International Experience with Highway PPPs

1. Latvian MOT and World Bank Workshop on PPP in Highways International Experience with Highway PPPs Cesar Queiroz Consultant Roads and Transport Infrastructure Riga, 9 May 2006

2. Presentation Outline • Infrastructure and economic development • Public-private partnerships (PPP) • PPP and public policy requirements • Alternative PPP approaches • Some policy implications

3. Developing and Developed Countries • Developing countries include low- and middle-income economies • Developed (advanced, industrial, rich) countries denote high-income economies

4. Classification of Economies Economies GNI per capita Low-income $825 or less Middle-Income $826 to $10,065 Lower $826 to $3,255 Upper $3,256 to $10,065 High-income $10,066 or more Source: www.worldbank.org/data

5. Gross National Income (US$ per Capita) Source: http://devdata.worldbank.org/data-query/

6. Extent and condition of road infrastructure in developed and developing countries

7. Some Measures of Infrastructure • Paved road density (PRD), in km per million persons • Electricity-generating capacity (ELE), in thousands of kilowatts per million persons • Number of telephone connections per million population (TEL) • Railroad tracks (RWY), in km per million population

8. Average Measures of Infrastructure Economies PRD ELE TEL RWY (km/mil pop) (1,000’s of (# of connec. (km/mil kw/mil pop) /mil pop) pop) Low-income 410 70 7,920 70 Lower-middle 610 190 46,760 190 Income Upper-middle 1,950 560 154,100 330 Income High-income 10,150 2,070 673,000 840

9. Economic Development and Infrastructure GNI ($/pop) logGNI = 1.39 logPRD R squared: 0.76 98 countries Source: Queiroz and Gautam

10. What is PPP? • A partnership between the public sector and the private sector to deliver a project or a service traditionally provided by the public sector • It allows each sector to do what it does best • Risks are borne by those best able to manage them

11. Why PPP? • Financial shortages in the public sector • Operating efficiencies inherent to the private sector • Reduced whole life costs through better risk allocation and incentives to perform • Improved quality of service • Generation of additional revenues • Enhanced public management

12. PPPs are becoming a global business – however reaching financial close remains a challenge Only 55% of proposed projects reached financing Source: Public Works Financing-Major Project Survey 1995-2004

13. 350 300 250 200 150 Number of Projects 100 Project Cost ($bn) 50 0 East Asia Europe South Sub- Middle Developed Latin World America and and Asia Saharan East and and the Pacific Central Africa North Africa Caribbean Asia PPPs remain concentrated in a select group of countries

14. Concentration of Projects in Top 10 Transport Sponsors 1994-2004 Proposed and Underway … and highly influenced by a few global concessionaires or sponsors Top 10 Transportation Developers 2004 Source: PWF Major Project Survey – October, 2004 Period: 1985-2004

15. What Have We Learned? • Successfully concluding a transport PPP is a challenge: • As a result of unrealistic and aggressive bids, a large number of projects face re-negotiation • Government commitment can disappear in periods of financial stress • Historically only 55% of proposed projects have reached financing

16. What Have We Learned? • Cost recovery is a major challenge: • Full cost recovery is only achievable in some transport sub-sectors • Revenue projections often suffer from a bias towards optimism • Access to local currency funding is a critical success factor for infrastructure projects with local currency revenues • The vulnerability of PPP projects to changing political, financial and economic circumstances is often underestimated

17. 14 70 12 60 10 50 8 40 Number 2003 US$ billion 6 30 4 20 2 10 - 0 0 88 89 91 92 93 94 96 99 2000 01 02 03 1990 95 97 98 Rise & fall in developing countries shows vulnerability in era of financial shocks Total Investment in Road Projects with Private Sector Participation 1988-2003 Asian Crisis Mexican Crisis Argentinean Crisis Total Investment Number of Projects Source: PPI Database

18. PPP projects in highways have suffered from optimism bias • Forecasting errors from poor data or incorrect assumptions in models • price elasticity of traffic to tolls • substitute services/intensified competition • Political commitment at too early a stage • before appraisal at sufficient depth to allow graceful exit • project timelines inconsistent with sound bidding practices • Downplaying vulnerability of PPP projects to changing political, financial, economic context • failure to identify/value political and social costs (e.g., toll increases)

19. Incentive Schemes How can the government provide incentives for private sector firms to participate? • Cost sharing and pricing arrangements • Incentive payments (or penalties) linked to performance standards • Support the provision of guarantees (e.g., World Bank Partial Risk Guarantee)

20. World Bank Group Instruments Available to Support PPPs • The World Bank • Loans to governments • Partial credit and partial risk guarantees • Technical assistance • International Finance Corporation - IFC • Loans to the private sector • Equity investment • Technical Assistance • Multilateral Investment Guarantee Agency - MIGA • Political risk insurance

21. World Bank Partial Risk Guarantee Structure Govern’t World Bank Counter Guarantee World Bank Guarantee Concession Agreement Project Company or Concessionaire Private Lenders Loan Agreement

