PP420-01: Private and Public Sector Partnerships The Global PPP Experience

Private Investment in Infrastructure in Developing Countries:

Countries with >10% of generating capacity in private hands,1989 Source: Henisz

Countries with >10% of generating capacity in private hands, 2001 Source: Henisz

Renegotiations, 1989–2001 Source: Henisz

Global Trends 6 1. PPP model faces intense scrutiny, but continues to spread 2. PPP Coordination Agencies are on the rise 3. Infra funds are aggressively chasing deals

Global Trend #1 7 P3 Model faces intense scrutiny, but continues to spread

Spectrum of Infrastructure Provision Options 100 yr pendulum swings with political winds! 8 Public Private PPP

Typical Opposition to P3, globally 9 P3 is more expensive P3 is privatization in disguise; State is “selling-off the family silver” Public employees lose their jobs Private sector profit means reduced service levels The State is awarding secret tenders

Why does the pendulum swing towards more private provision? 10 Bankrupt states – Spain, Chile, UK, Australia….

Why does the pendulum swing towards more private provision? 11 Bankrupt states – Spain, Chile, UK, Australia…. Persuasion of multilaterals – Organizations like the World Bank have been highly instrumental in persuading countries to enact privatization legislation from 1985-present

Why does the pendulum swing towards more private provision? 12 Bankrupt states – Spain, Chile, UK, Australia…. Persuasion of multilaterals – WB and ADB with developmental objectives persuade states to enact privatization legislation from 1985-present “New Nations & Rapid Growth”– US canals and railroads in the 1800s built by private European investment; China today

Why does the pendulum swing towards more private provision? 13 Bankrupt states – Spain, Chile, UK, Australia…. Persuasion of multilaterals – WB and ADB with developmental objectives persuade states to enact privatization legislation from 1985-present “New Nations & Rapid Growth” – US canals and railroads in the 1800s built by private European investment; China today Times of Crisis – eg. Three Mile Island Disaster – nuclear activity ended in US, supply shortfall, major foray into private power in 1980s

Why does the pendulum swing towards more private provision? 14 Bankrupt states – Spain, Chile, UK, Australia…. Persuasion of multilaterals – WB and ADB with developmental objectives persuade states to enact privatization legislation from 1985-present “New Nations & Rapid Growth” – US canals and railroads in the 1800s built by private European investment; China today Times of Crisis – eg. Three Mile Island Disaster – nuclear activity ended in US, supply shortfall, major foray into private power in 1980s New PPP model: competition, risk transfer, lifecycle perspective = value for money – direct and material benefit to society!!! eg. California, “new tool in the State toolkit”

The components of the P3 value proposition 15 Competition Increase efficiency Maximize innovation Tap global best practice Risk transfer Private sector takes performance risk (i.e. cost, schedule, service levels) Lifecycle perspective Integrate a project’s D, B, F, O & M components & optimize lifecycle costs Reserve for future maintenance costs = Value for Money! = Direct, material benefit to society!! … eventually opposition goes away!!! P3 is not: New Money Privatization

Key lessons learned, globally 16 World Bank: Renegotiations are driven bilaterally Not just private sector “hold ups” and not just public sector “opportunism” Renegotiations are not all bad, efficient breech is possible Inter-American Development Bank: Best practice is a myth Not all PPP structures work in all host country contexts, Success is heavily dependent on local conditions, (i.e. political risk, rule of law, willingness to pay, etc.), UK HMS Treasury : PPPs on average reduce costs by 17% over the lifecycle, with some projects saving 30-50% or more, others not showing any benefit

Key lessons learned, globally 17 Canada: DBFM achieves lifecycle benefits but avoids labor issues of DBFO P3 is not privatization -- appropriate public control/ownership must be preserved (Alternative Financing and Procurement, not PPP) All processes must be fair, transparent and efficient + accountability must be maintained California: P3 is not new money Even though public finance is about 150 basis points cheaper than private finance, “all in costs” of PPPS over D, B, F and M phases are lower versus conventional design-build Overall, despite scrutiny, model continues to spread!

Global Trend #2 18 As PPP model gains global legitimacy… PPP Coordination Agencies are on the rise

Global diffusion of PPP Coordination Agency model since Partnerships UK Infrastructure Ontario Partnerships BC California: Performance- Based Infra South Africa, Spain Italy, Portugal, France 49 Other U.S. States ???

P3 Coordination Agencies: Roles & Functions Vary 20 Super Agency Service Agency Center of Excellence Approve new projects Execute assigned projects Standardize doc. packages Manage procurement processes Manage construction phases Hand over at construction completion Provide “transaction advisory” expertise (or coordinate such expertise from market) Help agencies identify projects appropriate for P3

Debate in California: Service Agency vs. Center of Excellence? 21 Benefits of Service Agency: Better positioned to protect public interest than private “transaction advisors” Economies of scale in transaction management Long-term institutional memory for assimilation of lessons learned into future project design Global knowledge of terms negotiated in other deals and avoids inequities across sectors & geographies

PPP Coordination Agencies: Funding Models 22 Start-Up Funding Partnerships UK, 49%-51% California, market-rate loan OR not-for-profit entity funded by corporate donations Ongoing Revenue Infra Ontario, Transaction advisory fees charged to service agencies

Global Trend #3 23 Global funds aggressively chasing deal flow

Who is originating these funds?

Geographic Focus Concentration in US/Europe 25 Source: CRGP, 2007, Infrastructure Fund Database

~15 India Focused Infra Funds, US$ bn 26 Source: CRGP, 2007, Infrastructure Fund Database

Summary - Three Global Trends 27 PPP Model Gains Legitimacy PPP Coordination Agencies are Formed - New model of delivering public services taking hold Infrastructure Funds enjoy Consistent, Standardized Deal flow - Infra could grow to rival real estate as an asset class for financial investors