World Bank Experience: Road Asset Management and Development through Public-Private Partnerships Cesar Queiroz Highway A

1. First International Conference Perspectives for Ukraine on Implementation of Public-Private Partnerships World Bank Experience: Road Asset Management and Development through Public-Private PartnershipsCesar QueirozHighway AdvisorWorld BankKyiv, March 21, 2006

2. Outline • Brief International Overview • Lessons Learned from Past Transport PPPs • How Can the World Bank Group Support PPP Development • Selection of the Strategic Investor • World Bank Toolkit for PPP in Highways • Allocation of Risks and Payment Mechanisms (e.g., availability fees, shadow tolls, BOT, BOO) • Estimating Minimum Toll Rates to Attract Private Investors • The Way Forward

3. 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

4. 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

5. 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

6. 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 • The vulnerability of PPP projects to changing political, financial and economic circumstances is often underestimated • Access to local currency funding is a critical success factor for infrastructure projects with local currency revenues

7. Selection of the Strategic Investor or Concessionaire For large projects, it is recommended to carry out: 1. Prequalification 2. A Two-Stage Bidding

8. Prequalification • Advertisingnotice requesting expressions of interest to pre-qualify to be published locally and internationally • Investor feedbackmeeting with selected potential investors/ concessionaires • Public informationinformation dissemination on the financing and construction of the project • Pre-qualificationinclude financial and operational criteria to ensure bids from only qualified candidates

9. Two-Stage Bidding The First Stage Client prepares functional performance specifications Bidders offer unpriced technical proposals Client evaluates technical proposals, and indicates what bidders should do to make their bids responsive The Second Stage Client sends memorandum of changes for each bidder and addendum to bid documents, if necessary • Bidders offer amended bids containing their final technical proposal and a financial proposal Client evaluates combined technical and financial proposals

10. Unsolicited Proposals to Governments • Origin of most controversial private infrastructure projects • In theory, generate beneficial ideas • In practice, some unfavorable experiences (e.g., attempt to avoid competition, exclusive negotiations behind closed doors) • Usually sole-source negotiations take much longer than expected

11. ShouldGovernments Forbid Unsolicited Proposals? • Some governments forbid all unsolicited proposals to reduce public sector corruption and opportunistic behavior by private companies (e.g. Colombia) • Some countries require “market-testing” (e.g., Sri Lanka, Australian States) • Some recognize a good project idea in the tender by compensating the original project proponent while holding an ICB (e.g., Chile, S. Africa, S. Korea)

12. 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)

13. 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

14. Possible Roles of the World Bank • Financing part of government subsidies to the construction cost of a project • Providing a Partial Risk Guarantee (PRG) to the private investors: reduced interest rate, increased maturity

15. 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

16. 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

17. Coverage of World Bank PRGs • Cover specific government obligations to a private project • 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: • performance of government or state owned entities, e.g., government contractual purchase and supply obligations • political events, e.g., changes in law, expropriation, nationalization; contract frustration; obstruction in arbitration process; non-payment of termination amount or arbitral award • certain force majeure events • foreign exchange convertibility/transferability

18. 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:

19. Partial Risk Guarantee Facility for Peru’s Infrastructure PPP Program • Facility Size – US$ 200 million; Maximum individual guarantee amount – US$ 50 million • Project Eligibility Criteria • Projects in the infrastructure sector • PPP concession (or similar) contracts • Economically and socially desirable and technically viable, but financially viable only with appropriate government support • In compliance with applicable WB safeguard • Coverage: Up to 50% of project debt against political, regulatory and breach of contract risks to project lenders • Duration: 5 years of government obligations on a rolling basis for a maximum of 15 years • Currency: Local currency or US$ denominated debt

20. Concession term: 20 yrs Construction Cost: $1M/km to $5M/km Operation cost: $500,000/km/yr Equity: 14% Subsidies: 0 Interest rate: 5%/yr Grace period: 4 yrs Repayment period: 14 years Discount rate: 10% Initial traffic: 5,000 vpd to 20,000 vpd Traffic growth: 3% Inflation: 6% Tax: 18% IRR ≥ 12% ROE ≥ 16% LLCR ≥ 1.0 DSCR ≥ 1.0 Basic Assumptions to Estimate the Minimum Toll Rate to Attract Private Investors for a PPP Project

21. Toolkit for PPP in Highways The toolkit is structured under five headings and includes a library and interactive financial simulation model Available on the World Bank web site www.worldbank.org/highways

23. Estimated Minimum Toll Rate to Attract Private Investment for a PPP Project $/km 5,000 vpd 10,000 vpd 15,000 vpd 20,000 vpd Construction cost, $ million/km

24. 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

25. 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, and can facilitate public monitoring of concessionaire performance

26. Payment Mechanisms • 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) • BOT is a scheme where the government contributes land to the project and sometimes a negotiated 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 is similar to BOT, but does not involve the transfer of the assets to the government

27. 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 %

28. Transport Infrastructure: Way Forward in Ukraine • Developing local currency markets for contributing to transport infrastructure development • Learning from lessons of experience from regional transition economies, e.g., motorways in Hungary, ports in Poland • Structuring PPPs is a complex, time demanding exercise that requires dedicated resources from the public sector – consider establishing a Transport PPP Unit • Selecting a small number of transactions with the highest potential for success in the short term • Developing a consistent and organized approach to assess, evaluate and monitor contingent liabilities arising from public financial support to PPP transport projects • Developing smart and effective risk mitigation products for supporting PPPs

30. Thank you!

31. 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.

32. Cesar QueirozHighway AdvisorWorld Bank, 1818 H Street NWWashington DC 20433 USATel +1 202-473 8053Fax +1 202 522 3223Email: cqueiroz@worldbank.orghttp://www.worldbank.org/transporthttp://www.worldbank.org/highways