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Key Success Factors for PPP projects Based on International Experience

Key Success Factors for PPP projects Based on International Experience. Vickram Cuttaree The World Bank Europe & Central Asia Region St. Petersburg – May 22, 2008. The international environment is currently favorable for PPP investment. Source: PPIAF database (World Bank)

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Key Success Factors for PPP projects Based on International Experience

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  1. Key Success Factors for PPP projectsBased on International Experience Vickram Cuttaree The World Bank Europe & Central Asia Region St. Petersburg – May 22, 2008

  2. The international environment is currently favorable for PPP investment Source: PPIAF database (World Bank) Note: Investment in US$ million in year of commitment

  3. Investment is now less concentrated in Latin America and East Asia PPP Investment is less concentrated in Latin America and East Asia but new emerging economies are attracting more investments These countries are representing competition for Russia in PPP investment Source: PPIAF Database

  4. However a few countries still receive the majority of investment Regional growth in PPP is in fact driven by a couple of countries PPP Investment tends to favor fast growing middle-income countries such as Russia Source: PPIAF Database

  5. Despite progress in recent years, Russia is still behind its potential Competition from other countries and need to further increase PPP investment puts increased importance of remaining internationally competitive Source: PPIAF Database

  6. What Makes a PPP Project Successful? Successful PPPs are characterized by comprehensive planning, clear contractual rules and contingencies, competitive procurement and credible contract enforcement. Countries with strong public sector institutions have typically performed best. Examples include the United Kingdom, South Africa, Australia and Chile.

  7. Public Sector Capacity as Key Driver of Success South Africa PPP Unit • South Africa established a dedicated Treasury unit to scrutinize the quality, affordability, and expected fiscal cost of proposed PPPs • A review of all PPP transactions since 2000 concluded that key success was optimal risk transfer to the private sector • Between 1993-2001, 21 road concessions awarded (approx. $5.0 billion), all competitively • 27 consortia, more than 40 Chilean and foreign companies, from 10 countries • Program viewed as competitive and transparent with focus on creating public awareness (tolling culture) • Innovative projects: e.g. Least Present Value of Revenue (LPVR), multiple variable bidding • Surveys of users, consultations with local and national leaders, and focus groups graded Concessions System at 6 on scale from 1 to 7. Chile Road Concessions

  8. Lesson 1: Planning is essential to prevent failures Common reasons for failure: • Poor legal framework and enforcement • Weak institutional capacity and PPP strategy • Unrealistic revenue and cost estimations • Lack of thorough financial and economic analysis • Inappropriate sharing of risks • Lack of competitive procurement • Public resistance (willingness to pay not assessed) Most PPP failures can be attributed to inadequate or non-existent feasibility studies, including unrealistic traffic forecasts and undefined public contribution of funds.

  9. Lesson 2: Solid Revenue and Cost Estimations Strong emphasis should be put on forecasting revenues and costs as part of the feasibility study. Overestimation of revenues can bankrupt the concession • Hungary M1/M15 was the first toll motorway tendered and implemented in Central and Eastern Europe. • Construction of motorway was finished in 1995 on schedule and within budget. • Traffic volumes were about 40% lower than anticipated, despite the forecasts being prepared by independent experts. • High toll rate did not cover for low volume. Instead, it led to a court case by dissatisfied road users. • As a result, the concessionaire was unable to service its debt and ultimately the government had to take over the concession at a high cost. CASE: Hungary M1/M15 Toll Motorway Project

  10. Lesson 3: Assess willingness to pay and prepare a communication plan Widespread public opposition to a PPP project can prematurely end the concession. The absence of an assessment of willigness to pay can lead to public dissatisfaction, and even violent protests. CASE: Bolivia Cochabamba Water System • In 1999, the Bolivian government privatized the water system in Cochabamba by granting a 40-year concession to an international consortium called Aguas del Tunari • Rate structures were immediately modified, which resulted in increases of up to $20 in water bills for local families, many of whom often earn as little as $100/month • In October 1998, groups gathered in protests, which led to an outbreak of violence, when the Bolivian army killed as many as nine, injured hundreds and arrested several local leaders • Finally, Aguas del Tunari announced that the consortium was withdrawing from the project

  11. Lesson 4: Need to conduct an extensive Feasibility Study The absence of a solid feasibility study is likely to reduce the benefits of PPP and diminish project attractiveness to private investors. Without a feasibility study, the government cannot predict its total financial liability under various scenarios. CASE: Mexico Toll Road Program • Ambitious PPP toll road project awarded 52 projects between 1987-1995 • The bid with the shortest concession period would win (max 15 years), which led to very high tolls. • Construction cost overruns averaged 25%, while average actual revenues were 30% below projections (only 5 out of 52 projects met or exceeded the targets). • Government had to take over 23 projects and commit to a massive bail-out of debt ($5 billion to Mexican banks and $2.6 billion to construction companies) • The government did not compensate equity holders, which lost an estimated $3 billion.

