Strategic Infrastructure Steps to Prepare and Accelerate Public-Private Partnerships

Industry Agenda Strategic Infrastructure Steps to Prepare and Accelerate Public-Private Partnerships

Prepared in collaboration with The Boston Consulting Group

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The views expressed are those of certain participants in the discussion and do not necessarily reflect the views of all participants or of the World Economic Forum.

REF 010513 Contents Foreword

3 Foreword Foreword by the World Economic Forum 6 Contributors 8 Executive Summary Today’s global infrastructure demand is estimated at approximately US$ 4 trillion in annual expenditure, with a gap – or missed opportunity – of at least US$ 1 trillion every year. In 12 Overview of the Strategic Infrastructure Initiative spite of the much needed investment in infrastructure, and the significant supply of private capital from pension funds, insurance firms, sovereign wealth funds and private equity 14 Introduction: The PPP Project funds in excess of US$ 60 trillion, countries are often faced with the paradox of a dry Preparation Gap pipeline of projects. 14 The Infrastructure Investment Needs 15 The Opportunity for PPPs A country’s competitive economic advantage clearly depends on a properly articulated 17 The Challenges for PPPs vision for infrastructure and long-term planning. However, government leaders must 18 The Imperative for Best Practice PPP critically inspect their project portfolios and decide which ones to accelerate first based Preparation on their strategic importance, independently of the restricted duration of a political cycle. Yet vision and planning alone are not sufficient, and it is fundamental that governments 22 1 Managing a Rigorous Project Preparation Process learn how to assess and select the right infrastructure delivery model at the early stages of the project preparation process. 22 1.1 Team 23 1.2 Leadership Without innovative financing and delivery models, as well as private companies that are 23 1.3 Project Governance suited to carry out the much-needed infrastructure projects, it will not be possible to 24 1.4 Project Management meet the demand. In fact, infrastructure is coming of age as an investment class and has shown its ability to resist inflation, outperforming general equities. And even traditional 25 1.5 Project Preparation Funding infrastructure companies (of “bricks and mortar” reputation) have launched infrastructure 25 1.6 Project Preparation Facilities funds in response to the demands of investors worldwide, who seek a diversified portfolio 28 2 Conducting a Bankable Feasibility of infrastructure assets with attractive returns. Study 28 2.1 Demand Forecasting The World Economic Forum’s Strategic Infrastructure Initiative is a collaborative reflection 30 2.2 Technical Specifications of the steps required to effectively and efficiently deliver economic infrastructure projects; while the first phase investigated infrastructure project identification and prioritization, the 32 2.3 User Charges and Other Funding Sources current second phase is focusing on how governments can prepare and accelerate key infrastructure projects through a Public-Private Partnership delivery model that provides 33 2.4 Bankability Testing and Market optimal economic and social benefits for their countries. The Strategic Infrastructure Sounding Initiative, with its linkages to the B20 and G20, and its cumulative track-record of pan- 35 2.5 Stakeholder Engagement regional engagement of the private sector, government and civil society, has identified 37 2.6 Legal Due Diligence, Permits some key challenges. These include a lack of project preparation and sluggish progress, and Land Acquisition as well as insufficient mobilization of capital flows into the investment in physical assets. 40 3 Structuring a Balanced Risk Allocation 40 3.1 Contract Model This report assumes that infrastructure projects have already been selected and prioritized on the basis of a country’s infrastructure vision and plan, and that a life-cycle 43 3.2 Price Regulation and Competition based economic valuation has indicated that the Public-Private Partnership delivery 46 3.3 Risk Allocation and Mitigation model renders value for money. In this context, the four best practice areas concerning 48 3.4 Adaptive Regulation Public-Private Partnerships covered in this report are: (i) managing a rigorous project 49 3.5 Quality Regulation preparation process, (ii) conducting a bankable feasibility study, (iii) structuring a balanced 51 3.6 Intervention Options risk allocation and regulation, and (iv) creating a conducive enabling environment. For each of these best practice areas the report identifies and explores six critical success 54 4 Creating a Conducive Enabling Environment factors that governments should be aware of and seriously consider when preparing an infrastructure project to be delivered as a Public-Private Partnership. 54 4.1 Public Sector Readiness: Legal and Institutional Framework The Strategic Infrastructure Initiative – and its Knowledge Series Reports – will provide a 56 4.2 Public Sector Readiness: roadmap to inform governments and key stakeholders of best practices while providing Capacity Building actionable frameworks that ensure resources and funding in order to secure and 59 4.3 Private Sector Readiness: Access accelerate a robust pipeline of bankable projects at an early stage. Furthermore, the to Finance Initiative will continue to carve out a space for a number of future regional and national 61 4.4 Private Sector Readiness: Local discussions – throughout the next two years – including in Africa, Asia, and Latin Industry Development and Trade America, but also in Europe and North America, which will transform the globally acquired Reforms knowledge and experience into concrete measures that contribute to boosting strategic 63 4.5 Civil Society Readiness: infrastructure development. Transparency and Anti-corruption 64 4.6 Civil Society Readiness: This report is a direct result of a cooperative process with leaders from government, civil Communication, Information and society and the private sector, particularly the engineering and construction, financial Participation services and investors industries. In this regard, we would like to thank and acknowledge 66 5 The Way Forward the World Economic Forum partner companies that served on the Strategic Infrastructure 70 Overview of Further PPP Guidance Initiative Steering Committee: ABB; Alcoa; Amec; Arup; Bilfinger; CH2M HILL; CVC Capital Partners; Fluor Corporation; GE; Hindustan Construction Company; Leighton 71 Abbreviations Holdings; Petrofac; Prudential; Punj Lloyd; Siemens; SNC-Lavalin Group; and Welspun 72 Endnotes Corporation. 74 Bibliography

Steps to Prepare and Accelerate Public-Private Partnerships 3 We would also like to thank the many experts who contributed to the Report through their role on the Strategic Infrastructure Initiative Advisory Committee: Norman Anderson (CG/ LA Infrastructure); Victor Chen Chuan (University of Sichuan); Nathalie Delapalme (Mo Ibrahim Foundation); Angelo Dell’Atti (IFC); Clive Harris (World Bank Institute); Rashad Kaldany (IFC); Rajiv Lall (IDFC); Yves Leterme (OECD); Clare Lockhart (Institute for State Effectiveness); Thomas Maier (EBRD); Rajat M. Nag (Asian Development Bank); Mthuli Ncube (African Development Bank) and Mark Romoff (Canadian Council for Public- Private Partnerships).

Finally, we would like to give special acknowledgement to the leadership provided by Hamish Tyrwhitt (Chief Executive Officer of Leighton Holdings), Gordon Brown (Prime Minister of the United Kingdom 2007-2010 and Chair of World Economic Forum Global Issues Group), Tidjane Thiam (Group Chief Executive, Prudential and Chair of the Cannes G20 High-Level Panel on Infrastructure and Cannes B20 Task Force on Infrastructure Development), Rajat M. Nag (Managing Director General, Asian Development Bank), and Donald Kaberuka (President, African Development Bank), and thank them for their genuine, relentless interest and commitment to the Strategic Infrastructure Initiative. The experience, perspective and guidance of all the above people and organizations substantially contributed to a number of remarkable discussions with particular highlights at the World Economic Forum on East Asia in May 2012, the World Economic Forum on India in November 2012, and the World Economic Forum Annual Meeting in January 2013.

Alex Wong Pedro Rodrigues de Almeida Senior Director Director Head of Business Engagement Head of Infrastructure & (Geneva) Urban Development Industries

4 Steps to Prepare and Accelerate Public-Private Partnerships Foreword by the International Finance Corporation (IFC)

Economic growth and prosperity depends on modern infrastructure. That much is obvious from the experience of a host of developing countries—including those in sub- Saharan Africa, where infrastructure development has accounted for half the recent acceleration in the region’s economic growth.

Such development is also essential for lifting people out of poverty. China, for example, spent about $600 billion in the 1990s and early 2000s to upgrade its road system and connect its largest cities—an investment that helped increase real incomes by an estimated 6 percent. Not surprisingly, demand is growing across the world for greater investment in roads, bridges, airports, and telecommunications.

The need is enormous. As this report notes, the gap in funding available for infrastructure projects is about $1 trillion a year. It’s a gap that can be filled only by bringing together capital and know-how from the public and private sectors. Public-private partnerships, or PPPs, can be a major force in modernizing infrastructure in affordable ways—and in improving the quality of life in local communities.

The World Economic Forum has played a vital role in identifying innovative solutions for infrastructure development. Last year, under its Strategic Infrastructure Initiative, it proposed a comprehensive framework for selecting and prioritizing infrastructure projects in any given country, building on the knowledge of all relevant stakeholders.

This report represents the logical next step—how to implement the prioritized projects effectively and efficiently. It provides a detailed guide to governments on the best ways to plan a PPP project, including designing the project structure and governance, conducting feasibility studies, managing risks, and building a conducive enabling environment.

At IFC, we know from experience that effective project preparation and careful risk allocation are essential for attracting investor interest, achieving the desired results, and ensuring the sustainability of a PPP project.

As the largest global development institution focused on the private sector, we have been advising governments on PPPs for more than two decades. In the past decade alone, our PPP advisory group has helped in the successful implementation of more than 250 infrastructure projects in more than 100 countries. These projects have been in a wide range of sectors—including, energy, transport, water, and telecommunications—and have improved the lives of millions of people in developing countries.

We believe that innovative approaches can make a transformational difference. We continue to develop creative PPP structures and models—including the use of rooftop solar panels to generate electricity in India, and efforts to rebuild the electricity grid in post-conflict Liberia. We also provide significant financing for private investment in infrastructure, making more than 100 investments each year.

This report makes a significant contribution to strengthening best practices in infrastructure development. We look forward to working with the World Economic Forum, and with the members of the Strategic Infrastructure Initiative Steering and Advisory Committees to build on this important work.

Rashad Kaldany Vice President and Chief Operating Officer International Finance Corporation (IFC)

Steps to Prepare and Accelerate Public-Private Partnerships 5 CVC Capital Partners Rashad Kaldany Contributors – Stephen Vineburg, Partner and Chief Vice-President and Chief Operating Officer, Executive Officer, Infrastructure International Finance Corporation (IFC) – Co-Founder and Co-Chairman: Donald Rajiv Lall Mackenzie Vice-Chairman and Managing Director, Fluor Corporation Infrastructure Development Finance Company Project Team – Robert Prieto, Senior Vice-President Yves Leterme Christoph Rothballer – Chief Executive Officer:David T. Seaton Deputy Secretary-General, Organisation for Project Manager, Strategic Infrastructure GE Economic Co-operation and Development Initiative, Infrastructure & Urban Development – Jay Ireland, Chief Executive Officer, GE Africa Clare Lockhart Industries, World Economic Forum Director, Institute for State Effectiveness – Nils Tcheyan, Head, Africa Policy, GE Hanseul Kim Africa Thomas Maier Senior Manager, Head of Engineering & Managing Director, Infrastructure, European Construction Industry – Chairman and Chief Executive Officer: Jeffrey R. Immelt Bank for Reconstruction and Development Hindustan Construction Company Rajat M. Nag Editors – Arjun Dhawan, President, Infrastructure Managing Director-General, Asian World Economic Forum Business Development Bank Alex Wong – Chairman and Managing Director: Ajit Mthuli Ncube Senior Director, Head of Business Gulabchand Chief Economist and Vice-President, African Engagement (Geneva) and Head of Basic Leighton Holdings Development Bank Industries – Patrick Brothers, Executive General Mark Romoff Manager, Corporate Strategy Pedro Rodrigues de Almeida President and Chief Executive Officer, Director, Head of Infrastructure & Urban – Chief Executive Officer:Hamish Tyrwhitt The Canadian Council for Public-Private Development Industries Petrofac Partnerships – Matthew Harwood, Group Head of Strategy The Boston Consulting Group – Group Chief Executive: Ayman Asfari (Adviser and Knowledge Partner) Prudential Philipp Gerbert – Pierre-Olivier Bouée, Managing Director, Senior Partner and Managing Director, Global Chief Executive Officer’s Office Head of Infrastructure – Group Chief Executive: Tidjane Thiam Jeff Hill Punj Lloyd Partner and Managing Director, Head of – Luv Chhabra, Director of Corporate Affairs Engineering & Construction Americas – Chairman: Atul Punj Jan Justus Siemens Principal, Infrastructure Expert – Roland Busch, Member of the Managing Board and Chief Executive Officer, Strategic Infrastructure Initiative Steering Infrastructure and Cities Sector Committeee – Chief Executive Officer:Peter Löscher ABB SNC-Lavalin Group – Roman Schafer, Head of Business – Nicola Angelini, Vice-President, Corporate Intelligence, Corporate Strategy Strategy and Development – Chief Executive Officer:Joseph M. Hogan – Chief Executive Officer:Robert G. Card Alcoa Welspun Corporation – Kevin McKnight, Director of Environment, – Vineet Mittal, Co-Founder and Managing Health, Safety, and Sustainability Director, Welspun Energy – Chief Executive Officer:Klaus Kleinfeld – Chief Executive Officer:Balkrishan Goenka AMEC – Hisham Mahmoud, Group President – Duncan Guy, Senior Vice-President and Strategic Infrastructure Advisory Head of Government Relations Committee – Chief Executive Officer:Samir Brikho Norman Anderson Arup President and Chief Executive Officer, CG/LA – Peter Chamley, Chair, Global Infrastructure Infrastructure Practice; Director Victor Chen Chuan – Chairman: Philip Dilley Professor of Engineering Management, Bilfinger Business School, Sichuan University – Joerg Weidner, Senior Manager, Nathalie Delapalme Technology Centre Director of Research and Policy, Mo Ibrahim – Chairman of the Executive Board: Roland Foundation Koch Angelo Dell’Atti CH2M HILL Manager, Change Management Office, – Jacqueline Hinman, President, International Finance Corporation (IFC) International Division – Chief Executive Officer:Lee A. McIntire Clive Harris Manager, Public-Private Partnerships Program, World Bank Institute

6 Steps to Prepare and Accelerate Public-Private Partnerships Context and Objectives of the Report

Infrastructure is a key driver of sustained relevant best practices, and the reader can This definition specifically excludes economic growth and social well-being, then refer directly to the corresponding sub- two other kinds of infrastructure: soft but infrastructure development by the chapters. infrastructure (i.e. the public institutions public sector has often turned out to be required to maintain society, notably the slow and/or inefficient in many countries. While the report specifically addresses legal and judicial system, the education and While the investment requirements for issues of PPPs, many of the presented health systems, and the financial system); infrastructure are huge, the fiscal situation of best-practices are also applicable to and industrial infrastructure (such as mine many countries is increasingly constrained. projects procured under traditional delivery works or interconnecting roads within a In such an environment, Public-Private and financing models.The best practices large factory complex). Partnerships (PPPs) offer a promising way related to the project preparation process forward: they can accelerate infrastructure (chapter 1) and to the feasibility study development by tapping the private sector’s (chapter 2) are relevant for both PPP and financial resources and skills in designing, non-PPP modes, but those related to risk building and operating infrastructure allocation (chapter 3) are specific to PPPs. effectively and efficiently on a whole life- Some of the best practices related to the cycle cost basis. Early PPP experiences enabling environment (chapter 4) are again have been both promising and sobering: applicable in a broader context, but are some projects have proven to be financially customized to account for the features of viable, with social and economic benefits, PPPs. while other projects have been plagued by delays, cost overruns or renegotiations. This report identifies a key challenge that Scope many governments are faced with – the lack of effective PPP project preparation – and The report is intended to serve as a recommends actionable best practices to “roadmap” to direct governments and other address this issue. stakeholders to the critical success factors in PPP project preparation. It does this by The report’s role is not to advocate PPPs providing an actionable framework and case relative to other modes of infrastructure studies. The report is not a compendium delivery, but rather to provide neutral advice of the whole PPP life cycle: its focus is if the PPP route is chosen. (The basis for on project preparation exclusively, and it that choice – a rigorous value-for-money assumes that the best practices related to analysis – was discussed in Strategic project identification and prioritization, as Infrastructure: Steps to Prioritize and Deliver well as to choice of delivery mode, have Infrastructure Effectively and Efficiently, been consistently applied. The framework the previous report of the Strategic and recommendations have deliberately Infrastructure Initiative.) been kept generic so that the principles and insights can be applied broadly in developed and developing economies and Target Audience across sectors of economic and social infrastructure. This report is designed primarily for senior government leaders and for the In the context of this report, infrastructure is officials responsible for planning and defined in such a way as to include: delivering infrastructure projects. Other – Economic infrastructure: assets that stakeholders would also benefit from the enable society and the economy to report – the private sector (construction function, such as transport (airports, and operating companies, financiers and ports, roads and railroads), energy (gas others), multilateral development banks, and electricity), water and waste, and the donor community, and civil society. telecommunications facilities; The formulation of this “common language” – Social infrastructure: assets to support and best practices on PPP preparation will the provision of public services, such as enable them all to have a more productive government buildings, police and military engagement with governments. facilities, social housing, health facilities, and educational and community establishments. At issue here are not Structure and use just traditional “bricks-and-mortar”

PPPs, but also public-service PPPs, The report is structured in keeping with the such as running a passport service for PPP preparation best practice checklist citizens. in figure 3, with four main chapters, each subdivided into six sub-chapters describing the critical success factors. According to the reader’s interest, the relevance to the local context, and the country’s level of maturity in the various critical success factors, the checklist can help to identify the most

Steps to Prepare and Accelerate Public-Private Partnerships 7 Executive Summary

Many countries are facing significant cycle cost basis. But despite this seeming fit challenges and closing the preparation gap. infrastructure needs, owing to growing between demand for and supply of private As shown in figure 1, the report focuses populations, economic growth and rapidly sector participation, too few projects get off on the subset of PPP best practices that progressing urbanization. The strong the ground. The reason for this paradox – guide the public sector through the crucial demand for infrastructure and its insufficient especially in developing countries, though preparation phase – from the initial decision provision imply a global investment gap of also in some developed countries – is the to structure a project as a PPP, on through at least US$ 1.0 trillion per year.1 As many “project preparation gap”, i.e. the lack of the feasibility study and regulatory contract governments do not have the financial well-prepared, bankable PPP projects design, to the point where the project is resources and skills to provide the required where investors are sufficiently reassured bankable and ready for tendering. In line infrastructure assets, they are increasingly by the commercial and technical feasibility, with the Initiative’s previous report, Strategic looking at the private sector to close the the risk allocation, the public sector`s Infrastructure: Steps to Prioritize and Deliver gap. In fact, institutional investors hold contractual commitment and capacity as Infrastructure Effectively and Efficiently, this substantial assets under management, for well as the institutional and legal framework. report assumes that projects have been which they are seeking attractive, long-term Furthermore, of those PPPs that have been identified and prioritized on the basis of an investment opportunities. implemented, several have been plagued by integrated infrastructure plan and rigorous delays, cost overruns or renegotiations as a economic cost-benefit analysis, and that the In such an environment, Public-Private result of a suboptimal preparatory phase. PPP delivery mode has been indicated by Partnerships (PPPs) can accelerate an unbiased value-for-money analysis of the infrastructure development by tapping This report, developed within the framework whole life cycle (see the synopsis of phase I the private sector’s financial resources as of the World Economic Forum’s Strategic report on project origination best practices). well as its skills in delivering infrastructure Infrastructure Initiative, outlines government effectively and efficiently on a whole life- best practices in overcoming the various

