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3.6–3.8-Group-Exercise-on-PPP-Feasibility-Studies.pptx
- 1. PPP Training Program 3.6 –3.8: Group Exercise on PPP Feasibility Studies
- 2. 2 • A growingnumber of municipal & regional governments are implementing PPPs to recycle municipal solid wastes • Focus on: • Cardboard & paper materials • Plastics • Glass • Compostable organic materials • Common PPP structures are: • Concession: City grants exclusive license (ie “concession”) to private developer to collect & process municipal solid wastes & then sell the recycled products 2 PPPs in Waste Recycling & Processing
- 3. 3 3 Waste Recycling &Processing PPPs Private Owner /Investor Banks & Lenders $ Gotham City Government Citizens & Households Waste Recycling Concession (Exclusive) PPP Contract Loans Repayment Equity PPP Private Partner (Special Purpose Vehicle – SPV) Collection of Solid Wastes Local Businesses & Institutions Bulk Purchasers of Recycled Products LANDFILL Sale of Bulk Recycled Products Disposal of Residual Wastes
- 4. 4 • Cost-Recovery: Oftenthe revenues from sell bulk recycled materials does not cover the entire costs of waste collection, separation, processing, and disposal of residual non-recyclable materials. In this case, the City may need to pay the private partner for collection, etc. • Municipal Benefits: Often the benefit to the municipality is not additional revenue-generation (ie revenue-sharing with the private partner). Instead it is avoiding having pay the current costs of waste collection & disposal. • Waste-Stream Quality: Municipal Solid Waste can be very heterogeneous. The percent of recyclable materials in the waste stream can vary greatly over time, and differ from what a PPP feasibility study & or PPP tender documents state. Municipalities are often required to guarantee minimum quantities & qualities of wastes for the private partner. • Managing Stakeholder Impacts: Often small-scale, low-income, informal, recyclers already depend heavily on existing waste collection systems (ie no formal recycling) for their livelihoods. A new PPP could completely remove their economic livelihood. 4 Waste Recycling PPPs: Key Challenges
- 5. 5 5 PPP Financial ModelCase Example: Background on KERFLOKISTAN • Kerflokistan: An Emerging Market Economy • GDP per Capita per Year: $4,000 • Population 40 million • Current crisis in infrastructure & public services due to decades of lack of public investment under previous single- party regime. • New economic reform policies of liberalization, competition, and private sector-led growth expected to increase economic growth from 1% to 4% over next 5 years. • Inflation projected at 7% for next 5+ years • New Government has launched a new Municipal PPP Unit (MP3 Unit) to identify and accelerate local Government PPP transactions in infrastructure
- 6. 6 6 “Informal recyclers” Current WasteCollection By Gotham City
- 7. 7 • Gotham City,a medium-sized city in Kerflokistan: population 300,000 • Gotham City currently spends $1,000,000 per year on municipal waste collection & disposal • However, waste collection service is not reliable, due to inadequate maintenance of trucks. Illegal dumping of wastes along road-side and on vacant plots of land is common. • City has no official recycling program. However, recycling by low-income “informal recyclers” is reportedly common. No official data exists on the current levels of recycling by these informal recyclers. • National Policy is to encourage recycling and reduce waste generation, but there is no official plan yet, with clear targets or any clear financial incentives or supports for municipal government recycling investments • Gotham City lacks the funds to construct and operate a solid waste management recycling program to address the problem 7 Gotham City, KERFLOKISTAN
- 8. 8 Group Assignment #1 1.Identify all of the key stakeholders who would need to be included in this project as a PPP 2. Identify the most important risks facing each key stakeholder group 3. Propose how the risks should be allocated (or shared) between the stakeholder groups: Government (Gotham City) Interested Private Developers 8
- 9. 9 9 PPP Financial Model 3-CAPITALINVEST.: -Construction - Depreciation 5-PROFIT & LOSS STATEMENT: +Revenues(10 yrs.) - O & M Costs -Interest expenses -Depreciation Exp. -Taxes -= Net Income 2-DEMAND: Vehicle Pop. -Projected Pop. over 20 yrs. = Required Capacity 6-CASH FLOW STATEMENT Net Income + Depreciation - Debt Principal Paymnts. = Cash Flow DSCR IRR 4-FINANCING: -Debt (term, %, DSCR) -Equity (Gearing & RoE) - Loan Repayment Sched A.TARIFFS Bulk-Purchasers/ City Support? B. DSCR Lenders C. IRR Investors 1-INPUTS & RESULTS
- 10. 10 • Municipal SolidWaste Stream Analysis: 10 Gotham City Recycling Project Feasibility Study:Technical & Cost Estimations Gotham City Regional Population (2016) # of People 300,000 Gotham City Regional Population Growth Rate % 1.5% Total Municipal Solid Waste Volume (2016) tonnes/Year 100,000 Annual Growth Rate in Municipal Solid Waste Volume % 2.5% Percent of Recycleable Paper & Cardboard % 17% Percent of Recycleable Plastics % 12% Percent of Recycleable Glass % 3% Percent of Recycleable Metal % 1% Total Percent of Recycleable Materials % 33% Recovery Rate (% of Recycleable Materials Recovered) % 30% Annual Growth Rate in Recovery of Recycled Materials (Years 1 - 5) % 5% Annual Growth Rate in Recovery of Recycled Materials (Years 6 -10) % 0%
