Successes and Failures of PPP Projects

1. Successes and Failures of PPP Projects Vickram Cuttaree The World Bank Europe & Central Asia Region Warsaw – June 17, 2008

2. Introduction • Objective of the presentation is to show some contributors of successful PPP programs • Mexico and Chile PPP programs illustrate the importance of proper design of a PPP program • Experience in the region but also worldwide converge into the same essential elements: • Strong public sector capacity • Appropriate PPP and sector Framework • Planning and solid feasibility study • Transparent and Competitive Procurement • Strong monitoring and flexibility towards unpredicted events 2

3. Investment is now less concentrated in Latin America and East Asia Countries with strong public sector institutions have typically performed best. Examples include the United Kingdom, South Africa, Australia and Chile. These countries are not only good examples but represent also competition for Poland in PPP investment Source: PPIAF Database 3

4. Success Story: Chile Road Concession Program • Between 1993 and 2001 Chile awarded 21 road concession worth US$ 5 billion on a competitive basis • Bidding started with smaller projects, in order to test the market and reduce the risk to the private sector • The bidding attracted 27 consortia and more than 40 Chilean and foreign companies, from 10 countries • PPP program is viewed as transparent and competitive, with only one minimum revenue guarantee called • Surveys of users, consultations with local and national leaders, and focus groups graded Concessions System at 6 on scale from 1 to 7 4 Source: Hodges (2006)

5. (In)Famous PPP Failure: Road Concession Program in Mexico • Between 1987 and 1995, 52 projects (25 competitively tendered) was awarded (largest PPP toll road program) • By the end of 1995, 34 projects had reached financial close for US$ 9.9 billion in private investment committed • Shortest concession period would win (max 15 years), led to very high tolls • Concessioned roads obligated to have a parallel toll free road • Construction cost overruns averaged 25% and average actual revenues were about 30% below forecasts (only 5 projects met or exceeded targets) • Average toll road fee increased from US$ 0.02/km to US$ 0.17 after concessioning • Government took over 23 projects and paid outstanding debt to Mexican Banks (about US$ 5 billion) and construction companies (about US$ 2.6 billion) 5 Source: Hodges (2006)

6. Chile Procurement process was transparent Focus on creating public awareness (tolling culture) Government learned as program developed and made adjustments Attracting international firms brought finance, credibility, know-how etc… Mexico Combination of small contract duration and low traffic resulted in high tolls Existence of free roads contributed to financial distress of concessionaires Situation aggravated by Tequila crisis Program resulted in massive Government bail-out Lessons learned from Chile and Mexico 6 Source: Hodges (2006)

7. International experience helps identify typical causes of failure Other 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. 7

8. Lesson: 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 8

9. Lesson: 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 willingness 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 9

10. Lesson: 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 10

11. Lesson: 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 renegotiations 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 11

12. Lesson: 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 12

13. Lesson: 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 13

14. Lesson: 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 14

15. Summary of Lessons from Successes and Failures 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 estimate 3. User willingness to pay and communication plan 4. Extensive feasibility study with use of PPP experts 5. Compliance with contractual agreement 6. Appropriate Legal and Regulatory Framework 7. Strong Institutions with appropriate resources 8. Competitive and transparent procurement 9. Mitigation and flexibility in managing macro-risks 15

16. Success and Failures of PPP projects THANK YOU !!! Vickram Cuttaree The World Bank vcuttaree@worldbank.org 16