Implementing a Private Sector Arrangement

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Implementing a Private Sector Arrangement
Penelope Brook The World Bank
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Managing the Process Institutions

• To implement a reform process, a responsible unit
  must be established.
• 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

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Hiring and Managing Advisers

• Much of the relevant work will likely need to be
  contracted out
• Categories of advice
• economic and regulatory
• legal
• technical
• environmental
• investment banking / financial
• human relations
• public relations

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Getting What You Want from Advisers

• 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
• The process is likely to be an interactive one -
  and theres no substitute for good management on
  the government side

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Implementing a TransactionObjectives

• 1st Order
• find a suitable partner
• conclude a sustainable transaction
• 2nd Order
• competitiveness
• transparency
• political sustainability

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Basic Decision Parameters

• pre qualification
• bid design
• bid process
• framework for the ongoing relationship

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Prequalification

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

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Pre-qualification Common Issues

• If there arent strong existing local candidates,
  how can you structure prequalification to help
  build a domestic industry over time?
• If the market seems small, what are the options
  for broadening the field?

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Bid Design

• Objective
• to find a way of eliciting the information most
  relevant to the choice of partner
• 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

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Bid Design OptionsThe Technical Envelope

• 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

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Bid Design OptionsThe Financial Envelope

• 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

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Example Commuter Rail Concessions in Argentina

• Government thought that commuter rail might need
  subsidies for operation, rehabilitation and
  investment
• Government identified the type and amount of
  investments required for each line
• Concessions were awarded to the bidder requiring
  the lowest subsidy to operate the line and do the
  required rehabilitation and investments

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The Bid Process

• Objective
• to select a suitable partner, at the best price
  (effective competition for the market)
• Options
• competitive bid
• competitive negotiations
• direct negotiations

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Competitive Bid

• Pros
• market mechanism for choosing the best proposal
• relatively transparent
• Cons
• works best if outputs can be standardized, and
  all parameters are pre-specified
• may encourage under-bidding if renegotiation is
  possible later

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Competitive Negotiations

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

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Direct Negotiations

• Pros
• incentives to provide innovative solutions to
  local problems
• may be attractive where the costs of bidding are
  high relative to expected revenues
• Cons
• lacks transparency reduces incentives for cost
  effectiveness
• may undermine political sustainability

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In Practice...

• Most processes involve some combination of
  pre-bid discussions with potential bidders,
  competitive bidding and negotiation
• 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

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Preparing for the Ongoing Relationship

• The bid is only a first step towards a 10-, 25-
  or 30-year relationship
• theres no magic in the bidding process
• Need tools to
• maintain the spirit of the initial agreement (on
  both sides!)
• maintain competitive pressures on the private
  partner

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Key Elements

• Promotion of competition, as far as possible
• Effective, credible regulatory arrangements
• Contractual provisions for dealing with
  unpredictable events

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Options for Introducing Competition

• 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

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Allowing Entry May be the Best Way of Getting
Services to the Poor

• Low-income households often lack water and
  sewerage connections
• Even under a very good contract, progress in
  getting formal connections to these households
  may be slow
• Allowing competition from micro-enterprises and
  community groups to serve these households may
  result in lower cost solutions and faster
  connections

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The Role of Regulation

• 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

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Regulatory Independence is Key
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What Regulators Do

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

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Designing Regulation

• 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?

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Options Where Regulatory Capacity is Limited

• In many developing country cities, regulatory
  skills are in short supply, and there is no
  (good) regulatory track-record
• 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

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Example Contracting out Regulatory Functions

• Much of the work of regulators involves data
  gathering and processing
• 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

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Provision for Unforeseen Events

• 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
• Careful provisions are therefore needed for
  adjusting contractual terms over the life of the
  contract

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Critical Elements to Specify

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

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Implementation Key Issues

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

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