World Bank Toolkit for Public-Private Partnership in Highways

1. Tallinn Technical University World Bank Toolkit for Public-Private Partnership in Highways Cesar Queiroz Lead Highway Engineer World Bank Tallinn, 4 October 2004

2. Presentation Outline • Public policy requirements • The main risks of highway projects • International experience with highway PPP projects • Traffic forecasting risks • Error drivers • Impacts on revenues • World Bank Toolkit for Highway PPP • Case studies • Discussions

3. Public Policy Requirements • Proposed highway projects should be part of Government program • Subject to full social cost-benefit assessment • to ensure public as well as private benefits • to establish need, and provide basis for public participation in financing • Concession award and agreement should • be well designed • be transparent & competitively procured • have clear rules for regulation of the concession

4. S&P Research Coverage • 67 toll case studies comparing forecast performance with actual/observed • Toll roads, bridges & tunnels • User-paid & shadow tolls • Key findings: • Systematic errors (optimism bias) in forecasts • Consistency of error-drivers • Produced a traffic risk index • Sensitivity testing is essential

5. Infrastructure FinanceTraffic Risk in Start-Up Toll FacilitiesStandard &Poor’sSeptember 2002

6. S&P Research Results 2002 Mean ~ 70% Spread: 18% - 146% !

7. Traffic Forecasting Risk Index

8. Error Drivers • Miscalculation of road user willingness-to-pay • Recession/economic downturn • Future land use scenarios that never transpired • Time savings less than expected • Improvements to competitive (toll-free) routes • Underestimate of ramp-up period (traffic stability), both severity and duration • Less usage by trucks

9. Tolling Experience No tolling experience: actual traffic = 56% of forecast Tolling experience: actual traffic = 87% of forecast

10. Future Challenges • Point-of-use charging • depends on ability to pay/willingness to pay • New toll collection technologies • Reliability, take-up, back-office processing • Pricing sophistication • discounts (frequent user programs, resident discount schemes), peak/off-peak pricing, day-of-week, season-of-year

11. Main Lessons for Success • A well defined legal framework • Simple and transparent procurement • Shared risk-reward concession structure • First attempt with toll roads tend to have mixed results • Projects should have social benefits as well as commercial viability • Particular attention to traffic forecasting and hence revenues • Public sector comparator advisable

12. World Bank Toolkit for Public-Private Partnership in Highways

13. Toolkit’s Objective To provide policy makers from economies in transition with some guidance in the design and implementation of a Public Private Partnership (PPP) in the highway sector

14. Definition of PPP A Public-Private Partnership (PPP) constitutes a sustained collaborative effort between the public sector (government agencies) and private enterprises to achieve a common objective (e.g., the road project) while they pursue their own individual interests.

15. The Toolkit The toolkit is structured under five headings and is navigated through a series of tree diagrams under each of these headings. It also includes a library and interactive financial models.

16. Availability of the Toolkit • Free of charge • A multimedia product available on a CD ROM • Also available at the World Bank’s web site: www.worldbank.org/transport

17. Contributors Financing Institution Public-Private Infrastructure Advisory Facility (PPIAF) www.ppiaf.org Executing Agency The World Bank www.worldbank.org Consultants Groupe Egis (http://www.groupegis.com) in association with Coudert Brothers (http://www.coudert.com)

18. The Highway Toolkit Includes • over 5000 pages of reference publications and web links • a 500 word glossary • case studies and financial simulation software

19. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

20. Toolkit Modules • Overview and Diagnosis: rationale for private participation in the highway sector, alternative contractual forms, guide to conduct a diagnostic of the sector 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

21. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics: key considerations in the design of a public-private partnership, discussions of well-known PPPs 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

22. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions: analyzes the roles of the public sector and presents the tools at Government's disposal for performing such roles 4. Laws, Rules and Contracts 5. Implementation

23. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts: guidance on the design of legal and contractual frameworks for private participation in highways, with boilerplate provisions 5. Implementation

24. Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation: outlines the key steps in introducing PSP, bringing elements from previous modules and distinguishing by type of private sector contract

25. 1. Overview and Diagnosis • Context and Key Issues • Expected Benefits from PPP • Why (and where) is the Private Sector more efficient than the Public Sector? • Overview of PPP experience • PPI project data base Why Embark on PPP? Choosing the right option • Forms of PPP • Making the diagnosis • PPP policy and strategy

26. 2. Project Characteristics • A continuum of alternatives • Comparing PPP with music Tailoring appropriate PPP PPP Equalizer Examples of well-known PPP

27. 3. Public Sector Functions • Protect community welfare • Planning and policy making • Provide adequate framework • Facilitator • Contract award • Regulation

28. 4. Laws, Rules and Contracts • Legislative framework • Adjust legal framework • Regulatory framework • Standards • Legislation • Contracts • Maintenance contracts • Operation and maintenance concessions • BOT type projects

29. 5. Implementation • Actors • Main Steps • Managing the Reform • Selection and contract award

31. Public Private Partnerships Build Operate Transfer Concessions Management & Maintenance Contracts Works & Services Contracts Operation & Maintenance Concessions Full Privatization Low High Extent of private sector participation

32. BOT-type of Concessions The responsibility of the concessionaire comprises an initial construction, upgrading or major asset rehabilitation, and operation and maintenance of the facility.

33. Allocation of Risks 100 MaintenanceContracts ManagementContracts Operation & Maintenance Concessions RISK TO PUBLIC SECTOR BOT BOO Decreasing Public Risks, Increasing Private Risks 0 100 RISK TO PRIVATE SECTOR

34. In addition to the five modules, the Toolkit also includes: • Financial simulation tool • Graphic simulation tool • Case study • CD Map • Documentation • Glossary

35. And where is the toolkit?

36. Graph Simulation Case Study The Government of Farland is considering to build a road between the cities of Farport and Farcapital (located 50 km apart) through a Public Private Partnership (PPP) scheme.

37. Graph Simulation Case Study Basic data include: Construction cost: US$200 million Source of funds: Subsidies, equity and credit Real interest rate: 10% Concession duration: 30 years Initial traffic: 15,000 vpd Toll rate: US$5.00 (indexed on inflation) Inflation rate: 7% per year

38. Graph Simulation Case Study Using the above information and other default data in the Graphic Simulation tool of the Toolkit for Public-Private Partnership in Highways, please answer the questions below:

39. Graph Simulation Case Study Question 1: In the absence of Government subsidies, ceteris paribus, what would be the return on equity (ROE)? What would be the change in the internal rate of return (IRR) of the project? Answer: ROE would reduce from 15.63% (with a Government contribution of 44% of the construction cost) to 6.94%. No change in IRR (12.27%).

40. Graph Simulation Case Study Question 2. While subsidies may be paid by the Government during the construction period, it recovers some of this payment through taxes during the operation period. What would be the Government contribution to this project that would lead to a financial balance for the government throughout the concession period? Answer: About 23% of the construction cost, as 22% would generate a US$171,000 surplus and 24% would lead to a US$2,464,000 deficit.

41. Graph Simulation Case Study Question 3. In the absence of Government subsidies, ceteris paribus, what would be the required initial toll rate to yield a return on equity (ROE) of 16%? Answer: With no subsidies, an initial toll rate of US$8.00/veh yields a 15.08% ROE; an initial toll rate of US$9.00 yields a 17.82% ROE. So an initial toll rate between US$8.00/veh and US$9.00 would be required.

42. Some WB-related Sites • Toll Roads and Concessions http://www.worldbank.org/transport/roads/toll_rds.htm • Public-Private Options for Roads 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