Figure 1: PPP best practice framework

Rigorous monitoring of Integrated construction and infrastructure plan Project operations & & cost-beneﬁt based Project ex-post evaluation project prioritization implementation origination Focus of Focus of forthcoming ConduciveConducive previous Phase III Competitive, enaenablingbling envenvironmentironment Life-cycle Phase I transparent based tendering Public-sectorPublic-sector rreadinesseadiness assessment

& ﬁnancing PPrivate-sectorrivate-sector rreadinesseadiness of public vs. support private delivery CCivil-societyivil-society readiness (Value for Money test)

Balanced Bankable risk allocation feasibility & regulation study

Focus of present Project preparation Phase II

The four best practice areas detailed in this 3. Structuring a balanced risk allocation when preparing PPPs (see figure 2). While report are: and regulation: How to balance the report focuses on the specific issues 1. Managing a rigorous project preparation efficiency incentives, risk mitigation, and of PPPs, many of the presented best process: How to effectively set up the public-interest safeguards to ensure practices, including those related to the project team and leadership, design the a successful long-term partnership project-preparation process, the feasibility project governance structure and project between the public and the private study and (to some extent) the enabling management, and secure the required sector; environment, are also relevant to other preparation funding; 4. Creating a conducive enabling project delivery modes. Depending on the country’s maturity in each critical success 2. Conducting a bankable feasibility study: environment: How to enhance public, factor and the relevance of the particular How to conduct a robust and high- private and societal readiness for PPP success factor to the country’s particular quality technical, commercial, legal and projects. context, governments can use this holistic environmental feasibility study; For each of these four areas, this report checklist to identify and prioritize the areas identifies six critical success factors that where change is required. governments should take into consideration

8 Steps to Prepare and Accelerate Public-Private Partnerships

Figure 2: Checklist of PPP preparation best practices

Team and 1.1. Assemble an experienced, cross- 1.2. Secure buy-in and leadership of high- leadership functional team level political champions and public servants Rigorous project Governance & 1.3. Set up a governance structure with clear 1.4. Pursue rigorous project management, preparation project mgmt roles/responsibilities and a coordinator and devise multi-stage planning process Preparation 1.5. Secure sufﬁcient preparation funding, 1.6. Leverage project-preparation facilities funding and minimize costs through standardization (with cost recovery, advisory and monitoring)

Technical 2.1. Conduct robust and sophisticated 2.2. Fix contractible, innovation-friendly output scope demand forecasting speciﬁcation cross-checked by cost forecast Bankable Commercial 2.3. Apply user charges, ancillary revenues, 2.4. Test bankability continuously and feasibility attractiveness land-value capture and government payments conduct market sounding early study Prerequisites 2.5. Pursue proactive, inclusive and 2.6. Complete holistic legal feasibility check professional stakeholder engagement and expedite permits and land acquisition

Incentives 3.1. Adopt a life-cycle oriented contract model 3.2. Apply incentive-based price regulation aligned with the policy objectives and evaluate competition options Balanced Risk 3.3. Identify all risks, allocate them to the best- 3.4. Adopt regulation that is adaptive to risk allocation mitigation suited party, and apply risk sharing/mitigation exogenous changes and volatility and regulation Safeguards 3.5. Fulﬁl social objectives via enforced 3.6. Provide for government intervention quality regulation and efﬁcient monitoring options in a predictable and fair way

Public-sector 4.1. Establish a solid legal framework and 4.2. Enhance individual capacity with training, § readiness independent regulators/dispute resolution and build institutional capacity in PPP units Conducive Private-sector 4.3. Facilitate access to local currency, long- 4.4. Develop a competitive and capable local enabling readiness term ﬁnance and guarantees industry/workforce and pursue trade reforms environment Civil-society 4.5. Insist on transparency and enforce 4.6. Optimize public communication, readiness anti-corruption standards information and participation

Managing a rigorous project preparation preparation. PPP planners need to ensure The forecast itself should take into account process sufficient upfront funding, to be disbursed factors such as willingness to pay, inter- at set milestones, to conduct a thorough and intra-modal competition, ramp-up The PPP preparation process is quite feasibility study. Governments should also effects, and long-term macroeconomic and complex, as it involves large teams and establish project-preparation facilities – i.e. population trends – depending on which multiple stakeholders (including ministries, dedicated funds for feasibility studies – factors are most relevant for a given asset regulators, engineering firms, banks and with cost-recovery mechanisms as well and environment. users), as well as a multitude of interfaces as supervisory and advisory capabilities, between the different functional feasibility to provide sustainable sources of project- Besides estimating future demand, project studies and the regulatory contract development funding. To reduce the promoters also need to determine the design. So it is of paramount importance funding needs, the planners should try project’s technical specifications. Before to assemble capable and experienced increasing the standardization of the detailing these, they should pause and cross-functional teams with a well-defined project-preparation process; for example, consider various alternative ways of governance structure backed by strong and by using common feasibility-study easing the infrastructure bottleneck – for committed political and project leadership. guides, standard specification manuals or example, managing demand through new A project management office should define adjustable draft concession agreements. pricing models, or reducing transmission a multi-stage project plan along with losses rather than making costly capital decision gates and potential exit ramps, expenditures. The project promoters and should flag issues early, as well as Conducting a bankable feasibility study must also make sure, when drafting the coordinate and monitor the workstreams. technical specifications, that these are When responsibilities are spread across Many PPPs have failed owing to a faulty outcome/output-oriented, so that potential different levels of government and appraisal of just one single variable: contractors can devise innovative and jurisdictional boundaries, decision-making demand.2 The optimism bias inherent in cost-effective solutions. And lastly, the can be improved and accelerated by many demand forecasts – for greenfield project promoters should carefully forecast establishing a designated coordinating toll roads, for instance, actual traffic after costs and assess risks to avoid gold-plated authority, and by defining clear roles the facility opens is on average 23% and designs (which are over-specified well past and responsibilities for all other agencies sometimes even 50% below projections the point at which extra effort is adding involved. – has led to notorious renegotiations value). or even bankruptcies. To avert forecast High-quality project preparation is also inaccuracies, it is crucial to maintain the Once the demand and cost estimates are costly – for medium and large-sized independence of the forecaster, ensure made, it is time for the evaluation of the projects the feasibility studies and contract high-quality data and process guidelines, project’s commercial viability. A common design typically consume 1-3% of the and challenge the results under multiple danger here is to focus too sharply on user total costs. In many cases, insufficient or robust methodologies and scenarios as well charges or direct government payments as ad-hoc funding has led to poor quality, as from different stakeholder perspectives. funding sources.3 For certain assets in high- inconsistencies and delays in project density environments, ancillary revenues

Steps to Prepare and Accelerate Public-Private Partnerships 9 – for instance, from retail operations – and Structuring a balanced risk allocation the public sector needs to attract high- land-value capture can contribute up to and regulation quality local staff through solid pay and 50% of the funding requirement. When career prospects, and to train them to user charges are applied, they should PPPs tend to be contracted for 20 years or build up the capacity (in particular, financial, be differentiated by time, location and more – a timeframe with potentially major legal and transaction skills) for negotiating usage intensity: such differentiation can changes. It is often the quality of the risk with the private sector on an equal basis. maximize revenues and ensure efficient allocation and the regulation that determine But individual capacity building needs to capacity usage. Although user charges if a partnership can successfully master be complemented by institutional capacity often arouse opposition, they tend to gain these uncertainties while continuing to fulfil building – for example, by disseminating acceptance when the new infrastructure the expectations of both the public and the standardized tools and knowledge asset proves that it gives users a higher private side. products and by establishing PPP units service level or new opportunities. As with adequate executive authority (not just for the adverse social consequences of There is a fundamental design objective in an advisory function), located in a powerful user charges, these should be mitigated the allocation of risk and in the regulation central ministry such as the Ministry of through tariff reductions or alternatives – of price, service and investment – namely, Finance. for instance, a slower rural road parallel striking a balanced trade-off between to the tolled highway. For some particular attractiveness for the private sector on the Governments can also help to increase assets, bankability needs to be enhanced one hand and safeguarding public interests the readiness of the private sector and by asset-bundling or viability-gap funding and optimizing overall economic returns civil society for PPPs. They should foster – i.e. the provision of a public subsidy on the other. The chosen trade-offs are the development of a resourceful and to make a project viable for investors – sector-, country- and asset-specific, yet competitive local set of industries as well but without sacrificing fiscal prudence, the fundamental objective stays the same: as a skilled workforce. To attract both local transparency and competitiveness. To to allocate risks to the party best able to and international companies to the market, evaluate the attractiveness and the risks manage them. For example, governments governments would do well to formulate a of the overall PPP project to the private can increase investor attractiveness by steady project pipeline and an integrated sector, the project’s planners must conduct sharing or mitigating difficult-to-manage infrastructure plan, while also enabling a robust business-case analysis, including risks, such as traffic volume, by means policy dialogue with the private sector. sensitivity analyses on key risks and of sliding scales, guaranteed minimum To complement industry development, potential economic scenarios. They should off-takes, least-present-value-of-revenues governments should take further measures, then carry out early “market sounding” – auction mechanisms, or availability- to improve the concessionaires’ access testing the proposed PPP package with a based concessions. On the other side, to local currency, long-term financing – wide range of construction and operating governments can protect the public interest by such means as creating innovative firms, multilateral development banks and by various means: choosing a concession risk-guarantee and currency hedging/ financiers – to understand key concerns model and pricing regime that incentivizes convertibility schemes, facilitating access to and elicit suggestions for improvement. the concessionaire to operate efficiently investment opportunities, and developing and invest adequately, or introducing domestic capital and banking markets. Apart from the technical and commercial service regulation that provides quality Furthermore, to unlock demand for aspects, there are two other frequent incentives via bonus and penalty schemes, infrastructure, governments might need to sources of project delays: stakeholder for instance. In addition, the regulatory initiate trade reforms; for example, faster opposition and incomplete legal system can include adaptive mechanisms border and visa procedures would enable prerequisites. It is crucial, even in the that self-correct against economic higher throughput for a cross-border feasibility stage, to conduct proactive and cycles or commodity price volatility for highway and would increase trade flows. professionalized stakeholder engagement. concessionaires. Many regulations, for The project’s planners should consult example, automatically adapt to inflation, Civil society’s readiness for PPPs can thought leaders across all stakeholder while many power-sector regulations be enhanced by communicating more groups (some of which may already be, include pass-through clauses for volatility effectively the PPP value proposition and or may become, active promoters of in the cost of fuel. With regard to public- its relevance for social and economic the project), as well as less organized sector intervention options – whether progress, as well as by introducing groups such as ordinary local residents. they concern contract termination, capital participatory elements during the feasibility This consultation process should actively expenditure or financing – these need to study. Transparency standards need to be engage the citizenry on aspects of the be clearly defined in the contract; they maintained: they are critical in deterring, project by communicating transparently should have well-specified triggers and detecting and penalizing corruption in both both negative and positive impacts and an established consultation and decision- the public and private sectors, and will help providing feedback opportunities. Efforts making process to balance public-sector to reassure the public at large. must be made to mitigate the social and flexibility with the private sector’s desire for environmental impact: these should not predictability. only focus on short-term measures and The way forward cash compensation, but also take a longer- term view – for example by arranging Creating a conducive enabling The recommendations presented in this community-owned maintenance of facilities environment report are aimed at helping governments or by providing administrative support in the to close the “project preparation gap” and case of involuntary resettlement. In addition, In addition to sophisticated preparation, accelerate infrastructure development. prior to tendering, public-sector sponsors any PPP project also relies on a conducive Governments should start by reviewing should complete the other essential enabling environment. If a broader and benchmarking their PPP policies preliminaries: obtain land-planning and PPP programme is pursued, the public and frameworks against the best environmental permits, acquire land and sector needs to ready itself with regard practice checklist presented here to rights-of-way, as well as dedicate funding to legislation, institutions and capacity identify those areas most relevant to the and obtain approvals for the construction of building. Needed first of all is a robust country’s particular context and most essential connections to the infrastructure legal and institutional PPP framework, with in need of change. Based on these asset. an independent regulatory function and insights, governments should aim to a trusted dispute-resolution process to standardize their PPP approach along best enhance regulatory commitment. Secondly, practices; for example, by establishing

10 Steps to Prepare and Accelerate Public-Private Partnerships a clear gateway/approval process; by dimensions. The build-up should proceed deliver the best value for money, it should institutionalizing project-preparation at a measured pace: the initial emphasis be abandoned and perhaps replaced by a facilities, viability-gap funding or financing/ should be on uncontroversial projects, better-suited delivery mode (PPPs are an guarantee facilities; and by providing relatively less complex contracting option, not an objective). But overall, a well- model documents for contracts and RfPs/ modes, and financially attractive assets; designed PPP strategy and programme RfQs. To maximize the value of PPPs, as lessons learned are incorporated and – complemented by other policies to governments should structure them as a as the enabling environment matures, improve infrastructure prioritization, delivery long-term programme within a national more complex and demanding PPPs can and operations – can give developed or infrastructure plan, instead of as a series be undertaken across various sectors. developing countries a great opportunity of separate projects. Governments However, governments should keep their to boost their infrastructure, increase also need to recognize that building a expectations flexible and realistic by also competitiveness, and achieve major socio- conducive enabling environment takes looking beyond PPPs: the PPP approach economic advances. time, and that initial projects are unlikely to infrastructure projects is no failsafe to excel along all identified best practice silver-bullet solution, and if a PPP will not

Steps to Prepare and Accelerate Public-Private Partnerships 11 Overview of the Strategic Infrastructure Initiative

The Strategic Infrastructure Initiative of The first phase in 2011/12 centred on The Initiative expands on work already the World Economic Forum supports project identification and prioritization, and commissioned by the World Economic governments in their efforts to address produced the report Strategic Infrastructure: Forum, including Paving the Way: and debate two fundamental questions to Steps to Prioritize and Deliver Infrastructure Maximizing the Value of Private Finance maximize their returns on investment from Effectively and Efficiently in September in Infrastructure (2010) and Positive strategic infrastructure projects: 2012 (a synopsis is provided on page 13 Infrastructure: A Framework for Revitalizing – How should they prioritize which as these practices are a precondition for the Global Economy (2010). infrastructure projects create the this report). The second phase in 2012/13, greatest impact on economic growth, which is summarized in this report, focused The Initiative draws on partners from social uplift and sustainability? on project preparation, specifically looking at the Forum’s Infrastructure & Urban Public-Private Partnerships as an exemplary Development and other relevant industries, – Once they have selected the project delivery mode. The third phase in including Mobility, Energy and Investors. investments, how should they prepare, 2013/14 will investigate issues of existing Experts from multilateral development procure and deliver these assets most infrastructure assets, such as throughput banks, academia, governments and the efficiently and effectively? optimization as well as operations and wider infrastructure community are also maintenance. Figure 3 provides an overview participating in the Initiative. Refer to figure of the three phases of the Initiative and their 11 for an overview of the various meetings respective topic focus. at which the Initiative partners convened.

Figure 3: Overview of the Strategic Infrastructure Initiative

Phase I Phase II Phase III

Project Project origination Project preparation Project implementation * phase and title Prioritization and selection of Preparation and acceleration of Operations and maintenance of infrastructure projects Public-Private Partnerships existing infrastructure — Infrastructure planning & project — Project preparation process — Operations & maintenance Specific identification — Feasibility study — Throughput optimization topics — Project prioritization & selection — Regulatory design — Upgrades & renewals addressed — Choosing delivery modes — Enabling environment — Environmental & social impact optimization Delivery — Public, private and PPP delivery — Specifically addressed PPPs as — Public, private and PPP delivery modes an exemplary delivery mode

How to operate and maintain existing Outputs infrastructure?

— Report published in Oct. 2012 — Report in May 2013 — Report in spring 2014 — Strategic Infrastructure — PPP Maturity Assessment — Operations & Maintenance Planner Tool and Framework Tool Evaluation Tool

* Tentative planning for Phase III

Source: World Economic Forum; Global Strategic Infrastructure Initiative

12 Steps to Prepare and Accelerate Public-Private Partnerships Synopsis of Phase I Report consider both greenfield developments and brownfield capacity enhancements. Project origination best practices In addition to considering hard assets, it will also consider infrastructure efficiency This report assumes that the best practices improvements (for example, by influencing related to project origination will be user behaviours through peak pricing or car- applied consistently – as they constitute sharing incentives) and soft infrastructure a key precondition for successful project improvements (for example, by enabling preparation. Those critical success factors trade reforms). The infrastructure planners have been described in detail in the should also make provisions for updating previous report of this Initiative, Strategic the infrastructure plan regularly, as Infrastructure: Steps to Prioritize and Deliver conditions and requirements change. Infrastructure Effectively and Efficiently. After identifying the projects, the plan will In particular, it is assumed here that prioritize them using robust cost-benefit governments will create a comprehensive analysis, explicitly taking into account the infrastructure vision and plan that addresses performance throughout the whole life cycle economic, social and sustainability needs. and the various socio-economic objectives. This ideal infrastructure plan will be The plan will then be translated into a developed in a methodical way, starting continuous project pipeline, with a clear from an analysis of the current infrastructure timeline for each project and an indication of status and needs, incorporating all the the most appropriate financing and delivery various stakeholder and agency inputs. mode – private, public or via PPP. To decide Such a plan should be based on a on that delivery mode, governments should broader, national economic plan and would conduct a value-for-money analysis that take an integrated, cross-sector, and determines whether delivery as a PPP or system-wide perspective – including the traditional procurement/financing is the major cities and even assuming a cross- cheaper option on a whole life-cycle cost border perspective – to account for the basis. This process has to be unbiased and interdependencies between the different thus should be based on high-quality data components of the infrastructure network. and a clearly specified and standardized The optimal infrastructure plan will carefully evaluation process.

Delivery mode choice needs to be based on value-for-money analysis

Government to conduct value-for-money Possible options include public, PPP analysis to choose appropriate delivery model and private delivery

Value-for-money analysis needs to consider both — Civil works contract: costs and benefits of available delivery modes DBB* & DB* — Costs: Efficiency in investment, operations and Public — Service contracts maintenance (PPP typically better); Financing costs, transaction and contract oversight costs (PPP typically worse) — Benefits: Potential non-financial impacts such as accelerated and enhanced project delivery — Management contracts — Lease/ affermage Result of the value-for-money analysis typically Public-Private — Concession, BOT*, DBO*, depends on a number of factors Partnership DBFO * — Size of capital expenditure involved — Project size relative to transaction costs Focus of this report — Design/implementation expertise of private sector — Feasibility of risk identification and allocation — Regulated privatization — Specification of service needs as outputs — Liberalization and full — Possibility to estimate long-term asset costs divestiture — Stability of technological aspects Privatization

A PPP project yields "value-for-money" if provides a net positive economic gain greater than that of any alternative procurement route (i.e. the public sector comparator)

*DBB = design-bid-build DB = design-build BOT = build-operate-transfer DBO = design-build-operate DBFO = design-build-ﬁnance-operate

Source: The Guide to Guidance, How to Prepare, Procure and Deliver PPP Projects. July, 2011. Luxembourg: European Investment Bank.