22. PRG for a Sub-national Project Counter Guarantee WB Guarantee Federal Government Private Lenders Buys Guarantee Legal Framework Loan Agreement Provincial Government Concession Project SPV

23. Coverage of World Bank PRGs • Cover specific government obligations • Guarantee payment against default on private debt due to non-performance of government contractual obligations • Relevant when there is a high perceived risk of policy reversal • Coverage examples: • political events, e.g., changes in law, expropriation, nationalization; contract frustration; obstruction in arbitration process • certain force majeure events • foreign exchange convertibility/transferability

24. Public sector Catalyze private financing and facilitate PPP Reduce government risk exposure by shifting commercial risk to the private sector Encourage larger co-financing Private sector Reduce risk of private transactions Mitigate risks difficult for the private sector to manage Open new markets Lower the cost of financing and extend maturities Improve project sustainability Benefits of WB Partial Risk Guarantees for:

25. Value Engineering • A professionally applied, function oriented, creative and systematic team management approach, used to analyze and improve value in transportation projects • Provides a balance of quality, performance and functionality in a project, minimizing life cycle costs of construction, operation and maintenance

26. Anti-Corruption and Road Concessions • Road concessions are susceptible to corrupt practices: • sole source selection of concessionaries (unsolicited proposals) or non-transparent competitive selection • renegotiations (sometimes tantamount to sole source) • land acquisition • Public disclosure of concession agreements

27. Benefits of Public Disclosure of Concession Agreements • Further check on corruption, which in addition to its direct benefits can enhance the legitimacy of private sector involvement in often sensitive sectors • Provision of consumers with a clearer sense of their rights and obligations, which can facilitate public monitoring of concessionaire performance

28. Incidence of Renegotiations, Latin America, 1988-2004 Source: Guasch 2004

29. Some Renegotiation Concerns • It may eliminate the competitive effect of the bidding process and question credibility of the model • Renegotiation takes place away from competitive pressures in a bilateral (government-operator) environment • Winner may not be the most efficient operator but the one most skilled in renegotiations • While some renegotiations are efficient, many are opportunistic and should be deterred

30. Payment Mechanisms for Road Concessions • Availability Fee is paid to the concessionaire by the government based on the availability of required capacity (number of lanes in satisfactory condition) • Shadow Toll is paid to the concessionaire by the government, not charged to motorists, on the basis of veh-km achieved (volume and composition of traffic)

31. Payment Mechanisms • BOT (build-operate-transfer) is a scheme where the government contributes land to the project and sometimes a financial support, while the concessionaire builds, maintains and operates the motorway and transfer the assets after the concession completion. The commercial risk rests with the concessionaire. • BOO (build-own-operate) is a scheme where the concessionaire builds, maintains and operates the motorway. It does not involve the transfer of the assets to the government. The commercial risk rests with the concessionaire.

32. Allocation of Risks by Forms of Concession 100 Availability Fee Shadow Tolls RISK TO PUBLIC SECTOR % BOT BOO Decreasing Public Risks, Increasing Private Risks 0 100 RISK TO PRIVATE SECTOR %

33. Some Policy Implications • Infrastructure is essential for economic development, • …then sufficient resources should be made available to maintain and expand a country’s infrastructure. • Despite relative slowdown, PPPs remain an attractive option for many governments

35. Thank you!

36. Some Basic References World Bank (2001). “World Bank-Financed Procurement Manual [Draft].” Washington, D.C. http://siteresources.worldbank.org/PROCUREMENT/Resources/pm7-3-01.pdf Guasch, J. Luis (2004). Granting and Renegotiating Infrastructure Concessions Doing It Right. Washington, D.C.: World Bank.http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2004/05/06/000090341_20040506150118/Rendered/PDF/288160PAPER0Granting010renegotiating.pdf World Bank (2004). “Guidelines: Procurement Under IBRD Loans and IDA Credits.” (May). Washington, D.C. http://siteresources.worldbank.org/INTPROCUREMENT/Resources/Procurement-May-2004.pdf Queiroz, Cesar (2005). “Launching Public Private Partnerships for Highways in Transition Economies.” Transport Paper TP-9. (September). Washington, D.C.: World Bank. Kerf and et al. (1998). “Concessions for Infrastructure: A Guide to Their Design and Award.” Technical Paper no. 389. World Bank (1998). “Bidding for Private Concessions. The Use of World Bank Guarantees.” RMC Discussion Paper Series, no 120. Washington, D.C.

37. WB PPP-related Sites • Toll Roads and Concessions http://www.worldbank.org/transport/roads/toll_rds.htm • Toolkit for PPP in Highways 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

38. Some Key EC References • Guidelines for Successful Public Private Partnerships • Resource Book on PPP Case Studies http://europa.eu.int/comm/regional_policy/sources/docgener/guides/pppguide.htm

39. Cesar QueirozRoad and Transport Infrastructure ConsultantTel +1 202-473 8053Cel +1 301-755 7591Email: queiroz.cesar@gmail.comcqueiroz@worldbank.orgwww.worldbank.org/highways