Public Private Partnerships: The Next Phase for World Bank Bob Prieto Senior Vice President Fluor World Bank Transport Unit Presentation May 15, 2008 Washington DC GV20060229001.ppt

Agenda What is a Successful PPP? PPP Legislation and Regulation from a “Greenfield” Developer Perspective PPP “How To” Process Things to Consider GV20060229001.ppt

What is a Successful PPP? GV20060229001.ppt

What is a Successful PPP? High-Speed Line JFK Airport Route 895 Connect GV20060229001.ppt

What is a Successful PPP? Provides improved project execution and performance certainty to the public sector. More efficiently applies available capital or accesses additional sources of capital. Scope control Life cycle framework Real pricing of risks Sculptable finance structures Effectively allocates life cycle risks Provides attractive return with good performance upside to private sector GV20060229001.ppt

Public-Private Partnerships (PPP) Top Ten GV20060229001.ppt

PPP Legislation and Regulation from a “Greenfield” Developer Perspective GV20060229001.ppt

PPP Legislation and Regulation from a “Greenfield” Developer Perspective Good Legislation Good Regulation Design of an Efficient and Effective Bidding Process Contract Issues to be Addressed by the Regulator GV20060229001.ppt

Attributes of Good Legislation Clear statement of policy Provision to receive unsolicited proposals – a competition of ideas Approval authority delegated to DOT Requirement for clear regulations including evaluation of proposals Involvement of local governmental units defined Clear authority to commit public property Powers of private sector partner delineated Right to toll or charge other user fees explicitly stated GV20060229001.ppt

Attributes of Good Legislation Exemption from property and ad valorem taxes Authority and requirements related to pre-development and comprehensive development agreements fully delineated Termination provisions for cause and convenience provided for, including any remedies Funding resources identified if federal, state, or local resources to be included Condemnation authority defined Enforcement provisions related to tolls and traffic enforcement Waiver of any procurement regulations inconsistent with PPP delivery model GV20060229001.ppt

International PPP Framework The wealth of experience provides a framework for policy, project, and procurement design Government financial models are gradually evolving toward models that better allocate risk and measure the financial effects of uncertainty Regulatory regimes recognize the change that occurs in key financial variables over time and provide for renegotiation Models are built for either outright sale of government assets or privately financed concessions Models take a longer term view than a traditional project-specific financial model and explicitly consider available regulatory instruments GV20060229001.ppt

Clear Regulatory Objectives Financial viability of PPP Toll rate structure efficiency Fairness of toll rate structure Efficiency of delivery and operation Reinvestment efficiency Recalibration of toll rate structure at periodic refinancing Development of regulatory regime must be simple, transparent, non-conflictive, justifiable and justified, fair in allocation of risks, and avoid pricing discrimination and excessive price fluctuation GV20060229001.ppt

Tools of the Trade Policy framework Concession period and its linkage to rate of return Toll rate level, structure, and adjustment mechanisms Concession payments Penalties and fines for non-compliance Timing of investment and reinvestment Quality standards, including those related to effective management and operation of the facility over time Depreciation and amortization rules (tax and accounting policy issues) GV20060229001.ppt

Types of Regulation Price or revenue caps Rate of return Hybrid GV20060229001.ppt

Design of an Efficient and Effective Bidding Process Encourage the bidder’s creativity Judge all proposals received by carefully assessing the capabilities, credibility, and commitment of the proposers and carefully respecting the intellectual property rights Choose a proposer on the basis of known and qualitative abilities. Financial criteria cannot be sole selection criteria Recognize that the concessionaire’s capital contribution is determined by financing community requirements and should not be artificially capped Establish the clear legal framework required Implement a well-defined and transparent concession process with clearly defined selection criteria Clearly define the obligations of concessionaire to: Build Maintain in good condition Operate Hand over the works at end of period GV20060229001.ppt