Steps to Prepare and Accelerate Public-Private Partnerships 13 Introduction: The PPP Project Preparation Gap

Infrastructure projects – from ports to While the global infrastructure requirements – Industrialization and rising living pipelines, from hospitals to highways, are huge, governments’ fiscal budgets are standards in emerging countries will from water and sewage systems to phone increasingly constrained in the wake of the drive global economic growth at a rate systems – provide the bedrock of a nation’s global financial crisis of 2008. In addition, of about 2% per year in real terms, so prosperity and well-being. They facilitate infrastructure development by the public that by 2050, worldwide per capita GDP transport, promote communication, provide sector has often been slow and inefficient. will more than double from its present energy and water, boost the health and In such an environment, Public-Private level of US$ 10,000 to about US$ education of the workforce, and enable Partnerships (PPPs) are an important way 21,000;11 the whole economy to flourish. The costs forward: they can accelerate infrastructure – Increasing globalization of supply chains of building infrastructure are vast, but the development by tapping the private sector’s and increasing regional economic costs of failing to make such investments financial resources and its skills in delivering integration drive the need for globally are incalculable. An improved infrastructure infrastructure effectively and efficiently on interconnected communication and produces abundant benefits of three types a whole life-cycle cost basis. So far the transportation networks. – on the economy, on the environment and overall global PPP experience has been on social progress: both promising and sobering: some projects So massive is the impact of these have proved to be financially viable, with – First, economic development and megatrends that current infrastructure broader socio-economic benefits, but other competitiveness hinge crucially on development activity is failing to keep pace projects have been affected by delays, cost infrastructure development. Public with demand: infrastructure reduces the costs of overruns and contract disputes. – Actual infrastructure construction, or trading, and thus facilitates economies supply, amounts to US$ 2.7 trillion per of scale and enhances production One of the most pressing challenges is the year, representing about 3.8% of global efficiency for other sectors. On average, lack of effective PPP project preparation GDP;12 infrastructure investments yield a 15- and acceleration towards bankability. While 25% economic return.4 Fit-for-purpose institutional investors hold substantial assets – Needed infrastructure construction, or infrastructure in Africa, for example, under management, for which they are demand, is about US$ 3.7 trillion per would increase the annual growth of seeking attractive, long-term infrastructure year, representing about 5.2% of global GDP per capita by 2.2%.5 investment opportunities, many projects are GDP;13 stalling in the pipeline and have failed to get – Second, improved infrastructure helps – The shortfall, or the so-called global off the ground. The reason for this paradox, to reduce environmental damage. Better infrastructure investment gap, therefore especially in developing countries but also roads will reduce fuel consumption and amounts to at least US$ 1.0 trillion per in some developed countries, is the “project extend the life of vehicles. Reduced year. preparation gap”, i.e. the shortage of well- congestion at ports and airports will prepared, bankable PPP projects where reduce carbon dioxide (CO ) emissions. 2 investors are sufficiently reassured by the The immediate effects of the shortfall An expansion of gas and electricity commercial and technical feasibility, the risk are well-known – and dire. Ports and networks will lead to a reduction in allocation, the public sector`s contractual airports suffer severe capacity constraints off-grid diesel generators and other commitment and capacity as well as the and delays: in Brazil, for example, ships inefficient and polluting energy sources. institutional and legal framework. typically have to wait 15 to 20 days to – Third, improved infrastructure will load Brazilian grain for export.14 In many help to achieve the United Nations To bridge the project preparation gap and countries, the road and rail networks are Millennium Development Goals on to overcome the challenges of the PPP grossly deficient: in Africa, for example, poverty, education, gender and health model, this report offers recommendations some 40% of the food produced perishes 15 in developing countries. Without large- with actionable best practices on taking on the way to market. In many rapidly scale infrastructure advances, the grim advantage of these opportunities for developing economies, electricity shortages status quo will continue: currently, 1.6 infrastructure advancement. But first, it is are a chronic feature of daily life: in India, for billion people are without electricity, worth looking at the scale of the investment example, supply is 9% below demand on 884 million have no secure supply of needed. average, and 40% below demand during safe water, and 2.5 billion lack proper peak periods.16 sanitation.6 But paved roads have doubled girls’ school attendance in The Infrastructure Investment Needs But these infrastructure deficits also have Morocco; clean water has reduced tremendous long-term implications for child mortality by 55% in India, and Global demand for infrastructure has economic growth and social progress. The in Colombia 72% of children with powerful underlying drivers: affected countries are less competitive, electricity at home read in the evening, and conducting business is more – By 2050, the global population will compared to 43% of those without.7 difficult. Three recent reports from the increase by about 2.3 billion people, to And in developed countries, improved World Economic Forum have highlighted reach a total of about 9.3 billion;9 infrastructure will enhance user quality; the problem. According to The Global for example, in the United States, traffic – By 2050, the urban population Competitiveness Report, 15-17% of could exceed capacity at nearly 20 worldwide will increase by 2.6 billion, corporate decision-makers in India and major airports by 2015, implying drastic almost doubling its present size and Brazil identify infrastructure deficiencies 10 delays.8 reaching a total of about 6.3 billion; as the top constraint on doing business.17

14 Steps to Prepare and Accelerate Public-Private Partnerships Introduction: The PPP Project Preparation Gap

According to the Global Risks Report, one projects in Europe and North America environment, PPPs can be a viable way of the foremost risks to the global economy during the period 1927–1998 shows an forward to overcome the limitations of the is the prolonged neglect of infrastructure average overspend of 28%, with little traditional delivery models. investment and upgrading.18 And according variation from decade to decade.20 to the Global Agenda Survey 2012, global While there is no international consensus business leaders consider constraints in Today the problem of public infrastructure on the definition of a PPP, this project- critical infrastructure to be one of the most delivery inefficiency is exacerbated as delivery model is commonly understood as underestimated trends.19 public finance is no longer so readily follows: it involves medium- or long-term available. As budget deficits have become contracts between a public-sector authority widespread and public debt has grown in and a private party, with the private party The Opportunity for PPPs Organisation for Economic Co-operation delivering certain defined infrastructure and Development (OECD) countries, services or works. PPP contracts are The reason that PPPs were developed governments have been reducing their characterized by the bundling of activities in the first place is that traditional public investments in infrastructure projects, across the life cycle (including design, delivery of infrastructure projects has delaying many essential projects.21 In the construction, operation and maintenance); often proved to be disappointing in many case of emerging countries, the picture the private party assumes or shares countries. Unfortunately, projects procured is more varied, but the principle remains substantial risk, has some control over the under the traditional model regularly go the same: government coffers alone are asset, and often raises private finance for over budget and over schedule – and often an unreliable way to finance and deliver capital expenditures (see figure 4 for an disregard the resulting life-cycle costs. For the infrastructure projects that the growth overview).22 example, a survey of major rail and road trajectory of countries requires. In such an

Figure 4: Overview of Public-Private Partnership vs public and private project delivery Public-Private Partnerships fall between public project delivery and privatization

Public Public-Private Partnership Privatization

— Restructuring & — Management — Lease/ — Concession — Joint venture — Full divestiture corporatization and operating affermage — BOT*** — Partial — Civil works contracts — DBO**** divestiture contract: DBB* — DBFO***** & DB** — Service contracts

Private Mix of public and private ownership Public ownership and finance ownership and and finance finance

Public Private operations operations

Extent of private sector participation

*DBB = design-bid-build **DB = design-build ***BOT = build-operate-transfer ****DBO = design-build-operate *****DBFO = design-build-ﬁnance-operate

Source: World Bank PPP in Infrastructure Resources Centre. “PPP Arrangements / Types of Public-Private Partnership Agreements.” Available at http://ppp.worldbank.org/public-private-partnership/agreements

Based on these characteristics, PPPs offer various potential advantages over public project delivery, as outlined in figure 5 (despite their challenges, described in the next section).

Steps to Prepare and Accelerate Public-Private Partnerships 15 Introduction: The PPP Project Preparation Gap

Figure 5: Potential advantages of PPPs Public-Private Partnerships promise several potential advantages

Potential advantage Description

— Wasteful or "white elephant" projects – that is, economically underproductive projects – 4.5 are potentially filtered out (at least for user revenue-based PPPs ), as both the 3.5 Improved government and private investors tend to conduct more thorough due diligence. 2.5 project — The private sector has no bias between greenfield or brownfield investments, but the 1.5 1.5 2.5 3.5 4.5 selection public sector may prefer the funding of new assets which attract much publicity (and votes), whereas routine maintenance has low visibility and thus may be neglected.

— When public ﬁnancing for infrastructure is constrained or provided slowly in a Accelerated "pay as you go" fashion, private sector investment can reduce delays in project implementation and hasten the macroeconomic beneﬁts – particularly in an emerging infrastructure country context with major bottlenecks. provision

— PPPs address the life-cycle dependencies between design, construction and operations effectively as they assign the full asset responsibility to a single party. Whole — PPPs attempt to unbundle risks and allocate to the best party able to manage them. life-cycle cost — The private sector, being subject to the proﬁt motive and capital market discipline, strives optimization to operate efﬁciently and exploits technical and managerial expertise (e.g. preventive maintenance, lean operations) and economies of global scale, and will invest in technology and process innovations early to reduce whole life-cycle costs. — The private sector systematically maximizes revenue opportunities, for example by increasing asset capacity and utilization or by setting and segmenting user prices (i.e. Revenue applying demand management). innovation — At the same time, it is often more innovative in matters of developing new customer $ services and products, as well as ancillary businesses.

In addition to these advantages, , the infrastructure firms often enjoy a natural screen out the least viable infrastructure private sector has vast disposable funds. monopoly based on high entry barriers; projects, and thereby potentially reduce Institutional investors in OECD countries once construction is completed, construction needs. They also contribute have assets under management amounting operational risks are generally low, and to efficient project delivery by tapping the to an estimated US$ 71 trillion. More demand is fairly predictable and inelastic private sector’s integrated skills in project specifically, investment funds have US$ to price changes. management, design, construction and 28 trillion at their disposal, insurance firms – Portfolio diversification. Infrastructure operations. Lastly, PPPs also incentivize a US$ 22 trillion, and pension funds US$ services are generally essential goods productive use of infrastructure assets by 23 19 trillion. The same is true for emerging with low substitutability, so demand adopting innovations to optimize capacity, countries where these investors have also is often relatively stable; therefore, maximize utilization and increase revenues. piled up significant reserves over the last infrastructure returns show a lower decade. In addition, increasingly active correlation with the wider economy Although PPPs offer benefits in the sovereign wealth funds have about US$ 5 and other assets than other equity developed world (particularly for major 24 trillion at their disposal. investments do. rehabilitation and renewal projects with large capital expenditure involved), their – Hedge against inflation. Thanks to For these institutional investors, greatest potential lies in emerging and strong pricing power, to regulatory infrastructure project risk-return profiles developing countries. In these countries, regimes that adjust user charges to present an attractive alternative investment efficiency gains are more impressive as the Consumer Price Index, and to low – especially with real fixed income returns local standards and capacity tend to be operational cost exposure, infrastructure being near zero in the wake of the global comparatively modest. The economic and returns are generally considered to be financial crisis. Although the infrastructure social benefits of new infrastructure emerge well hedged against inflation. investment characteristics may vary greatly quickly, as PPPs may enable earlier project depending on the specific sector, asset and financing and completion and thus ease country, the overall appeal of infrastructure Accordingly, institutional investors are infrastructure bottlenecks. Finally, emerging investments is considerable. The main planning to increase their portfolio countries are more likely to commission attractions are: allocations to the infrastructure asset class. greenfield infrastructure projects – the Research by Preqin in 2012 suggests that – Matching of assets and liabilities. kind of projects particularly suited to the insurance companies aim to increase their Infrastructure investments tend to be PPP model since they bundle the design, infrastructure investments from the current of long duration – the typical technical construction and operations aspects and 1.1% to their target allocation of 2.6% of life of infrastructure assets is between thereby enhance the efficient delivery of assets under management, while pension 30 and 70 years, and concessions infrastructure on a whole life-cycle basis. funds aim to increase from 2.8% to about mostly last between 20 and 40 years 5.0%.26 – so they accord well with the long- While in many developed countries PPP term obligations of pension funds and volumes remained relatively flat over the Given these background trends, PPPs 27 insurance firms.25 past decade, they have been increasing can contribute effectively to closing the rapidly in emerging and developing – Stable returns. Cash flows are looming infrastructure gap. They help to countries over the last two decades (see reliable and volatility is subdued, as figure 6).

16 Steps to Prepare and Accelerate Public-Private Partnerships Introduction: The PPP Project Preparation Gap Figure 6: Infrastructure PPP investments in developing and emerging countries Infrastructure PPPs are on the rise in emerging and developing countries

Total PPP* investment commitments in current US$ billion in low-/middle-income countries** 100 East Asia and Paciﬁc Middle East and North Africa South Asia Sub-Saharan Africa 80 Europe and Central Asia Latin America and the Caribbean

Asian 60 ﬁnancial crisis

0 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*** Latin American PPP crisis Early days PPP boom PPP bonanza years

* This includes management and lease contracts, concessions (or management & operation contracts with major private capital commitments), and greenfield projects (excl. merchant contracts), but excludes divestitures/privatizations. ** Following the World Bank definition *** Data as of December 2012. Sometimes projects are included in the database later, hence 2011 figures may be downward biased.

Source: The World Bank and Public-Private Infrastructure Advisory Facility (PPIAF). Private Participation in Infrastructure Database, 2012. http://ppi.worldbank.org/index.aspx.

The Challenges for PPPs

Offsetting the many advantages of PPPs are various drawbacks. Key complaints are listed in figure 7:

Figure 7: Potential challenges of PPPs Public-Private Partnerships also face several potential challenges

Potential challenge Description

— Governments are sometimes unwilling to share control of infrastructure due to the Restricted inflexibility to influence future system design and operations, particularly with control & regard to national interests, social objectives and integration with other facilities. flexibility

— The indirect and direct costs of management time and advice from experts Transaction & in the preparation, procurement and monitoring of PPPs can be very monitoring high – yet are often unavoidable. As these expenses are largely ﬁxed, PPPs are time and costs only cost-effective above a certain project size.

— The design of regulatory regimes is sometimes sub-optimal, or the originally Regulatory conceived regulation is gamed by special interest lobbying ("regulatory capture"). failures — Private operators might have insufﬁcient incentives to regard safety, equity, community and environmental considerations, raising the risk of market failure if no adequate regulations for internalizing these issues have been stipulated. — Even the best PPP contract cannot foresee all circumstances that may arise over Incomplete a concession duration of multiple decades. Thus, the need to amend the contract contracts can entail lengthy and expensive renegotiations between the partners.

— If a PPP uses availability payments and is over-dimensioned, this may lead to excessively high future government payments – and possibly costly renegotiations. Public budget — In some cases, politicians have excessively used PPPs with availability payments, risks effectively moving public obligations into the future and off the government's balance sheet with a resulting large contingent liability to the public budget.

Steps to Prepare and Accelerate Public-Private Partnerships 17 Introduction: The PPP Project Preparation Gap

As a consequence, in developed and (more than 50%) have involved subsequent procurement, to a weak financial structure developing countries alike, many promising renegotiation during their life cycle.30 and low-quality operations during project PPPs have ended in failure. In Bolivia, execution. (See figure 8 for a list of the most for example, a water-project PPP was prevalent issues.) But the issues are not only terminated after protests targeted a 35% The Imperative for Best Practice PPP related to the project cycle itself; many are water-price increase.28 In Spain, motorway- Preparation also related to the enabling environment: project PPPs have been bankrupted or corruption, weak government institutions renegotiated after traffic levels turned The reasons for these failures are as varied and legal systems, shortage of private- out to be half of the original forecast. In as the projects themselves. They range sector skills, and so on. emerging countries, though relatively few from inaccurate cost-benefit analysis during PPPs (about 6%) have experienced distress project origination, to an uncompetitive or cancellation,29 a high number of PPPs bidding procedure during project

Figure 8: Reasons for PPP failures Public-Private Partnership failures and dry pipeline are particularly due to preparation issues

tcejorP Project tcejorP inception preparation implementation

— No integrated strategic plan — Lack of preparation funding & — Uncompetitive, opaque & & long-term project pipeline rigorous preparation process slow tendering

— Unreliable cost-benefit — Biased demand & cost — Overbidding & renegotiation analysis forecasts * — Biased value-for-money — Insufficient revenue sources & — Opportunistic regulation & Project- analysis — lack of market sounding — termination cycle — Delayed approvals & — Weak financial structure & related land acquisition low operational performance

— Stakeholder resistance — Macroeconomic shocks

— Inadequate risk sharing/mitiga- — tion & misaligned incentives

Enabling Low local ﬁnancial market & — Weak public-sector capacity environ- local industry development ment — Poor legal & institutional framework — Corruption related

* Planning fallacy, optimism bias and strategic misrepresentation

However, the foremost reason for most of This preparation gap obviously has practice areas, and is organized into four these failures or false starts is inadequate severe negative implications for users main chapters accordingly: project preparation: notably, poor demand and governments. Projects are late or not 1. Managing a rigorous project forecasts, delayed land acquisition and delivered at all, and the preparation phase is preparation process: How to effectively approvals, and inadequate risk allocation. needlessly long or expensive. For the private set up the project team and leadership, For example, ineffective project preparation sector, these preparation issues imply lost design the project governance delayed the ambitious Philippines PPP investment opportunities. Additionally, if the structure and project management, programme, and most of the ten projects tender documents are deficient or unclear, and secure the required preparation announced in 2010 were held back owing to the potential bidders have to generate funding (chapter 1); insufficiently rigorous feasibility studies. the required information via extensive due 2. Conducting a bankable feasibility study: diligence, and this process is costly and How to conduct a robust and high- If PPP planners could just get the wasteful. (The problem is compounded quality technical, commercial, legal and preparations right, that would not only when multiple bidders conduct bid environmental feasibility study reduce the issues that beset well-advanced preparations in parallel.) projects, but would also increase the number (chapter 2); of projects that get launched in the first This report outlines best practices that 3. Structuring a balanced risk allocation place. To put it another way, optimized governments can adopt to close the and regulation: How to balance preparation would help to resolve the project preparation gap and to address efficiency incentives, risk mitigation and “PPP preparation gap”. As Rajat M. Nag, the shortcomings of many PPP projects. public-interest safeguards to ensure Managing Director-General of the Asian As shown in figure 9, the focus is on the a successful long-term partnership Development Bank, expressed it at the 2012 project preparation phase, which guides between the public and the private World Economic Forum on East Asia, “Every the public sector step by step – from the sectors (chapter 3); week I receive calls from investors looking initial decision to identify a suitable project 4. Creating a conducive enabling for investment opportunities, and every day I and structure it as a PPP (which this report environment: How to enhance public, receive calls from project managers requiring assumes has been dealt with rigorously financing.” Therein lies the paradox: a severe private and societal readiness for PPP as described in the Phase 1 report), right shortage of bankable PPP investment projects (chapter 4). through to the point where the project is projects despite the huge infrastructure bankable and ready for tendering. This construction and financing needs. report details the following four main best-

18 Steps to Prepare and Accelerate Public-Private Partnerships Introduction: The PPP Project Preparation Gap

Figure 9: PPP best practice framework

& ﬁnancing PPrivate-sectorrivate-sector rreadinesseadiness of public vs. support private delivery CCivil-societyivil-society readiness (Value for Money test)

Balanced Bankable risk allocation feasibility & regulation study

Focus of present Project preparation Phase II

Drawing on extensive consultations with the partners convened), this report identifies and multistakeholder constituencies of the World discusses 24 critical success factors and Economic Forum’s Strategic Infrastructure actionable best practices (see figure 10). Initiative (see figure 11 for an overview of the various meetings at which the Initiative

Figure 10: Checklist of PPP preparation best practices

Steps to Prepare and Accelerate Public-Private Partnerships 19 Introduction: The PPP Project Preparation Gap

This checklist presents a holistic overview Best practices related to project origination of the critical success factors that should and project implementation (as illustrated be in place to make PPPs successful. The in the PPP best practice framework above) large number of individual best practices are beyond the scope of this report. illustrates how complex PPPs can be, but They have been covered in a previous it certainly does not imply that successful report of the World Economic Forum’s PPPs are unachievable – many countries Strategic Infrastructure Initiative, Strategic and projects have also mastered the Infrastructure: Steps to Prioritize and Deliver challenge by focusing on certain aspects Infrastructure Effectively and Efficiently (see that are most relevant in their particular synopsis of best practices on page 13), and context. In reality, many countries are will be elaborated in a future publication already mature in several of these aspects, on operations and maintenance of existing and perhaps need to direct their efforts assets. towards upgrading just a few of the critical success factors. (Readers may use the checklist to navigate through the report and jump directly to the chapters of most interest.)

