The role of advisors and consultants in PPP projects

The transaction advisory services arena experienced vibrancy in 2015 as governments in East Africa, through their PPP Units, created their pipeline of projects and put out tenders for Transaction Advisors with the support of the World Bank IFPPP project. Most of the bidders came from the more mature PPP markets in countries where projects had been implemented, bringing with them sector specific knowledge and relevant expertise. Global advisory firms that are domiciled in East Africa with a global footprint including PwC, KPMG and Deloitte also created consortiums to bid for the projects that spanned diverse sectors including education, science & technology, transport, energy, commerce & tourism, water, ports, industry & manufacturing, environment, water & natural resources, health, agriculture, livestock & fisheries and housing.

By 2020 Kenya had a pipeline of 80 PPP projects in its pipeline with 28 awaiting guidance from the contracting authorities. 12 of the projects attained commercial close, a few achieved financial close and even fewer went to construction and operationalization. The Nairobi Expressway, 3 geothermal plants, Ngong-Kiserian-Isinya road under the 10,000 road annuity program, are amongst the projects that successfully went to construction. The PPP program experienced many challenges, further complicated by Covid19 pandemic, which saw many transactions left in abeyance.

?Details of these projects can be found in this report: Kenya-PPP-Pipeline-Status-Report-January-2020.pdf (pppunit.go.ke)

With further improvements in the institutional and regulatory framework and a refinement of the project pipeline, there is a renewed focus on PPPs. East Africa has a diverse set of homegrown transaction advisory services firms, engineering consulting firms, legal firms, amongst other outfits that can partner with international transaction advisory services firms to support MDAs (Ministries, Departments and Agencies) who form the bulk of implementing authorities in developing their PPP infrastructure projects.

Accelerating the implementation of PPP projects can however not be discussed without delving into the matter of human capability and capacity. In previous articles I have written about institutional capacity and the initiatives that have been undertaken to prepare for delivery of PPP projects. This article will focus on the role transaction advisors and consultants play in supporting implementation of PPP projects, and the final article in this blog series will look into human capacity and capability for PPP infrastructure projects.

Research for this article heavily borrowed from the European Investment Bank (EIB) publication: Role and Use of Advisers in preparing and implementing PPP projects (eib.org). It was published in March 2014 and provides a useful template that can be adopted by Authorities in East Africa who will engage advisors for their PPP projects. The overall objective of the publication is to help public contracting authorities, especially less experienced ones, to understand what they can reasonably expect from their advisors and how they can obtain the best advice from them.

The context for advisory services in PPPs

Many implementing authorities are not frequently exposed to PPP transactions and do not maintain the required range of competencies in-house. Furthermore, the required skills need to be regularly refreshed to capitalize on recent experience, developments in market standards and innovation. Hiring advisors is often indispensable to an Authority undertaking a PPP project.

The expertise commonly needed spreads over various fields such as technical, finance, legal, market/demand, tax, accounting and insurance. The “theoretical” knowledge required also needs to be complemented with practical deal-making experience in areas such as project management or contract negotiation. Advisors not only bring skills and practical experience to the Authority but also additional capacity to face the unusual, intensive and non-recurrent workload that inevitably arises from implementing complex projects such as PPPs. The Authority may otherwise be exposed to significant risks in delivering the right project on the right terms. When they are managed efficiently, advisors work shoulder-to-shoulder with the Authority, to enable, foster and implement the best outcome for the project. By appointing experienced and reputable advisors, the Authority sends a positive signal to PPP market stakeholders that its project is well-resourced and can deliver its project effectively.