Design of an Efficient and Effective Bidding Process Identify rights of the concessionaire Counterparty rights which arise from financial agreements, including subsidies and tariff guarantees included in the contract Rights to operate the service and the degree of independence of those rights from the granting authority De facto monopoly rights Rights with respect to third parties State rights transferred to concessionaire (eminent domain) Rights to use the facility and receive fees GV20060229001.ppt

Design of an Efficient and Effective Bidding Process Procurement process itself should be carefully conceived: Should not be built around competing on toll levels or expected usage (increase risk to government from increased likelihood of concession company default) Should have adequate preliminary studies complete to define project scope and facilitate advancement of the environmental process Rely on careful pre-selection of qualified bidders to ensure capability to meet financial commitments Carefully define government’s role and obligations at outset of process Provide an opportunity to comment on tender documents and negotiate contract form in advance of proposal submission Clearly define the evaluation criteria Establish a realistic timetable for the negotiation process GV20060229001.ppt

Contract Issues to be Addressed by Regulator Concession period Investment Toll rates and structure Quality GV20060229001.ppt

PPP “How To” Process GV20060229001.ppt

Does Political Will Exist? GV20060229001.ppt

Does A Potential Project Exist? GV20060229001.ppt

Will Stakeholders Support the Project? GV20060229001.ppt

Are There Any Fatal Flaws? GV20060229001.ppt

Will It Make Financial Sense? GV20060229001.ppt

Are There Any Fatal Flaws? GV20060229001.ppt

Will the Project “FLIP”? inancial egal and risk nnovation/value creation olitical ocial and environmental L I P S GV20060229001.ppt

Will the Project “FLIP”? GV20060229001.ppt

Sharing the Risks GV20060229001.ppt

Risk Allocation – Value of Money GV20060229001.ppt

Contract Issues Issues Considerations Risk Uncertainty and who owns it is what a PPP negotiation is all about Concession period Time to recover target rate-of-return; repayment of debt Procedure for toll rate approvals (and linkage to cash flows and costs) Rules related to transfer of assets for non fully amortized investments Investment Commitments Timing of toll rate increases and linkage to political cycles Amortization rules (accounting, tax, and concession agreement-specific) Toll rates and structure Rates, structure, free vehicles, mechanisms for adjustment over time Targeted efficiency gains Modeling of uncertainty and changing financial coverage ratios become key parameters in the negotiation process Handling of any non-regulated activities must be carefully addressed Cross subsidies clearly defined and any restrictions placed on use of cross subsidies fully understood GV20060229001.ppt

Contract Issues (continued) Considerations ”Social engineering” Objectives and their potential impacts on toll rates and structure must be clearly developed Quality Technical and service quality standards Caps or floors Level of fines Relationship between cost, quality, and level of fines Contractor/developer rights Counterparty rights which arise from financial agreements, including subsidies and tariff guarantees contained in the contract Rights to operate the service and degree of independence of those rights from the granting authority De facto monopoly rights Rights with respect to third parties State rights transferred to concessionaire (eminent domain) Rights to use the facility and receive fees Rights of government to repurchase concession at an early date and basis for any such repurchase GV20060229001.ppt

Can We Close It? GV20060229001.ppt

Things to Consider GV20060229001.ppt

Things to Consider Policy Model legislation and regulation including alternative dispute resolution process (by World Bank) Special category of tax free debt Pricing as scarce resource allocation mechanism Managed lanes Congestion in and around urban areas accounts for significant portion of annual greenhouse gas emission growth Pocahontas “variant” Financing tools TIFIA style sub-debt facility (by World Bank) Defined rules Sculptable National level private activity bonds for use by local governments (tax features) Monoline type facility GV20060229001.ppt

Things to Consider Technical work Life-cycle cost tradeoff models (concrete vs asphalt) O&M cost models and long term performance specs for PPP contracts Income vs CPI differences for major urban centers Value of time correlations Traffic models that consider: Changing income demographics (economic link) Peak spreading over long PPP periods Changing annualization factors over long PPP periods GV20060229001.ppt

Questions? GV20060229001.ppt