Large Project Finance Workshop Presentation on Public Private Partnerships (PPPs) Structural, Legal and Regulatory issu

1. Peter Kyle Lead Counsel The World Bank Large Project FinanceWorkshopPresentation onPublic Private Partnerships (PPPs)Structural, Legal and Regulatory issues

2. Outline for Discussion • PPPs – Structures, Objectives and Options • PPP Unit • Legal Environment - Key Issues • Regulatory Issues

3. What are Public Private Partnerships (PPPs)? • a range of relationships between the public and private sectors for the delivery of infrastructure services • generally, the public sector enters into an agreement with a private company to provide a specified public service, in exchange for payments based on the service actually delivered

4. Concession BOT, BOOT etc Lease/ Affermage Contracts Operation & Maintenance Contracts Management Contracts Service Contracts Summary: Range of Options Joint Venture Divestiture Public Water Co. Private Corporatisation Management of Service provider Mixed Delegation to Private Sector Municipal or Provincial Authority Public Public Mixed Private Ownership of Assets

5. Objectives behind PPPs Why do governments choose PPPs? • insufficient public funds to meet the demand for infrastructure • new sources of finance • a desire to improve the quality of public services • transfer of certain risks to the private sector • better value for public investments in infrastructure by the use of private sector skills • introduction of innovation/ technology

6. Assets – Existing or New Existing service to be operated by private sector? New facilities to be added and then operated? Transfer end-user risk Operator takes all risk of end user – bills user directly Operator is paid fee by public entity + performance bonus for increased collection rates Management contract/ O & M/ Lease/Affermage/ Concession BOT/ BOOT/ Concession etc Lease/ Affermage/ Concession Management Agreement/ O & M Agreement BOT/ Concession with off-take arrangement Which option fits objectives?

7. Pros Off balance sheet – creates fiscal space Private sector is seeking to make a profit – generally will do what it is paid to do Private sector brings expertise and good practice Private sector paid to make efficiencies Cons Can be expensive Contract needs to be carefully drafted to ensure operator cannot avoid obligations/ benefit excessively Public body will need to retain expertise to monitor operator Efficiencies are likely to be made at expense of workforce – don’t underestimate trade union and public pressure Pros and Cons of PPPs

8. PPP Unit • Is there an entity equipped to implement PPP Program? (Unit in Treasury, PPP Unit, statutory body etc) • Does it have full mandate from relevant ministries? • Are all PPPs, in all sectors, handled by this unit? • Will it have all necessary powers? • How is it funded? • How is it staffed?

9. LEGAL ISSUES • The laws, regulations and concession agreements are not the whole story • Government commitment on a continuing basis is key • Stable and investor-friendly legal/ enabling environment is key • Involvement of all stakeholders from an early stage in project development is key • Need for high quality legal advisers – foreign and domestic • Need for sophisticated financial instruments and financing techniques

10. Competitive Selection Domestic Borrowing Corruption Index Ranking Transition to Competitive Market Investment Grade Debt Rating Clear Rules for Exit Judiciary's Independence Government Efficiency Government/Multilateral Guarantee Consumer Payment Discipline Legal Protection of Investors Possibility of Vertical Integration LEGAL ISSUES - Trends in Power Industry PPPs:World Bank 2003 Survey of Investor Concerns Minor Major Critical “Deal-breaker” 3.57 3.11 3.11 2.98 2.91 2.83 2.83 2.68 2.66 2.49 2.43 2.00 2 9

11. Local Legal Environment - Key Issues (1) • Is the environment a safe one in which to invest? • Legal/ political certainty • What power does the government have to expropriate assets? • Are adequate dispute resolution systems available? • Foreign exchange controls – are there limits on the amounts of forex that can be brought into or out of the country? • Is the return that the operator is to receive protected by contract? Who is responsible for setting tariffs? • Are political risk insurance/ guarantees available– eg MIGA, World Bank

12. Local Legal Environment - Key Issues (2) • Can the public body (Ministry, PPP Unit) delegate powers and obligations? • If the service is decentralized, does the legal instrument delegating authority to municipality allow it to delegate powers? • Even where the authority has general power to delegate, is it actually possible to delegate what is contemplated? • If it is intended that private operator is to bill end-users, is this allowed? What recourse does private operator have against non-payers? In the case of the utility, can the user have service cut off? • A utility will need powers to work on third party property, can this be delegated?

13. Local Legal Environment - Key Issues (3) • Property rights • If the private entity is to build a new power plant, and is to receive financing to do this, are the laws on title to land sufficiently clear to allow entity to own plant and have rights of access over land? • Is a foreigner permitted to hold property? • Can security be granted over assets • Possibility of step-in rights for lenders/ direct agreements • Tariffs • If it is intended that tariffs will be increased, are there legal limitations on tariff increases? Can the public body guarantee that such tariff increases will be implemented, or is this the responsibility of a third party regulator/ parliament?

14. Local Legal Environment - Key Issues (4) • Are guarantees available from the central government? • Is the procurement regime clear and transparent? • Are the labor laws conducive to a PPP investor? • What are the taxation implications for the PPP? • Dose the country have a modern insolvency regime? • Will the Legislature enact an appropriate PPP/Concession Law?

15. Regulatory Issues • Canregulation be achieved in the contract or is there a necessity for a separate regulatory body? • Relationship between regulator and PPP Unit • Transitional arrangement before regulatory body is established • Formal regulation may not be practical • Who will regulate the contract – independent engineer? • Should regulatory body be “independent” What does independence really mean? Who appoints regulator, is it a board or an individual, how is it funded (through tariffs or from central government)? • Should there be outsourcing of regulatory duties?

16. ISSUES TO CONSIDER WHEN CONTEMPLATING REGULATION/ GOVERNANCE RE. UTILITIES • Should there be a separate regulator to cover each sector or a common regulator? • What powers and duties should be given to the regulator • Can Government step in and reverse regulator’s actions without recourse to legislation? • Can other bodies/ courts overrule regulator? • Is regulator to set tariffs? • Are there other regulatory body with similar/ conflicting powers/ duties? • Need adequate appeals process against regulatory decisions

17. Thank You Guidance and Materials Uncitral - http://www.uncitral.org/pdf/english/texts/procurem/pfip/guide/pfip-e.pdf EBRD - http://www.ebrd.com/country/sector/law/concess/core/index.htm Peter Kyle, Lead Counsel, The World Bank Tel: (1) 202 458 2394, Email: pkyle@worldbank.org