Session%20I:%20International%20Experience%20in%20PPPs

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Session I International Experience in PPPs
Key Challenges for Mobilizing Private Capital and
Management into Infrastructure Development
Cledan Mandri-Perrott Infrastructure Economics
Finance Department (IEF) Workshop, PPP in
Highways, Latvia May 9th 2006c
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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

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The Economics of Transport Infrastructure
Investments - 1

• Infrastructure investments
• 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).

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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

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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
  countrys competitiveness)
• High impact on economic growth
• Poverty alleviation and meeting MDGs.

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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

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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

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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
Output Based Aid Approaches
Time
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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.)

/ 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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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

/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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PPPs Spectrum of Options

• Contractual arrangements where the focus is
  payment for delivery of services rendered.
• Transfer of the performance risk.

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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

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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
Too much project failure
Risk Transfer
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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)

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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)

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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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PPPs Key Challenges for Success -2

• Transaction Design
• Market structure
• Users 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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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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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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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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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.
  (Governments 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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• Thank You!