Developing PPP projects is a costly endeavor if the advisory "galaxy" demonstrated in the figure above is anything to go by. Careful selection and screening of projects to focus on the bankable ones, political will to see the process through and building capacity in the actors are key enablers in reducing wastage of financial resources, time and effort of all involved. Advisors and consultants on a PPP project support the project actors in various ways:

• Specific expertise at different stages of the project
• Practical and relevant experience
• Networks to attract the right private players to the project
• Credibility for the Authority
• Workload reduction
• Time management
• Project Management
• PPP process management

The entities providing PPP advisory services typically are:

• Law firms usually experienced in public/administrative law matters as well as business, financing and tax issues;
• Financial advisory companies that may be (i) part of an international accounting and advisory group/network, (ii) investment banks or (iii) smaller entities specializing in PPP or public service management;
• ?Technical firms that are often specialized by sector (transport, energy, water, social infrastructure, etc.). The term “technical” is used in a broad meaning and include, beyond the pure technical issues, issues such as demand/revenue analysis, costs estimation, environmental/social impact assessment, etc.; and
• ?Public entities, such as national or sectorial PPP units/directorates that have been tasked and staffed to advise on projects.

Some advisors may offer a broader PPP service beyond legal/financial/technical boundaries and may therefore act as multidisciplinary advisors and experts in project management. PPP projects are developed in a multi-disciplinary approach as illustrated in the matrix below.

The resource intensity of the tasks varies throughout the PPP Project life cycle as illustrated in the indicative overview of the workload for each member of the advisory team would typically face in a medium-size PPP project.

A good balance between in-house expertise and outsourced advisor expertise and capability assures this effort is sustained and risk exposure for the Authority is properly managed. The procurement strategy for appointing advisors is a key consideration for an Authority that wishes to see success in taking its projects from selection to financial close and construction.

The PPP project life cycle and role of advisors and consultants through the cycle

Even if it has appointed good quality advisors, the Authority must retain the ability to make choices itself. The Authority should expect its advisors to propose solutions or make recommendations but the ultimate decision-making role must remain with the Authority. In addition to the tasks they are specifically assigned, it is important that all advisors have a duty of “general advice” toward the Authority and act in a pro-active manner to contribute effectively to the success of the project. It is advisable that MDAs (Ministries, Departments and Agencies) develop in-house capability and retain some level of internal expertise for developing and implementing their projects. Typically the Project Manager is an inhouse resource but an external one may be hired for large or particularly complex projects.

Authorities may adopt two approaches to hiring their advisor and consulting teams:

• An integrated approach where the Authority hires a consortium of advisors in a single procurement.
• The Authority appoints each advisor in separate procurement procedures.

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The main advantages of the integrated approach include:

(i) a lighter process,

(ii) less involvement in coordinating the team of advisors during the assignment, thereby limiting, for the Authority, the interface risk between the various advisors and

(iii) more assurance that it will benefit from balanced advice.

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The main disadvantages are:

(i) less competitive pressure among advisors because of the difficulties of setting up consortia and

(ii) the risk of having to compromise on quality to obtain a comprehensive team of advisors at the expense of not getting the best in each field.?

?In between these two approaches, many mixed solutions are possible, such as mandating the technical advisor under a separate contract and appointing the legal and financial advisors as a consortium. The ultimate decision must be taken case by case considering:

(i) the local advisory market (e.g. the number of advisors, their experience),

(ii) the resources available within the Authority (both in terms of quantity and quality) and

(iii) the features of the project.

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The term of the advisor's contracts also varies depending on the objectives of the Authority. Short term contracts may be adopted to produce discrete deliverables such as the feasibility study, procurement support and operational management. Medium term contracts may also be adopted for continuity with some phases being conditional to give the Authority flexibility and they also come with advantages and disadvantages as outlined below.

The advantages of this approach include:

(i) a contract size that may foster competition at the procurement stage,

(ii)?a better overall service as the advisor will know the project from the outset and

(iii) a long-term collaboration between the Authority’s project team and the advisor, which may lead to a stronger partnership.

However, long-term contracts can have disadvantages such as:

(i) the risk of getting biased advice because of the advisor’s desire to see the project continuing and ultimately procured as a PPP and

(ii) the difficulty of changing advisor if performance is not satisfactory.

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East African governments are still in the early stages of implementing PPP projects and it is therefore advisable that Authorities select more integrated procurement approaches as these may limit interface and management risks for the Authority. Further It may often be advisable to adopt a mixed approach to contract terms that combines (i) an initial short-term contract for activities related to the assessment of the PPP option and subsequently (ii) a medium-term contract using conditional phases covering the project procurement phase and the initial period of the operational phase. In any case, the Authority must bear in mind that a contract may not be extended indefinitely due to the legal obligation for periodic re-tendering of its advisory services.

