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Latvian MOT and World Bank Workshop on PPP in Highways. International Experience with Highway PPPs. Cesar Queiroz Consultant Roads and Transport Infrastructure Riga, 9 May 2006. Presentation Outline. Infrastructure and economic development Public-private partnerships (PPP)

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international experience with highway ppps

Latvian MOT and World Bank Workshop on PPP in Highways

International Experience with Highway PPPs

Cesar Queiroz

Consultant

Roads and Transport Infrastructure

Riga, 9 May 2006

presentation outline
Presentation Outline
  • Infrastructure and economic development
  • Public-private partnerships (PPP)
  • PPP and public policy requirements
  • Alternative PPP approaches
  • Some policy implications
developing and developed countries
Developing and Developed Countries
  • Developing countries include low- and middle-income economies
  • Developed (advanced, industrial, rich) countries denote high-income economies
classification of economies
Classification of Economies

Economies GNI per capita

Low-income $825 or less

Middle-Income $826 to $10,065

Lower $826 to $3,255

Upper $3,256 to $10,065

High-income $10,066 or more

Source: www.worldbank.org/data

slide5

Gross National Income (US$ per Capita)

Source: http://devdata.worldbank.org/data-query/

some measures of infrastructure
Some Measures of Infrastructure
  • Paved road density (PRD), in km per million persons
  • Electricity-generating capacity (ELE), in thousands of kilowatts per million persons
  • Number of telephone connections per million population (TEL)
  • Railroad tracks (RWY), in km per million population
average measures of infrastructure
Average Measures of Infrastructure

Economies PRD ELE TEL RWY

(km/mil pop) (1,000’s of (# of connec. (km/mil kw/mil pop) /mil pop) pop)

Low-income 410 70 7,920 70

Lower-middle 610 190 46,760 190

Income

Upper-middle 1,950 560 154,100 330

Income

High-income 10,150 2,070 673,000 840

economic development and infrastructure
Economic Development and Infrastructure

GNI ($/pop)

logGNI = 1.39 logPRD

R squared: 0.76

98 countries

Source: Queiroz and Gautam

what is ppp
What is PPP?
  • A partnership between the public sector and the private sector to deliver a project or a service traditionally provided by the public sector
  • It allows each sector to do what it does best
  • Risks are borne by those best able to manage them
why ppp
Why PPP?
  • Financial shortages in the public sector
  • Operating efficiencies inherent to the private sector
  • Reduced whole life costs through better risk allocation and incentives to perform
  • Improved quality of service
  • Generation of additional revenues
  • Enhanced public management
slide12

PPPs are becoming a global business – however reaching financial close remains a challenge

Only 55% of proposed projects reached financing

Source: Public Works Financing-Major Project Survey 1995-2004

ppps remain concentrated in a select group of countries

350

300

250

200

150

Number of Projects

100

Project Cost ($bn)

50

0

East Asia

Europe

South

Sub-

Middle

Developed

Latin

World

America

and

and

Asia

Saharan

East and

and the

Pacific

Central

Africa

North

Africa

Caribbean

Asia

PPPs remain concentrated in a select group of countries
and highly influenced by a few global concessionaires or sponsors

Concentration of Projects in Top 10 Transport Sponsors 1994-2004

Proposed and Underway

… and highly influenced by a few global concessionaires or sponsors

Top 10 Transportation Developers 2004

Source: PWF Major Project Survey – October, 2004 Period: 1985-2004

what have we learned
What Have We Learned?
  • Successfully concluding a transport PPP is a challenge:
    • As a result of unrealistic and aggressive bids, a large number of projects face re-negotiation
    • Government commitment can disappear in periods of financial stress
  • Historically only 55% of proposed projects have reached financing
what have we learned1
What Have We Learned?
  • Cost recovery is a major challenge:
    • Full cost recovery is only achievable in some transport sub-sectors
    • Revenue projections often suffer from a bias towards optimism
  • Access to local currency funding is a critical success factor for infrastructure projects with local currency revenues
  • The vulnerability of PPP projects to changing political, financial and economic circumstances is often underestimated
rise fall in developing countries shows vulnerability in era of financial shocks

14

70

12

60

10

50

8

40

Number

2003 US$ billion

6

30

4

20

2

10

-

0

0

88

89

91

92

93

94

96

99

2000

01

02

03

1990

95

97

98

Rise & fall in developing countries shows vulnerability in era of financial shocks

Total Investment in Road Projects with Private Sector Participation 1988-2003

Asian Crisis

Mexican Crisis

Argentinean Crisis

Total Investment

Number of Projects

Source: PPI Database

ppp projects in highways have suffered from optimism bias
PPP projects in highways have suffered from optimism bias
  • Forecasting errors from poor data or incorrect assumptions in models
    • price elasticity of traffic to tolls
    • substitute services/intensified competition
  • Political commitment at too early a stage
    • before appraisal at sufficient depth to allow graceful exit
    • project timelines inconsistent with sound bidding practices
  • Downplaying vulnerability of PPP projects to changing political, financial, economic context
    • failure to identify/value political and social costs (e.g., toll increases)
incentive schemes
Incentive Schemes

How can the government provide incentives

for private sector firms to participate?

