PPP Operating Models: Managing the Transition for Public and Private Partners 24 Feb 2016
A lot of attention is brought to public-private partnerships throughout the planning and procurement stages, right up to financial close where media and political coverage is often at its height. However, once substantial completion has been reached, construction risk is evacuated and officials cut ribbons – projects need to transition into the operations phase.
This underappreciated, transformational stage can be one of the most perilous, and getting it wrong can create problems that can haunt both private and public partners for years.
In this blog, we’ll be looking at why the transition from transaction close and construction phase to operating phase can be a stumbling block for many PPP projects, and how ignorance and inattention can combine to create significant problems throughout the asset’s lifecycle for both public and private partners.
From construction to operations: the end of the beginning
Once PPP operations start, the originating finance teams and their advisors have long moved on to other transactions, the procurement authorities’ focus reduces and the hundreds (sometimes thousands) of design and construction professionals have burnt through the project’s capital expenditures and moved on to new construction sites.
While not wishing to diminish the massive role all of these players have in bringing projects to life, the true nature of a well-run PPP comes into fruition during the thirty years following substantial completion and commissioning.
There are a wide range of interested parties at the outset of operations for a PPP. Lenders are interested in the ratios and debt service payments made on time. Sponsors are watching distributions tests, making sure that they are getting the returns they were planning on. Sponsors, if looking to refinance or to sell their stake will want the dedicated operating model to feed into an ad hoc transactional model. And finally, for the public authority, the operating model will be an essential tool to monitor project performance and to ensure proper oversight throughout the operations phase.
On both public and private sides, one team will rarely be involved throughout the entire concession. This will make the onboarding of new recruits inevitable. Both teams will require an ad hoc financial tool to ensure that these transitions are done smoothly. The public and private operating models will play a crucial role in capturing the project’s lifecycle events and memory.
From financial close to operations
Managing the transition effectively requires people who are experienced in taking a model that was fit for one purpose (raising finance at financial close) and building a tool that will follow the project’s events year by year (a dedicated model for operations). With the wrong tools in place, projects can go through a painful process, reducing profitability and effective governance or hindering operations for years.
CASE STUDY CANADA
From a historical perspective, since the Confederation Bridge PPP was signed in 1993, the Canadian deal flow has increased exponentially (see figure 1). If we consider the recently announced Trudeau infrastructure stimulus package, this trend should continue (or even accelerate?).
In Canada, a raft of long-term projects are nearing completion and are set to enter operations phase in the coming years. According to the Canadian Council for Public Private Partnerships, approximately 150 projects have already reached operations phase in Canada. About another 250 projects could reach substantial completion or financial close in the years to come. In other terms, the pipeline of projects scheduled to enter operations phase has never been greater in Canadian history.
In the next 5 years, 50 to 100 projects should come online. In a 10 year horizon, taking into account the Trudeau infrastructure stimulus, the number of additional projects reaching operations stage could be as high as 250.
As more and more projects reach substantial completion and transition into operations, both public and private partners are starting to understand the need for bespoke operating models. The next few years will inevitably generate demand for able professionals to create tools to help manage the transition from construction to operations and support public and private teams throughout the assets’ lifecycles, including extraordinary events such as private debt refinancing and changes of ownerships.
Managing the transition
Understanding the importance of managing this transition is definitely the first step to ensuring a project doesn’t meet any unnecessary delays or inefficiencies, but it is worth taking this analysis one step further.
Both public and private partners need a bespoke operating model for the same asset. The structure of the public and private Operating Model should be anchored in the financial close model, however this is just the starting point. The working model for both sides of a partnership need to be fundamentally different yet fully complementary. Again, either side trying to run an efficient operation using the same unified operating model is likely to encounter problems.
In the weeks to come, we will be looking at specific steps both public and private teams should consider taking in order to ensure their operating models are properly designed and updated on a periodic basis throughout operations. The topics we will cover include:
Key specifications for public and private operating models
How to design and build operating models
Our methodology for auditing operating models
Training and reporting activities
In the meantime, if you’re looking ahead to a transition into PPP operations, or simply want to discuss planning for a transition, we’d love to hear from you.