Stages a PPP project goes through and interplay between advisor responsibilities

1.1?? Project selection and definition

This stage consists of the Project identification (requirements and definition of expected outputs to meet requirements) and project pre-feasibility and feasibility studies (including supply or demand analysis, cost analysis and preliminary environmental assessment). In this stage the Technical/Market/Demand experts take a lead role with the Financial expert supporting with preliminary market sounding to test private sector appetite for the project, and the Legal expert assessing the legal feasibility of the project. This stage should not be rushed and this is the stage where projects that are not viable should be killed. Political support is particularly crucial at this stage to avoid the temptation of pushing pet projects that are not viable or pushing profit seeking projects that don’t have public interest and Value-for-Money consideration.

1.1?? Assessment of the PPP option

This stage is the most task intensive stage and has five steps of evaluation that are usually carried-out broadly simultaneously as they feed each other. A business case is developed as the consistent document that captures the business justification for initiating a project. The Financial expert is the lead in this stage. The five steps evaluate the following aspects of the proposed project:

• Affordability (the capacity to pay for building, operating and maintaining the project).
• Risks (identification and allocation)
• Bankability (level of willingness of prospective lenders to finance the project)
• Value for Money (the estimate of the whole-life or baseline costs of the project from the government's?perspective - compares the relative merits of PPP procurement against one or more other procurement routes, usually traditional public finance).?
• Reporting and accounting treatment

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In evaluating affordability the Financial expert develops a preliminary financial model aimed at assessing the main financial features of the project (e.g. costs, revenues, typical financing structure). They propose the macroeconomic indicators and financing structure, prepare a preliminary business case, assess basic budgetary and fiscal sustainability, and identify additional sources of funding such as grants. The Project Manager develops a preliminary integrated project plan and adopts a document management and storage system. The Technical expert provides input for the preliminary financial model, proposes costs and revenue assumptions and may propose a preliminary tariff policy for user-pay PPP options. The Legal expert may carry out a preliminary assessment of the legal issues related to the feasibility of the project as a PPP.

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When conducting the risk evaluation the Financial expert, Technical expert, Project Management expert and Legal expert identify macroeconomic and financing risks, technical and demand/revenue related risks, project management risks and legal, regulatory and administrative risks respectively, and all propose allocation of those risks based on the advisor’s experience on similar projects. The Financial expert supports the other advisors in evaluating financial impact of all risks and gathers data from the other advisors to run the preliminary financial model to assess the overall financial impact of the risks identified.

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Bankability assessment is primarily the role of the Financial expert to perform a market analysis to make sure the project will meet requirements of financial stakeholders. They advise the Authority in designing an attractive project for financial stakeholders and check the financial capacity of the Authority to bear the cost of the project over the long run. They also help secure additional public funding opportunities for the project (e.g. grants).

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Testing for Value for Money? requires the Financial expert to further develop the preliminary financial model to enable a comparison between the PPP option and the most probable alternative public procurement route. They collect data from the Technical expert and run the financial model to update and fine-tune the preliminary business case. The Project Manager compares the organizational implications of the various procurement options (traditional procurement, various procedures to procure a PPP, etc). The Technical Expert compares the procurement options regarding construction, operation and maintenance issues, output and outcomes, and highlights the differences in term of costs, demand, revenues and performance levels (including risk valuation). The Legal expert may contribute to identifying key differences between procurement options and procedures.

In evaluating Reporting and accounting treatment the Financial expert assesses whether the PPP can be expected to be on or off balance-sheet for the public sector for reporting purposes, and also assess how the project will be recorded in the public account. The Legal expert supports on the legal aspects of the risk allocation and other features relevant to the reporting/accounting treatment analysis.

2.1 Getting organized

The Project Manager takes lead in this stage of the PPP project and propose a workable project governance structure for the Authority (set out the decision-making chain and how key responsibilities and will be discharged by the Authority). They propose solutions to consult periodically with the various project stakeholders (end users, affected parties) and propose a roadmap for the project preparation, procurement and implementation in terms of reporting, timetable, allocation of financial and human resources, risk monitoring, and budget supervision etc. The Technical expert provide a realistic timetable for the technical implementation of the project whilst the Financial expert may help to establish monitoring tools for the Authority’s budget over the preparation and procurement phases of the project. The Legal expert may be involved in assessing administrative and legal issues as they arise.

