1. Session I: International Experience in PPPs
Key Challenges for Mobilizing Private Capital and Management into Infrastructure Development
Good Morning
A pleasure to be here and have the opportunity to share with you some of our recent thoughts on transport infrastructure development, the financing gap and the need to rebuild the PPI model for better and more effective mobilization of private capital and management
Cledan Mandri-Perrott
Infrastructure Economics & Finance Department (IEF)
Workshop, PPP in Highways, Latvia May 9th 2006c

2. Contents Transport Infrastructure Investment
The Economics of Transport Infrastructure
The effect of Fiscal Space (Public Investment)
The Real Gap : Cost Recovery and Affordability
Public Private Partnerships (PPPs)
Leveraging Public Money
Public Sector options for Infrastructure investment
Achieving Value for Money
Way Forward
PPPs from a Fiscal Approach angle.
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3. The Economics of Transport Infrastructure Investments - 1
are inherently “lumpy”
involve huge sunk costs and
create assets that are long-lived and location-specific
Economies of scale and scope (i.e., minimum size of facilities, inelastic adjustment of capacity to demand, long term project completion, etc.).
Infrastructure supply systems contain elements of natural monopoly (competition).
Infrastructure assets demand large investment and long repayment periods. They tend to be location specific, involve large sunk costs and their market value is a function of their use. A 200 KM motorway is only worth the traffic it has, you do not have the ability to move it if traffic is slow nor can you exercise any liquidation value to repay your debt holders in the event of bankruptcy. Same is applicable to other types of infrastructure (I never heard of an airport been relocated or a rail track or a port terminal). You better got it right the first time around when you plan for infrastructure.
Elements of natural monopoly
Wide demand (difficult to target)
Revenues are usually on local currency (cross-border financing)
Essentiality component that raises legitimate public policy concerns of affordability issues.
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4. The Economics of Transport Infrastructure Investments - 2
Demand is wide spread (difficult to target).
Revenues are usually in local currency (mismatch if foreign debt financing).
Affordability: related legitimate public policy concerns
Infrastructure assets demand large investment and long repayment periods. They tend to be location specific, involve large sunk costs and their market value is a function of their use. A 200 KM motorway is only worth the traffic it has, you do not have the ability to move it if traffic is slow nor can you exercise any liquidation value to repay your debt holders in the event of bankruptcy. Same is applicable to other types of infrastructure (I never heard of an airport been relocated or a rail track or a port terminal). You better got it right the first time around when you plan for infrastructure.
Elements of natural monopoly
Wide demand (difficult to target)
Revenues are usually on local currency (cross-border financing)
Essentiality component that raises legitimate public policy concerns of affordability issues.
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5. The Economics of Transport Infrastructure Investments - 3
However transport infrastructure allows:
Countries to integrate to the global economy
Increases competitiveness (transport and telecom sectors are the highest contributors to a country’s competitiveness)
High impact on economic growth
Poverty alleviation and meeting MDGs.
Infrastructure assets demand large investment and long repayment periods. They tend to be location specific, involve large sunk costs and their market value is a function of their use. A 200 KM motorway is only worth the traffic it has, you do not have the ability to move it if traffic is slow nor can you exercise any liquidation value to repay your debt holders in the event of bankruptcy. Same is applicable to other types of infrastructure (I never heard of an airport been relocated or a rail track or a port terminal). You better got it right the first time around when you plan for infrastructure.
Elements of natural monopoly
Wide demand (difficult to target)
Revenues are usually on local currency (cross-border financing)
Essentiality component that raises legitimate public policy concerns of affordability issues.
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6. Fiscal limits to increase public investments in infrastructure - 1
Transport investments are sizeable in most countries but difficult to quantify
Countries face important trade-offs between infrastructure spending and other expenditure items (i.e., health and education).
Countries with relatively high public debt burden have a limited scope for increasing investment via public borrowing
Second factor : limited fiscal space
We are working with our colleagues form the IMF but preliminary results of the pilot test cases of 2004 are not very encouraging.
Needs
Dimension of needs far exceeds present capacities
Challenges
Infrastructure economics (given characteristics with not much to do or say to influence them)
Service Delivery Gap (relatively little capacity to influence this in the short and medium term – 2015)
Constraints
Private sector financing has been declining
Fiscal space for public investment will be limited at best.
