Public Private Partnerships for Development & Conflict Mitigation Beirut, Nov. 11th, 2008

Agenda Conflict Environments Public Vs. Private Sector Public Private Partnerships IFC in Conflict-Affected Countries IFC in Africa and Afghanistan

Characteristics of Conflict Environments Weak Government/Control Rapidly changing security, political, social and business environment Wide range of immediate needs Resources constraints

Why Private Sector? The State/Donors have many priorities and limited resources The Private Sector is often more agile and can mobilize rapidly Private Sector is often more able to assess and address risk Private Sector (if managed carefully) can be more cost efficient and manage resources more efficiently

Private Investment is Strongly Associated with Economic Growth

Poverty Reduction is Closely Associated with Economic Growth

Poverty Reduction Associated with Private Investment IFC Objective: “To fight poverty with passion and professionalism for lasting results. To help people help themselves and their environment by providing resources,sharing knowledge, building capacity, and forging partnerships in the public and private sectors.” Private Sector provides: More Jobs Efficient Processes Access to financial resources Access to improved varieties Increased Competition A Stimulus to Growth Private Sector is a significant contributor towards sustainable Poverty Reduction

Roles of Public and Private Partners Main role of the private sector partner: to assure the project financial parameters Main role of the public sector partner: to assure the public interest determining goals, quality and pricing policy Public Private Partnership (PPP): A Partnership between the Public and Private sector to deliver a project or service traditionally provided by the public sector.

Bringing Public and Private Sectors Together - PPP Continuing Public Spending Support PUBLIC SECTOR Specify requirements USERS (the public) services payments for performance PRIVATE SECTOR Build facilities Support services expertise skills finance Source: PriceWaterHouseCoopers, 2002

Convergence of Government Expectations and Private Sector Requirements Alleviation / Removal of State’s role Alleviation of fiscal burden Transfer risks to private sector Private sector: Financing of infrastructure; assuming debt; paying concession fees / tax Social Benefits Reasonable tariffs Minimize costs related to retrenchment Maintaining Control through Bidding process design Contractual package Increase in quality of service Defend concept of public service Increase access to services by population Affordable tariffs Apply principle of cost recovery for the sector Respect consumers’ affordability to pay Manage consumers’ willingness to pay Assurance of profitability Balanced allocation of risk Appropriate tariff level for financial equilibrium and ROI Access to concessional finance Supply guarantees Quality and volume of demand Exclusivity, enforcement of collection Protection from risks Safeguard for contingent and environmental liabilities Fair risk allocation (contract) Enabling environment Clear, reliable Government commitment to reform Adequate legal and regulatory framework Enforceable contracts Transparency The CFS Difference What causes potential clients to look to engage PSAS to provide advisory services? CFS brings to each transaction the reputation of a neutral partner, a reputation which has enabled us to win the confidence of the investment community. We have a strong track record in defining, supervising and enforcing strict, tendering rules, which assure fair competition. PSAS’s stature is often key. In Peru, for example, we were able to attract the investors for the privatization of Electrolima, a power utility, at a time when the country experiencing considerable unrest, and its credibility with international investors was at an all-time low. In Gabon we were able to subject insiders to real competition. We believe that the balanced nature of PSAS’s character is precisely that needed in our work, and therefore our strongest selling point. We always stress two key aspects in describing what we offer: PSAS is a publicly-owned development institution focusing on private sector-led development and is therefore continually measured by the extent to which its activities and investments achieve public development objectives. At the same time, we have investments in over 1,000 private companies in over 130 developing countries around the world, and know what is necessary for the private sector to operate effectively. There is no other institution in the world that can offer this to the same degree.

Public Sector vs. PPP Procurement Models Traditional Government Procurement PPP Procurement Capital and operating costs are paid for by the public sector. Risk of cost overruns and late delivery. Public Sector might not have the budget to support the large capital and operating costs required. The public sector only pays over the long term as services are delivered. The private sector funds itself using a large portion of debt plus shareholder equity. The returns on their equity will depend on the quality of services, therefore, an incentive to provide higher quality.

Why are PPPs taking front stage? Availability of public capital remains constrained due to deficits and/or prudent fiscal management Availability of private capital also constrained: investors generally more risk-aware and less willing to take risks in emerging markets Yet huge capital needs remain in infrastructure, education and health care, for development and for competitiveness Efficiency gains from private sector involvement are believed to be considerable. The last decade has been particularly reach in the development of experiences in Private Participation in the Provision of Public Services (here below, simplistically use PPI as a defined term). The failure of certain large concession operations and the general decline of private investments in infrastructure demonstrated that the concept of full delegation of all investment and operations to the private sector cannot be considered as a panacea to providing better public services. The past five years have seen a revival of the importance of a strong involvement of the public sector, not only in the regulatory aspects of PPI, but also in the financing of the necessary assets or in the support of specific operating expenditure elements (e.g. direct subsidies to defined classes of consumers). In this perspective the concept of Public Private Partnership is taking an ever-growing role in the definition of more adapted forms of PPI. The concept of PPP applies to those PPI projects where the public sector provides direct economic and/or financial support to the investments and operations of the infrastructure delivery. It is the correct and balanced mixing of public and private sector financing that defines a successful and sustainable PPP arrangement.

Pros of PPPs Competitive process; Increased transparency; Balance sheet consideration; Private sector efficiencies and innovation; Well designed risk allocation and transfer of project risk to the private sector; Improved levels of service; Enhancement of revenues: PPPs may set user fees that reflect the true cost of delivering a particular service.

