How does the government get the private sector to work ? Lessons from LDCs

1. This presentation will probably involve audience discussion, which will create action items. Use PowerPoint to keep track of these action items during your presentation • In Slide Show, click on the right mouse button • Select “Meeting Minder” • Select the “Action Items” tab • Type in action items as they come up • Click OK to dismiss this box • This will automatically create an Action Item slide at the end of your presentation with your points entered. How does the government get the private sector to work ?Lessons from LDCs Economie Publique 1 ULB A. Estache

2. Objective • To give you a sense of how policy reforms work in a given sector • Overview of the evidence on what works and what doesn’t in public private partnerships defined broadly • Privatization of infrastructure services • Market for public contracts in infrastructure

3. Infrastructure? • Electricity • Gaz • Ports • Roads • Rail • Telecoms • Water and sanitation

4. Part 1: Overview of presentation on PPP • Which reforms are we talking about? • Historical context • The promises of PPI • To what extent were the goals achieved? • The actors in the payoff matrix • Performance indicators • The winners and the losers • Emerging issues • Concluding comments

5. Broad reforms of the 1990s • Liberalization of sectors • More competition • More private sector • More autonomous regulators • More decentralization • More user participation • => new types of contracts between the public sector and the private sector • Concession contracts • Management contracts • Build-Operate and Transfer contracts • ..and total sales of assets! • Main objective: pass on some of the risks of delivering infrastructure services to the private sector = PPP (public-private-partnerships)

6. International Interest in PPP 1999 Interested in PPP Source: IFSL

7. International Interest in PPP 2006 Interested in PPP Source: IFSL

8. Principles of PPP Risk Allocation and Risk Management (1) • Think of the construction of a new toll road, airport, port, water treatment station, electricity transmission line, …. • Main Characteristics of PPPs • Risk-sharing between public and private sectors. • Long-term relationship between parties. • Public service and ultimate regulatory responsibility remain in public sector. • Using private sector skills for public sector services • Contracts for services, not procurement of assets. • Output, not input, specifications. • Payments related to service delivery. • Whole life approach to design, build and operation.

9. Principles of PPP Risk Allocation and Risk Management (2) Criteria for sound PPPs • Economically viable for the Public Sector • Realistic risk sharing • Realistic fiscal cost. • Focused, dedicated and experienced public sector team. • Clear legal, institutional and regulatory framework. • Transparent and competitive procurement. • Financially viable for the Private Sector. • Financially viable for users • Fair Risk & Reward Balance for Public & Private Sector • Public Sector: value for money.

10. Risk Allocation…..…. and each project is different and needs individual risk allocation Design and construction Planning Legal, Force Majeurs Regulation Political Risks Traffic / revenue Private sector risk Public sector risk

11. Delivery Competition Risk allocation Economic Fundamentals PPP Programmes: Key success factors • Public sector’s capacity to manage its side of PPP and stable political commitment • Competitiveness of bidding process • Appropriateness of risk sharing – value for money • Economic fundamentals – viability and affordability

12. Benefits expected from PPPs • Better risk assessment/management and improved long-term visibility, not only on financial issues. • Greater innovation in design and financing structures. • Incentives to deliver assets on-time and on-budget. • Incentives to improve operational and commercial performance. • Bundling different phases => life cycle cost/benefit optimisation. Need for competence at public level to maximise these benefits…

13. PPPs and Value for Money (VfM) for the public sector • In principle, PPPs can improve VfM by: • Facilitating and incentivising on time and on budget project implementation: • No service / no pay. • Incentives to cost control. • Optimisation of capital & maintenance spends over project life. • Innovation in design and financing structures. • Improving management of operational risks. • Optimalrisk allocation  reduced cost of risk • Reduced cost of risk  lower tariffs or subsidies • =>better Value for Money

14. Testing Value for Money • In practice: • Does the private sector’s price for taking project risks represent good value for money? • Is the private sector’s return on capital appropriate to the level of risk being taken? • To be tested case by case through an agreed methodology (Public Sector Comparator).

