Evaluating country readiness and capacity for public-private infrastructure partnerships

1. Evaluating country readiness and capacity for public-private infrastructure partnerships A briefing session for the InfraScope on Latin America and the Caribbean May 2010

2. Presentation • Introduction • The Infrascope • Process and design • Key findings • Conclusion

3. Introduction • Presenter: Erica Fraga, Senior Analyst, Economist Intelligence Unit • Project History: • November 2008: FOMIN commissioned the Economist Intelligence Unit to evaluate the environment for Public-Private Infrastructure Partnerships in Latin America and the Caribbean • December 2008: FOMIN and the Economist Intelligence Unit organised a workshop on PPPs to determine the focus and structure of the study • A pilot InfraScope index was launched June 2009 • In February 2010, the Economist Intelligence Unit organised a second workshop as a methodology review for the second edition of the index. Work to update and adjust the pilot index began March 2010

4. Government structure The InfraScope

5. What is the InfraScope? A dynamic Excel model that evaluates the business environment for Infrastructure PPPs according to a country’s regulatory, institutional and financial conditions: • It ranks 19 countries in Latin America and the Caribbean • According to their performance in five key areas for specific sectors • Using18 indicators • And focuses on concession projects

6. Key characteristics • Experiences and frameworks for the Water/sanitation and transport sectors • It is a primarily federal level evaluation • Considers qualitative and quantitative data • Looks at both readiness and capacity • The index is dynamic The 2009 InfraScope index is characterised by the following parameters:

7. Objectives • Index uses: • A valuable tool • Evaluates country performance and identifies areas of improvement and best practice • Highlights strengths and weaknesses • Contains relevant sector information and an overview of the entire project life span for each country • Generates increased transparency • A unique collection of information, laws, and regulations on each country • It is important to remember that: • It is not a financial index • Takes an objective approach to private and public sector risks • It began as a pilot project and aims to be used as a learning tool

8. Government structure Process and design

9. Constructing the index Data and information collection Construction, weighting, scoring of Index Research and analysis Activities • Search relevant, publicly available data sources for project number and quality metrics • Search for primary information (legal sources) • Identify relevant sector and government institutions • Interview country and sector experts, government actors • Review laws and regulations • Obtain context from secondary reports and assessments • Qualitative analysis of laws, regulations and institutions: score on 0-4 scale • Data normalisation Sources • World Economic Forum, PPIAF PPI data base, World Bank, Economist Intelligence Unit, Transparency International, Latinobarometer survey, Multilateral Investment Guarantee Agency (MIGA) data • Economist Intelligence Unit publications (Country Commerce, Country Finance, Risk Briefing),PPIAF sector reports, IADB reports, • Economist Intelligence Unit analysts and model builders complete the index in Excel

10. Public capacity to plan and oversee PPPs • Methods and criteria for awarding projects • Regulators’ risk allocation record • Experience in transport and water concessions • Quality of transport and water concessions Defining readiness and capacity The index contains 18 indicators grouped into five categories Laws and regulations Institutional design Project experience and success • Consistency and quality of PPP regulations • Effective PPP selection and decision making • Fairness/openness of bids, contract changes • Dispute resolution mechanisms • Quality of institutional design and roles • PPP contract, hold-up and expropriation risk Financial facilites • Government payment risk • Financial financing capabilities • Long-term debt markets • Subsidy schemes Investment climate Project experiences and regulatory environment Economic and financial environment • Political distortion • Business environment • Social attitudes towards privatisation

11. Index weights Each category is scored 0-100 and is weighted to produce the overall index score: Regulatory framework Institutional framework Investment climate 42% 25% 4% Operational maturity Financial facilities 25% 4%

12. Qualitative indicator design • The EIU developed a set of new indicators specifically • for the Infrascope • This required defining the indicator through a set of specific questions • We then assigned a 0-4 score to each qualitative indicator, where 0=worst and 4=best. Individual numbers represent the range of possible answers to the question defined in the indicator’s design • A scoring guide can be seen in the model, where worst and best criteria are explicitly defined • Where possible, findings are cross-checked against comparable, existing information such as sovereign risk ratings, Transparency International data and other indicators that also assess relevant criteria

