Session 1: Sector Perspective on PPPs

1. Session 1: Sector Perspective on PPPs Vickram Cuttaree The World Bank St. Petersburg – May 22, 2008

2. Objective of the presentation • Provides an overview of PPP trends in selected infrastructure sectors • Analysis includes review of investment in other countries and use of specific structures • Some guidance will be given on the selection of structure with the understanding that it ultimately remains a project-specific decision

3. Although PPP Investment is mostly in Telecom and Energy, solid growth is seen in Transport • PPP Investment has remained mainly in Telecom since 1990 (almost 50% of total investment) • Most of the growth in infrastructure between 1990-99 and 2000-06 was driven by Telecom and Transport • Telecom average yearly PPP investment increased by 118% between 1990-99 and 2000-06 • Transport yearly investment increased by 34% between the same two period • Growth in other infrastructure sectors more limited (5% in Energy and 10% in Water & Sanitation)

4. Choice of Structure has implication on level of investment and required return for the private partner As risk increases… …cost of debt and equity increases… …need for higher project returns increases in order to be financeable.

5. Greenfield (BOT-type) and divestiture represent most of PPP Investment

6. Concession and Greenfield are mainly in Transport and Energy whereas Lease/Mgt dominate Water Sector Source: World Bank and PPIAF, PPI Projects database.

7. PPP arrangements differ also across regions Projects Source: World Bank and PPIAF, PPI Projects database.

8. How to match structure with sector/project • Although some structures are used more in specific sectors, it is difficult to recommend a specific structure for a given type of project • Investment trends and experience show the structure used depend on the sector, Government/City objectives and project characteristics • The choice of structure is decided during (pre)-feasibility studies

9. Government/City objectives will guide choice of PPP form Key: $$$ to a large extent; $ to a small extent; X not usually.

10. Establishing frameworks: Extent of tasks under different types of PPP structures Concessions/Greenfield often require extensive work on the legal/regulatory framework These activities should take place as early as possible, and during the feasibility stage

11. The complexity of reforms are also a decision factor

12. Sector characteristics: Transport • Public ownership and operation common as transport services are considered public goods • Infrastructure involves substantial planning, safeguards issues and upfront investment • Cost recovery difficult as many users without contractual obligations • Roads: users have often low willingness to pay • Airports, ports, railways: importance of reforms before seeking private investment • Demand for services is very dependent on Government policy/planning decisions • Hence, risky investment for private sector • Almost always risk sharing of demand risk or funding • Primary PPP arrangement: Concessions/Greenfield • BUILD being the driver in BOTs

13. Transport Sector: structure varies within modes

14. Sector characteristics: Power • Private participation linked to industry structure and level of reforms • Private ownership common in power generation and often first step in power sector • Public often retains distribution as a perceived public good • Like in transport, power sector is characterized by important investment and relatively long contracts • Primary PPP arrangement: Privatization and Greenfield

15. Mostly Greenfield projects in Electricity Generation and Transmission

16. Natural Gas divestiture done mainly in consolidation of distribution and transmission

17. Sector characteristics: Water, Sewage and Sanitation (WSS) • WSS services have characteristics that create special problems for public policy: • Public good and natural monopoly characteristics – customers doubt value for money and resist price increases – below cost-recovery tariffs result • Ongoing, long-term investment requirements often ignored – underinvestment • Externalities for which individual customers unwilling to pay (eg sanitation and associated reduction in disease control) • Assets largely underground; condition difficult to assess (problem for PPP bidders, hard for governments to set appropriate tariffs) • Local, provincial and national governments often have overlapping/conflicting responsibilities • Government’s biggest challenge is to address these problems and encourage investment to improve quality, lower costs and extend access • A variety of PPP models have been tried, in particular: • Management contracts • BOT/(B)ROT/RLT • Affermage/leases • Concessions • Divestiture

18. Divestitures Divestitures (full), 1 (partial), 4 BOT, 4 Management contracts, 16 RLT, 1 ROT, 36 Leases, 23 BROT, 12 Water utilities PPP contracts arrangements, 2003-07 Greenfield projects Concessions BOT = build, operate, transfer. BROT = build, rehabilitate, operate, transfer. ROT = rehabilitate, operate, transfer. RLT = rehabilitate, lease or rent, transfer Source: World Bank and PPIAF, PPI Project database

19. Conclusion on Sector Overview • PPP investment in transport has seen a solid increase in recent decade (although total investment mainly in telecom and energy) • Choice of structure varies across regions and even within a sector • Sector and project characteristics, as well as Government objective will determine the appropriate structure • Essential role of feasibility study in confirming the choice of structure

20. Sector Perspective on PPP THANK YOU !!! Vickram Cuttaree The World Bank vcuttaree@worldbank.org