- 11. 11 11 Capital Investments 3 -CAPITAL EXPENDITURE Assumptions Units Civil Works & Site Preparation $ $50,000 Recycling Facility Construction $ $500,000 Waste Sorting & Packaging Equipment $ $250,000 Number of Trucks # 6 Cost per Truck $ $70,000 Number of Recycling Bins # 500 Cost per Recycling Bin $ $500 Start-up Working Capital ( = 3 months x Total O&M Costs) $ $50,000 Total Capital Investment $ $1,520,000 Annual Depeciation Rate on Assets % 10%
- 12. 12 12 Projected Revenues Revenues: Sale Priceper tonne of Recycled Paper & Cardboard $/tonne $125 Sale Price per tonne of Recycled Plastic $/tonne $45 Sale Price per tonne of Recycled Glass $/tonne $50 Sale Price per tonne of Recycled Metals $/tonne $400 Annual Growth Rate in Recycled Materials Sales Prices % 1% Annual Subsidy Payment from Gotham City $200,000 Total Revenues (Year 1) $1,164,500
- 13. 13 13 Financial Model Results RESULTS InternalRate of Return (IRR) on Equity % 35.1% Reinvestment Rate % 10.0% Modified Internal Rate of Return (MIRR) on Equity % 23.6% Minimum Debt Service Coverage Ratio (DSCR) Ratio 1.48
- 14. 14 14 ($1,000,000) ($800,000) ($600,000) ($400,000) ($200,000) $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 1 2 34 5 6 7 8 9 10 11 Project Year Gotham City Recycling PPP: Private Investor's Net Cash Flows
- 15. 15 • What ifthe percent of recyclable wastes falls from 30% to 25%? Is the PPP project still bankable? • The proposed structure includes an annual payment from Gotham City of $200,000 per year? Is this beneficial to the City, or not? Should a PPP that is getting revenues from selling bulk recycled waste also receive an Availability Payment from the City – Or is this just wasting public money on “subsidizing private profits”? • Should the City offer to guarantee of minimum level of supply of solid waste to the private partner? • Should Gotham City ask for a revenue-sharing agreement, for revenues that are above a minimum-level? • What role should the City take regarding the impacts on the current informal recyclers in this PPP process? 15 PPP Case Exercise Questions:
- 16. 16 Gotham City’s PPPTender for Municipal Solid Waste Recycling • Gotham City issued a Request for Qualification (RfQ) & short-listed 4 private bidding consortia: 1. Roma Recycling Inc. (RRI) 2. Poa Kachizi Pickers, Inc. (BPI) 3. Enviro-Tech, Inc. (ETI) 4. Garbage-In & Garbage-Out (GIGO) 16
- 17. 17 • Concession structure:10 year concession. Concessionaire earns its own revenues from sales of recycled wastes to bulk purchasers + payment from Gotham City Gotham City Recycling PPP Structure PPP Risk Category Government Private Concessionaire Land Acquisition Gotham City Administration Construction Cost Risk Private Concessionaire Financing Risk All financing for project is raised by the Private Concessionaire Completion Risk Private Concessionaire (Concessionaire provides a performance bond equal to 1 year of estimated annual revenues during construction) Performance Risk (Ability to meet perform all required waste collection standards & procedures) Private Concessionaire (Concessionaire provides a performance bond equal to 1 year of estimated annual revenues until year 20) Demand Risk Gotham City guarantees: • A minimum annual payment to the private partner, set through competitive tender. Private concessionaire assumes demand risks for any levels above the guaranteed annual payment from Gotham City. Political & Regulatory Risks Gothem City Adminstration Inflation Shared (Private Concessionaire may petition Gotham City Administration for payment changes due to inflation as needed during life of the contract) Shared (Private Concessionaire may petition Gotham City Administration for price changes due to inflation as needed during life of the contract) Environmental Risks Private concessionaire is liable for any environmental impacts during the life of the PPP contract 17
- 18. 18 • Capacity: • Providecapacity to collect and sort up to 150,000 tonnes of municipal solid waste per year, and an average of 75 tonnes per day. • Ability to recover and to sell four different types of bulk recycled waste products: • Paper & Cardboard • Plastics • Glass • Metals • Ability to transfer and dispose residual non-recyclable waste projects in a sanitary landfill • Timing: Facility must be operational within 1 year of the private concessionaire’s reaching of financial closure for this project. Concession term of 10 years. • Performance: • Reliability: Private partner must be available to provide waste collection and recovery service 99% of the time, according to its scheduled hours of operations. Gotham City’s Recycling PPP Project Output Standards 18
