document review, the modelling team would customise the public authority model to meet the project’s specificities.

    op model blog

    While most of the model’s inputs and workings would be based on template sheets, the output sheets (summary/dashboard, reporting outputs and project-specific outputs) would be fully tailored to meet the project’s needs.

    Auditing an Public Authority Operating Model

    Based on the complexity of the model, an independent Operis team would be engaged to perform an audit of the operating model. The audit team would focus on a thorough review of the model’s workings (structural and formulaic checks), the supporting documentation (Partnership Agreement, payment mechanism and other schedules) and perform a series of stress tests in the form of advanced sensitivities to check the robustness of the model through time.

    Of course, both public and private operating models coexist for each project. That’s why in the coming weeks we will be sharing a complimentary paper on operating models for Private partners; leveraging our extensive experience in developing such models on a wide range of asset classes including accommodation P3s, renewables, transportation, municipal infrastructure and others.

    If you would like to discuss operating models for public authorities or for Private partners please feel free to reach out to our team at info@operis.com

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