PPP International Best Practice and Regional Application

1. PPP International Best Practice and Regional Application Tegucigalpa, Honduras April 23 - 25, 2008 Sponsored by the Spanish Trust Fund

2. Building Sustainable PPP’s Session 1.2 Considering Private Sector Participation David Stiggers - Independent PPP specialist

3. Day 2:Session 5.3 Case Study Ports Day 2:Session 5.2 Case Study: Water & Sanitation Day 2:Session 5.1 Case Study: Highways Session 1.3 Day 2 – Session 6 Setting Upstream Policy Day 1: Session 1.1 Overview of PPP Day 1:Session 1.2 Challenges: Latin America Day 1- Session 1.3 Considering Private Participation Day 1:Session 1.3 Considering Private Participation PPP Approach Day 1:Session 2.1 Planning the Process Day 1:Session 3 Case Study: Transmission Day 2 :Session 4.2 Selecting an Operator Day 1:Session 2.3 Involving Stakeholders Day 2 :Session 4.1 Standards, Tariffs, Subsidy, Financials Day 1:Session 2.2 Regulation & Institutions

4. What are the underlying POLICY PROBLEMS for provision of the utility services in developing countries? What are the various MODELS OF PRIVATE PARTICIPATION that we can usefully consider? How do they address the problems How can we be sure of GETTING PRIVATIZATION TO WORK? Management Contract for What are the possible EFFECTS OF PRIVATE PARTICIPATION ? Jordan Valley Authority, Irrigation Water Supply, may be the first of its kind. Session 1.3 - What will we look at?

5. Session 1.3 - Considering Private Sector Participation • Before introducing Private Participation, Governments need to: • Document particular problems their service utilities face • Diagnose the underlying cases of the problems • Determine whether private participation can address the problems

6. REVIEW: Underlying Policy Problems UNDERSTAND: Effects of Privatization ACHIEVE: Getting PP to work HOW?: Different PP Models Session 1.3 - Considering Private Participation (PP) “We will look at four main areas…...”

7. REVIEW: Underlying Policy Problems REVIEW: Underlying Policy Problems UNDERSTAND: Effects of Privatization ACHIEVE: Getting PP to work HOW? Different PP Models Underlying Policy Problems • In this section we REVIEW underlying policy problems related to provision of Utility services, including • Customer Connections • Supply – Quality and Level of Service • Sanitation services • Money • Assets and Investment • Service providers

8. Underlying Policy Problems “Often the provision of utility services is unsatisfactory. A number of basic issues….” Basic issues affecting utility services can include: • Connection rates– Many households don’t receive services from the utility, although they are prepared to pay for service. • Quality of service– Those few connected get power service for only a few hours per day, of limited duration, water not safe to drink, and little sewage treatment. • Lack ofmoney– Solutions would be easier if customers could pay more or governments could raise more tax. • External benefits– Improved services create benefits for others (e.g. reducing disease), but customers may be unwilling to pay • Assets– With condition of underground assets hard to determine, private providers may be unable to make sensible bids for improvements • Local, provincial and central governmentmay have overlapping responsibilities

9. Underlying Policy: 3 Other Factors “………. but three additional factors may create serious obstacles.” • Three other factors may create serious obstacles: • These factors, alone or combined, may create obstacles to plans for water and sanitation service improvement: • Water services are critical to all consumers • Services are often provided under a natural monopoly; supply by one well run firm may be more effective than two or more firms • Required investments are large, and cannot be reversed if returns prove to be less than estimated • The combination of these factors potentially leads to trouble Basic issues affecting water services include: • Connection rates – Many households don’t receive water or sanitation services from the utility, although they prepared to pay for service. • Quality of service – Those few connected get water for only a few hours per day, with water not safe to drink, and little sewage treatment. • Lack of money – Solutions would be easier if customers could pay more or governments could raise more tax. • External benefits – Improved water services create benefits for others (e.g. reducing disease), but customers may be unwilling to pay • Assets – With condition of underground assets hard to determine, private providers may be unable to make sensible bids for improvements • Local, provincial and central government may have overlapping responsibilities

10. Underlying Policy Problems - The Challenge “Given that the provision of utility services is unsatisfactory, and a number of issues influence this…..” • The biggest challenge for governments is to address these issues and thus to encourage investment, in order to: • Improve service quality • Lower costs • Extend access to services

11. REVIEW: Underlying Policy Problems UNDERSTAND Effects of Privatization UNDERSTAND:Effects of Privatization ACHIEVE: Getting PP to work HOW? Different PP Models Possible Effects of Private Participation • In this section we show some of the possible effects of Private Participation in Utility services in developing countries. • We look at three main areas: •  Operation •  Investment •  Policy & enforcement

12. Possible Effects of Private Participation “Private participation changes the sector, with an operator being independent of government, and with incentive to be profitable. ” Private providers cannot be directed in the same way as a public provider, and the profit incentives can cause it to take actions not in the public interest. However independence and profit can help the government to achieve its objectives. Private participation may have effects in three areas: • The Operating Performance of the utility • The utility’s investment decisions • Policy and its enforcement

13. REVIEW: Underlying Policy Problems UNDERSTAND: Effects of Privatization ACHEIVE Getting PP to work ACHIEVE: Getting PP to work HOW? Different PP Models Getting Private Participation to Work • In this section we show some of the potential issues in getting Private Participation in water services to work. • We look at three main challenges: •  Ability and incentives to invest • Protecting operator from risk of change • Achieving ‘Fairness’ in PP Arrangements

14. Getting Private Participation to Work “The experience of the last decade shows how important it is to get two main issues right – but also how difficult” TWO MAIN ISSUES: • Giving the provider the ability and the incentives to make good operating and investing decisions • Protecting the Operator from risk of losing through Government changing ground rules

