International Experience with Highway PPPs 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

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

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

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

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

Extent and condition of road infrastructure in developed and developing countries

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

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 High-income 10,150 2,070 673,000 840

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

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

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

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

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

… and highly influenced by a few global concessionaires or sponsors PPP Projects under contract Awarded ACS Dragados 45 18 MIG / Macquarie Bank 23 4 Laing / Equion 21 1 Ferrovial / Cintra 20 14 Sacyr Vallehermoso 19 13 Albertis / La Caixa 2 FCC 17 8 OHL Cheung Kong Infrastructure 16 22 Vinci / Cofiroute 15 Top 10 Transportation Developers 2004 Concentration of Projects in Top 10 Transport Sponsors 1994-2004 Proposed and Underway Source: PWF Major Project Survey – October, 2004 Period: 1985-2004

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

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

Rise & fall in developing countries shows vulnerability in era of financial shocks Total Investment in Road Projects with Private Sector Participation 1988-2003 2 4 6 8 10 12 14 88 89 1990 91 92 93 94 95 96 2003 US$ billion - 20 30 40 50 60 70 Number 97 98 99 2000 01 02 03 Asian Crisis Mexican Crisis Argentinean Crisis Investment in PPP projects in roads reached a peak in 1997, recovered somewhat in 2001 and fell to about 17 percent of its annual average since 1990 in 2003 Mansoor Dailami, June 2005. Crisis in one country should be associated with higher spreads in other markets, if they both are a result of a changed attitude to risk or liquidity Total Investment Number of Projects Source: PPI Database

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) Forecasting errors resulting from incorrect assumptions in models and/or inability/unwillingness to obtain good data. we all are aware of the studies by Standard and Poor and others about overestimating traffic Need to pay more attention to price elasticity of traffic to tolls But also failure to consider substitute services/consequences of intensified competition from rival transport operators Or benefits counted twice in different parts of appraisal when secondary impacts are really ramifications of primary impact excessive focus on appraisal of individual projects in isolation, overlooking consequences for network as whole Failure from outset to clarify objectives and address potential conflicts between stated and actual objectives Political commitment at too early a stage before an appraisal at sufficient depth to allow graceful exit project timelines inconsistent with bid preparation Failure to identify and value political and social costs Downplaying risks associated with long gestation and operation periods which make PPP projects vulnerable to changing political, financial and economic circumstances. Great support to a PPP initiative may fade away latter as administration shifts attention to other burning or no so burning priorities.

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)

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

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

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

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

Benefits of WB Partial Risk Guarantees for: 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

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

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

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

Incidence of Renegotiations, Latin America, 1988-2004 Concessions Renegotiated, % Average time to renegotiate, yrs All sectors 59 2.1 Electricity 21 2.3 Transport 67 3.1 Water 82 1.7 Source: Guasch 2004

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

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)

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.

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

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

Thank you!

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.

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

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

Cesar Queiroz Road and Transport Infrastructure Consultant Tel +1 202-473 8053 Cel +1 301-755 7591 Email: queiroz.cesar@gmail.com cqueiroz@worldbank.org www.worldbank.org/highways