2.2 Before launching the tender

This stage is another heavy lifting one that requires a multidisciplinary approach and a close collaboration among the various adviser and entails the following steps:

• Carry out further studies
• Prepare the detailed design of the PPP arrangement and draft the PPP contract
• Procurement procedure
• Bid evaluation criteria

It starts off with all experts fine tuning and updating previous studies in readiness for launch of the tender. The Financial expert prepares the business case and confirms the market “appetite” for financing the project and simulates the most likely financing solutions. They also assess the impact of tax provisions on the project.

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The Project Manager plays an important role coordinating the advisory team to ensure a balanced/reasoned outcome from the technical, financial and legal advice. The Legal expert produces a detailed risk matrix with input from the Technical expert and Financial expert? who contribute to the design of the risk allocation and mitigation strategy. Based on the input of other advisers the Legal expert designs the risk allocation and mitigation provisions.

The Legal expert also proposes an outline/draft of the PPP contract to be proposed to the bidders with input from the Technical expert (contractual provisions or/and advise on clauses dealing with the design and construction process, service specifications, information reporting, output requirements and performance measurement) and Financial expert (contractual provisions regarding the payment mechanism, the funding/financing features, reporting of key financial and accounting information, the financial consequences of an early termination of the contract, accounting and tax obligations, insurance requirements). The Financial expert runs the financial model to assess various risk allocation scenarios and contributes to the design and testing of the payment mechanism.

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The Legal expert proposes a procurement procedure considering national procurement legislation and the project features with input from the Project Manager, Financial expert and Technical expert who contribute to the analysis that feeds the choice of the procurement strategy and procedure to be adopted. The Project Manager may adapt the organization of the project procurement to ensure that it suits the selected procedure. The Legal expert proposes a bid evaluation process in accordance with the legal framework with input from the Technical expert (criteria regarding the technical and economic aspects of the project - quality of the design, technical robustness, relevance of technical solutions, demand, performance target) and Financial expert (criteria regarding the financial aspects of the project ?- e.g. cost to the Authority and/or the users, payments to the Authority by the private partner, suitability and robustness of the financing structure). The Project Manager may contribute to the discussion on evaluation criteria.

3.1 Bidding process

Note: Throughout this stage, the legal adviser together with the other advisers should ensure that the key procurement principles are followed (e.g. transparency of the decision-making process, equal treatment of bidders, confidentiality of bids).

This is a multi-step stage in which the Legal expert takes lead supported by the other experts and has the following steps:

• Procurement notice, prequalification and shortlisting
• Invitation to tender
• Interaction with bidders
• Evaluation of tenders and selection of a preferred bidder

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The Legal expert drafts the procurement notice and the prequalification questionnaire and proposes a list of appropriate publishing media. They assess the formal admissibility of expressions of interest and/or qualification submissions and prepares letters for both qualified and unsuccessful bidder. The Technical expert supports by assessing the technical capabilities of the bidders while the Financial expert assesses the financial capabilities of bidders to implement the project. The Financial expert may contribute to the drafting of the procurement notice and the prequalification questionnaire and propose a shortlist of bidders and draft a report justifying the Authority’s choice. The Project Manager organises a (electronic) data room (for large and/or sensitive projects mainly) that provides project information to the bidders and give clarifications as necessary. They also monitor risks that can compromise the procurement of the project.