15. Getting PP to Work: ‘Fairness’ “In the last decade many PP arrangements have run into trouble or been cancelled. Lessons learnt show that the arrangement must be perceived to be fair and legitimate ” • If the customers or operator feel that the arrangements haven’t been fairly implemented, then they can run into trouble • Examples: Cochabamba and Manila • To work well, the Government must create an arrangement that people perceive as being fair. If not: • Customers & voters may pressure Government to override contractual protections • The Operator may find his property rights or returns are less secure than expected • Private providers may require a higher rate of return if the arrangement is not perceived as being fair

16. Rate of Return that must be promised Strength of legal protections Rules perceived as unfair Rules perceived as fair Getting PP to Work: Fairness & Cost “Additionally, perceived fairness allows a lower rate of return to be promised for a given legal protection – and possibly lower potential cost”

17. Getting PP to Work: ‘Fairness’ “WB PPP Toolkits explore ways of structuring fairness into PP arrangements, and here are some examples…. ”

18. REVIEW Underlying Policy Problems UNDERSTAND Effects of Privatization ACHEIVE Getting PP to work HOW? Different PP Models HOW? Different PP Models Models of Private Participation • In this section we show the key Private Participation models: •  Management Contracts • Affermage – Lease • Concessions and Divestitures • Joint Ownership

19. Models of Private Participation “It is useful to understand the nature of some key PP models, and implications for the Challenges of Private Participation.” • Management Contracts • Management Contracts transfer responsibility for managing a utility to an operator – often for 3 to 5 years • Affermage - Leases • In Affermage-Leasesthe operator is responsible for operating and maintaining the business, • but not financing investment - with a term often from 5 to 14 years • Concessions, BOTs (and variants) and divestitures • Concessions give the operator responsibility for financing investment, as well as operation and maintenance, with assets returned to government after 25 or 30 years. • Divestiture gives the same responsibilities, but ownership of the assets stays withprivate investor • Joint Ownership • Joint Public / Private Ownership of the Operating Company is a possibility, and offers certain advantages

20. PP ModelsMore details Selected risks typically borne Ownership Definition Selected Stylized typical by operator - and of Ownership of Type of of operator responsibilities of profit function typical share of opera ting infrastructure duties the operator for operator assets arrangement total project risk assets Management Supplies management Providing management Fixed fee + Bonus Depends on the nature Contracting Contracting Contract services to the utility in services to the utility - managers’ salaries of the performance authority authority return for a fee and related expenses bonus – very small Affermage Runs the business, Employing staff. (Affermage fee Operating and Operator Contracting retains a fee (generally nt Operating and x volume of water commercial risks authority equal to the customer maintaining utility sold) – operating and - significant tariff) based on volume of maintenance costs water sold, but does not finance investments in infrastr ucture assets Lease Runs the business, Employing staff. Revenue from Operat ing and Operator Contracting retains revenu es from Operating and customers - operating commercial risks authority customer tariffs, pays maintaining utility and maintenance - significant lease fee to the costs - lease fee contracting authority, but does not finance investments in infrastructure assets Employing staff. Concession Runs the business and Revenue from Operating, commercial Operator Contracting Operating and finances the investment customers and investment related authority maintaining utility. but does not own the - operating and risks Financing and managing infrastructure assets maintenance costs - major investment. - finance costs - any concession fee Employing staff. Operating, commercial Divestiture Runs the business, Revenue from Operator Operator Operating and and investment related finances investment, and customers maintaining utility. risks owns the infra structure - operating and Financing and managing - major assets maintenance costs investment. - finance costs - any license fee Note: The use of terms such as "affermage," "lease," "concession," and "divestiture" varies, and arrangements that go by these names do not always have the features set out in the table. Other things being equal, the operator bears more demand risk in an affermage because the government's payment is fixed in a lease, and variable in an affermage

21. REVIEW: Underlying Policy Problems UNDERSTAND: Effects of Privatization ACHIEVE: Getting PP to work HOW?: Different PP models Reviewing Session 1.3 ‘This session has looked at a whole range of issues for analysis and allocation of responsibilities & risks in PP design………….

22. Checklist: Considering PP ‘……..and what to do before beginning this process is discussed in this Checklist”

23. Building Sustainable PPP’s Session 1.2 THANK YOU ! Considering Private Sector Participation David Stiggers - Independent PPP specialist

24. Session 1.3More information: Other References: Fundamental political-economy problems in the provision of water services and broad strategies for addressing them:Gómez-Ibáňez 2003, Nickson and Franceys 2003, Savedoff and Spiller 1999, and Smith 1997a Recent trends in private participation in water:World Bank 2003 Evidence and arguments about the effects of private participation, including case studies:Abdala 1996, Barlow and Clarke 2002,Bitran and Valenzuela 2003, Brocklehurst and Janssens 2004, Clarke and others 2004, Crampes and Estache 1996, Estache and Rossi 2002, Gray 2001, Harris 2003, Lobina and Hall 2003, Megginson and Netter 2001, Nickson and Vargas 2002, Palaniappan and others 1999, Plummer 2002, Public Citizen 2003, Rivera 1996, Saghir and others 1999, 200, Sirtaine and others 2005, Shirley 2002, Shirley and Walsh 2000, Sirtaine and others 2005 Concessions and management contracts in particular: World Bank 1997b Considering Private Participation:

25. Contacts For comments or further details contact: Junglim Hahm jhahm@worldbank.org Cledan Mandri Perrott cmandriperrott@worldbank.org Richard Cabello rcabello@ifc.org Sabino Escobedo sescobedo@tagfinancialadvisors.com David Stiggers davidstiggers@comcast.net

26. Building Sustainable PPP’s Session 1.2 Considering Private Sector Participation David Stiggers - Independent PPP specialist