1 Implementing a Private Sector Arrangement Penelope Brook The World Bank

2 Managing the Process: Institutions u To implement a reform process, a responsible unit must be established. u Key issues: – ensuring the unit has sufficient autonomy to do its job effectively – shielding staff from day-to-day political interference – making the unit accountable for its performance

3 Hiring and Managing Advisers u Much of the relevant work will likely need to be contracted out u Categories of advice: u economic and regulatory u legal u technical u environmental u investment banking / financial u human relations u public relations

4 Getting What You Want from Advisers u Adviser contracts should be structured with an eye to incentives – e.g., if investment banker receives a success fee, you may want a separate contract for regulatory advice u The process is likely to be an interactive one - and there’s no substitute for good management on the government side

5 Implementing a Transaction: Objectives u 1st Order: – find a suitable partner – conclude a sustainable transaction u 2nd Order: – competitiveness – transparency – political sustainability

6 Basic Decision Parameters u prequalification u bid design u bid process u framework for the ongoing relationship

7 Prequalification u Objectives: – identify serious, capable bidders – keep the pool of bidders manageable u Issues: – how much, and what kind, of experience is required? – how to ensure competition? – how to encourage bids, if costs are high?

8 Pre-qualification: Common Issues u If there aren’t strong existing local candidates, how can you structure prequalification to help build a domestic industry over time? u If the market seems small, what are the options for broadening the field?

9 Bid Design u Objective: – to find a way of eliciting the information most relevant to the choice of partner u Issues: – simplest if reduced to a single, quantifiable variable, but, in practice, complicated by incomplete information – trade-off between the richness of offers and the transparency of competition

10 Bid Design Options: The Technical Envelope u Selected Options: – technical bid is like prequalification; winner chosen on financial bid alone – technical proposals may pass or fail; winner chosen from those who pass, on basis of financial bid – technical proposals are scored, and weighted together with financial proposals

11 Bid Design Options: The Financial Envelope u Selected Options: – bids are based on the price of shares / assets being sold – bids are based on an up-front payment combined with future concession fees – bids are based on a future tariff – bids are for a service fee, with some kind of incentive component

12 Example: Commuter Rail Concessions in Argentina u Government thought that commuter rail might need subsidies for operation, rehabilitation and investment u Government identified the type and amount of investments required for each line u Concessions were awarded to the bidder requiring the lowest subsidy to operate the line and do the required rehabilitation and investments

13 The Bid Process u Objective: – to select a suitable partner, at the best price (effective competition “for” the market) u Options: – competitive bid – competitive negotiations – direct negotiations

14 Competitive Bid u Pros: – market mechanism for choosing the best proposal – relatively transparent u Cons: – works best if outputs can be standardized, and all parameters are pre-specified – may encourage “under-bidding” if renegotiation is possible later

15 Competitive Negotiations u Pros: – permits more creativity and innovation in bids – reduces incentive to under-bid – offers a richer means of screening bidders than price alone u Cons: – competition is less transparent – bids can be difficult to compare

16 Direct Negotiations u Pros: – incentives to provide innovative solutions to local problems – may be attractive where the costs of bidding are high relative to expected revenues u Cons: – lacks transparency; reduces incentives for cost effectiveness – may undermine political sustainability

17 In Practice... u Most processes involve some combination of pre-bid discussions with potential bidders, competitive bidding and negotiation u Whatever the process, post-transaction revisions are hard to avoid – so careful attention is needed to how the contract shapes incentives and processes for revision

18 Preparing for the Ongoing Relationship u The bid is only a first step towards a 10-, 25- or 30-year relationship – there’s no magic in the bidding process u Need tools to: – maintain the spirit of the initial agreement (on both sides!) – maintain competitive pressures on the private partner

19 Key Elements u Promotion of competition, as far as possible u Effective, credible regulatory arrangements u Contractual provisions for dealing with unpredictable events

20 Options for Introducing Competition u Competitive pressures can be introduced even in network industries: – by allowing new entrants to supply consumers – by having a competition for the job of running a utility – by creating benchmarks for comparing the performance of different utilities

21 Allowing Entry May be the Best Way of Getting Services to the Poor u Low-income households often lack water and sewerage connections u Even under a very good contract, progress in getting formal connections to these households may be slow u Allowing competition from micro- enterprises and community groups to serve these households may result in lower cost solutions and faster connections

22 The Role of Regulation u The role of regulators is to: – protect consumers from monopoly abuses – protect investors from arbitrary political action – provide incentives for efficiency – minimize costs of regulatory interventions

23 Regulatory Independence is Key Regulator Political Authorities Utilities & Shareholders Users

24 What Regulators Do u regulation and adjustment of prices u monitoring service and quality standards u monitoring competition u facilitating settlement of disputes u the precise role of regulators varies according to the kind of private sector contract

25 Designing Regulation u Early in the reform process, careful thought needs to be given to regulatory design, for example: – how much discretion should regulators have? – how can regulators be made at once independent and accountable? – should regulation be at the municipal level or a more centralized level?

26 Options Where Regulatory Capacity is Limited u In many developing country cities, regulatory skills are in short supply, and there is no (good) regulatory track-record u In these cases, it may be desirable to: – contract out some regulatory functions to private consultants – limit regulatory discretion, and pay special attention to the rules on how it will be applied

27 Example: Contracting out Regulatory Functions u Much of the work of regulators involves data gathering and processing u By contracting out this work, the regulator may: – gain access to scarce technical skills – benefit from the credibility of the private contractor – benefit from the transfer of skills from the private contractor

28 Provision for Unforeseen Events u All contracts are based on incomplete information, both about the current state of the utility and consumer needs, and about what will happen in the future u Careful provisions are therefore needed for adjusting contractual terms over the life of the contract

29 Critical Elements to Specify u The conditions under which contractual terms may be changed u Which kinds of change will necessitate renegotiation of the contract u The process by which renegotiation must be initiated and conducted u The procedures to be followed when the parties cannot agree on how to resolve an issue

30 Implementation: Key Issues u A well-prepared contract is an essential first step towards a good public - private sector partnership u Preparation needs to focus not only on the contract, but on promoting competition and developing regulatory structures u Clarity and transparency in implementing a transaction are critical