More than ever we need to reengage private sector into infrastructure development. Need to rebuild the PPI model
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7. Fiscal limits to increased public investments in infrastructure - 2
Significant scope to improve the quality of infrastructure investment.
Changes in fiscal accounting cannot create room for additional spending for infrastructure
PPPs can leveraging investment and efficiency
Second factor : limited fiscal space
We are working with our colleagues form the IMF but preliminary results of the pilot test cases of 2004 are not very encouraging.
Needs
Dimension of needs far exceeds present capacities
Challenges
Infrastructure economics (given characteristics with not much to do or say to influence them)
Service Delivery Gap (relatively little capacity to influence this in the short and medium term – 2015)
Constraints
Private sector financing has been declining
Fiscal space for public investment will be limited at best.
More than ever we need to reengage private sector into infrastructure development. Need to rebuild the PPI model
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8. Cost recovery and affordability
Affordability constraints especially when considering low income end-users
Transport services are a public good and creates major positive externalities
Full cost recovery only possible in some situations (eg air transport, mass transport systems).
“Smart” subsidies make possible service delivery
The Service
Delivery Gap
Tariffs
Affordability
Cost recovery
Elements of the 90s PPI strategy that was not fully right was to assume that full cost recovery was possible across sectors and markets. That a well designed regulatory FW with the adequate institutional capacities will resolve in the long term the gap between affordability and the needs for full cost recovery tariffs by the private sector.
Besides affordability there are also willingness to pay issues.
(what some else says a=I can pay for a service – what I want to pay for a particular service) . Mobile versus water.
Output Based Aid Approaches
Time
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9. PPP: Leveraging Public Money* - 1
Reconcile infrastructure development needs with criteria for fiscal prudence
Mobilize additional private capital to match the gap if infrastructure development is to keep its pace sustaining economic growth
Maximize private capital mobilization per unit of public sector contribution (e.g., direct investment, subsidies, guarantees, etc.)
First action:
Leveraging available public money
It is more difficult to influence the amounts of public money that will be available for infrastructure investments (fiscal space & competition from other funding needs – social infrastructure, military, etc.) let’s try to leverage and mobilize as much private capital as possible via effective public private partnerships
Maximize private capital mobilization per unit of available public sector contribution (i.e., co-investment, supplemental subsidy or guarantees)
/* For purposes of this presentation PPP consists of the contractual arrangements between the public and private sector including the different types of private sector participation options utilized in infrastructure projects from service and management contracts to lease and concession arrangements to joint venture companies.
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10. PPP: Leveraging Public Money - 2
Need to develop PPPs approaches as a procurement tool for better and efficient allocation of scarce public sector resources (the concept of value for money)
Risk management framework to manage contingent liabilities arising for public money support to PPPs development
First action:
Leveraging available public money
It is more difficult to influence the amounts of public money that will be available for infrastructure investments (fiscal space & competition from other funding needs – social infrastructure, military, etc.) let’s try to leverage and mobilize as much private capital as possible via effective public private partnerships
Maximize private capital mobilization per unit of available public sector contribution (i.e., co-investment, supplemental subsidy or guarantees)
/1 For purposes of this presentation PPP consists of the contractual arrangements between the public and private sector including the different types of private sector participation options utilized in infrastructure projects from service and management contracts to lease and concession arrangements to joint venture companies.
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11. PPPs : Spectrum of Options
Contractual arrangements where the focus is payment for delivery of services rendered.
Transfer of the performance risk.
Transport Infrastructure Facilities
Provision of Transport Services
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12. PPP: Achieving Value for money - 1
PPP projects should:
provide equivalent or better value for money than a pure public sector project
develop base data to be used for measurement
Develop incremental Benefits (“good investment”) may accrue from:
speedier Implementation (fiscal constraints)
total long-term costs (life costs) of the operation
better service (cost & efficiency) and coverage
This audience is very knowlegable the art of risk allocation so I will not bore you with this details but when designing PPPs is very important to satisfy the value for money test (equivalent or better value for money than a pure public project) within the parameters
If you transfer too much risk (private sector) the project is likely to fail and if you transfer too little there is no value for money.