15. Evolution of PPI?

16. Countries with Private Capital as of 2002 (% of sample)

17. Evolution of Commitment to regulatory reform

18. Share of countries with autonomous regulatory agency in telecoms and electricity(2002)

19. Why did these reforms come about? Historical Context(Late 80s-mid 90s) • Major Fiscal Crisis • Lack of Investment in public services • Declining service quality • Excess supply of funds on international capital markets • Ideological changes favoring market driven economies among leaders of all political sides • Widespread popular support for reforms including privatization

20. The promises of PPI • Contribution to fiscal stabilization • Efficiency gains • Increased investments • Growth payoffs • Contribution to poverty reduction • Improved governance

21. To what extent were goals achieved? (1) • Fiscal benefits:yes in short run, more complex in long run • Short run: sales of assets and reductions from transfer of Opex and capex obligations to private operators • Long run: renegotiations associated with increased changes on fiscal effects of reforms • Campos et al (2003) for LA experience • Papers in Ugaz and Waddams (2004) for country specific studies • Emerging new evidence from country diagnostics being conducted by World Bank

22. Long Term Fiscal Effects in LA?

23. To what extent were goals achieved? (2) • Efficiency gains:ok in general • Lots of evidence from partial performance indicators • Confirmed by a few papers looking at more economic concepts of efficiency (TFP, TE, TEC) • Recent survey on LDCs (Estache et al (2004)) • Noteworthy: • evidence of changes in allocative efficiency for a few papers on electricity in Latin America and Africa hints at redistributional issues • Evidence that regulatory regime drives efficiency often more than ownership (Estache and Rossi (2004))

24. Efficiency gains in European PPPs:Evidence on construction projects from the UK’s National Audit Office

25. To what extent were goals achieved? (3) • Investment:not clear • Fast increase till 1997, steady decline since and then small recovery in the last 2 years • Overall: Not as much as expected • Drop in CAPEX from 8-10% in 1970s to 1-3% since mid 1990s • And it is not only a result of efficiency gains • Not as private as expected (mostly in middle income countries) • Briceno et al. (2004) for evidence survey • Easterly and Serven (2003) for full LA story • Calderon & Serven (2004) for more on LDCs • Significant cream-skimming problems: • Typically urban better off than rural

26. Investment commitment to PPI Projects, developing countries by destination of investment, 1990-2006 In 2006, investment commitments to infrastructure projects with private participation grew by 10% to a level just 20% lower in real terms than the peak in 1997 . $143 $114 $114 Total: US$1,090 billion in almost 3,800 projects Source: World Bank and PPIAF, PPI Projects database.

27. EIB Annual Loan Signatures for PPPs Signature of PPPs varies annually in line with financial closes. Loan approvals to date have been over EUR 20 bn and financial closes of EUR 16 bn with an average of over EUR 1.8 bn p.a. since 2000

28. PPI Projects, developing countries by sector, 1990-2006 Total number of projects recovered thanks to the growth in transport which reached its highest level ever, and to some extend to telecomm. In energy, number of projects remained stable although at a level which was half of its peak level in 1997. In water, the number of project also stable but at peak levels. Projects Source: World Bank and PPIAF, PPI Projects database.

29. Total investment commitments, 1990-2006 – By Subsector Investments in 2001-06 Investments in 1990-2000 Total: US$782 billion (2006 US$) Total: US$509billion (2006 US$) Source: World Bank and PPIAF, PPI Project database

30. Investment commitments to PPI Projects in developing countries as % of GDP and excluding telecom by income group, 1990-2006 The convergence of investment commitments as a percentage of the GDP across income groups is more noticeable when telecommunications are excluded. Percentage of GDP * This graph includes both investments in physical assets and payments to the government Source: World Bank and PPIAF, PPI Projects database.

31. To what extent were goals achieved? (4) • Growth payoffs:not clear • Direct effect of PPI generally non-significant • But…strong evidence that infrast. matters in LDCs • But lower investment/cream skimming linked to lower growth for utilities; • Positive payoff from freight transport reforms • Useful counterfactual studies on growth consequences of infrastructure gaps associated with reforms • See various papers in Easterly and Serven (2003)

32. To what extent were goals achieved? (5) • Improved governance:not clear • Institutional changes tend to be associated with better outcomes in terms of access in some sectors but not all • High renegotiation rates (Guasch (2004) • Yet corruption continues to be an issue

33. Incidence of renegotiation

34. So who gained and who lost from these mixed outcomes? • Three ways of looking at it: • Regions • Sectors • Actors

35. Total investment commitments, 1990-2006 – By Region Investments in 2001-06 Investments in 1990-2000 Total: US$782 billion (2006 US$) Total: US$509 billion (2006 US$) Source: World Bank and PPIAF, PPI Project database

36. The winners and losers in terms of Regions • Winners: • Latin America and East Asia and to a growing extent: Eastern Europe • Losers: • Africa, Middle East and South Asia