Figure 11: Key meetings of the Strategic Infrastructure Initiative in 2012/13

Location, date London, October 2012 — Main points of discussion — Framework and checklist of project preparation and PPP best-practices

Gurgaon, November 2012 Davos, January 2013 — Challenges and best practices — Public-private collaboration for in the Indian PPP programme the enabling environment — PPP best practices — Ways to unlock private ﬁnance

Addis Ababa, May 2012 Bangkok, May 2012 — Project preparation funding — Project preparation gap — PPPs in the African context — PPP and enabling environment best practices

Johannesburg, July 2012 — Project origination and prioritization — Project preparation process — Bankability criteria

20 Steps to Prepare and Accelerate Public-Private Partnerships Introduction: The PPP Project Preparation Gap

Steps to Prepare and Accelerate Public-Private Partnerships 21 1 Managing a Rigorous Project Preparation Process

The PPP preparation process is key to getting any good project going in its Rigorous respective supporting framework. First, project preparation 1.1. Assemble an 1.2. Secure buy-in and the project needs an experienced cross- experienced, cross- leadership of high-level process Team & functional team as well as steady leadership leadership functional team political champions and by the government sponsors. The public servants preparation process also requires a clear Bankable governance structure and structured project feasibility management to coordinate the various study 1.3. Set up a governance 1.4. Pursue rigorous workstreams. Finally, adequate funding Governance structure with clear roles/ project management and & must be secured to pay for such thorough Project responsibilities and a devise multi-stage preparations, ideally via project-preparation management coordinator planning facilities. Balanced risk allocation and regulation 1.5. Secure sufﬁcient 1.6. Leverage project- preparation funding, and preparation facilities Preparation funding minimize costs through (with cost recovery, Conducive standardization advisory and monitoring) enabling environment

deal-making experience – ideally, from experienced, full-time project manager on 1.1 Team team members who have worked on PPPs the government side will have to excel if before. Note that different project stages the process is to run smoothly. He or she The success of a PPP project, as with will need different skills and mindsets, so will need to have prompt access to key any large-scale project, depends on the number and mix of staff will need to be decision-makers and enablers, have the the presence of competent teams adjusted over time. ability to navigate the stakeholder maze, preparing and executing it. The staff at and be familiar with both private- and the government agency promoting a PPP Some agencies preparing PPPs may need public-sector environments. He or she also might all be experienced in traditional to reinforce their staff and fill knowledge needs proven transaction and negotiation procurement, but if they have never been gaps by occasionally hiring additional expert skills, as well as the ability to deal with the involved in a PPP before, they might staff or using advisers from multilateral different functional teams by “speaking struggle to launch the project smoothly. development banks, academia or the their language” and “finding a common PPPs typically have more complex private sector. Such advisers can provide language” for them to coordinate. dimensions than standard projects as functional expertise, train the agency’s staff all responsibilities are packaged in one and accelerate the progress of the project. long-term contract. As a consequence, Some steps and precautions to take in unwary PPP planners might be tempted to regard to involving them are: underestimate or even ignore the requisite procedures and the financial, legal and – Identify suitable advisers with the help transaction skills required. of the PPP unit or local/multilateral development banks; Assemble an experienced, cross-functional – Base the selection on experience and team, complemented with quality advisers quality, not just on cost; as required. Team composition is crucial. – Align incentives through adequate It should cover a broad range of functional compensation schemes and strict expertise (see figure 12), sector know- output and progress checks. how, and project-management as well as Assign an experienced project director. An 22 Steps to Prepare and Accelerate Public-Private Partnerships 1 Managing a Rigorous Project Preparation Process

Figure 12: Skill requirements for PPP preparation Many different skills and mindsets are required for Public-Private Partnerships – and the needs change over the project life cycle Review of team size and composition Cross-functional team required at major milestones required

Example activities Phase-in the right specialist at the right time

— Process coordination Project/contract director Team size Plan needed to & oversight manage phase-in/out of team members Technical manager Financial — Speciﬁcation and advisers (+ architectural/engineering — Forecasting analyst manager) Social & — Business case Regulatory and Commercial/ﬁnancial manager environmental — Market sounding legal specialists + legal/regulatory manager specialists — Legal due diligence Transaction and Engineers & banking specialists — Operations concept Operational manager designers Contract — Transition planning administrator Planners — Stakeholder Economists & policy maker Communication manager engagement Contract Structur- Procure- — Administration & Origination Feasibility manage- ing tnem Administrative support documentation tnem 1–12 mths 3–36 mths 3–6 mths 6–18 mths 20–40 yrs

Source: National Public Private Partnership Guidelines, Volume 2: Practitioners’ Guide. March, 2011. Commonwealth of Australia: Infrastructure Australia

While politicians are essential to providing 1.2 Leadership direction, the project also needs the whole- hearted backing of high-level civil servants. A further risk to PPP preparations is the lack They ensure unbiased planning and of attentive and consistent guidance from continuity if the government changes; after senior government sponsors – guidance all, the timeline for preparing and executing that could determine the fate of a project. infrastructure projects exceeds the 4-year For example, the cancellation of the lifespan of any particular government. Visakhapatnam water, sewage and urban road PPP project in Andhra Pradesh, India, was due at least in part to the change of commissioner during the planning phase.31 1.3 Project Assure buy-in and leadership from high- Governance level politicians and technocrats. Political will is a key pre-condition for PPP success. Preparing a PPP project is a complex and A PPP project will benefit greatly if a lengthy process involving multiple agencies prominent public figure champions it and and stakeholders as well as large cross- demonstrates personal commitment to it. functional teams. To avoid confusion about For example, the Chief Minister of Andhra each group’s roles and responsibilities and Pradesh was strongly involved in setting to enable quick decision-making, PPP up the Hyderabad airport PPP. Ideally, this preparation requires a dedicated and clear public figure will articulate a clear vision governance structure. and goal that appeals to stakeholders, keeps the project focused and minimizes Set up a governance structure involving distractions. The political leaders backing all key stakeholders with clear roles and the project should not just endorse it, but responsibilities. To help the project develop also be accountable for its success and and launch as smoothly as possible, the for removing roadblocks. An interesting PPP promoters would do well to take the example is that of the African Presidential following actions: Infrastructure Champion Initiative (PICI), – Draw up a detailed governance where national presidents report progress structure, including a steering on infrastructure projects to their peers at committee, a project management the African Union Summits, sometimes office (PMO) and the workstream teams. “naming and shaming” suboptimal or The steering committee should have delayed projects and those responsible at least one representative from each for them. For the optical-fibre project in ministry or agency involved, but its size Algeria, Niger and Nigeria, the Initiative should be limited. (Refer to figure 13 for has facilitated a joint declaration between a typical project governance structure.) the partner countries and accelerated the The assigned roles and responsibilities feasibility study and project funding. of each agency should be clearly formulated, and accountability should be enforced in regular meetings.

Steps to Prepare and Accelerate Public-Private Partnerships 23 1 Managing a Rigorous Project Preparation Process

– Select one agency (or committee) and decisions to be made to proceed as a central point of contact and 1.4 Project through each stage gate (for example, communication hub to coordinate the preparation of best practices in the other agencies and facilitate their Management this report could be used as checklist). decision-making. For example, for Continuously and vigorously look for For PPP preparations – as for other large the Latur Water Supply Project in a “NO” at multiple possible exit ramps infrastructure projects – workstreams are India, the process was mediated and because exiting at the earliest possible interconnected and interdependent in coordinated by the state-level nodal stage conserves funds, avoids the so many ways, yet sometimes operate agency for water supply and sanitation, planning fallacy and adds credibility to independently, as if in silos. The government which had extensive experience in projects that move forward. project promoters must take proactive handling consumers, strong government steps to prevent that isolation and keep – Define required deliverables and backing and technical knowledge. Such the workstreams coordinated and aligned timelines for the overall feasibility study coordinating authorities are particularly through rigorous project management; and each workstream and support the helpful for cross-border projects. For otherwise, the interlinkages could cause teams in drawing up their action plan instance, Energie des Grands Lacs problems that become apparent only and in detailing the tasks, milestones, (EGL) prepares and procures the Ruzizi during procurement. And at that point, the accountabilities and risks. III hydropower plant PPP on behalf of promoters will have to backtrack to deal the Democratic Republic of Congo, with the issues, and the project could be Coordinating Rwanda and Burundi. delayed. – Keep in contact with political leaders – Consider establishing a separate and high-level technocrats to maintain governmental delivery vehicle with Establish an “activist” PMO to plan, their support. full-time, focused staff for the project coordinate and monitor the PPP preparation preparation prior to tender. This entity process. The PMO should take an energetic – Enable communication among the will help to bypass bureaucratic and diligent role in driving the preparation teams, and between them and the procedures that are inherent to many process. Its list of duties includes the steering committee. government agencies, and will increase following: – Ensure the accountability of each staff flexibility and commitment. In India, workstream manager while enabling the for example, each ultra mega power Planning exchange of functional expertise within a plant (UMPP) was assigned its own – Define, align and articulate the top-level project and across projects. project preparation entity to secure strategic objectives that the project is – Identify interdependencies between clearances and land acquisition. intended to address. Select metrics workstreams; note, for example, the that enable the measurement of project need for aligned assumptions. success. – Initiate a staged feasibility study with Monitoring gateway reviews, ideally following a – Check that progress conforms to the standardized approach that is used for project plan, and evaluate workstream all projects, as in the United Kingdom. outputs against best practices and Define clear criteria, required information Figure 13: Project governance set-up Project governance with well-defined roles and responsibilities Example: Ruta del Project governance structure Typical roles & responsibilities Sol, Colombia

Steering committee — Establish targets & accountabilities Central Central Sector — Prioritize resource constraints & make trade-offs unit ministry ministry Ministry of Ministry of Ministry of — Resolve issues & remove impediments Finance Transport Planning PPP unit MoF/MoP* MoT/MoE** — Provide overall guidance & programme ownership

— Engage with workstreams to create roadmaps President’s ofﬁce Project — Support workstream teams when required National Lead adviser Management — Ensure communication to all stakeholders Institute of (if required) Ofﬁce (PMO) — Provide consistent tracking & reporting Concessions IFC — Synthesize & create reports for SteCo

— Sign off roadmaps, schedules & budget PMO liaison PMO liaison PMO liaison — Be accountable for workstream success — Provide updates on progress & issues to PMO Internal team and advisors for — Coordinate across workstreams to identify & • Planning resolve issues • Trafﬁc forecasting • Engineering • Legal Env./social Financial Technical — Create & own roadmaps • Environmental workstream workstream workstream — Drive workstream content — Identify & mitigate issues/risks

Ensure that the PMO is led by a respected project director, supported by adequate and appropriate staff resources

* Ministry of Finance/Ministry of Planning ** Ministry of Transport/Ministry of Energy

Source: Report of the international conference on public-private partnerships ‘PPP DAYS’ 2012. February, 2012. Geneva: United Nations Economic Commission for Europe.

24 Steps to Prepare and Accelerate Public-Private Partnerships 1 Managing a Rigorous Project Preparation Process

country- and sector-specific PPP – Start modestly, perhaps with an initial was done to regain the trust of civil society in guidance. pre-feasibility study, and then, in a fair and transparent procurement process. – Submit regular reports to the steering subsequent phases, expand the scope committee and stakeholders, and level of detail of the preparatory The following guidelines and safeguards customized to their information needs. work. Disburse the funds according to should be observed: a plan that has pre-defined stages and – Identify, evaluate and track emerging – Before giving consideration to an decision points with triggers (so that risks and issues proactively and unsolicited proposal, make sure that the the project go-ahead or exit after each continuously – and bring them to the public sector has sufficient capacity to stage depends on the deliverables and attention of the steering committee; evaluate how cost effective the project the updated project’s viability). develop risk-mitigation strategies, and would be, and how well the project fits institute a pre-defined issue-resolution – Secure upfront commitment to the the existing infrastructure plan of the process for different scenarios. whole feasibility study, with funds to country or region. For example, for a be allocated to each phase of the power plant in Tanzania (which was – Track and assure the continued validity preparation process. For example, the directly negotiated after an unsolicited of underlying assumptions. Infrastructure Consortium for Africa’s proposal), the technology choice of – Encourage work teams to raise “Tunnel of Funds” concept identifies and using heavy oil instead of indigenous gas concerns and warning signals early by aligns available funding facilities along turned out to be suboptimal, and the fostering a culture of transparency and the project’s life cycle. project was poorly integrated into the assigning accountabilities for risks to overall power-sector plan.34 individuals. By standardizing the preparation process, – If an unsolicited proposal is submitted, the PPP promoters can minimize the channel it into a well-defined, transparent funding needs for feasibility studies. The and competitive procurement process. 1.5 Project PPP programme in India serves as a – Allow fairly generous deadlines to model in this regard. Standards were give competing firms sufficient time to Preparation established for several elements of the prepare their bids. preparation process and were then adopted Funding fairly widely. The result has been a quick roll-out of PPPs, making the country the To incentivize the private sector to put effort To deliver a high-quality PPP project on largest PPP market among emerging into project identification and development, time, the preparation needs to be very economies globally. More importantly, the proposer of the project needs to be thorough. Yet such preparation is expensive. this standardization has also resulted in rewarded by: The feasibility studies and contract design impressive savings of costs and time. – A scoring advantage in the bidding typically amount to 1-4% of the total project Recommended actions include: evaluation (in Chile, for example, proposers have been rewarded with investment. Preparation costs typically – Standardize the process of selecting a bid bonus added to the evaluation are 1-2% for large projects (> US$ 500 advisers for feasibility studies. million), 2-3% for medium projects (> US$ score35); – Draft model concession agreements for 100 million) and 3-4% for small projects (< – The right to match the best bid and each sector (based on consultations US$ 100 million).32 As preparation costs are win the contract (the so-called Swiss with the industry). largely fixed, small projects are mostly not challenge, which has been used in suited for PPPs. – Develop standard technical specification several states in India); manuals for each type of project. Ideally, – A developer’s fee, paid by the these are outcome-oriented rather than Nevertheless, the investment into project government or the winning bidder, to prescriptive in nature. preparation is a price worth paying. If reimburse the proposer for the project a project’s preparation is rushed and – Produce standardized requests for development costs, including an of low quality, it could lead to delays, qualifications/requests for proposals adequate return. inconsistencies, a lack of private-sector (RfQs/RfPs) for procurement. bidders, and sometimes increased costs on adaptations that have to be made in a In some cases, the private sector might repeated feasibility study. take the lead in developing projects. Governments sometimes facilitate 1.6 Project Securing and disbursing the preparation private-sector driven project initiation and funding takes careful planning. If the preparation by allowing unsolicited project Preparation implementing government agency does not proposals from corporations. Private have the required preparation funding (as is companies may be willing and able to take Facilities often the case in developing countries), the the initiative, and their unsolicited proposals Public-sector budgets are often ill-suited to PPP promoters need to get external funding have produced innovative solutions with covering the large preparation costs that commitments for the preparation process. overall lower costs. For example, in the PPP projects involve. In a sense, feasibility And they need to plan the disbursement of United States, a major contractor proposed the funds in detail. Specific actions include: studies are a high-risk investment, since the high-occupancy/toll (HOT) lanes for the end-point could well be a decision not to – Identify a wide range of possible funding I-495 highway in Virginia. proceed with the project. The later life-cycle sources, including project preparation stages are far less risky, since they seldom facilities (PPF), taking into consideration Note that unsolicited proposals need an bring the entire project to a halt. So the the particular sector and life-cycle unusual degree of scrutiny to prevent managers of public-sector finances, often focus of these funds. For example, the companies from abusing their information being risk-averse, are reluctant to dig deep Infrastructure Consortium for Africa advantage and creating an uncompetitive into their operating budgets to fund the operates an online searchable database procurement process. In World Bank-funded preparation phase. to quickly identify suitable project- projects, unsolicited proposals are actually preparation facilities. not permitted, and the World Bank advises – Apply to multiple sources for backing. To that any unsolicited proposal should be make the request convincing, illustrate treated with great caution.33 And in the the economic, environmental and social Philippines, unsolicited proposals were benefits of the project realistically, suspended and the mechanisms reviewed and demonstrate the linkages to after controversial cases came to light. This complementary projects. Steps to Prepare and Accelerate Public-Private Partnerships 25 1 Managing a Rigorous Project Preparation Process

Figure 14: Risk and return characteristics of project life-cycle phases Project preparation has different risk and return characteristics relative to later project life-cycle

Preparation & Construction Operations development — Planning & system design — Engineering & detailed design — Operations & maintenance — Permits/land acquisition — Construction — Demand evolution — Environmental — Demand ramp-up Key risks — Regulation/political — Stakeholder opposition

Risk level

Indicative data ** Expected 30-40% 15-30% 8-15%15% equity IRR*

Indicative data ** Typical 0 70 DebtDb ﬁnancing 100 80 Equity structure 30 20

Venture capital Expansion capital Private equity Analogy (early stage/seed) (2nd stage/bridge) (late stage)

* IRR = internal rate of return ** Expected equity IRR and typical ﬁnancing structure depend on project type, sector, local ﬁnancing market conditions, concession type and length, and the country environment.