  12. Lesson 5: Comply with contractual agreement Financial profitability and sustainability is heavily dependent on Government’s respect of contractual agreements • In 1989, the Don Muang Tollway (DMT) company received a 25-year concession from the Department of Highways of Thailand to build a $407 million segment of an elevated highway. • The DMT faced several problems due to non-fulfillment of pre-construction obligations by the government, which failed to remove a local road competing with toll revenues. • As a result, traffic volumes and revenues were less than forecast, and by October 1996 the tollway company could no longer service its debt. • The government had no option but to authorize a substantial toll increase and take over some of the DMT’s existing loans CASE: Thailand Don Muang Tollway

  13. Lesson 6: Solid Legal Framework A solid legal framework for PPP is needed to specify the “rules of the game” for the private sector and reduce the project risk , thus improving the success rate of PPP projects. • In August 1997, Gdansk Transport Company obtained the concession to finance, build and operate a section of the Autostrada A1 from Gdansk to Torun. • However, the Concession Agreement could not be signed because key piece of PPP legislation was missing. • Multiple rounds of renegotiation and frequent adjustments to legislation took place in the following years. • The Concession Agreement was signed in August 2004, 7 years after the beginning of negotiations. • The specifications of the project were significantly changed and the construction was divided into two projects, instead of the original plan of one project CASE: Poland A1 Toll MotorwayProject

  14. Lesson 7: Strong Institutional Arrangements Institutional Arrangement should ensure coordination, technical support and that checks and balances are appropriately applied CASE: Portugal weak management of its PPP program • Portugal pursued its first PPPs in the mid-1990s to more efficiently build new infrastructure • The government PPP unit suffered from lack of experience with PPP projects and inexperienced staff • As a result, Portugal’s early PPPs were subject o constant delays and cost overruns– by 2003, the country’s PPP-related liabilities amounted to 10% of GDP • Weak public sector capacity was evident in insufficient risk transfer to the private sector and delays in giving government approvals on essential land and environmental aspects

  15. Lesson 8: Value of Competitive Procurement Uncompetitive procurement gives a strong position to the negotiating private party and can lead to long delays and excessive cost to the government. CASE: Bulgaria Trakia Motorway Project • The Bulgarian Government awarded a concession without competitive bidding for financing, rehabilitating, constructing, tolling and operating the a section of the A1 motorway in 2004 • Opposition parties attacked the project on the basis of a lack of transparency, and high government contribution and construction price • The concessionaire asked to increase construction costs due to legal obstacles causing substantial delays and did not want to assume the risk of lower-than-expected traffic • As a result, the talks with the concessionaire collapsed in November 2006 and the financial closure is yet to be achieved

  16. Lesson 9: Mitigate Macro-economic risk and remain flexible An external macroeconomic shock can create an unexpected situation for the government, whereby it cannot comply with its contractual duties in PPP • As part of a massive privatization program, the highest profile concession was signed in 1993 with a consortium called Aguas Argentinas for water services of Buenos Aires • After the 2001 economic crisis, many concessions were renegotiated. Some were even terminated and the responsibility for service provision reverted to public entities, as was the case in Buenos Aires • When the government rescinded the concession in March 2006, it argued that Aguas Argentinas did not comply with obligations on expansion and quality. • The company replied that a freeze in tariffs when the Peso depreciated in 2001 substantially reduced the real value of tariff revenues and thus made it difficult to achieve the original targets CASE: Argentina Water System

  17. Summary of Lessons from International Experience Although Russia is an attractive destination for PPP investment, strong international competition requires to use international best practices in preparing, procuring and monitoring PPP projects Key success factors include: 1. Careful planning of PPP project 2. Solid revenue and cost estimations 3. User willingness to pay and communication plan 4. Extensive feasibility study with use of PPP experts 5. Compliance with contractual agreement 6. Strong Legal and Regulatory Framework 7. Strong Institutions with appropriate resources 8. Competitive and transparent procurement 9. Mitigation and flexibility in managing macro-risks

  18. Key Success Factors Based on International Experience THANK YOU !!! Vickram Cuttaree The World Bank vcuttaree@worldbank.org

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