  • Cost sharing and pricing arrangements
  • Incentive payments (or penalties) linked to performance standards
  • Support the provision of guarantees

(e.g., World Bank Partial Risk Guarantee)

world bank group instruments available to support ppps
World Bank Group Instruments Available to Support PPPs
  • The World Bank
    • Loans to governments
    • Partial credit and partial risk guarantees
    • Technical assistance
  • International Finance Corporation - IFC
    • Loans to the private sector
    • Equity investment
    • Technical Assistance
  • Multilateral Investment Guarantee Agency - MIGA
    • Political risk insurance
slide21

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

slide22

PRG for a Sub-national Project

Counter

Guarantee

WB

Guarantee

Federal

Government

Private

Lenders

Buys

Guarantee

Legal

Framework

Loan

Agreement

Provincial

Government

Concession

Project SPV

coverage of world bank prgs
Coverage of World Bank PRGs
  • Cover specific government obligations
  • Guarantee payment against default on private debt due to non-performance of government contractual obligations
  • Relevant when there is a high perceived risk of policy reversal
  • Coverage examples:
    • political events, e.g., changes in law, expropriation, nationalization; contract frustration; obstruction in arbitration process
    • certain force majeure events
    • foreign exchange convertibility/transferability
benefits of wb partial risk guarantees for
Public sector

Catalyze private financing and facilitate PPP

Reduce government risk exposure by shifting commercial risk to the private sector

Encourage larger co-financing

Private sector

Reduce risk of private transactions

Mitigate risks difficult for the private sector to manage

Open new markets

Lower the cost of financing and extend maturities

Improve project sustainability

Benefits of WB Partial Risk Guarantees for:
value engineering
Value Engineering
  • A professionally applied, function oriented, creative and systematic team management approach, used to analyze and improve value in transportation projects
  • Provides a balance of quality, performance and functionality in a project, minimizing life cycle costs of construction, operation and maintenance
anti corruption and road concessions
Anti-Corruption and Road Concessions
  • Road concessions are susceptible to corrupt practices:
    • sole source selection of concessionaries (unsolicited proposals) or non-transparent competitive selection
    • renegotiations (sometimes tantamount to sole source)
    • land acquisition
  • Public disclosure of concession agreements
benefits of public disclosure of concession agreements
Benefits of Public Disclosure of Concession Agreements
  • Further check on corruption, which in addition to its direct benefits can enhance the legitimacy of private sector involvement in often sensitive sectors
  • Provision of consumers with a clearer sense of their rights and obligations, which can facilitate public monitoring of concessionaire performance
some renegotiation concerns
Some Renegotiation Concerns
  • It may eliminate the competitive effect of the bidding process and question credibility of the model
  • Renegotiation takes place away from competitive pressures in a bilateral (government-operator) environment
  • Winner may not be the most efficient operator but the one most skilled in renegotiations
  • While some renegotiations are efficient, many are opportunistic and should be deterred
payment mechanisms for road concessions
Payment Mechanisms for Road Concessions
  • Availability Fee is paid to the concessionaire by the government based on the availability of required capacity (number of lanes in satisfactory condition)
  • Shadow Toll is paid to the concessionaire by the government, not charged to motorists, on the basis of veh-km achieved (volume and composition of traffic)
payment mechanisms
Payment Mechanisms
  • BOT (build-operate-transfer) is a scheme where the government contributes land to the project and sometimes a financial support, while the concessionaire builds, maintains and operates the motorway and transfer the assets after the concession completion. The commercial risk rests with the concessionaire.
  • BOO (build-own-operate) is a scheme where the concessionaire builds, maintains and operates the motorway. It does not involve the transfer of the assets to the government. The commercial risk rests with the concessionaire.
slide32

Allocation of Risks by Forms of Concession

100

Availability Fee

Shadow Tolls

RISK

TO

PUBLIC

SECTOR

%

BOT

BOO

Decreasing Public Risks, Increasing Private Risks

0

100

RISK TO PRIVATE SECTOR %

some policy implications
Some Policy Implications
  • Infrastructure is essential for economic development,
  • …then sufficient resources should be made available to maintain and expand a country’s infrastructure.
  • Despite relative slowdown, PPPs remain an attractive option for many governments
some basic references
Some Basic References

World Bank (2001). “World Bank-Financed Procurement Manual [Draft].” Washington, D.C. http://siteresources.worldbank.org/PROCUREMENT/Resources/pm7-3-01.pdf

Guasch, J. Luis (2004). Granting and Renegotiating Infrastructure Concessions Doing It Right. Washington, D.C.: World Bank.http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2004/05/06/000090341_20040506150118/Rendered/PDF/288160PAPER0Granting010renegotiating.pdf

World Bank (2004). “Guidelines: Procurement Under IBRD Loans and IDA Credits.” (May). Washington, D.C. http://siteresources.worldbank.org/INTPROCUREMENT/Resources/Procurement-May-2004.pdf

Queiroz, Cesar (2005). “Launching Public Private Partnerships for Highways in Transition Economies.” Transport Paper TP-9. (September). Washington, D.C.: World Bank.

Kerf and et al. (1998). “Concessions for Infrastructure: A Guide to Their Design and Award.” Technical Paper no. 389.

World Bank (1998). “Bidding for Private Concessions. The Use of World Bank Guarantees.” RMC Discussion Paper Series, no 120. Washington, D.C.

wb ppp related sites
WB PPP-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
some key ec references
Some Key EC References
  • Guidelines for Successful Public Private Partnerships
  • Resource Book on PPP Case Studies http://europa.eu.int/comm/regional_policy/sources/docgener/guides/pppguide.htm
slide39

Cesar QueirozRoad and Transport Infrastructure ConsultantTel +1 202-473 8053Cel +1 301-755 7591Email: queiroz.cesar@gmail.comcqueiroz@worldbank.orgwww.worldbank.org/highways