1. Overview of PPPs Raymond Bourdeaux The World Bank St. Petersburg – May 22, 2008

2. What is a PPP?

3. What is a PPP: Key characteristics Agreement between Public and Private sector entities Often (but not always) on a long term basis) For the provision of services or a facility, most often defined as outputs Payments may flow in either direction between private sector and the government (sometimes both) Risks are shared between the private sector and the Government But foremost this is a partnership

4. PPPs : Spectrum of Options Private Participation in Infrastructure (PPI) focus is payment for delivery of services rendered and transfer of the performance risk.

5. Sectors where PPPs are involved

6. Tendency for project to cascade from central to local government / municipalities. Most countries commence PPP programmes in transport, with later migration to other sectors. Rate of ‘migration’ to other sectors (health, education, energy, water, waste treatment) reflects i) national priorities and ii) legal frameworks. Pathfinders set the path for better or worse Sectors where PPP are involved, natural evolution

7. PPP are also a procurement process … Procurement mechanisms are different from a “typical” State procurement and require a specific legislative framework Overall process has steps specific to PPPs Process seeks to get the best of competitive tension to achieve an optimal risk allocation and a low price Contrary to a typical public procurement, there is significant steps post contract award Procurement timetable might seem longer, but this because the project is procured once, not in slice over many years

8. … an evaluation methodology…. What are the risks faced by the Government over the life cycle of the project and how they should be allocated? Evaluation looks at all risk related aspects (commercial, financial, technical) How does a PPP compare with a typical procurement? Evaluation looks at cost to the City over the life of the project, not over the construction period

9. … and a way of raising finance Project Financing: –Usually, revenues are generated only once construction is completed –Based on evaluation of future cash flows –Based on contractual documentation Limited recourse Financing: –Capabilities of sponsors and track records –Risk allocation is key

10. What PPPs are not A magic wand A time traveling machine A way of transforming capital markets instantly A way to make investors forget about their objectives

11. Implications: Procurement objectives should be different than for public procurement Ways of identifying and evaluating risks should be adapted to PPPs Time table should reflect specifics of PPP (3year average for PFI tender) Approval process within Government bodies should reflect the specifics of the PPP process

12. Why bother doing one?

13. PPP requires significant upfront preparation But such preparation is precisely the assurance that the risk allocation is thought through for the period of the concession, not just construction Everything needs to be evaluated in advance rather than as the (public) procurement is done

14. Why bother doing one? For the first deals but the learning curve is there But if the process is well managed and transparent, it works and delivers benefits Until financial close there is no certainty that the project will be successful There are so many players involved that this requires large amount of management throughout the process

15. Why bother doing one? Private sector cost of capital is higher than public sector cost of capital, so is it cheaper? If the projects are badly structured or the situation changes radically PPPs get restructured anyway But the real cost to the Government is a risk adjusted cost over the life of the project

16. Key Benefits of DBFO Contracts ALEC BRIGGS, SENIOR PROJECT LEADER, HIGHWAYS AGENCY march 07 Fostering development of a private sector road operating industry Better outturn cost certainty More reliable and accurate expenditure forecasts Transfer of appropriate levels of risk to private sector Improved partnerships between public and private sectors Provide scope for innovation in all areas including finance Overall, provides better value for money

17. OBJECTIVES FOR PRIVATISATION of UK RAILWAY SECTOR (legal team associated with the privatisation process) Official objectives were: –Provide greater incentives –Allow choices through competition –Give railway managers the freedom to manage –Set clear and enforceable quality standards –Reflect regional or local identities –Improve efficiency and reduce costs Real objective was desire to use private sector funding and to reduce subsidies Labour’s threats to re-nationalise increased risks of investing and led the Government to moderate competition Political necessity made privatisation itself the objective rather than the means

18. % of projects in sample Conventional procurement PPP procurement Cost overruns for the public sector 73%22% Delay in project delivery 70%24% PPP performance: Evidence on construction projects from the UK’s National Audit Office

19. Benefits of Private Sector engagement To mobilize private funds, and focus public funding in areas where private money cannot be channeled To leverage public resources by spreading public costs over the life of the project, To link quality of services to payments and focus role of the state on improvement of service To benefit from private sector expertise and know-how To respond in time to increasing public demand for public services To meet expectations for access to more and better services To address backlogs in infrastructure maintenance To drive costs down by introducing competition in areas where competition might not be present To increase transparency

20. Advantages of long term Concessions in the Transport Sector Facilitate and create flexibility for the development of projects where users have willingness to pay for services; Facilitate establishing specific level of service standards that can be easily monitored; Allows addressing anti maintenance bias of Public Work Ministries; Create market discipline if allocation of risks are properly designed(commercial risks should be born by the firms); Allows technology modernization through FDI; Reduce natural monopoly costs and information monopoly creating competition for the right to provide the services; Facilitate the trade off between investment and operational cost; Create incentives for capital market reform; Rationalize the use of infrastructure promoting efficient user charges.

21. Main stakeholders

22. Main Stakeholders Government Operator Investors Lenders End Users Equipment suppliers Construction companies

23. Decision making process during bid for investors Approval to proceed with prequalification Approval to proceed with bid preparation Update on bid and discussions on main parameters Management approval to submit a bid Management approval to close the transaction

24. Typical bank decision process Marketing phase “ of course we can do it” Letter of interest “we may be interested in doing it” Management approval in principle Letter of support “we are interested subject to” Draft term sheet “this is how we are thinking of doing it” Mandate letter “you have an obligation to do it with us, against payment of fees” Credit committee approval Loan signature Increasing commitment

25. Government support: what does it mean? Strong, political will and leadership Clear and supportive legal framework Coordinating entity within the Government, to provide support for PPP Setting priorities among most promising projects, in terms of economic efficiency Listen to the market and react accordingly Be prepared to be flexible

26. Some practical conclusions

27. When PPPs go wrong … Some external elements are difficult to manage: –Macro economic shocks –Lack of interest of international investors “Enron crisis” –International banks withdrawal But often design problems that can be overcome with the right process: –Partial feasibility study –Unrealistic risk allocation –Financial viability of project poorly defined –Unclear legal environment (legal, regulatory, tax etc..) –Lack of capacity for project follow up during construction and operation

28. PPP Pros.PPP Cons. Competitive process Increased transparency Well designed risk allocation Cheaper over the life of the project Private sector efficiencies and innovation Commercial risk sharing Complexity Time to prepare High transaction preparation costs Skill deficit for Administration Structuring risks Public perception and political reactions What have we learned?

29. PPP need serious commitment at all Government levels and require a carefully coordinated approach by all Government counterparts PPPs are time consuming process The more preparation at the beginning, the quicker the process to financial close: The more hurried the preparation the longer the process to financial close and the higher the chance of failures Bid award is not the end of the story (larger scope for project modification and half time in development process on average) Some practical conclusions

30. PPPs are about risk sharing: this requires a flexible approach in ways that are different from the typical procurement process Some risks are not taken into account in public procurement processes: if they are taken under consideration under a PPP it does not mean that the risk should be allocated to the private sector Stronger the competition, the more the project is likely to lead to significant benefit to the Government The worst negotiating position is not to be able to walk away. There is always the possibility not to conclude a deal and to do a typical public procurement Some practical conclusions

31. So, yes, it is difficult, but it delivers results! Investment commitments into infrastructure projects with private participation in developing countries by sector, 1990-2006 Source: The World Bank and PPIAF, PPI project database

32. Overview of PPPs THANK YOU !!! Raymond Bourdeaux The World Bank Rbourdeaux@worldbank.org