37. The winners and losers in terms of Sectors • Winners: • Telecoms and Energy • Losers: • Water and Sanitation • Transport infrastructure • Transport services have been doing much better

38. The winners and losers in terms of Actors • The actors in the payoff matrix • The users (access: (+ but not as much as expected and distributional issues), affordability(-), quality (+)) • The taxpayers (cash!: + in SR, -/+ in LR) • The workers (jobs + cash: - in SR, + in LR) • The operators (cash in the SR and IRR> COC in the LR for a few! (+ in SR, ? for LR) • The local owners (cash! + in SR and LR) • The foreign owners (cash! + in SR, +/- in LR) • The bankers (cash! + in SR and LR) • The politicians (cash! + in SR and LR) • The donors (???)

39. Emerging Issues • For users: • Residential users: Distributional issues • Non-residential users: could do much better • For operators: SR Cash issues linked to: • Demand forecasting games • Demand uncertainty • Cost levels revisions to address overruns • Projects design revisions • Exchange rate risks and other economic shocks • For government: • Uncertain net fiscal effects • Fiscal space: the illusion of private sector invest. • For operators • De facto expropriation risks • Weak regulatory commitment and strong capture • But counterfactual may be worse!

40. Concluding comments • Problems with privatization reflected in: • Underestimated distributional implications • Problems in water and some of the transport sectors where cost of capital too high for viable average tariffs • New macro teams seeing long term fiscal costs • People fed up with corruption issues • …people interested in new sources of rent… • NGOs • Change in ideology • Demand for fine tuning in PPPI and further weddings from technocrats and academics • net welfare impact is globally positive • Know-how to address distributional effects exists • …main issue is political commitment on the parts of ALL actors

41. Part 2: Overview of public markets for infrastructure • Background and motivation • Increase in infrastructure assistance for LDCs (US$18 billion business) • …but limited privatizations => public procurement still core policy • …yet… poor information on efficiency of contract award processes associated with this assistance • Currently most research focused on project result evaluations and public expenditure management at the aggregate level. • Thanks to a new database on ODA infrastructure procurements, we can know more empirically about the: • Efficiency in procurement auctions • Effects of bidder asymmetry • Effects of joint bidding

42. Some basic fact: Infrastructure assistance is increasing...but weakly in terms of implementation, allocation... Sectoral Allocation of ODA Total ODA for “Infrastructure” Allocation to Education and Health Allocation to Infrastructure

43. Informal payment practices are very common, and government contracts are no exception... Informal Payments in Developing Countries Informal Payments and Bribes

44. Basic question • How much scope is there to improve procurement efficiency? • Focus: Competition in auctions as key factor! • i.e. how to increase the degree of competition in auctions organized to award public infrastructure contracts? • …To do so… essential to understand the dimensions of the procurement game

45. The dimensions of the procurement game • Dimensions of auction from government viewpoint • Frequency of auctions (number of projects) • Procurement arrangements (lot packages) • Who could be contractors—domestic, international, joint ventures? • International vs. local competitive bidding? • Auction format....usually first-price sealed-bid...but could be different. • Information disclosure • Technical specification • How to exclude those who are likely to fail to meet the contracts? Prequalification or two-envelope? • Dimensions of auction from firms viewpoint • Decision whether to participate in competition (yes vs. no), • Assessing the likelihood to win and calculating the best bid • Looking for possible bidding partners • Room for collusion and/or corruption, low balling....?

46. Overview of a new dataset on procurement contracts from the World Bank and the Japanese Development Agency Expected Contract Size Technical Capacity per Contract Number of Firms Participating in Competitive Bidding Total Project Cost and Lot Division

47. How do auctions influence procurement efficiency for infrastructure development?

48. Competition in procurement auctions: what basic theory and empirics tell us • Basic auction theory: The winning bid tends to approach the lowest possible procurement price, as competition becomes intense. • Empirics? • Generally supportive of basic theory • But the degree of competition required varies across sectors.

49. Data available • Three infrastructure sectors: • Roads, water and sewerage, and electricity. • 211 auctions (contracts) for 69 projects in 29 developing countries from 1997 to 2007. • This means...our sample represents only 1% of total ODA or 5% of infrastructure assistance. • Country coverage is by no means all-inclusive. • Nature of projects may be biased by agency strategic choices • But the data may be rich enough to analyze bidding behavior. • In 211 auctions, 862 bids (winning and losing). • In 862 bids, 1,637 firms in total. • All firms are identifiable.

50. Competition in infrastructure procurements seems limited...especially in the water and electricity sectors