Toolkit for Public-Private Partnership in Highways Cesar Queiroz June 2004

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 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.

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.

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

Some PPP Useful Sites Toll Roads and Concessions http://www.worldbank.org/transport/roads/toll_rds.htm Public-Private Options for Roads 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

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

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 Comparing PPP with music PPP Equalizer 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

And where is the toolkit?

Graph 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.

Graph Simulation Case Study Basic data include: Construction cost: US$170 million Source of funds: Subsidies, equity and credit Real interest rate: 8.5% Concession duration: 23 years Initial traffic: 20,600 vpd Toll rate: US$3.40 (indexed on inflation) Inflation rate: 5% per year

Graph 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

Graph 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 20.43% (with a Government contribution of 36% of the construction cost) to 13.33%. No change in IRR.

Graph 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 37% of the construction cost, as 36% would generate a US$1,186,000 surplus and 38% would lead to a US$954,000 deficit.

Graph 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 20%? Answer: With no subsidies, an initial daily revenue of US$90,000 yields a 19.5% ROE; an initial daily revenue of US$95,000 yields a 20.9% ROE. Using linear interpolation, an initial daily revenue of US$91,790 yields a 20% ROE. As the initial daily revenue is the product of the initial traffic (i.e., 20,600 vpd) and the initial toll rate, the required toll rate would be US$4.45 per vehicle (i.e., 91790 / 20600).

Subsidies and ROE