Pros of PPPs - Risk Allocation "Risks should be allocated to the party best able to manage them" Public Private Shared Planning Volume risk Detailed planning permission Inflation risk permission Regulatory Risk Design General regulatory risk Construction Force majeure Commissioning Operating performance Project finance Technology obsolescence

Pros of PPPs - Value for Money (“VFM”) “price” Conventional Procurement Model PPP Whole life cost of procuring services Cost of finance Risks retained by Public Sector VfM

Pros of PPPs - Value for Money (“VfM”) Two independent UK studies found VfM benefits of between 3% and 20% on UK projects (i.e. up to $15 billion) produced by: faster procurement of asset risk transfer to private sector “whole life” approach to construction/maintenance innovations in design/service delivery _____________________________________________________________

NAO Report of 2003 UK’s National Audit Office report on PPP Improved Project Delivery Non PPP Procurement (1999 Survey) PPP Procurement (2002 Survey) Price Overruns 73% 22% (mostly client changes) Time 70% 24% (only 8% > 2 months)

Cons of PPPs Complexity; High transaction costs: Large tendering and contracting costs; For some projects, total tendering costs can equal around 3% of total project costs as opposed to around 1% for conventional procurement. Significant legal costs in contract negotiation; Higher borrowing costs than public financing; Skill deficit for administration; Structuring risks; Public perception that critical “public” assets are controlled by private sector; Difficulties in ensuring good performance, especially with respect to “soft” performance dimensions.

IFC in Conflict-Affected Countries Conflict-Affected Economies are different than other economies: Lack of basic and strategic Infrastructure Perception of relatively High Risk Huge Fiscal Burdens on the Government Less Access to Financing High Reconstruction and Rehabilitation needs IFC can help: Global resources enable quick launch Encourage Private Sector to enter these economies Expertise in key areas: Infrastructure, Access to Finance etc. Ability to leverage IFC investments and work through partnerships.

IFC in Conflict-Affected Countries IFC is active in 52 countries that have been classified by the World Bank Group as ‘conflicted-affected.’ Since 2000, IFC has made over US$ 5 billion in investment commitments to countries affected by conflict. Beginning of Fiscal Year 2008, Total committed exposure = $3.3 billion, Outstanding exposure = $2 billion.

IFC in Conflict-Affected Countries: Advisory Services Fiscal Year 2007 - Advisory activities in 97 countries, with the majority of the projects in low-income or high-risk areas. Of the 35 conflict-affected member countries, IFC has advisory projects committed in 23. Advisory Services is organized in 5 business lines: Business Enabling Environment Access to Finance Environmental and Social sustainability Infrastructure Value addition to firms

IFC in Conflict-Affected Countries: Advisory Services There has been tremendous growth in AS work: 57% growth rate by value in AS from 2003 to 2006. This is more than twice the growth rate for AS overall in the same period. $110 million committed to Advisory Service projects, as at end March 34% or $39 million of this has been committed to projects in Africa, which makes sense in light of the fact that Africa represents 21 of the 45 countries that are fragile and conflict-affected

IFC in Conflict-Affected Africa IFC has a current/planned advisory services portfolio of $42m in 15 conflict affected countries in Africa, and an investment portfolio of $370m in 11 countries

IFC in Conflict-Affected Africa: Lesotho Hospital As part of the Health Sector Reforms, the referral system in the health sector needed to be greatly improved to meet the clinical needs of the country The New Referral Hospital would provide a higher level of service and quality The benefits of the hospital would be felt throughout the health sector in the country due to high quality of specialist care thus reducing the referrals to neighboring South Africa, and training of health workers A Public Private Partnership was the preferred route to the provision of the new referral hospital IFC is advising the government on the structure of the deal.

Lesotho Hospital: Current Situation vs. PPP Project Hospital Capacity – does not meet current standards for modern medical practices, basic infection control and patient needs Equipment availability - zero to 50%, no recourse when non-functional Maintenance Not performed Not budgeted Staffing Chronic shortages Little training Budget – no cap Accountability – no recourse, no measures Hospital Capacity – designed for maximum flexibility and operational efficiency to meet staff and patient needs Equipment availability – 100% or penalties imposed Maintenance Regular maintenance schedule with contracts in place Included in cost (annual unitary payment) Staffing Full staff in place from opening Training in place Budget – contractual with inflation index Accountability – contractual, with monitoring, penalties and performance bonds; Accreditation requirement (Lesotho and COHSASA)

IFC in Conflict-Affected Afghanistan Investments: US$ 60 million in 4 projects Advisory Services: US$ 1.5 M in 5 projects Close coordination with donors, initiatives building on existing knowledge and experience Close cooperationg with the World Bank Group Co-location in the World Bank Office Sharing Staff: IFC Country Officer / WB PSD Officer Established synergies in project design and implementation

Afghanistan:Horticulture Export Development Project Project supports raisin and pomegranate producers in Kandahar to improve production and participate in high value, international markets Improve productivity: Introduced new production technologies - 300% increase in production capacity Enhance Quality: Assisted wholesalers to provide “embedded” extension services to farmers - Trained 10 extension workers and 600 farmers Find New Markets: Assisted wholesalers to identify export markets Rapid engagement in sensitive area, in economically vital sector Designed on basis of knowledge and experience of other donors (USAID/UNDP) Shared consultants with WBG in project design, resulted in key synergies with WB Emergency Horticulture & Livestock Project WB finances the scale-up of new production technologies in second project phase