In many low- and middle-income countries, operational expertise. One solution first large-scale PPP in Cape Verde, the attempts are being made to address the might be that of joint public and private Cabeólica Wind Power project, which has problem via special project development facilities with mixed teams. been prepared thoroughly by working in facilities (PDFs) or project preparation – Assure that the PPF stays involved over close partnership with the national utility and 36 funds (PPFs). But these have a long way the course of the project to strengthen the government, and by bringing in experts to go. The gap between required funding accountability and monitoring and to in renewable energy and carbon financing. and available funds remains huge. For enable the sharing of lessons learned Thanks to this diligent preparation, the example, the New Partnership for Africa’s across multiple projects. project launched very promptly, secured Development (NEPAD) Infrastructure Project loans from multilateral banks, and – Provide the PPF with adequate initial Preparation Facility (IPPF) can offer only a successfully attracted an equity financier. small fraction of the preparation funding funding that is supplemented or replenished from time to time. Initial estimated for the projects of the Programme The current fragmented assortment of PPFs funding sources can include the for Infrastructure Development in Africa remains unsatisfactory, and needs to be government and donors, but could Priority Action Plan (PIDA-PAP). Most of consolidated and better coordinated. also include private-sector players that the PPFs have relatively low endowments, For example, the total commitment to often less than US$ 20 million, and they are interested in advancing project preparation. project preparation funds in Africa is only will quickly become depleted if no recovery about US$ 190 million and is scattered – Enable the PPF to recover its mechanism is available. across 16 different facilities.37 preparation expenses if the project is – Encourage efforts to coordinate the For effective and sustainable PPFs, tendered to a private-sector partner for various PPFs and exchange information the design should incorporate these a concession fee; that can help the PPF among them, for example, by considerations: to become more financially sustainable (as with the South African PPP Project standardizing application procedures and information requirements for PPFs need thoughtful governance, and Development Facility or the IIPDF). interested parties. That will help to should make provision for cost-recovery Possible recovery mechanisms include: reduce multiple applications and will and value-adding services. − Fixed fees: for example, a specified ease the administrative burden of those – Ensure that PPFs have clear eligibility percentage margin on top of the applications. criteria (a specified sector, limited incurred preparation costs (“cost- environmental impact, and so on), plus”) or a fixed compensation from – Promote the pooling of resources by strong institutional oversight, and a rate sheet, depending on the facilitating PPF mergers or syndication disbursement caps (for example, the project size (as used in India). arrangements. India Infrastructure Project Development − Variable success fees: a sum tiered – Focus individual PPFs on specific Fund (IIPDF) provides up to 75% of total according to the winning bid or the sectors or initiatives (such as transport project-preparation costs). number of bidders. corridors) and on highly transformative projects, rather than running them as – Structure PPFs to provide value-added − Equity stakes in the tendered PPP services and capabilities like a venture “generic” facilities, which lack the sector or a share above a targeted return and regional expertise as well as the capital fund – advisory, supervisory, level. networking. Besides providing funds, scale to be effective. PPFs can play an important role in – Ensure that development banks work The infrastructure development company systematically to capture and analyse driving the overall preparation process InfraCo, for example, is structured as a in accordance with established best data on PPF performance and derive principal project developer, originating best practices that can be shared practices. and preparing projects and recovering across countries. – Make sure that the PPF has adequate its expenses by retaining a shareholding staff with the required financial and in the project. Among its projects is the

26 Steps to Prepare and Accelerate Public-Private Partnerships

2 Conducting a Bankable Feasibility Study

To assess a project’s feasibility, the government authority promoting the project Rigorous needs a clear picture of the technical scope, project preparation 2.1. Conduct robust and 2.2. Fix contractible, the commercial attractiveness, and the sophisticated demand innovation-friendly output process Technical project prerequisites. First, the promoters scope forecasting speciﬁcation cross- need to forecast the demand that the facility checked by cost forecast is going to attract; this requires a robust Bankable and unbiased approach. Then, in drafting feasibility the technical specifications, they need to study 2.3. Apply user charges, 2.4. Test bankability ensure that these specs are innovation- Commercial ancillary revenues, land- continuously and friendly yet realistic and cost-conscious. attractive- value capture and conduct early market- ness For the assessment of the project’s revenue government payments sounding potential, the promoters should look not Balanced risk allocation only at user charges or direct government and regulation payments, but also at other possible 2.5. Pursue proactive, 2.6. Complete holistic inclusive and legal feasibility check, sources, such as pursuing ancillary business Pre- opportunities and capturing incremental requisites professional stakeholder and expedite permits and land value. Next, the promoters need to put Conducive engagement land acquisition considerable effort into testing the project’s enabling environment bankability, both through internal business- case analysis and through external market sounding. Lastly, the government needs to engage the various stakeholders proactively to secure their support, and it needs to meet legal requirements in advance, including permits and land acquisition, to avoid delays.

commonly, the problem is over-optimism The actions and safeguards needed 2.1 Demand in the short-term – recorded toll-road traffic to optimize demand forecasts can be after opening the facility, for example, is grouped into five broad categories: planning Forecasting on average 23% below the original traffic adequate time and resources, providing forecast.38 These overestimates have led data and process guidelines, applying To assess the feasibility of a PPP, the to many bankruptcies and renegotiations. a robust methodology, reviewing and project’s promoters have to estimate the The M1/15 toll-road in Hungary is a case validating the results, and addressing the likely level of usage that the infrastructure in point, with a traffic shortfall of more forecast’s uncertainty. asset will attract (though investors will also than 50% and a subsequent restructuring require an independent demand forecast). of the concession.39 This failure also Follow a structured approach with adequate Unfortunately, demand forecasts are very affected successor projects where private time and resources. Ensure sufficient time unreliable, and represent one of the key finance was impeded due to a loss of and funding so that the demand estimate risks inherent in PPPs, particularly for investor confidence and an increase in can be fine-tuned and validated on the transport infrastructure. risk premiums. Alarmingly, the quality of basis of feedback from stakeholders. forecasts has not improved much over Bring in a team of experienced and neutral The forecasting inaccuracy comes about time, despite advances in data quality and analysts; ascertain that they have no vested in two ways. Occasionally it takes the methodology. While both of these factors interests; and provide them with appropriate form of underestimation, such as for the can cause a problem, the persistence of the guidance, continuous supervision, ex-post Bangalore airport and the Delhi-Gurgaon issue is due mainly to human failures and evaluation and incentives. highway where the infrastructure eventually biases, including strategic misrepresentation proved too limited in capacity. Far more and optimism bias.40

28 Steps to Prepare and Accelerate Public-Private Partnerships 2 Conducting a Bankable Feasibility Study

Ensure the availability and quality of Governments should also provide integrated an overview of typical key demand drivers data and provide standardized process secondary data in a central database, for transportation assets.) For example, guidelines. Instead of relying on secondary as well as tools, guidelines and process the methodology for toll roads should data only, acquire fine-grained and context- checklists. For example, New Zealand and include an explicit modelling of parallel, specific primary data by conducting on-the- the United Kingdom have a library of model un-tolled roads, of ramp-up effects,41 ground surveys to clarify market needs and parameters and standards for modelling, and of user values of time and price users’ willingness to pay. For example, for validation and documentation. And Australia elasticity. In contrast, the methodology a greenfield toll road, the traffic on existing implemented a National Transport Data for container ports should emphasize the roads needs to be counted, distinguished Framework to provide readily available and estimated level of trans-shipment, the by different times of day (peak vs off-peak), consistent data across states. macroeconomic and industrial trends, different seasons and for different user and the anticipated strategies of shipping groups and trip types (such as discretionary Apply a sophisticated forecasting lines. Compare the results against those leisure travellers vs commuters), ideally methodology that accounts for the key produced by other, simpler methodologies with a history of a few years to reveal demand drivers, and check the robustness (such as a linear extrapolation), and test the usage trends. The population data has to of the forecast by means of triangulation forecast for robustness and riskiness by be sufficiently up-to-date, not based on a and risk analysis. Select a forecasting such means as benchmark comparisons census from ten years before, given the methodology that incorporates the key (such as reference-class forecasting and fast-evolving demographics in emerging demand drivers that are particularly relevant backcasting), probabilistic simulations, countries. to the circumstances. (See figure 15 for sensitivity analyses and scenario analyses.

Figure 15: Critical demand forecast drivers

Forecasting needs to account for the most critical demand drivers

Indicative Tolling amount & (Inter/intra-modal) Macroeconomic trends checklist for structure competition transport

Relevant in most Willingness/ability to Trans-shipment/ Population develop- project settings pay, price elasticity hubbing potential ment & urbanization

Ramp-up effects Industry ( siting) and commodity trends Network effects Relevance

Disaggregation in Induced demand User behaviour and peak vs off-peak needs

Relevant only in Disaggregation in Non-linear demand Structural breaks, select project different seasons evolvement e.g. new technologies settings Disaggregation of ﬂows: e.g. freight vs passenger Short-term Medium-term Long-term Effect The relevant demand drivers depend on the speciﬁc context of the infrastructure asset

Invite selected stakeholders and Acknowledge and address the uncertainty (demand risk for a corridor or network is independent experts to review and of the forecast. Estimate the level of easier to asses than for a single asset), and validate the forecast. Guard against uncertainty inherent in the final forecast, when evaluating private-sector bids, to misrepresentation and optimism bias and make it public, so as to ensure reduce the likelihood of intentionally inflated by involving a range of reviewers – both transparency on the demand risks involved bids and the winner’s curse phenomenon independent experts and stakeholders with in the project. For example, some rating (for example, by imposing common varied interests in the project and different agencies use a traffic risk index that rates macroeconomic assumptions or using levels of risk-aversion. These stakeholders the uncertainty of a highway traffic forecast Vickrey auctions43). could include the sponsoring government by considering such factors as the country’s ministry, potential concessionaires and tolling culture, the level of car ownership, users, and also typical “devil’s advocates” the forecast horizon, and the quality of data such as potential lenders or the Ministry of (see figure 16 for details).42 In addition, take Finance. Don’t just focus the discussion on into account the uncertainty rating when the model results, but also trigger a critical designing the contract’s risk allocation (for review of the assumptions and model example, by using revenue risk sharing dynamics by explaining them fully and models, revenue guarantees, or availability- clearly. based concessions where demand risk is borne by the government), the PPP’s scope

Steps to Prepare and Accelerate Public-Private Partnerships 29 2 Conducting a Bankable Feasibility Study

Figure 16: Components of a traffic risk index Traffic risk index combines different risk factors to create transparency on the overall demand uncertainty

Magnitude of uncertainty

Tolling culture Toll roads well established and data on No previous toll roads in the country and actual acceptance available uncertainty over toll acceptance

Tariff escalation Flexible rate setting - Regulatory approval needed for tariff no government approval needed increases

Time horizon Near-term forecast Long-term forecast

Road network Already existing road, Early planning of a new site, multiple clear view on future network design options for future network design

Surveys/data Easy to collect data and experienced Little data available and no data sharing surveyors among authorities

Private users Clear market segments, simple toll Unclear market segments, complex toll structure, few origins and destinations structure, multiple origins and destinations

Commercial users Fleet operator pays toll, clear time/ Owner-driver pays toll, complicated time operating savings, simple route choice savings and route choice

Trafﬁc growth High car ownership, growth correlated Low car ownership, growth depends on

Exemplary components of trafﬁc risk index with established predictable factors many uncertain factors Macro- Stable local economy and predictable Weak or volatile local economy and environment population growth population development unclear

Trafﬁc risk index has been adopted by a number of trafﬁc consultants, sponsors and rating agencies, e.g. Standard & Poor’s

Source: Bain, R., L. Polakovic. Traffic Forecasting Risk Study Update 2005: Through Ramp-Up And Beyond, 2005. Standard & Poor’s. http://www.robbain.com/Traffic%20Forecasting%20Risk%202005.pdf.

Define the scope and interfaces of the Establish the boundaries of the project early 2.2 Technical project, after conducting diligent baselining. and assess the boundary risks of the project Identify and understand problems with and its interdependence with other projects. Specifications the infrastructure status quo by analysing For example, for the Bangkok Skytrain, ridership was initially jeopardized by poor In drafting the specifications for a project, current performance and capacity. Do PPP promoters should remain constantly not assume to know what is needed, road access to the train stations and poor alert to three broad dangers: defining but conduct a user survey to clarify the integration with other transport modes; inadequate project requirements and requirements. fortunately, later improvements, such as changing the project scope; over-restricting the addition of feeder buses and new aerial 45 the way that contractors might approach Evaluate different solutions – notably, walkways, helped to increase ridership. the project; and misjudging the amount of improving, expanding or replacing the And assess the safeguards against such time and costs needed to complete the existing system. Solutions can often be setbacks; for instance, get approvals for project. found that address the infrastructure essential connections early and impose bottleneck by managing demand through contractual penalties for late completion of For PPPs, the public sector specifies new pricing models, or by reducing complementary public-sector undertakings, outputs or performance levels. This transmission losses (for instance, high- such as electricity transmission lines to a approach differs from that of common voltage direct-current electricity transmission hydropower plant, a feeder road or an urban public-sector procurement, which is suffers lower electrical losses than redevelopment programme. based on detailed input specifications. If common alternating-current systems), or PPPs take that restricted approach, they by increasing the productivity and capacity Ensure that output/outcome specifications could discourage innovative solutions. For of existing assets via additional investment are contractible and innovation-friendly. example, the specifications for the Bangkok and new technologies (such as automated All specifications should be measurable, Blue Line required the entire system to highway tolling, next-generation air-traffic clear and achievable; for example, for be run underground, which involved systems, or new telecommunication a bridge they would stipulate that it will unnecessarily high costs, higher than protocols). Careful consideration of such be used “by vehicles up to 40 tonnes”, those required by a more flexible approach alternatives can yield significant capital not “by heavy vehicles” or “by any road combining underground with above-ground expenditure savings. For example, vehicles”. In the output specifications, list routes. Mumbai’s water-distribution system was the performance and service requirements upgraded very economically by reducing very clearly, but keep them as broad as Measures to minimize these dangers fall into leakage and theft: the initial proposal – a possible to encourage competition between four broad categories: defining the scope new water-supply line of more than 100 different technical solutions and allow and interfaces of the project, ensuring kilometres – would have cost six times as bidders to propose their own innovative an innovation-friendly output/outcome much if it had been implemented.44 approaches. A good example of broad specification, keeping input constraints to a specification is that of the rural electrification minimum, and cross-checking the cost and project in Senegal, where the specified complexity of the project.

30 Steps to Prepare and Accelerate Public-Private Partnerships 2 Conducting a Bankable Feasibility Study goal was simply to connect the maximum needs over the long term; such flexibility not be in its own interests anyway). Input number of households – leaving it to the is of particular relevance for infrastructure specifications might be needed to compel concessionaire to optimize connections and assets, given the high uncertainty of the integration of systems and services (for on-grid vs off-grid power supplies. Similarly, future user requirements or demand. Two instance, for public-transport ticketing and the specifications of the PPP bridge over the examples: Heathrow Terminal 5 used scheduling), or to ensure compliance with Ohio river in Indiana allowed the contractor modular components for its check-in area health, safety and environmental standards, to evaluate various design alternatives – (to adapt to fluctuations in passenger or to enhance the cyber-security of critical such as the use of LED lighting, more robust numbers) and its aircraft parking stands infrastructure. If input specifications are pavement and “weathering steel” that does (to adapt to various aircraft types); and the used, contractors should be given some not need to be repainted – to reduce whole Tagus Bridge in Portugal was constructed flexibility and be permitted to propose life-cycle costs.46 Or consider the example in such a way as to allow a railway line to be alterations to over-stringent project designs of urban transit, which could be specified as added later on, alongside the car lanes. along international design codes and technology-neutral: it would then be left to standards. the concessionaire to choose between light- Use input specifications sparingly rail and monorail options (or even bus rapid and selectively. Every additional input transit), on the basis of capacity needs, specification surrenders design options (see future flexibility, and network and depot the illustration for a bridge in figure 17), and compatibility, as well as speed and safety. thus might increase costs. If possible, use input specifications only where necessary If possible, allow for strategic flexibility for the sake of benefiting society, and where options that the concessionaire can apply the private sector is unlikely to deliver them to enable the project to adapt to changing otherwise (i.e. where delivering them would

Figure 17: Example of over-specification of project requirements Over-specification leaves no room for creative and innovative solutions

With an increasingly detailed ... alternative design options input speciﬁcation... are surrendered

Bridge Ferry service or tunnel

Steel bridge Concrete bridge

Steel bridge Steel bridge with 3 flexible lanes with 4 lanes depending on traffic flows Steel bridge with Steel bridge with 4 lanes flexible ship passing and 20 m ship clearance option

Don't specify all bells and whistles

Conduct realistic cross-checks on the the output specifications and actual user construction risks along a risk matrix expected cost, schedule and complexity requirements. Check during the market (including an initial assessment of which involved in delivering the PPP. While sounding process (see chapter 2.4) whether party will bear them) in the tender document output/outcome-based specifications the project type and size is manageable by so that potential bidders can assess them allow efficiency gains by eliciting innovative the companies (or consortia) active in the well. solutions, they implicitly carry the risk of market. Beware of unfamiliar complexity gold-plating (where work has gone well and technical challenges in new and untried Establish various milestones at which past the point at which extra effort is systems: the new passport-processing specifications can change, but define an adding value), as the public sector has PPP in the United Kingdom, for instance, early point at which they will be frozen to no immediate way of knowing how any overran its budget and suffered a significant avoid late adaptations close to tender or particular specification will impact on costs delay. Such assets, where the requirements even after a successful tender – these and the construction schedule. To prevent are difficult to specify owing to the intrinsic adaptations have often led to severe cost such performance requirements from going technical uncertainties and the likelihood of increases. over-budget and beyond user needs, some fast-paced changes, are ill-suited for PPP precautionary measures are essential: delivery. forecast the likely capital and operating expenses, comprehensively assess the risks Set out detailed technical requirements for involved, including both uncertainty risks a successful financial close and provide and event risks, and check the fit between a granular overview of the design and