- 19. 19 PPP Technical ProposalEvaluation Criteria: “Technically Responsive, or Not?” • Legal: Are all of the legal conditions and risk-allocation measures contained in the model Concession Contract acceptable to the private bidder? • Design: Is the design determined to be technically feasible and provide the capacity to meet the performance standards of the PPP project? • Timing: will the private partner be able to reliably provide the services by the required start date and throughout the 10-year life of the contract? • Strategy for Raising Financing: does the private partner have a realistic and practical plan for raising the financing required for the project? • Operating Plan & Performance: Will the private partner be able to meet all of the required technical performance output standards including both safety and emission standards? 19
- 20. 20 PPP Technical Proposal#1: Roma Recycling, Inc. (“RRI”) • Legal Structure: All terms & conditions in the model Contract acceptable • Technical Design & Operation: • Construction of a 6,000 m2 Recycling Facility • Purchase of 6 trucks • Hiring of 75 total staff • Timing: Construction will be completed 12 months of financial closure • Strategy for Financing the Project: • Limited-recourse project financing basis, require 1 year reach financial closure • Operating Plan & Performance: • We will provide the capacity to collect & process 150,000 tonnes of wastes per year and an average of 75 tonnes per day • Reliability: Our facility will be available a minimum of 99% of the time Average inspection time: • Expected hours of facility operation: 9AM to 5PM (8 hours per day), 260 days per year (5 days per week) • Will meet all technical standards as required by the PPP Tender Documents 20
- 21. 21 PPP Technical Proposal#2: Poa Kachizi Pickers, Inc. (“BPI”) • Legal Structure: All terms & conditions in the model Contract acceptable • Technical Design & Operation: • Construction of a 3,000 m2 Recycling Facility • Purchase of 4 trucks • Hiring of 125 total staff • Timing: Construction will be completed 12 months of financial closure • Strategy for Financing the Project: • Limited-recourse project financing basis, require 1 year reach financial closure • Operating Plan & Performance: • We will provide the capacity to collect & process 150,000 tonnes of wastes per year and an average of 75 tonnes per day • Reliability: Our facility will be available a minimum of 99% of the time Average inspection time: • Expected hours of facility operation: 7AM to 11PM (16 hours per day), 360 days per year (7 days per week) • Will meet all technical standards as required by the PPP Tender Documents 21
- 22. 22 PPP Technical Proposal#3: Enviro-Tech, Inc. (“ETI”) • Legal Structure: All terms & conditions in the model Contract acceptable • Technical Design & Operation: • Construction of a 4,500 m2 Recycling Facility • Purchase of 5 trucks • Hiring of 90 total staff • Timing: Construction will be completed 12 months of financial closure • Strategy for Financing the Project: • Limited-recourse project financing basis, require 1 year reach financial closure • Operating Plan & Performance: • We will provide the capacity to collect & process 150,000 tonnes of wastes per year and an average of 75 tonnes per day • Reliability: Our facility will be available a minimum of 99% of the time Average inspection time: • Expected hours of facility operation: 9AM to 5PM (8 hours per day), 314 days per year (6 days per week) • Will meet all technical standards as required by the PPP Tender Documents 22
- 23. 23 PPP Technical Proposal#4: Garbage-In, Garbage-Out (“GIGO”) • Legal Structure: All terms & conditions in the model Contract acceptable • Technical Design & Operation: • Construction of a 5,500 m2 Recycling Facility • Purchase of 6 trucks • Hiring of 80 total staff • Timing: Construction will be completed 12 months of financial closure • Strategy for Financing the Project: • Limited-recourse project financing basis, require 1 year reach financial closure • Operating Plan & Performance: • We will provide the capacity to collect & process 150,000 tonnes of wastes per year and an average of 75 tonnes per day • Reliability: Our facility will be available a minimum of 99% of the time Average inspection time: • Expected hours of facility operation: 9AM to 5PM (8 hours per day), 260 days per year (5 days per week) • Will meet all technical standards as required by the PPP Tender Documents 23
- 24. 24 24 Working Group Assignments: 1.Evaluate each of these 4 Technical PPP proposals. 2. Decide whether each bid is “technically- responsive” or not. • (The next step will be the separate opening and evaluation of the PPP cost proposals.)
- 25. 25 25 Opening of CostProposals: Gotham City Solid Waste Recycling PPP BidderName 1 2 3 4 5 6 7 8 9 10 #1 RomaRecylingInc.("RRI") $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 #2 PoaKachiziPickers,Inc.("BPI") $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 #3 Enviro-Tech,Inc.("ETI") $160,000 $160,000 $160,000 $160,000 $160,000 $135,000 $135,000 $135,000 $135,000 $135,000 #4 Garbage-In,Garbage-Out("GIGO") $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 $175,000
- 26. 26 $100,000 $110,000 $120,000 $130,000 $140,000 $150,000 $160,000 $170,000 $180,000 $190,000 1 2 34 5 6 7 8 9 10 Gotham City Recycling PPP Bids #1 - Roma Recyling Inc. ("RRI") #2 - Poa Kachizi Pickers, Inc. ("PKPI") #3 - Enviro-Tech, Inc. ("ETI") #4 - Garbage-In, Garbage- Out ("GIGO")