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13. PPP: Achieving Value for money - 2
Adequate distribution of risks :
Public Sector
Contribution
Guarantees
Subsidies
Co-investment
Tax incentives
Optimal: efficient sharing of risks
Too little: no Value For Money
This audience is very knowlegable the art of risk allocation so I will not bore you with this details but when designing PPPs is very important to satisfy the value for money test (equivalent or better value for money than a pure public project) within the parameters
If you transfer too much risk (private sector) the project is likely to fail and if you transfer too little there is no value for money.
Too much: project failure
Risk Transfer
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14. PPP: Public Sector Options for Transport Investments – 1
Pure Public Option:
Funded via ordinary revenues
Funded via earmarked taxes (i.e., gas taxes for road network development)
Funded via public debt financing (i.e., future tax payers)
Services are finally paid by end-users (through services charges or fees) or by tax payers (via taxes) or future tax payers.
PPP to make impact of investment less acute on public finances:
Different options . All of them constitute available options to fund via private sector the development of a facility or a piece of infrastructure.
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15. PPP: Public Sector Options for Transport Investments – 2
Public Private Partnerships Options
Funded via tolls or tariffs (i.e., full cost recovery)
Funded via tolls or tariffs with initial co-investment contribution (e.g., Bridge Rosario-Victoria, Argentina)
Funded via tolls or tariffs with minimum revenue guarantee (e.g., Motorway Santiago-Valparaiso, Chile)
Funded via tolls or tariffs with supplemental subsidies (e.g., BA metro system)
Funded via shadow tolls or subsidies (e.g., Portugal toll roads)
Services are finally paid by end-users (through services charges or fees) or by tax payers (via taxes) or future tax payers.
PPP to make impact of investment less acute on public finances:
Different options . All of them constitute available options to fund via private sector the development of a facility or a piece of infrastructure.
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16. PPPs : Key Challenges for Success -1
Policy Framework
Clarity of objectives (i.e., efficient and cost-effective delivery of services, optimization of impact of public spending, efficient risk allocation )
PPP legislation and rules of the game
Economic regulation (i.e., reduction of infrastructure related risk as perceived by the private sector and adequate and efficient measurement of the PPP outputs -- performance)
Institutional Capacity (centralized coordinating capacities with decentralized execution)
Communication Program (PPP marketing to key constituencies)
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17. PPPs : Key Challenges for Success -2
Transaction Design
Market structure
User’s fees “ tolerance” levels (willingness to pay) and public sector fiscal capacities (subsidies)
Investment Needs and type of assets to be generated
Nature of the service to be provided (i.e., local vs regional, network or individual, etc.)
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18. PPPs: Key Challenges for Success - 2
Financiability
Adequate risk allocation and mitigation mechanisms (i.e., commercial risk, performance risk vis-a-vis regulatory and political risk). Project finance structuring.
Access to private financial markets at adequate terms and conditions (Sustainability of such access).
Optimize mobilization of private capital per unit of public spending (i.e., direct investment, subsidies, guarantees).
Procurement rules (transparency & accountability)
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19. PPPs: Key Challenges for Success - 2
Public Sector Risk Management
Valuation and Monitoring systems of public sector commitments under PPP arrangements (i.e., direct investment, subsidies, guarantees).
Develop efficient public administration tools for effcient use of fiscal space targeting of infrastructure investments (Public Sector Risk Management Framework).
Evaluation and decision making analysis for different options to commit public sector fiscal support to PPPs.
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20. PPPs in Transport Infrastructure: Risk Assessment - 1
Project Related Risks
(manageable by sponsors and lenders)
Completion Risk (engineering & construction cost / time cost control)
Operational Performance Risk (technical & operational know-how)
“Market Risk” (Traffic)
Financial Risk (Exchange Rate and Interest Rate Fluctuations)
Environmental Risk (past and future liabilities, project delays, costs overruns)
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21. PPPs in Transport Infrastructure: Risk Assessment - 2
key role is the availability
and pricing of transport
concession finance (i.e.
(economic regulation)
Non-Project Related Risks
(non-manageable by sponsors and lenders)
Political Risk (expropriation, political violence, currency convertibility & transfer)
Contractual Risk [Regulatory Risks]. (Government’s default on contractual obligations, i.e., pricing formulas, right of way )
Macroeconomics Environment -- Volatility Risk (changes in macro balance in relatively short periods, i.e., exchange rate, inflation, etc...)
Legal Environment (rule of law, i.e., judicial system, regulatory procedures and arbitration)
Mitigation through to
local revenue generation
match with local
currency financing
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22. Thank You!
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