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The Legal expert finalises the drafting of the PPP contract to be proposed to bidders, fine tunes the evaluation criteria, sets out instructions to bidders regarding the legal aspects of their bids with input from the Technical expert and Financial expert, and verifies the final version of the tender documentation before sending it to bidders. During interaction with bidders the Legal expert analyses the legal aspects of intermediate bidder submissions with a specific focus on the allocation of risks/responsibilities between the Authority and the bidder consortium and within the various components of the consortium itself. They manage bid clarification questions together with the Technical and Financial experts and participate in the preparation for and meetings with the bidders. The Financial expert analyses the financial aspects of intermediary bids with a particular focus on the financing structure and proposes a dialogue and negotiation approach tailored to the specificities of each bid (e.g. timing, intensity). Between each dialogue round they contribute to updating the tender documentation regarding financial issue. The Project Manager updates and fine-tunes the project timetable, manages the bidders’ access to the data-room and organizes clarification meetings, prepares and leads meetings with bidders, allocates the evaluation tasks among advisors and monitors risks that can compromise the procurement of the project and propose solutions to mitigate them.

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In the final step of this stage the Legal expert analyses the legal aspects of final bids, in particular, the proposed PPP contract amendments, leads clarifications on any issues, evaluates the legal aspects of the bid, reviews the draft evaluation report and prepares letters for successful and unsuccessful bidder. The Technical expert analyses the technical aspects of the final bids, participate in seeking clarifications on any issues, evaluates and scores the technical aspects of the bids and contributes to identifying the preferred bidder. The Financial expert analyses the financial aspects of the final bids (overall cost to the Authority, public guarantees sought, robustness, integrity and coherence of the financial model, acceptability of the main terms and conditions of the financing, etc), participates in seeking clarifications on any issues and evaluates and scores the financial aspects of the bids. The Project Manager monitor and coordinate the evaluation process, collates all inputs in an evidence-based report, contributes to identifying the preferred bidder and preferred bidder monitors risks that can compromise the procurement of the project and propose solutions to mitigate them.

3.2 PPP contract and financial close

This stage is jointly led by the Legal expert and the Financial expert supported by the other experts with the following steps:

• Final PPP contract
• Financing agreements
• Financial close

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The Legal expert leads discussions with the preferred bidder (clarifications, confirmation of commitments, negotiations) with the support of the Technical and Financial experts, and finalises legal annexes to the PPP contract with inputs from both experts. They also carry out a final review of the full PPP contract documentation with their input. The Project Manager together with the other advisers, organizes the framework for interactions with the bidders and monitors risks that can compromise the procurement of the project and propose solutions to mitigate them.

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The Financial expert takes lead in assisting the Authority in finalizing and executing the financing agreements and attaining financial close.? In the case of a financing competition, they oversee the process on behalf of the Authority. The Financial expert reviews the impact on the Authority’s payments/user charges of changes in the financial assumptions, reviews the financing agreement and reviews any proposed interest rate and currency hedging strategy. ?The Legal expert drafts the direct agreement between the Authority and the lenders (if any), reviews the financing agreements and ensure consistency with the PPP contract and the direct agreement, and together with the Financial expert assists the Authority in the negotiations with the lenders.

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The Financial expert supervises the financial close process on behalf of the Authority and runs the financial model to reflect the final macroeconomic/financial parameters and supervises the execution of any interest rate/currency hedging. The Legal expert organizes the financial close process, reviews the conditions precedent to financial close and prepares and reviews the execution of all project and financing agreement.

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Financial close?in Public-Private Partnership (PPP) projects is a crucial milestone, but it doesn’t mark the project’s end.?It sets the stage for construction and operational phases in PPP projects. Financial close occurs when the financing documents are signed, and the conditions precedent for financing have been met. It’s not just about signing the papers; it’s also about ensuring that the necessary financing is available for the project to proceed. The specifics of financial close can vary significantly across different jurisdictions and market practices. In some cases (e.g., Spain), the private partner has a limited time (usually six to eighteen months) after contract signing to arrange finance and execute financial agreements. In other scenarios (typically negotiated or dialogue processes), bidders may have already secured financing before contract award, leading to a quicker financial close.

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Regardless of when financial close occurs, it has implications for the authority overseeing the project. The authority must validate the financial agreements to ensure they align with the contract provisions and do not pose additional risks. In emerging markets, the authority often acknowledges the contract and validates the lender’s rights as agreed upon in the contract. While not direct guarantees, these representations give lenders confidence that they can exercise their rights if needed.