Steps to Prepare and Accelerate Public-Private Partnerships 31 2 Conducting a Bankable Feasibility Study

designing the fee structure and enforcement facilities. (At the same time, however, 2.3 User Charges process. As appropriate, adopt all or some be aware of unintended consequences and Other of the following techniques: such as a fall in demand or revenues.) – Make sure that the infrastructure For example, in South Africa, some local Funding Sources improvement really does raise the residents are entitled to reductions in quality of the service for users – and highway-user charges if they have no The financing requirements for infrastructure communicate this value-add actively. other travel options. And in Nigeria, the projects are huge – up to a few billion Users do generally value (and readily pay Lekki Expressway overcame resistance dollars in some cases. If the investment for) improved services, as when a new by opening a slower un-tolled rural road has to be recovered over the project’s toll road saves them valuable time in alongside. life cycle (and especially if it also has to commuting to work each morning. provide an adequate return for the investor), – Institute differentiated rates. Specifically, Take advantage of ancillary revenues. Make where are the revenues to come from? adjust charges according to time, plans for the project to receive ongoing In traditional procurement, the funding47 location and usage; for example, a toll funding through ancillary businesses, such comes predominantly from government road in Santiago de Chile has three as retail outlets, advertising, accommodation tax revenues, and the services provided price levels based on the volume of and cross-selling. The type of ancillary have sometimes been offered to users at traffic at any given time. Fine-tune this business is sector-specific, as outlined in unrealistically low prices. But with public differentiation to maximize revenues and figure 18, but various possibilities exist in budgets often so depleted nowadays, that incentivize the efficient use of capacity. each sector. Some sectors have explored 48 the possibilities systematically and vigorously model is unsustainable. – Develop payment mechanisms – notably, best-practice airports generate that maximize efficiency but remain 50% or more of their revenues from the In contrast, many infrastructure PPPs make accessible to all users. Use technologies, their business case by exploring a diverse so-called non-aviation business50 – but such as e-tolling on motorways, other sectors such as roads and education range of funding sources: user charges, that are user-friendly and serve to ancillary revenues, land-value capture, and are lagging behind. Pursue innovative increase usage. For example, cross- opportunities, such as leveraging the direct government payments. (Increasingly, Israel Highway 6 uses two different these are also adopted by projects delivered project’s scale (a motorway PPP might offer mechanisms – transponders for road-cleaning services to nearby villages) or under traditional procurement as well.) In pre-registered users and convenient developing and emerging countries, more its tangible and intangible assets (renting out car-plate identification – each with a space for fibre-optic cables along a highway, than half of PPPs rely on user-based funding different pricing scheme. If required, sources such as direct user charges, or for open-air concerts at an airport car also retain payment mechanisms that park; using a transit network’s electronic purchase agreements with private entities, or are accessible to poor or less adaptable sales to the wholesale market. In the United payment scheme for non-transport users; for example, the Barranquilla payments or promotion activities). Kingdom, however, the majority of projects water PPP in Colombia uses payment 49 are backed by government payments. booths in poor districts to cater to clients While the optimal mix will vary from project Capture incremental land value. Make without bank accounts. to project, there are some common tasks plans to tap the likely rise in value of urban and responsibilities that PPP planners – Devise and implement effective payment- real estate near to the project site – the should take into account for each source. enforcement procedures. If necessary, value increase is often more than 10% press for relevant legislation, involve the of the original value, and the value can Apply user charges if possible, and ensure police, and take the necessary measures even double in cases where the local enforcement, but mitigate the adverse to detect illegal usage. For example, the infrastructure improvements are particularly social effects. User charges are beneficial Manila water PPP now monitors usage impressive.51 During the brief window of from an economic point of view, as they by means such as CCTV, improved opportunity between the devising of the incentivize consumers to use the service meters and pressure-control systems. project and the publicizing of it, adopt one responsibly and sparingly, and help to – Implement mechanisms to mitigate of the two main options, if possible. The manage congestion; but they are highly the adverse social consequences of first option is to buy up the land shortly unpopular with many users and politicians, user charges; notably, subsidies or before announcing the plan publicly, and particularly when applied to previously free reduced tariffs for at-risk groups, and then sell the land to independent real-estate infrastructure. Hence, finesse is needed in the provision of alternative infrastructure developers; for example, the new metro

32 Steps to Prepare and Accelerate Public-Private Partnerships 2 Conducting a Bankable Feasibility Study

Figure 18: Examples of ancillary business opportunities and the revenue potential Ancillary businesses provide significant revenue opportunity for PPPs – but potential and type vary by sector

Sector Examples for ancillary businesses Revenue potential % of total revenue — Retail, food & beverage, Internet, banking/foreign exchange, Airports advertising, fueling, ground handling, aircraft maintenance 20-50% and repair, catering, events

— Ship maintenance and repair, container leasing, tugging, Ports intermodal transport, export-import services, warehousing, 10-20% packaging, economic zones

— Gas stations, restaurants, shopping, e-tolling card, freight Highways centres, parking, road cleaning for close municipal roads 0-10%

— Restaurants, shopping, intermodal offers (e.g. bikes, car Urban Rail rental), real estate development for ofﬁces, residential and 10-40% retail

— Gas cross-selling, energy saving solutions, decentralized Electricity energy generation, demand response management, CO2 0-10% certiﬁcate management, smart home, smart meter, e-mobility

— Student accommodation, canteen and café, parking, Education 0-15% shopping, kindergarten, sports facilities

Hospitals — Restaurants, shopping, over-the-counter medicine, spas, 0-15% health centres, geriatric care

lines in Brasilia and Copenhagen raised The procuring agencies should also keep 85% and 50% respectively of their required constant watch on the long-term affordability 2.4 Bankability funding through the sale of land.52 The of the PPP (including any contingent second option is to buy the land and make liabilities), particularly if direct government Testing and the joint development of it part of the PPP availability payments are used; and they package; for example, in Hong Kong the should properly account for these long- Market metro operator MTR derives about 40% term obligations in their public budgeting, Sounding of its profits from property development following Eurostat or International Monetary and rental. Alternatively, governments may Fund (IMF) guidance. A well-structured PPP should attract several create “infrastructure improvement districts” bidders to ensure a competitive tendering and levy an added annual property tax to all To maximize efficiency, use the viability- process (yet, too many bidders will make land that is within a certain distance of the gap funding requirement as a bidding the transaction uneconomical due to the enhanced infrastructure. variable, and select the concessionaire high costs of bid preparation for each firm).55 that needs the least subsidy. Structure the For example, in British Columbia, Victoria Maintain government payments if necessary. availability payment to provide incentives and South Africa, which are regarded as Suppose that the above three sources for operators to excel, such as by leading PPP markets in their respective of revenue are not enough or that users correlating disbursement with the level of regions, the average number of bidders is cannot be charged directly, but the project’s their performance; for example, on the A1 three. In some cases, unfortunately, PPPs social and economic benefits remain project in Yorkshire, part of the availability prove unappealing and attract just one compelling. In that case, arrange to bridge payment by the government was inversely or two bidders or perhaps none at all. In the “viability gap” by means of government proportional to the amount of congestion 2004 in India, for instance, several port payments. For some assets such as social created by building works. Also, carefully and highway PPPs failed to attract a single infrastructure, these government payments evaluate whether demand-side subsidies adequate offer.56 And in the Philippines, will make up the majority of funding. To may be more effective than supply-side the troubled MRT2 metro project eventually ensure an efficient project-preparation payments to operators. had to be delivered by the public sector process, adopt an institutionalized approach alone, following unsuccessful attempts at to this viability-gap funding whereby projects Some of these government subsidies procurement. can apply for funding according to clearly can be generated from the revenues of defined criteria. financially attractive concessions. For example, to promote universal access This lack of bankability is usually due to To prevent wasteful “white-elephant” to mobile communication, the Ugandan faulty preparation of the PPP, specifically an projects, set up stringent control government set up a Rural Communications under-emphasizing of the private sector’s mechanisms, require a rigorous cost-benefit Development Fund, which is financed by concerns and interests. The designers of the analysis prior to approval, and impose a cap the three main licensed telecom operators: PPP might lack experience of the relevant on the subsidy; for example, viability-gap they pay 1% of their gross revenues into the market or industry and fail to look at the funding in India is limited to 20% of the total fund, and this money goes to subsidizing package from a private-sector perspective. project volume. (However, in countries with independent operators in rural areas that are The PPP’s promoters have to be sure of its lower demand growth prospects, a higher expensive to serve.54 bankability, and that involves continuous viability-funding cap may be necessary.53) and stringent evaluation by means of

Steps to Prepare and Accelerate Public-Private Partnerships 33 2 Conducting a Bankable Feasibility Study internal financial analysis, and proper market another source of value. Coordinate with Assess whether the resulting equity returns sounding with external parties. the various functional teams to secure all are aligned with the opportunity costs of relevant input information – on such topics equity. Getting the costs of equity and debt Conduct a thorough, holistic financial as usage forecasts, operations concepts, right is no easy task: take into account analysis. As for any large capital project, and environmental-impact mitigation – and such factors as the financing structure, the a proposed PPP needs thorough financial validate with them that the assumptions regulatory regime, country stability, and analysis to make its business case. The made in the financial model are operationally the operational asset characteristics, and private-sector bidders will conduct their own feasible. In the past, some business cases consider how risk exposure might change analysis as part of due diligence, but the have been based on outdated data, so as over the life cycle as a result of sequential project promoters should precede them and a precaution, note any changes in scope risk resolution and debt repayment. analyse the project from the private sector’s and assumptions using tracking tools, and perspective to clarify its financial viability adjust the analysis accordingly. Also, build Armed with this detailed business-case and to prepare for potential questions from long-term institutional capacity and support analysis, update and review the economic investors. by making use of assumption guidelines, cost-benefit analysis as well as the value-for- modelling templates, and a benchmark money analysis, and on that basis decide Identify and model all revenue and cost database of transaction and financing whether the project really is viable overall sources over the whole life cycle, as costs as well as capital and operating and a PPP is still the best way forward. Even illustrated in figure 19. Recognize the expenditures. if considerable effort has gone into all these increasing uncertainty over time and ensure preparations, it is never too late to pull the that the analysis covers all significant life- Keep in mind that the main aim of plug (though obviously this should happen cycle events, such as refinancing and investors is adequate risk-adjusted returns. at the earliest possible time) to avoid further asset renewal/replacement. In addition, Accordingly, thoroughly assess risks by sunk costs, or to decide on an alternative explore real options57 that provide flexibility means of simulations, scenario analysis delivery mode. and allow for adaptation to changing and so on, remembering to concentrate environments – as such flexibility represents particularly on the key risks such as delays.

Figure 19: Overview of cost and demand drivers in financial model Bankability testing needs to account for all relevant value drivers

Price differentiation Consistent Reﬁnancing after Modeling of user Competition and its potential and limits treatment of construction charge vs. volume revenue impact of regulation, inﬂation and (and later) trade-off e.g. price caps residual value

Capital Revenues Expen- Innovative and Cost of land diture ancillary revenues acquisition and environmental/ social mitigation User charges Ancillary revenues Years Maintenance Energy Construction Operations draw-downs Other operating costs

Life-cycle costs

Direct and indirect Uncertain, Economies of scale/ Reinvestment/ Higher maintenance transaction increasing energy/ scope and efﬁciency major refurbishment/ costs due to ageing costs commodity prices improvements capacity real options equipment

Conduct early market sounding. Take concerns and solicit ideas on how to shape offices, student housing and childcare; it early measures to establish how interested the project. Consider holding one-on-one also helped to validate assumptions on the market is in the project to help guard sessions with confidentiality agreements to the business case, the risk allocation, and against over-optimism, match the project get the real concerns regarding the project, an important strategic decision – to leave requirements to the market’s capabilities, the contract, the procurement process, relocation management with the private and reassure potential bidders that the and the legal and institutional framework sector, who could then integrate it closely deal is on track. Plan the market sounding on the table. For example, the market with the construction schedule. thoroughly with sufficient time to get sounding for the Southbank Institute of meaningful comments, as outlined in Technology PPP in Queensland involved 13 figure 20. Make sure to invite a broad private firms, including building contractors, range of respondents, including potential facility managers, and information and contractors, subsystem suppliers, communications technology (ICT) suppliers. multilateral development banks and It yielded innovative ideas on commercial financiers, to understand their specific activities such as hotels, parking, retail,

34 Steps to Prepare and Accelerate Public-Private Partnerships 2 Conducting a Bankable Feasibility Study

Figure 20: Process for market sounding Market sounding needs to follow a well-planned process

1 7 Evaluate need for market sounding based on Incorporate feedback to improve project innovation, complexity, size of project design and increase credibility Assess need Conduct precedent analysis to get first idea and feasibility Avoid shaping the project to suit a Make use of on market interest and contractor capabilities particular supplier or sacrifice value the outputs Check whether market sounding is feasible Create an up-to-date database of likely under the procurement rules and interested players 6 2 Assure open and fair process by Formulate clear market sounding process documenting process and results Formulate clear and objectives and communicate those to participants upfront Involve >1 individual from public Assure fairness objectives and process Make clear that this is neither a project authority and use a probity auditor and confidentiality roadshow nor an opportunity for supplier Invite select players directly but pitches provide open access by announcing the event publicly 3 Time not too late when all decisions are 5 Time already made Include broad selection of the private appropriately Time not too early to avoid appearing sector, including constructors, operators, Invite broad and consider vague and uncertain lenders and equity investors range of follow-ups Consider different formats, e.g. first round Include multilateral development banks constructive as written, second round as 1-on-1 and donors to elicit conditions of loans participants and guarantees 4 Prepare project briefing note/prospectus with key facts, background and objectives of project Prepare detailed Prepare a questionnaire with specific issues for briefing note and which assistance is sought questionnaire Do not hide critical information as this compromises the feedback quality

Source: Attracting Investors to African Public-Private Partnerships: A Project Preparation Guide. 2009. Washington DC: The International Bank for Reconstruction and Development/The World

If the PPP project fails the bankability testing identifying all stakeholders and preparing or market sounding, consider amending the 2.5 Stakeholder for targeted engagement, developing decisive parameters that make the business mitigation measures in partnership, and case – or even consider a different, more Engagement professionalizing the approach.59 suitable contracting mode such as a design- Infrastructure is a public good, with great 58 Start designing and conducting stakeholder bid-build or a design-build contract. Also, economic and social relevance for many engagement promptly, during the investigate the possibility of subsidies and different stakeholders. Some infrastructure feasibility study phase. Take the initiative in asset bundling. For example, packaging PPPs, however, can have a negative communicating with stakeholders: provide several toll roads into a single tender should impact on the environment or on particular information and invite feedback before reduce relative transaction costs for both population groups – for example, car formal opposition develops. Ideally, reach the public and private sectors, and might commuters are, in at least one respect, consensus prior to tender. For example, the increase the project’s financial attractiveness adversely affected by highway tolls. The sponsors of the Alandur Sewerage Project in by enabling cross-subsidies (between public opposition that then arises can delay rural and urban services, for instance) or or even halt a project; for instance, a new India ensured early involvement of the public by exploiting economies of scale or scope water-filtration plant proposed in Canada was through surveys and citizen’s committees for the concessionaire’s service delivery. cancelled after public protests, and a South coupled with targeted outreach explaining However, take care not to over-bundle, in African toll road was delayed. To prevent the project costs, benefits and tariffs; as a case some potential bidders are deterred or reduce such setbacks, PPP promoters result, the project proceeded smoothly, with by the size of the deal or the diversity of the need to engage all stakeholders and citizens agreeing to pay one-time connection fees and thereby contributing 29% of the operational skills required. address their needs and concerns. In fact, 60 stakeholder engagement is becoming more financing. important than ever, now that businesses are under such close scrutiny by the media Begin with an integrated analysis of the and regulators, and now that opposition project’s likely impact over time – both is so easily aroused and coordinated via its environmental and its social impact. social media. Note the converse, however: Make sure to differentiate the effects on stakeholders can be eager promoters of various regions and social groups, and infrastructure projects, and PPP promoters compare the impact against that of earlier, would do well to take advantage of such benchmark projects; to that end, make momentum. use of frameworks such as Envision, a tool to evaluate the sustainability of civil Yet PPP promoters often still take a infrastructure developed by Harvard half-hearted approach to stakeholder University. Then provide stakeholders engagement – an approach that is with a transparent, standardized overview reactive, ill-planned, unprofessional and report, covering the potentially adverse under-resourced. For proper stakeholder impacts along the project’s entire life engagement, they should be undertaking the cycle (planning, construction, operations, following tasks and responsibilities: starting and decommissioning) and the plans for promptly on stakeholder engagement, minimizing the impact.

Steps to Prepare and Accelerate Public-Private Partnerships 35 2 Conducting a Bankable Feasibility Study

Identify and classify stakeholders and their vendors. Analyse stakeholder concerns and – Local culture; for instance, the interests, and prepare for targeted and interests, being particularly attentive to such Coder hydropower project in Gabon customized engagement. Look widely when factors as: impinged on local fishing and cultural listing and profiling relevant stakeholders – – Adequate segmentation; for instance, practices related to the waterfalls, but from government departments, regulators differentiate private vs industrial users progressed smoothly thanks to proactive and customers to potential private-sector of electricity, or low-cost vs full-service engagement that included constructing contractors and financiers, and from trades airlines as airport users. a fish ladder and avoiding encroachment unions, environmental activists and local on sacred sites. – Hidden agendas; for instance, from homeowners to less organized interest- regional politicians who prefer to groups such as local farmers or street advance other projects.

Figure 21: Overview of potential stakeholder groups and their interests Individual stakeholders and their interests need to be identified – despite high complexity

Broad set of stakeholders with speciﬁc ... need to be captured in an concerns and interests ... up-to-date stakeholder mapping

Inhabitants Small, local farmers ...including less — e.g. small-scale farmers (and voters) & businesses organized, — e.g. local users dispersed Regional stakeholders politicians Environmental ...sufﬁciently Social activists — e.g. full-service airline vs activists segmented as low-cost airlines stakeholder — e.g. private vs industrial Competitors interests differ users in electricity

Sponsor companies Financiers ...consider less — e.g. water supply trucks and management obvious opposers vs water utility PPP proﬁting from Professional users: Private users — e.g. local street vendors teachers, trucking (and voters) bottleneck vs highway PPP

Regulatory bodies ...account for — e.g. regional politician hidden agendas and opposes PPP to get funding for other public Employees/Unions off-project goals projects Different stakeholder needs require individual engagement – but the engagement needs to be coordinated

Design a customized communication organizations (NGOs), to help win wider system in Australia included community programme for each stakeholder group, support. Provide reassurance by jointly representatives (see the case study in taking into account the specific information agreeing on sustainable mitigation measures figure 22). needs and cultural norms in each case. – discounted charges (but not free services), Exploit multiple communication channels, new job opportunities and job training, Institutionalize a standardized approach to from mass media to workshops or individual support for resettlement, and so on. Since stakeholder engagement that includes the briefings. Leverage technologies – if the stakeholder engagement is an ongoing following phases: stakeholder identification target population has access to them process, transition the programme to the along a standardized framework, – such as 3D models or Web pages to concessionaire; for example, in the case stakeholder mapping using relationship improve understanding of the project, or of the Barranquilla water PPP, the private- maps, stakeholder issue, interest and social media to elicit feedback efficiently. Or sector partner ran an information campaign objective analysis, planning of the form and provide lively examples of similar projects on water meters and the likely savings of frequency of stakeholder engagement, and elsewhere by bringing trusted individuals piped water relative to expensive supply implementation, coordination and evaluation into the community to speak about their by water trucks. To ensure such continuity, of activities.61 experience or by offering tours to those include the bidders’ capabilities and track sites. For example, the Rustenberg Rapid record on stakeholder management in the Transport project organized a three-day tour tendering evaluation criteria. for minibus-taxi drivers to visit existing bus rapid transit systems in Johannesburg and Professionalize stakeholder engagement. Cape Town. Provide sufficient resources and assign skilled staff (not just re-purposed engineers) Partner with the local community and to a dedicated communications team, with future concessionaires in facilitating clearly defined roles and responsibilities. and sustaining the project itself and the Include a local spokesperson in the team – mitigation measures. Gain the active support someone that the stakeholders can easily of influential local representatives, such relate to; for example, the communications as religious leaders or non-governmental team for the Gold Coast Rapid Transit

36 Steps to Prepare and Accelerate Public-Private Partnerships 2 Conducting a Bankable Feasibility Study

Figure 22: Case study on stakeholder engagement Professional and well-planned stakeholder engagement leads to success

Case study: Gold Coast Rapid Transit Project, Australia

Well-resourced & ... and rigorously professional...... well-planned ... executed approach

Dedicated resources Early, proactive engagement Multiple information channels — Communications team based in — Started during early planning — Fact sheets & newsletters project office — Reached out to stakeholders — Static displays in shopping — Participation of technical centres & public areas experts Targeted approach — Website, e-mail, hotline — City-wide information through — Community info sessions Professional management mass media (> 250 briefings) — Customer service charter for — Individual, detailed briefings of — PR work for media coverage enquiries and complaints key stakeholders: formation of a — Identification and empower- — Local spokesperson to create a business taskforce and two ment of community experts face for stakeholders community reference groups to acting as endorsers and capture views of localities and answering questions provide input on route options Active stakeholder participation Stakeholder pressure prevention — Opportunities for two-way — Differentiation between sensitive engagement: e.g. six weeks to and vocal stakeholders comment on concept design — Resisting temptation to over- and impact management plan service vocal stakeholders by — Provision of achievable options keeping on track towards goals for stakeholders aligned with overall objectives and plans

300,000 stakeholders informed and engaged with inﬂuence on key decisions

Source: Gold Coast Rapid Transit: Making a good project, a great project. A Critical Retrospective. Australian Government http://gcrtlessonslearned.com.au/workspace/assets/uploads/files/gcrt-lessons-learned-technical-4f9f6864ebbed.pdf.

