World Bank Toolkit for Public-Private Partnership (PPP) in Highways State Technical University - MADI World Bank Toolkit for Public-Private Partnership (PPP) in Highways Cesar Queiroz Lead Highway Engineer World Bank Moscow, 7 February 2005

Presentation Outline Transport and economic development PPP and public policy requirements The main risks of highway projects International experience with highway PPP projects Traffic forecasting risks Impacts on revenues The Toolkit for PPP in Highways Case studies Discussions

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

Classification of Economies Economies GNI per capita Low-income $765 or less Middle-Income $766 to $9,385 High-income $9,386 or more Source: www.worldbank.org/data

Classification of Economies Economies GNI per capita Low-income $765 or less Middle-Income $766 to $9,385 Lower $766 to $3,035 Upper $3,036 to $9,385 High-income $9,386 or more Source: www.worldbank.org/data

GNI per capita ($/pop) Source: http://devdata.worldbank.org/data-query

$/pop EU15, EU8 and CIS EU15 EU8 CIS

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

PPP: Public Policy Requirements Proposed highway projects should be part of Government program Subject to full social cost-benefit assessment to ensure public as well as private benefits to establish need, and provide basis for public participation in financing Concession award and agreement should be well designed be transparent & competitively procured have clear rules for regulation of the concession

“Traffic Risk in Start-Up Toll Facilities” Standard & Poor’s (S&P) 67 toll case studies comparing forecast performance with actual/observed Toll roads, bridges & tunnels User-paid & shadow tolls Key findings: Systematic errors (optimism bias) in forecasts Consistency of error-drivers Produced a traffic risk index Sensitivity testing is essential

S&P Research Results 2002 Mean ~ 70% Spread: 18% - 146% !

Traffic Forecasting Risk Index Project Attributes More Reliable Less Reliable Tolling Regime Shadow tolls User-paid tolls Tolling Culture Tolls well established No toll roads in country Infrastructure Estuarial crossings Dense urban networks Extension of existing road Green field site Highly congested corridor Limited/no congestion Few competing roads Many alt. routes Clear competitive advantage Weak competitive advantage Only highway competition Multi-modal competition Stand-alone facility Reliant on other, proposed highway improvements

Error Drivers Miscalculation of road user willingness-to-pay Recession/economic downturn Future land use scenarios that never transpired Time savings less than expected Improvements to competitive (toll-free) routes Underestimate of ramp-up period (traffic stability), both severity and duration Less usage by trucks

Tolling Experience No tolling experience: actual traffic = 56% of forecast Tolling experience: actual traffic = 87% of forecast

Future Challenges Point-of-use charging depends on ability to pay/willingness to pay New toll collection technologies Reliability, take-up, back-office processing Pricing sophistication discounts (frequent user programs, resident discount schemes), peak/off-peak pricing, day-of-week, season-of-year

Main Lessons for Success A well defined legal framework Simple and transparent procurement Shared risk-reward concession structure First attempt with toll roads tend to have mixed results Projects should have social benefits as well as commercial viability Particular attention to traffic forecasting and hence revenues Public sector comparator advisable

World Bank Toolkit for Public- Private Partnership in Highways

Toolkit’s Objective To provide policy makers from economies in transition with some guidance in the design and implementation of a Public Private Partnership (PPP) in the highway sector

Definition of PPP A Public-Private Partnership (PPP) constitutes a sustained collaborative effort between the public sector (government agencies) and private enterprises to achieve a common objective (e.g., the road project) while they pursue their own individual interests.

The Toolkit The toolkit is structured under five headings and is navigated through a series of tree diagrams under each of these headings. It also includes a library and interactive financial models.

Availability of the Toolkit Free of charge A multimedia product available on a CD ROM Also available at the World Bank’s web site: www.worldbank.org/transport

Contributors Financing Institution Executing Agency Consultants Public-Private Infrastructure Advisory Facility (PPIAF) www.ppiaf.org Executing Agency The World Bank www.worldbank.org Consultants Groupe Egis (http://www.groupegis.com) in association with Coudert Brothers (http://www.coudert.com)

The Highway Toolkit Includes over 5000 pages of reference publications and web links a 500 word glossary case studies and financial simulation software

1. Overview and Diagnosis 2. Project Characteristics Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

Toolkit Modules Overview and Diagnosis: rationale for private participation in the highway sector, alternative contractual forms, guide to conduct a diagnostic of the sector 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics: key considerations in the design of a public-private partnership, discussions of well-known PPPs 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions: analyzes the roles of the public sector and presents the tools at Government's disposal for performing such roles 4. Laws, Rules and Contracts 5. Implementation

Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts: guidance on the design of legal and contractual frameworks for private participation in highways, with boilerplate provisions 5. Implementation

Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation: outlines the key steps in introducing PSP, bringing elements from previous modules and distinguishing by type of private sector contract

1. Overview and Diagnosis Why Embark on PPP? Context and Key Issues Expected Benefits from PPP Why (and where) is the Private Sector more efficient than the Public Sector? Overview of PPP experience PPI project data base Choosing the right option Forms of PPP Making the diagnosis PPP policy and strategy

2. Project Characteristics Tailoring appropriate PPP: A continuum of alternatives Examples of well-known PPP

3. Public Sector Functions Protect community welfare Planning and policy making Provide adequate framework Facilitator Contract award Regulation

4. Laws, Rules and Contracts Legislation Legislative framework Adjust legal framework Regulatory framework Standards Contracts Maintenance contracts Operation and maintenance concessions BOT type projects

5. Implementation Actors Main Steps Managing the Reform Selection and contract award

Public Private Partnerships Build Operate Transfer Concessions Management & Maintenance Contracts Works & Services Contracts Operation & Maintenance Concessions Full Privatization Low High Extent of private sector participation

BOT-type of Concessions The responsibility of the concessionaire comprises an initial construction, upgrading or major asset rehabilitation, and operation and maintenance of the facility.

Allocation of Risks MaintenanceContracts ManagementContracts 100 MaintenanceContracts ManagementContracts Operation & Maintenance Concessions RISK TO PUBLIC SECTOR BOT BOO Decreasing Public Risks, Increasing Private Risks RISK TO PRIVATE SECTOR 100

In addition to the five modules, the Toolkit also includes: Financial simulation tool Graphic simulation tool Case study CD Map Documentation Glossary

Glossary Access control: Limiting the number of points at which vehicles may enter or leave the road …… Zero-coupon swap: A swap in which the fixed-rate payer does not make any payments until the maturity date of the swap but receives floating-rate payments at regular payment dates

Glossary Swap agreement: A contract whereby two parties agree to exchange periodic payments. The amount of the payments exchanged is based on a notional principal amount. There are four types of swaps: currency swaps, interest rate swaps, commodity swaps and equity swaps.

And where is the toolkit?

Financial Simulation Case Study The Government of Farland is considering to build a road between the cities of Farport and Farcapital (located 50 km apart) through a Public Private Partnership (PPP) scheme.

Financial Simulation Case Study Basic data include: Construction cost: US$200 million Source of funds: Subsidies, equity and credit Real interest rate: 10% Concession duration: 30 years Initial traffic: 15,000 vpd Toll rate: US$5.00 (indexed on inflation) Inflation rate: 7% per year

Financial Simulation Case Study Using the above information and other default data in the Graphic Simulation tool of the Toolkit for Public-Private Partnership in Highways, please answer the questions below:

Financial Simulation Case Study Question 1: In the absence of Government subsidies, ceteris paribus, what would be the return on equity (ROE)? What would be the change in the internal rate of return (IRR) of the project? Answer: ROE would reduce from 15.63% (with a Government contribution of 44% of the construction cost) to 6.94%. No change in IRR (12.27%).

Financial Simulation Case Study Question 2. While subsidies may be paid by the Government during the construction period, it recovers some of this payment through taxes during the operation period. What would be the Government contribution to this project that would lead to a financial balance for the government throughout the concession period? Answer: About 23% of the construction cost, as 22% would generate a US$171,000 surplus and 24% would lead to a US$2,464,000 deficit.

Financial Simulation Case Study Question 3. In the absence of Government subsidies, ceteris paribus, what would be the required initial toll rate to yield a return on equity (ROE) of 16%? Answer: With no subsidies, an initial toll rate of US$8.00/veh yields a 15.08% ROE; an initial toll rate of US$9.00 yields a 17.82% ROE. So an initial toll rate between US$8.00/veh and US$9.00 would be required.

Some WB-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

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

Typical Financial Benefit of Partial Risk Guarantees Reduce cost of private sector borrowing from LIBOR + 900 to LIBOR + 200 http://www.worldbank.org/guarantees

Unsolicited proposals to governments Origin of most controversial private infrastructure projects In theory, generate beneficial ideas In practice, some unfavorable experiences; attempt to avoid competition; exclusive negotiations behind closed doors Usually sole-source negotiations take much longer than expected

Should governments forbid unsolicited proposals? Some governments forbid all unsolicited proposals to reduce public sector corruption and opportunistic behavior by private companies Some governments recognize a good project idea in the tender by compensating the original project proponent