The stages after financial close do not follow a set out a typical contract management process as contract management activities depend significantly on the project characteristics and events arising during its life. Moreover, the way Authorities usually involve advisers at this stage is much less standardized than for the pre-financial close stages. The stages are:

4.1 Contract management

• Allocate management responsibilities
• Monitor and manage project delivery and service outputs
• Managing changes to the PPP contract
• Dispute resolution
• PPP contract termination or expiry

4.2 Ex post evaluation

• Institutional framework
• Analytical framework

The Kenya PPP Directorate has once again embarked on a concerted effort to evaluate projects and create a pipeline of bankable PPP projects. The jury is still out on how the development of next round of PPPs will fare this time around on the back of confirmed commitment that PPPs will be central to the country's development programs outlined in the Bottom-up Economic Agenda, which leaves the advisors cautiously optimistic and Authorities bullish to push their projects through.

Africa's leading financier of infrastructure projects, AfDB (has invested well over $44 billion in infrastructure—from roads to airports, seaports, digital infrastructure, water and sanitation and energy infrastructure) has confirmed PPPs will play a central role in their financing strategy. "So, infrastructure financing for us, going forward, should have to be a public-private partnership, with increased participation of the private sector." (Akinwumi Adesina, Africa Renewal e-magazine, October 2022 - Ongoing regional infrastructure will boost free trade in Africa | Africa Renewal (un.org).

This photo of two PPP projects that took different routes to successful completion and operationalization tell the tale of the dynamism experienced by Authorities and their advisor teams when developing PPP projects. The one of the left is of Nairobi Expressway which was conceptualized around 2014, designated as a PPP project in 2019 and was constructed, commissioned and launched in July 2022 following a record construction period of less than 2 years. The information about the project development process and financing is not readily available but it is said that the private partner, CRBC ( China Road and Bridge Corporation ) used their own money to construct the road expansion, interchanges and toll stations and will collect the toll fees for 27 years until their investment is recovered, then the road will revert to government.

The project required SMEC to manage and supervise construction of one of the largest highway projects in East Africa, within record time.? Spanning a highly complex urban environment with heavy vehicular and pedestrian traffic the project demanded diligent planning with regards to traffic management and safety. SMEC was appointed as the Contractor’s Engineer Nairobi Expressway (smec.com)

The one on the right is the Lake Turkana Wind Power (LTWP) Project?which was conceptualized in 2005 and went from groundbreaking in 2015 to full commercial operation in July 2017, and commenced operations in 2018 following the delay in completing the 428 km high-voltage power line from Marsabit to the Suswa sub-station in Narok by KETRACO. The project?received transaction advisory support from several entities during its development. African Development Bank (AfDB) played a crucial role in developing this project, having worked with the project developer since?2009.?They provided a?€115-million loan?to the project and acted as the?Mandated Lead Arranger?for the transaction1. RXPE was contracted for the?Dynamic Reactive Compensation systems?for the Lake Turkana wind farm in?January 2012. Mott MacDonald provided?technical advice?to the project’s financial lenders. SECO and Civicon were engaged for?civil construction work?on the Lake Turkana wind farm.

Developing PPP projects in East Africa will require a long-term view and patience from all actors involved. Politics will always have an influencing role in determining which projects get support and resourcing to accelerate their development cycle because politicians operate on different timelines and objectives that don't always align with the national objectives. PPPs have potential to unlock infrastructure development which creates an incentive to expand education and awareness creation to cover politicians so that they can appreciate the long-term adverse impact their decisions can have on PPP projects under development. Perhaps there needs to be new thinking to consider politician objectives/mindset when designing PPP processes for the African continent so as to cushion projects and the massive time and investment advisors and actors pull towards developing these projects. Non the less institution strengthening to ensure continuity and smooth transition of projects for one government administration to the next, government guarantees and political support to assure financiers and advisors, and human capacity building are factors that will progressively support growth and acceptance of the PPP model as an attractive and sustainable approach for developing infrastructure in East Africa.

The author:

Rose Kananu, PMP?, CP3P-Foundation, Civil Engineer is the Founder and Managing Director of Howard Aidevo Consulting Ltd and the creator of the BCDIP brand.

She is on a mission to build capacity for professionals and contractors in PPP and Project Management so that Africa's infrastructure is built by Africans.