PPP International Best Practice and Regional Application Overview of Public Private Partnerships (PPPs) April, 2008 Tegucigalpa, Honduras Filip Drapak World Bank Institute

Why PPP Large infrastructure gap in both developed as well as developing countries Risk management Project management skill Lack of public funding available for infrastructure Procurement efficiency

How is PPP defined? Long term contract Between Private and Public body Contract contains risks that are withhold by private sector

Roles of Partners Successful project Public partner Private partner Rules of the game set up by public sector: - Legislation and regulation - Institutions - Procedures - Procurement Project inputs set up by private partner: - Design - Construction schedule and content - Maintenance schedule - Subcontractors

Types of PPP 1. Who is paying? 2. Who has a demand risk? Concession type PFI type User pays principle Demand risk with private partner Public body pays on behalf of users Demand risk with public partner Hybrid type Shared payments between Public and User Demand risk with private partner, public partner or shared

Contractual types of PPPs M&O ?– long term operation and maintenance contract DB ?– Design Build BBO ?– Buy Build Operate BOT – Build Operate Transfer BOO – Build Own Operate BOOT – Build Own Operate Transfer DBFO- Design Build Finance Operate Concession

How to make it a success? Project Public partner Private partner Finance providers Users Meet objectives of all stakeholders

Public sector objective Output based delivery of infrastructure and service Value for Money Procurement according to regulation Risk transfer to Private partner

Private partner objective Profit Lowest possible procurement risks Reference Long term use of own capacity Risks transferred to subcontractors Projects pipeline

Financier objective Save return of loan Profit margin reflecting the risk Risks not with borrower (transferred to public sector or to subcontractors)

Users objective Low or no user fees Transparency of tariffs and procurement Quality of infrastructure and services

Is there a Best practise? Rules of game Capacity Political will Market capability

Political will Demonstrated political will Ideally not dependent on election terms Political rationale

Rules of game Clear procedures of project management Public procurement legislation Policy and regulation Law and legislation optimisation Standardised contacts Clear tolls of avaluation

Market capacity Availability of Experienced sponsors Availability of reliable subcontractors Availability of long term finance at a given risk profile Availability of risk mitigating instrument

Capacity Capacity (public) on national level Capacity (public) on executive level Institutional capacity, memory and experience Capacity with private sector –Advisory –Project Sponsors –Financiers

What is different in PPP? Extra costs: –For preparation and procurement –Cost of capital –Expensive debt Benefits –Life time costing –Risk transfer –Innovation

Fiscal space The Extent to which fiscal decisions can be made by a public body –Fiscal space is a key driver for PPPs –Successful PPPs tend to enlarge fiscal space –Fiscal space can be jeopardised by “bad” PPPs

Project Finance and PPP Financing infrastructure using Public Debt is in terms of financing most cheapest ways, however each new debt can affect overall rating and make all debts more expensive Project finance is most expensive way of financing projects, however its influence on overall rating and fiscal space can be limited To accept all risks and use Project finance is the worst solution for a Government

Project Finance - Risk Analyses Force major risks Risk mitigation and credit enhancement Sovereign risks On-project risks

Construction risk Key risk in PPP/PFI Difficult to measure Fully transferred to Subcontractors Some issues: –site conditions, potential delays, credit rating and track record of Subcontractor, new or existing project, vulnerability of project, risks of currency and inflation, planning risks

Demand risk Key risk in projects that apply user fees Difficult to predict Difficult to mitigate Some issues: –Users willingness to pay, level of fees, alternatives, who is responsible if there is not demand….

What can jeopardise PPP –Tender is not competitive or transparent –Project risks are not well defined and contractually transferred –Risks are to high and can’t be mitigated –Change in political will

Thank you for your attention Filip Drapak World Bank Institute