In India, problems over land acquisition Arrange a government initiative to establish 2.6 Legal Due are responsible for about one-third of all an efficient standardized process to the delays affecting infrastructure projects, secure approvals, permits and licences. Diligence, including the high-profile cases of Mumbai Governments should take the following Permits and Metro and Gurgaon Highway. The problems actions: are often due to bureaucratic red tape, but – Secure the approvals directly prior to Land Acquisition sometimes due to confusion over title rights. tender; for example, in the case of the In the case of the Bangalore waste PPP, Alandur Sewer Project, the municipality Another key cause of delays in PPP for example, the authorities struggled to took on responsibility for the acquisition projects is that of legal issues: specifically, establish the rightful ownership of the land in of key approvals related to road cutting, the complexity of and conflicts between question. In some countries, property rights service shifting and environmental the various relevant laws, the lack of legal are frequently disputed or problematic, owing issues.64 to land fragmentation based on inheritance prerequisites, and the difficulty in acquiring – If the responsibility for securing approvals law, for instance. land. is allocated to the private sector, for instance when design decisions affect For a PPP project to proceed smoothly and The legal feasibility of a PPP depends on the likelihood of building permits, clearly to avoid the high costs of delay, its promoters complying with – and reconciling – various explain the information requirements and should first ensure that it is legally failsafe. levels of law (national, municipal), various offer appropriate assistance. Engage the The tasks and responsibilities they should sector-specific laws (such as utilities, rail and high-level bureaucrats and/or political undertake are: education), and various fields of law (taxation, figures that champion the project to health and safety, and so on). resolve issues. Clarify the legal position across the various The legal prerequisites involve approvals, law areas before tendering. Consult legal – Establish a standardized approval permits or licences in relation to such aspects experts and experienced government officials process with a strict timeline for each as: land zoning, town planning, environmental to identify any legal risks to the project. Seek procedure – preferably along pre-defined standards, building standards, health and out and study similar cases from the past, stage gates with gateway reviews. safety regulations, and sanitary and fire- for comparison purposes. If the project does Encourage inter-ministerial cooperation protection requirements. The permits could appear to face legal obstacles, evaluate through appropriate levels of delegated be delayed if the procedures for obtaining all potential corrective actions – whether authority, joint process audits and an them are particularly inefficient. Securing a adjusting the project itself or modifying the exchange forum. licence for a hydropower plant, for example, law.63 takes 30% longer in Brazil than in the United States.62

Steps to Prepare and Accelerate Public-Private Partnerships 37 2 Conducting a Bankable Feasibility Study

– Impose penalties or require compensation Besides the financial challenges, land Optimize and expedite land acquisition or if the land is not acquired on time. acquisition also poses social challenges. To rights-of-way acquisition. Consider adopting For example, the contractors of mitigate these, design the project in such a any of the following options, if appropriate to the Hyderabad Metro project were way as to minimize involuntary resettlement. the context: contractually entitled to compensation if When displacement or expropriation is – Use real-estate experts to get realistic the government failed to supply 90% of unavoidable, ensure adequate public planning and fair value appraisals early. the land within 120 days after signing the consultation and involvement, and provide agreement, with a liability for each day of fair compensation. Be sure not to overlook – Require land acquisition to be completed delay.65 vulnerable groups: for example, tenants may by the government agency before putting not receive compensation while owners the project out to tender. This practice – Allocate the responsibility for land acquisition to the private sector, but do. But note that compensation requires is standard in South Korea. Similarly, more than money. So if necessary, provide Indonesia passed a law in 2012 that capping the cost of the land acquisition, with the government having to pay any administrative support for resettlement; for requires the land agency to prepare and many people, it will probably be the first implement land clearance, in accordance excess rather than the contractor. That arrangement is often adopted in Chile. time that they move. Empower people to with strict timelines and compensation make their own life choices by providing rules, prior to handing over the land to personalized resettlement options, instead of the requesting institution and later the telling them where to move to. concessionaire.

Figure 23: Strategies for social-impact mitigation of land acquisition Adverse social impacts of land acquisition require mitigation

— Minimize resettlement through project design — Inform (and update) about rights and options timely and fairly — Set realistic timeline completed by tender — Consult displaced persons early and meaningfully — Establish public agency for land acquisition — Include feedback of affected individuals in decision-making — Pay attention to and organize special meetings for minorities

Develop resettlement plan Inform & consult — Make resettlement less affected burdensome, e.g. by offering persons better-quality housing — Compensate full costs, e.g. — Assure ﬂexibility of resettlement include indirect costs and options with provisions for temporary earnings loss individual requirements Manage — Compensate for land area and — Provide administrative support resettlement Compensate number of resettled people for resettlement, e.g. broker and process with equiva- — Consider different interest moving services lence & groups for compensation, e.g. — Establish efﬁcient resettlement fairness mechanisms, e.g. handling landlords vs land users — Use collective pricing by area – multiple cases at same time no individual negotiations — Integrate in new community — Use independent real estate diligently, e.g. welcome event experts

Source: Involuntary resettlement policy. November, 2003. African Development Bank.

38 Steps to Prepare and Accelerate Public-Private Partnerships

3 Structuring a Balanced Risk Allocation

As PPP promoters strive to balance the interests of the private sector with those Rigorous of the public sector, they face a complex project preparation 3.1. Adopt a life-cycle 3.2. Apply incentive- challenge: to maintain sufficient incentives process oriented contract model based price regulation, for the private sector, while minimizing Incentives aligned with policy and evaluate competition unmanageable risks and allowing for public objectives options safeguards. First, they have to determine Bankable the optimal contract to achieve the policy feasibility objectives. Then they have to design price study 3.3. Identify all risks, 3.4. Adopt regulation that regulation and perhaps initiate competitive allocate them to the best- is adaptive to exogenous Risk elements to encourage efficiency and mitigation suited party, and apply changes and volatility avoid monopolistic abuse. They have to risk sharing/mitigation identify individual risks conscientiously, Balanced risk allocation allocate them efficiently, and adopt and regulation various measures to mitigate them – or 3.5. Fulﬁl social 3.6. Provide for implement regulatory mechanisms that objectives via enforced government intervention adapt to changing circumstances. Besides Safeguards quality regulation and options in a predictable regulating prices, they might also need to Conducive efﬁcient monitoring and fair way regulate quality to protect public interests. enabling environment Finally, they might need to introduce some public-sector intervention options, but structure them carefully so that they remain predictable for the private partner.

2. A management contract, where a bundle 3.1 Contract Model To design an appropriate contract model, of services – perhaps the operations the PPP promoters have to clarify three and maintenance of a motorway – is To exploit the efficiency potential of a PPP, elements: the type of contract; the amount contracted out to a private operator for the planners need to choose an appropriate of service bundling within the contract; and an agreed contract fee. 66 contract model. That choice will differ from the length of the contract. project to project. In making the choice and 3. A lease contract, where a private then customizing the contractual model company leases or acquires temporary Choose the type of contract on the basis of ownership of the asset for a certain fee for a particular project, the sponsors will policy objectives and stakeholder readiness. have to strike a balance between two and takes full responsibility for operating The PPP promoters will have (or certainly it, assuming all or most commercial risks. considerations: on the one hand, ensuring should have) clear policy objectives for the 4. A concession contract, where a private the attractiveness of the project for the project – how much financing to raise, how company raises the financing to (re-) private sector; on the other, safeguarding to optimize the asset quality and costs, design and (re-)build an asset in return public interests and keeping overall how much control to retain, and so on. The for a limited period of full operating rights economic costs down. project might remain almost entirely under and maintenance obligations. public-sector control, or it might involve the In designing the regulatory contract, the private sector in various degrees of intensity 5. Divestiture or privatization, where the promoters need to adopt a structured during various phases of its life cycle. The infrastructure asset is sold off to the and principle-based approach where early five main models, in ascending order of the private sector (by initial public offering agreement with stakeholders on design risk that the private sector assumes, are:68 (IPO) or a trade sale). The private principles makes it easier to iron out operator then takes on all risks and contractual details later on. The promoters rewards from the operation of the must also be sure to take account of the 1. A service contract, for specific infrastructure asset throughout its life industry-specific context and to keep sight operational aspects: the cleaning of cycle. The government would retain of the overall incentive system, as the a motorway, for example, might be regulatory powers, however, to prevent interdependent regulatory levers are so contracted out to a private company for the abuse of the monopoly situation. numerous.67 a contract fee.

40 Steps to Prepare and Accelerate Public-Private Partnerships 3 Structuring a Balanced Risk Allocation

Figure 24 shows in tabular form some of the adjacent electricity-transmission network. characteristics of the five different models. And in some cases, a hybrid model might be appropriate; for example, an airport If the policy objective is to transfer risk to runway could be government-funded and the private sector, to incentivize long-term operated, whereas the commercial activities efficiency, and to raise financing, then the in the terminals could be operated under a concession and divestiture models are PPP structure. But the scope of services the most appropriate. However, these covered in the PPP also deserves close models can be adopted only if the loss of scrutiny. For example, social infrastructure long-term public-sector control over the PPPs such as hospitals and schools asset is acceptable and if the enabling focussing on the facility aspect (and not the environment permits. In other words, these medical aspect) have proven to perform models are conditional on stakeholder quite well in terms of value for money. readiness. Do private-sector companies have the know-how and the financing? In choosing an appropriate contract model, Can the civil service muster enough skilled the government often faces an inherent personnel to regulate and make the deal conflict of interest: on the one hand, it has work? By contrast, service contracts the long-term duty to optimize the sector and management contracts are easier to and maintain some control for the sake of implement, since most of the control and the public good; on the other hand, it might risk remain with the public sector. But have the short-term aim of maximizing they would tend to produce less efficiency its own revenues, either by granting a full improvements from life-cycle optimization, divestiture or a very long concession (or by integrated asset operations and new forms allowing high user charges). This conflict of revenue sources. However, they can be of interest obviously needs very careful implemented at various points in time for management. shorter durations, whereas concessions are best whenever the asset needs to be expanded, upgraded and rebuilt.

Governments also need to carefully consider the physical scope of the PPP contract, i.e. to determine the assets that will form part of the contract and separate them from neighbouring government assets. For example, a concession may be granted for a power plant, while a management contract is assigned to operating the

Figure 24: Contract type and risk allocation Contract type determines high-level risk allocation

- Level of private involvement & risk +

Service/works Management /erutitseviD Lease contract Concession contract contract privatization PPPs

Asset Public or Public Private ownership private

Capital Public Private investment

Operation & Private only for Private Maintenance selected services

Commercial Private, public, shared risk Public Private

Public • None • None • Leasing fees • Concession fee • Privatization proceeds earnings • Revenue share • Revenue share model

Private • Agreed contract fee • Agreed contract fee • User charge • User charge • User charge earnings • Other revenues • Other revenues • Other revenues model • Public annuity • Public annuity • Asset value increase

Typical • 1-3 years • 2-5 years • 10-15 years • 20-40 years • Unlimited duration

Steps to Prepare and Accelerate Public-Private Partnerships 41 3 Structuring a Balanced Risk Allocation

Figure 25: Trade-offs in the choice of contract type Choice of contract type depends on policy objectives and stakeholder readiness

Private investment responsibility/risk

Divestiture/ Unbounded private invest- Privatization ment (private asset owner)

Time-bounded Concession private investment (public or private asset

ansfer of investment risk owner) Lease Tr contract Safeguard long-term interests No private Management investment Service/works contract

Financing: and need for private ﬁnancing (public asset Private Control: (e.g. future user needs, sector planning) contract PPPs owner) operational Single operations Integrated operations Integrated operations responsibility/ without commercial risk without commercial risk with commercial risk risk

Policy Efﬁciency: Improve efﬁciency, service quality, innovation objectives Control: Safeguard short-term interests (e.g. labour, service level, tariffs)

Bundle services within the contract to optimize the trade-offs along the life cycle. If the policy objective is to optimize life-cycle value, then the contract should bundle various responsibilities – design, build, operate, and maintain. In that way, the concessionaire will be able to maximize the efficiency of the life-cycle trade-offs. For example, if the company responsible for building the project is also responsible for maintaining it, the company would have an incentive to carry out the construction work to a very high standard or in an innovative way that reduces the frequency or cost of later maintenance work.

In some instances, however, such bundling may be contra-indicated. Perhaps the private-sector companies best equipped to handle the build or operations phase have far less expertise in design than a specialist design firm has, or than the public sector has. Or perhaps a major policy objective for the PPP promoters is to retain a high level of state control over the planning and designing of the asset. In such cases, the contracts would be tendered individually rather than in one bundle.

42 Steps to Prepare and Accelerate Public-Private Partnerships 3 Structuring a Balanced Risk Allocation

Figure 26: Factors to determine concession term and typical concession durations Concession term has to take many situation-specific factors into account, resulting in diverse durations

Concession term is determined based on many factors Typical concession durations

— Recover investments and earn Typically 20-30 years t+ adequate return 26% 36% 25% — Incentivize hard and soft investment 12% 2% Longer — Incentivize life-cycle cost optimization Ports duration — Add profitability buffers to avoid <10 11-20 21-30 31-50 >50 favored to ... restructurings or lack of bidders Duration (sample of 293 concessions) — Assure continuity of employment — Signal low government interference Typically 30-40 years — Average of concessions in Western — Safeguard public interests Highways t- Europe: 30 years — Provide operational and strategic — Spain: 75 years flexibility for the public sector Shorter — Allow rebidding and contracting of duration most efficient/innovative operator Typically 30-40 years favored to ... — Replace a contractor that fails to — India: 30 years for Bangalore and deliver required quality standards Airports Hyderabad — Make financing for concessionaires — Brazil: 30 years for Campinas easier in light of Basel III / Solvency II — Italy: 40 years

Rule of thumb: Concession duration should be ~1.5x the time to major replacement/refurbishment, so that the term includes one complete service cycle with hand-over occurring at mid-cycle.*

* For a highway, for example, major refurbishment occurs after 20-25 years supporting the typical concession durations of 30-40 years.

Source: Farrell, S. Observations on PPP Models in the Ports Sector, 2010.

Base the length of the concession on the incumbent to raise standards. Moreover, investment involved and the amount of long- any follow-up concession is likely to be less 3.2 Price Regulation term flexibility needed. Concessions vary risky than the original one, since the demand greatly in length, the number of years mostly forecast will now be much more accurate. In and Competition ranging between 20 and 40 as depicted in view of these advantages, some countries Infrastructure projects tend to involve figure 26. actually set a legal cap on the length of such great capital expenditure that entry concessions – for example, 50 years in Chile. barriers are bound to be high, and often The duration has to be determined with finesse: from the private sector’s point of Different types of service often call for a natural monopoly will result. When view, usually the longer the better; from the different contract durations, and might that happens, the usual risks arise: the public sector’s, vice versa. A longer term therefore be unbundled – hard, asset- monopolist operator could be tempted to will encourage the private sector to bid for intensive services deserve longer terms overcharge users and neglect investment the project and invest in the first place by than soft, labour-intensive services. So in and operational efficiency. To prevent that holding out the promise of a good return Portugal, for example, some hospital PPPs abuse of market power, and to create and signalling that government interference have assigned longer terms for the core incentives for efficiency and innovation, will be light. It will add buffers for long-term real-estate component than for cleaning the project’s promoters have two standard demand risk, and enable the recovery of services. Unbundled services can lead to levers – apply price regulation or introduce transaction costs and “soft” investments, high coordination costs, however; so PPP elements of competition (note, that when such as marketing, training and IT. It will also promoters need to very carefully study markets are fully competitive, PPPs may not spur the private operator to maintain high whether the unbundling approach really be appropriate and privatization could be efficiency at all phases of the project’s life would deliver greater value for money than considered). cycle. For greenfield assets, the concession an integrated operations approach covering period should include the construction phase hard and soft services. A regulatory price regime should incentivize – that will incentivize early completion by the efficiency and investments – and guard contractor. The M7 motorway near Sydney, Another possibility to consider is that against the abuse of monopoly power. for example, was duly completed eight of variable-term concessions. In these The regulator would decide between two months ahead of schedule, and opened a contracts, the duration is not pre-defined, main approaches: setting prices based on year earlier than expected.69 but is based on a revenue/traffic or rate of incurred costs and setting a price cap. In return threshold. For example, for the Vasco the former approach, the price would be On the other hand, a shorter term has da Gama Bridge in Portugal, the concession set (and regularly adapted) to ensure an the advantage of safeguarding public was to be terminated by a cap of 2.25 adequate rate of return on the operator’s interests. It gives the project’s sponsors billion vehicles crossing the bridge. Another expenses and investments – and the greater operational and strategic flexibility. approach is to auction concessions based on government or the user would carry most It enables them to replace a substandard the lowest discounted revenue requirement, of the cost risk. The main drawback is that concessionaire sooner rather than later, and to end the concession once this sum has of potential inefficiency: the operator would or at least to use that threat to induce the been reached. Such an approach has been have only limited incentive to cut costs and used in Chile (see chapter 3.4). might over-invest. For example, the PPP