13. Qualitative indicator example Ex. Dispute-resolution mechanisms (indicador 4):Are there fair and transparent mechanisms for resolving controversies between the state and the private operator? Does the law provide technically adequate and efficient conciliation schemes? Must arbitration rulings proceed according to law and to contracts, without lengthy appeals? Scoring: 0 = Dispute-resolution systems for PPPs are undefined and insufficient; 1 = Dispute resolution mechanisms exist but these are not transparent or efficient; 2 = Adequate dispute resolution mechanisms exist but arbitration and appeals are lengthy and complex; 3 = Comprehensive, effective dispute-resolution mechanisms exist, incorporating necessary technical considerations; 4 = Effective and efficient dispute-resolution mechanisms establish independent arbitration according to law and contracts, without lengthy appeals and with accompanying viable prejudicial reconciliation options? Data sources: Economist Intelligence Unit Country Finance and Country Commerce publications, regulations, laws, government web sites, specialized industry reports

14. Adjustments for 2010 A methodology review undertaken in February 2010 led to the following conclusions: + Political will indicator + Subnational performance indicator; disaggregation of national and local level evaluations + Electricity generation WEIGHTING SCHEMES Financial facilites Investment climate

15. Government structure Key findings 2009

16. Overall index • No country achieved a perfect score for the index • Chile scored highest overall (total score of 64.3). It has high degree of project experience, low project cancellation rates and a reasonably well developed legal, regulatory and institutional framework • The second and third ranked countries, Peru and Brazil, exhibited similar • characteristics • Most countries in the index score between 20 and 30 out of 100, with a few • countries scoring in the 40s and 50s • Venezuela, Ecuador and Nicaragua finish last, due to weaker regulatory environments, and unfavourable investment and financing conditions

17. Category rankings

18. Regional regulatory analysis • The structure of regulatory frameworks varies 1. Explicit concession laws 2. Public purchase laws • Requirement for legislative approval • Sharp legal distinctions between sectors • Defining the public-private relationship • 3.Assignment of risks • - Economic and financial project evaluations • - Accounting practices • - Contract negotiation and arbitration mechanisms • 4. Criteria for awarding and adjusting contracts • - Political influence and level of regulatory detail (or lack thereof)

19. Regional institutions and oversight • Few countries have adequate institutional frameworks • - The top-ranked countries have made positive steps in this direction • - The necessary roles are not always filled, and independence and oversight is often not well established • Project delays, renegotiation and expropriation risk • - Arbitration mechanisms are occasionally defined • - Project planning and financial analysis needs structure • - Macroeconomic stability, financial hedging instruments are key • - General business climate must be good (to avoid expropriation)

20. Financing capabilities • Financial facilities for these projects have advanced • - Medium and long-term local debt markets • - Modest range of financial hedging and risk instruments • - Countries with reformed and privatised pension markets fare best • Options for reducing government non-payment risk • - Trust funds • - Low use of MIGA • … political will, fiscal health and economic stability matter • Service affordability and subsidy design need improvement • -Recovery of costs to enable furture investments • - Improve access possibilities for low-income populations

21. Financial facilites category • The six top countries for financing PPP projects These countries also tend to fare best in the invesmtent climate category.

22. Regional conclusions • Countries undertake and plan PPP projects using a variety of different regulatory frameworks and legal systems • There is a tendency towards action (versus planning) • Project selection and evaluation systems are underdeveloped, as are project supervision arrangements and arbitration and negotiation schemes • It is important to consider project possibilities and implementation in light of the quality and sustainability of projects

23. Availability on the web The Excel model index contains: indicator and category scores, information sources, scoring criteria and country profiles. A report in electronic PDF format discusses index results. > The 2009 index and report are freely available for download at: www.eiu.com/LACInfrascope2009

24. Infrascope 2010 If you would like to contribute to the 2010 index, please contact us: • Weighting schemes • National and sub-national experiences • Electricity projects Thank you for your time To contact us, please email: Vanesa Sanchez, Senior Analyst, Client Research Division, vanesasanchez@eiu.com