World Bank Toolkit for Public-Private Partnership (PPP) in Highways

1. State Technical University - MADI World Bank Toolkit for Public-Private Partnership (PPP)in Highways Cesar Queiroz Lead Highway Engineer World Bank Moscow, 7 February 2005

2. Presentation Outline • Transport and economic development • PPP and public policy requirements • The main risks of highway projects • International experience with highway PPP projects • Traffic forecasting risks • Impacts on revenues • The Toolkit for PPP in Highways • Case studies • Discussions

3. Developing and Advanced Countries • Developing countries include low- and middle-income economies • Advanced (developed, industrial, rich) countries denote high-income economies

4. Classification of Economies Economies GNI per capita Low-income $765 or less Middle-Income $766 to $9,385 High-income $9,386 or more Source: www.worldbank.org/data

5. Classification of Economies Economies GNI per capita Low-income $765 or less Middle-Income $766 to $9,385 Lower $766 to $3,035 Upper $3,036 to $9,385 High-income $9,386 or more Source: www.worldbank.org/data

6. GNI per capita ($/pop) Source:http://devdata.worldbank.org/data-query

7. $/pop EU15, EU8 and CIS EU15 EU8 CIS

8. Economic Development and Transport Infrastructure GNI ($/pop) logGNI = 1.39 logPRD R squared: 0.76 98 countries Source: Queiroz and Gautam

9. PPP: Public Policy Requirements • Proposed highway projects should be part of Government program • Subject to full social cost-benefit assessment • to ensure public as well as private benefits • to establish need, and provide basis for public participation in financing • Concession award and agreement should • be well designed • be transparent & competitively procured • have clear rules for regulation of the concession

10. “Traffic Risk in Start-Up Toll Facilities”Standard & Poor’s (S&P) • 67 toll case studies comparing forecast performance with actual/observed • Toll roads, bridges & tunnels • User-paid & shadow tolls • Key findings: • Systematic errors (optimism bias) in forecasts • Consistency of error-drivers • Produced a traffic risk index • Sensitivity testing is essential

11. S&P Research Results 2002 Mean ~ 70% Spread: 18% - 146% !

12. Traffic Forecasting Risk Index

13. Error Drivers • Miscalculation of road user willingness-to-pay • Recession/economic downturn • Future land use scenarios that never transpired • Time savings less than expected • Improvements to competitive (toll-free) routes • Underestimate of ramp-up period (traffic stability), both severity and duration • Less usage by trucks

14. Tolling Experience No tolling experience: actual traffic = 56% of forecast Tolling experience: actual traffic = 87% of forecast

15. Future Challenges • Point-of-use charging • depends on ability to pay/willingness to pay • New toll collection technologies • Reliability, take-up, back-office processing • Pricing sophistication • discounts (frequent user programs, resident discount schemes), peak/off-peak pricing, day-of-week, season-of-year

16. Main Lessons for Success • A well defined legal framework • Simple and transparent procurement • Shared risk-reward concession structure • First attempt with toll roads tend to have mixed results • Projects should have social benefits as well as commercial viability • Particular attention to traffic forecasting and hence revenues • Public sector comparator advisable

17. World Bank Toolkit for Public-Private Partnership in Highways

18. Toolkit’s Objective To provide policy makers from economies in transition with some guidance in the design and implementation of a Public Private Partnership (PPP) in the highway sector

19. Definition of PPP A Public-Private Partnership (PPP) constitutes a sustained collaborative effort between the public sector (government agencies) and private enterprises to achieve a common objective (e.g., the road project) while they pursue their own individual interests.

20. The Toolkit The toolkit is structured under five headings and is navigated through a series of tree diagrams under each of these headings. It also includes a library and interactive financial models.

21. Availability of the Toolkit • Free of charge • A multimedia product available on a CD ROM • Also available at the World Bank’s web site: www.worldbank.org/transport

22. Contributors Financing Institution Public-Private Infrastructure Advisory Facility (PPIAF) www.ppiaf.org Executing Agency The World Bank www.worldbank.org Consultants Groupe Egis (http://www.groupegis.com) in association with Coudert Brothers (http://www.coudert.com)

23. The Highway Toolkit Includes • over 5000 pages of reference publications and web links • a 500 word glossary • case studies and financial simulation software

24. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

25. Toolkit Modules • Overview and Diagnosis: rationale for private participation in the highway sector, alternative contractual forms, guide to conduct a diagnostic of the sector 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

26. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics: key considerations in the design of a public-private partnership, discussions of well-known PPPs 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

27. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions: analyzes the roles of the public sector and presents the tools at Government's disposal for performing such roles 4. Laws, Rules and Contracts 5. Implementation

28. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts: guidance on the design of legal and contractual frameworks for private participation in highways, with boilerplate provisions 5. Implementation

29. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation: outlines the key steps in introducing PSP, bringing elements from previous modules and distinguishing by type of private sector contract

30. 1. Overview and Diagnosis • Context and Key Issues • Expected Benefits from PPP • Why (and where) is the Private Sector more efficient than the Public Sector? • Overview of PPP experience • PPI project data base Why Embark on PPP? Choosing the right option • Forms of PPP • Making the diagnosis • PPP policy and strategy

31. 2. Project Characteristics • Tailoring appropriate PPP: A continuum of alternatives • Examples of well-known PPP

32. 3. Public Sector Functions • Protect community welfare • Planning and policy making • Provide adequate framework • Facilitator • Contract award • Regulation

33. 4. Laws, Rules and Contracts • Legislative framework • Adjust legal framework • Regulatory framework • Standards • Legislation • Contracts • Maintenance contracts • Operation and maintenance concessions • BOT type projects

34. 5. Implementation • Actors • Main Steps • Managing the Reform • Selection and contract award

36. Public Private Partnerships Build Operate Transfer Concessions Management & Maintenance Contracts Works & Services Contracts Operation & Maintenance Concessions Full Privatization Low High Extent of private sector participation

37. BOT-type of Concessions The responsibility of the concessionaire comprises an initial construction, upgrading or major asset rehabilitation, and operation and maintenance of the facility.

38. Allocation of Risks 100 MaintenanceContracts ManagementContracts Operation & Maintenance Concessions RISK TO PUBLIC SECTOR BOT BOO Decreasing Public Risks, Increasing Private Risks 0 100 RISK TO PRIVATE SECTOR

39. In addition to the five modules, the Toolkit also includes: • Financial simulation tool • Graphic simulation tool • Case study • CD Map • Documentation • Glossary

40. Glossary Access control:Limiting the number of points at which vehicles may enter or leave the road …… Zero-coupon swap:A swap in which the fixed-rate payer does not make any payments until the maturity date of the swap but receives floating-rate payments at regular payment dates

41. Glossary Swap agreement:A contract whereby two parties agree to exchange periodic payments. The amount of the payments exchanged is based on a notional principal amount. There are four types of swaps: currency swaps, interest rate swaps, commodity swaps and equity swaps.

42. And where is the toolkit?

43. Financial Simulation Case Study The Government of Farland is considering to build a road between the cities of Farport and Farcapital (located 50 km apart) through a Public Private Partnership (PPP) scheme.

44. Financial Simulation Case Study Basic data include: Construction cost: US$200 million Source of funds: Subsidies, equity and credit Real interest rate: 10% Concession duration: 30 years Initial traffic: 15,000 vpd Toll rate: US$5.00 (indexed on inflation) Inflation rate: 7% per year

45. Financial Simulation Case Study Using the above information and other default data in the Graphic Simulation tool of the Toolkit for Public-Private Partnership in Highways, please answer the questions below:

46. Financial Simulation Case Study Question 1: In the absence of Government subsidies, ceteris paribus, what would be the return on equity (ROE)? What would be the change in the internal rate of return (IRR) of the project? Answer: ROE would reduce from 15.63% (with a Government contribution of 44% of the construction cost) to 6.94%. No change in IRR (12.27%).

47. Financial Simulation Case Study Question 2. While subsidies may be paid by the Government during the construction period, it recovers some of this payment through taxes during the operation period. What would be the Government contribution to this project that would lead to a financial balance for the government throughout the concession period? Answer: About 23% of the construction cost, as 22% would generate a US$171,000 surplus and 24% would lead to a US$2,464,000 deficit.

48. Financial Simulation Case Study Question 3. In the absence of Government subsidies, ceteris paribus, what would be the required initial toll rate to yield a return on equity (ROE) of 16%? Answer: With no subsidies, an initial toll rate of US$8.00/veh yields a 15.08% ROE; an initial toll rate of US$9.00 yields a 17.82% ROE. So an initial toll rate between US$8.00/veh and US$9.00 would be required.

49. Some WB-related Sites • Toll Roads and Concessions http://www.worldbank.org/transport/roads/toll_rds.htm • Toolkit for PPP in Highways http://rru.worldbank.org/Toolkits/PartnershipsHighways/ • Port Reform Toolkit http://www.worldbank.org/html/fpd/transport/ports/toolkit.htm • How to Hire Expert Advice on PPP http://rru.worldbank.org/Toolkits/Documents/Advisors/Full_Toolkit.pdf • Labor Issues in Infrastructure Reform www.ppiaf.org/Reports/LaborToolkit/toolkit.html

50. World Bank Partial Risk Guarantee Structure Govern’t World Bank Counter Guarantee World Bank Guarantee Concession Agreement Project Company or Concessionaire Private Lenders Loan Agreement