Steps to Prepare and Accelerate Public-Private Partnerships 43 3 Structuring a Balanced Risk Allocation for the Trencin Water System in Slovakia The pricing regime should also provide to operate the asset. To make use of for- initially granted over-generous terms to the incentives for capital expenditures: market competition, it is often necessary concessionaire, who enjoyed a guaranteed usage-based pricing, for instance, would to arrange “horizontal” unbundling, i.e. profit margin while facing few risks and incentivize investments in quality. While separating services across geographies (for service responsibilities.70 In the second existing prices should be adequate to cover instance, tendering water utilities region by approach, the price cap is typically based replacement capital expenditure, they might region) or separating businesses that use on a cost forecast plus a fair return, and be insufficient in covering enhancement the same infrastructure assets (for instance, can be adjusted annually by an I-X formula and expansion investments. So the pricing tendering railway freight services separately (= inflation - efficiency increase), to provide formula should make provisions for these from passenger services). for inflation and the contractor’s expected upgrades, particularly if the new capacities performance improvement. This time the are initially not fully used. However, some infrastructure assets can operator bears much of the operational cost also accommodate “in-market” competition, risk. The main drawback now would be that Competition – in its various forms – where different infrastructure operators the operator, with strong cost-efficiency can likewise promote efficiency, but is continually compete for customers; for incentives, might under-invest and produce not always applicable in PPPs and in example, the operators of two closely a poor-quality service. infrastructure industries. Competition tends situated ports. In such a case, the project to drive higher quality and innovation, cost- promoters need to evaluate whether The regulatory price regime has a further efficiency and lower prices, and greater a PPP is still be most appropriate way role: to prevent the concessionaire from investment. To take a simple example, the forward or whether regulated privatization setting disproportionately high prices and improvements made by the private operator is more suitable. In some sectors, in- exerting monopoly power. That danger of Moscow’s second airport, Domodedovo, market competition often requires prior was evidenced in Mexico’s early road PPP led to rapid enhancements in the downtown “vertical” unbundling, i.e. dividing a formerly programme, for example, where auctioning rail link and terminal structures at the main integrated industry into separate segments based on the shortest concession length airport, Sheremetyevo. of the value chain (for example, splitting led to excessive and increasing tolls. If the an electricity-supply network into distinct pricing regime limits itself to prescribing By defining the scope of the PPP, components – electricity generation, average prices for the product basket, governments can actively influence market transmission, distribution and retail). But in that still leaves the concessionaire much design and thus the feasibility of competition many cases, the regulators need to impose leeway, and pricing strategies by can still be – and that could make certain regulations fair-access pricing terms to enable third- fairly sophisticated. To optimize the use of unnecessary. Competition can come in party players to access essential facilities capacity, the regulatory regime could allow various forms, and PPP promoters will need that are owned by incumbent firms. Figure peak or congestion pricing (higher prices to decide which is the most appropriate for 27 shows which parts of the infrastructure at times of higher demand), but not to the the current project. value chain are most amenable to in-market extent of allowing the exploitation of any competition. particular user group (such as rush-hour Most infrastructure assets constitute office workers dependent on a commuter a natural monopoly. The only possible train) that has low price sensitivity due to competition is “for-the-market” competition, the monopoly status of the infrastructure for i.e. private-sector bidders compete at their specific needs. auction for time-limited monopoly rights

44 Steps to Prepare and Accelerate Public-Private Partnerships 3 Structuring a Balanced Risk Allocation

Figure 27: Infrastructure value-chain segments and their potential for competition Various parts of the infrastructure value chain have potential for in-market competition

Indicative*

Superstructure Ancillary Airports Infrastructure Airlines (terminals ) business

Ancillary Ports Civil structure Superstructure (terminals) Shipping lines Trans- business port Ancillary Rail Railway network Superstructure Train operating companies business

Ancillary Roads Roads, bridges, tunnels Trafﬁc (trucks, cars ) business

Renewable and conventional Electricity Transmission Distribution Retail generation Energy Transmission & Gas Exploration & production Distribution Retail storage

Transmission & Water Treatment Distribution Retail storage Urban Waste Collection Treatment

Fixed-line Network Retail Telco Wireless Network Retail

Value chain segments with Value chain segments with Value chain segments with Not well-suited low potential medium potential high potential for in-market competition for in-market competition for in-market competition for PPPs * Actual potential for competition depends on speciﬁc circumstances.

Even where competition is not feasible for example, the level of competitiveness for the whole asset, there are still various depends not only on the location of any options to instil competition at sub-asset nearby ports, but also on technical port level: characteristics (crane capacity, available – Selected services at a PPP asset can draft under different tidal conditions, and so accommodate in-market competition. on), local and hinterland infrastructure (such For example, following the deregulation as storage facilities and transportation time of ground-handling services in the and costs), and operational excellence (such European Union, many airports have as container turnaround times and ease of found that their own incumbent ground- customs procedures). handling services have progressively lost market share to new competitors In many cases, it turns out that competition, – enabling airlines to choose which though feasible, is not actually beneficial. ground-handling company to hire. For instance, competition might lead to a loss of economies of scale, to a loss of – Asset-light services at a PPP asset can system coordination, or to sub-optimal use be repeatedly subject to for-market of capacity. For example, when Toronto competition if contracts are kept short. Pearson Airport’s terminal 3 opened in Take the example of the light rail system 1991 as a private competitive venture, it in Oporto: the approach taken was for coordinated poorly with the other terminals separate tenders – a 20-year contract and duplicated some of their costs; in 1997 for network extension and maintenance, it was bought by the airport’s main operator, but just five-year contracts for network Greater Toronto Airports Authority. operations – and the frequent rebidding process for the operations contract helps to keep operations competitive and enables the government to achieve savings.71

When deciding whether competition has potential, project promoters will need to conduct a rigorous analysis. For a port,

Steps to Prepare and Accelerate Public-Private Partnerships 45 3 Structuring a Balanced Risk Allocation

risk and select “macro” risks to the public of the project to anticipate all possible 3.3 Risk Allocation sector). But the detailed distribution will vary risks, including unconventional risks. from time to time, according to the project’s For instance, leverage checklists, and Mitigation distinctive circumstances. apply scenario techniques, host expert workshops, and review earlier cases. Infrastructure projects are almost inevitably To achieve well-balanced and customized risky. The risks arise at each stage of the – Create a risk register or matrix, risk allocation, the project’s promoters project’s life cycle (see figure 28) and have systematically identifying all risks can divide their work into three broad to be divided carefully between the public – not just those related to design, sections: identifying and assessing the risks; and private sector partners of the PPP. construction, financing, operations and determining the party best able to manage If the allocation is misjudged, that could maintenance, but also political and the risk; and reassuring investors by taking have severe consequences – on the one “macro” risks, such as inflation, floods, measures to mitigate and share risks. More hand, inadequate incentives for the private new tax laws, emerging technologies or specifically, the tasks and responsibilities 72 contractor; on the other, bankruptcy or new spatial developments. that the promoters need to carry out are: costly bail-outs. – Classify each risk as either continuous or “digital” (one-off), and evaluate all the Identify and assess all possible risks The allocation of risks between the public risks identified in terms of their likelihood inherent in the project throughout its life sector and the private sector often tends to and their potential impact. cycle – and make them transparent. follow a generic pattern (build, operations and maintenance to the private sector, site – Within a reasonable budget and time frame, conduct a wide-ranging preview

Figure 28: Potential risks along the project’s life cycle All potential risks along the project cycle have to be identified

— Availability of site (land acquisition/rights-of-way), quality of site (geological conditions, Site risk existing asset condition), zoning permits — Inadequate planning, substandard design vs user requirements, lack of system integration, Design risk delayed construction permits, delay in PPP approval — Time delays, completion risk, cost overruns, quality issues, sub-contractor Construction risk Design & underperformance, untried and complex technologies, design change requests construction Environmental and — Delayed environmental permits, environmental constraints for construction and operation, social risk stakeholder opposition, costs of social and environmental mitigation

Commercial risk — Lower demand than forecast, higher price elasticity, network interface risk, revenue collection risk

Operating cost risk — Higher operating costs, maintenance costs, labour costs and commodity prices

— Operational inefﬁciency, system underperformance, reduced asset availability and Performance risk capacity, service interruptions, innovation risk Operations

Financing risk — Reﬁnancing availability, borrowing rate risk, counter-party and government sponsor risk

— Changes to economic growth, population, demographics, industrial development, interest Macroeconomic risk rates, exchange rates, inﬂation

Regulatory risk — Changes in regulated prices, competition, sector framework, taxation

macro Political risk — Breach of contract, expropriation, currency inconvertibility, no proﬁt repatriation Political &

Force majeure — Natural or man-made events, e.g. earthquake, ﬂood, hurricane, civil war, riot, crime, strike

Note: This list of risks is for reference and is not necessarily exhaustive. While it covers the typical and major risks, many risks are specific to the project circumstances.

Determine the party best able to manage – Start with the accepted and common – Consider the limits of risk allocation. the risk, and allocate the risk accordingly. standards of risk allocation (see above) Often, risks have to be bundled – that – Allocate the risk to the party that is and evaluate the need for project- is, allocated in groups – as the cost of best able to control the likelihood of specific adjustments. For example, if identifying and allocating each individual occurrence, to limit the risk’s impact, demand is affected by policy decisions risk is excessive. So in practice, only and to absorb the risk at the lowest (such as urban planning, gas tax a few particularly significant risks are cost. To make this allocation accurately, rates, or complementary government separated from a bundle of risks and analyse the risk’s correlation to other infrastructure), the demand risk should singled out for specific allocation risks, and the private sector’s ability to be assigned to the public sector. But (for example, geological risks would pass the risk on (for example, through if demand can be influenced strongly be treated separately from general insurance, sub-contracting or hedging). by the concessionaire’s marketing or construction risks). And bear in mind Also, study the skills and tools that operations, the risk should be allocated that risk transfer to the private party the candidate contractors have to to the private sector. is mostly limited by that party’s equity manage each identified risk – that is, to – Assess the implications of transferring exposure. minimize the likelihood and impact of risk from the public sector to the the risk (for instance, through project contractor, i.e. the increase in cost of management or technical solutions such capital and its effect on the project’s as earthquake-resistant construction). bankability.

46 Steps to Prepare and Accelerate Public-Private Partnerships 3 Structuring a Balanced Risk Allocation

Risk allocation does not need to be an “either-or” decision, however; options are available between the two extremes of allocating solely to one sector or the other.

Attract investors by pre-emptively sharing and mitigating risks that are difficult to manage. If the perception is that the project’s risks outweigh the opportunities, potential investors will stay away. For the more formidable risks, such as traffic risk, the project’s promoters need to understand that assigning such risks to the private sector will increase the price they are paying. As a consequence, they may apply various techniques to reduce these risks for the private sector. Besides direct government support (such as co-financing, subsidies or administrative support), these techniques involve various risk-sharing and mitigation mechanisms.

Figure 29: Options for risk mitigation and sharing PPP planners have various options for risk mitigation and sharing

Mechanism Example Risk exposure

Private Public

No risk — For highway M1/M15 in Hungary, private mitigation sector bears trafﬁc risk alone and sharing Revenue Demand*

— Sliding scales and earnings sharing Risk sharing schemes, e.g. used at Frankfurt Airport with a 33% trafﬁc risk sharing Revenue Demand*

— Minimum revenue guarantees often used in Risk Korea and Chile and also for Gautrain in mitigation/ South Africa and the Dakar toll road

guarantees Revenue — Minimum waste guarantee by municipality for Demand* solid waste management facility in India

No risk — Availability payments are nowadays the allocation to standard practice for urban transit or rail

Revenue PPPs and are also often used for roads private sector Demand*

* These examples refer to risk mitigation and sharing mechanisms for demand risk. Similar approaches can be applied for other risk factors.

Some specific examples of sharing and proportion has been 70:30 in favour – Risk-mitigation with guarantees: In mitigating measures are: of the government).73 Various sharing some contracts the private partner is – Risk-sharing: Sliding scales or earnings- mechanisms are used, including a one- guaranteed a minimum level of revenue. sharing schemes set a pre-determined off payment to government, a reduction For example, the Dakar toll-road project profit range for the concessionaire; any of tariffs for users, or an agreement to makes provisions to compensate the upside and downside risks beyond this reinvest a proportion of the profits (for operator if average traffic levels, and range are shared symmetrically between example, the concessionaire of the hence revenues, fall below a stated the public and private sectors. Such M6 toll-road in England committed to threshold. If the government does offer reinvest 30% of the refinancing gains such a “lower cap” to protect against sharing mechanisms help to align the 74 interests of both contractual parties, and into improving local infrastructure). downside risk, it seems only fair that it so will increase the sustainability of the Another example of risk-sharing is should also apply an upper cap. Such arrangement and reduce the incidence the use of “hybrid tills” for ancillary symmetrical risk-sharing usually suits of painful renegotiations. revenues, as at Rome and Frankfurt private investors, who tend to be more Risk-sharing is often applied to airports, where the revenues from concerned about potential downsides refinancing, to avoid public discontent ancillary businesses are partly retained than about the chance of excessive that may arise from windfall profits by the operator and partly go to returns. when interest rates are decreasing (for cross-subsidize the core infrastructure business, thus aligning the interests of instance, in the United Kingdom the the two contractual parties.

Steps to Prepare and Accelerate Public-Private Partnerships 47 3 Structuring a Balanced Risk Allocation

– Availability-based payment schemes company to bankruptcy. On the other hand, bypass the risk of over-optimistic usage (rather than usage-based), in which the it might turn into a bonanza, producing high predictions. This system has been operator is reimbursed by the public profits for the concessionaire, possibly at adopted in Chile, for example, for the sector regardless of usage, though the expense of the public. Santiago-Valparaíso Highway and for subject to agreed standards of service. the Iquique and Puerto Montt airports. These schemes are recommended To be more flexible when these uncertainties (See figure 30 for details.) when the end user cannot be charged occur, contracts should contain some built- – An automatic subsidy in the form of directly (as in the case of prisons), in adaptation mechanism for prices and shadow charges: this mechanism might and where the concessionaire has profits. Its purpose is not to remove all risk be activated if the operator’s profits fall little influence over demand (as in from the operator – risk exposure remains below a specified threshold because many urban transit projects, back- a useful incentive for efficiency – but rather a necessary customer price increase up electricity-generating plants or to spread uncontrollable risk more evenly is disallowed for political reasons. For highways that are part of a broader between the contractual parties and over example, the Chengdu water PPP network). For example, the Doyle Drive/ time. Adaptation mechanisms are of two contract obliges city authorities to pay Presidio Parkway PPP in California uses types: automatic and manual. the full difference to the contractor availability payments on these grounds: when input costs rise unavoidably and if the private concessionaire can influence Adopt automatic adaptation mechanisms consumer-tariff increases are denied by traffic volume only to a limited extent, to buffer exogenous revenue and cost risks. the authorities. since the concession covers just a In some PPP projects, various adjustments – “Revenue smoothing” to counteract small part of the overall road network. are triggered automatically by external economic cycles: this mechanism can These availability-based concessions developments, and thereby help to keep be used, for instance, at airports that are becoming more widespread as the operator’s profits within reasonable have traffic variations. the private sector increasingly prices margins. The mechanisms can be classified demand risks and the public sector into those that are cost-related and those understands PPPs as a way to optimize that are revenue-related. The cost-related risk allocation. mechanisms include: – A “cost pass-through”: it automatically Obviously, the above mechanisms can also enables the operator to increase prices be combined. For example, the payment for consumers whenever the operator’s bands applied for the Beiras Litoral and own input costs rise unavoidably above Alta Shadow Toll Road in Portugal combine a tolerable level. So, electricity prices availability-based government payments might rise in line with the rising costs with “shadow tolls” that are adjusted to of the coal or gas used in generating the traffic level. In this contract design, the electricity. The Siza Water Utility the concessionaire can certainly cover PPP in South Africa’s KwaZulu-Natal its fixed costs, but the price received per province is an example of what happens car decreases at a high number of users. if uncontrollable cost increases cannot Likewise, some Indian road concessions be passed-through. Following a 20% also combine an annuity model with user price increase by the bulk supplier, tolls. the company was unable to pay its annual concession fee, which led to a PPP promoters should be aware that renegotiation of the contract.75 these sharing and mitigation techniques – Indexing to inflation: this indexation come at a cost – both indirect and direct. is standard practice in concessions, Revenue guarantees, for instance, could and is usually incorporated in price indirectly cause complacency: the danger regulation via the aforementioned I-X is that they reduce quality incentives for formula (= inflation - efficiency increase). the concessionaire. And if contingent This adjustment is often based on the guarantees become effective, they lead to consumer price index, which is not a direct burden on the government budget. always a properly suitable measure. It For example, some Hungarian availability- is often preferable to use an index that based road concessions that were over- accurately reflects the contractor’s real dimensioned have led to high costs for the cost exposure. For example, in some government. European countries, electricity-grid regulation relies on a formula combining consumer, labour and construction-price 3.4 Adaptive indices. Below are some of the revenue-related Regulation mechanisms used in practice: Some risks in infrastructure projects are – Adjusting the length of the concession difficult to predict: a severe shortfall in to actual demand: least present value demand, input-price volatility, refinancing of revenues (LPVR) concessions are conditions, national economic shocks, and auctioned and are won by the bidder so on. The problem is compounded by the that stipulates the least discounted long contract durations of PPPs because revenues for the whole concession the risks are likely to change significantly period – which terminates once during the course of the contract. As the the specified revenues have been revenues and costs fluctuate, so too does collected (or the specified volumes the concessionaire’s income. A promising have been reached). Such variable- venture can turn into an unprofitable burden, time concessions effectively buffer and could eventually drive the project demand risk for the concessionaire, and

48 Steps to Prepare and Accelerate Public-Private Partnerships 3 Structuring a Balanced Risk Allocation

Figure 30: Example of least present value of revenue concessions Least present value of revenue concessions automatically adapt their duration to actual demand

Least present value of Advantages revenue (LPVR) mechanism and issues Cases of LPVR in Chile

Variable-time/endogenous period Advantages Santiago – Valparaíso concessions + Most efficient construction firm Highway (1998) — Term is not predetermined, but wins auction – not the one with — Five participating firms with depends on posteriori revenues the highest demand forecast winning bid below estimated — Concession ends when the + No exposure to hard-to-predict costs collected revenue reaches the traffic risk — PPP got largest and least amount quoted in the bid + Financing costs lower due to expensive infrastructure less commercial risk bond issued in Chile up to Auction mode + Operating efficiency incentives then — Concessionaire is selected as toll increases not feasible based on lowest discounted + If the contract has to be revenue requirement over the terminated, compensation is Iquique and Puerto Montt whole concession duration easy to calculate airports (2008) — Five bidders with winning Issues bid ~65% of maximum Little incentives for quality and LPVR set by government demand enhancement Lack of flexibility if revenue generation takes significantly longer than expected Variable loan term possibly needed

Source: Engel, E., R. Fischer, A. Galetovic. “Least-Present-Value-of-Revenue Auctions and Highway Franchising”. In Journal of Political Economy, 2001, vol. 109, no. 5: 993-1020.

Implement manual adaptation mechanisms – A set of principles of regulation pre- with well-defined limits. When no automatic formulated in the contract (in addition to adaptation mechanism is applicable, specific rules) to help guide the required contractual arrangements may still permit adaptations; an adjustment based on mutual agreement – Benchmarking to provide guidance on and negotiation between the two parties. the amount of adjustment needed. Contracts sometimes allow for regular reviews, and these might indicate the need to change the price cap, the quality targets or the service requirements. In addition, an 3.5 Quality exceptional review or renegotiation might be initiated, either by the government or by the Regulation contractor. Most PPP project types have conflicting These manual adjustments are in some objectives: between low tariffs for users respects less satisfactory than the and high service quality – that is, good automatic adjustments. They provide some availability, reliability, safety, accessibility, discretionary scope to the regulator, for and other safeguards of public interests. example in making certain assumptions, In pursuit of the former goal, the project’s and are therefore less predictable. And on sponsors will impose price caps on the the operator’s side, there is the prospect operator. Unfortunately, that undermines the of opportunism, since the operator – in second goal, since the operator’s incentive effect a monopolistic service provider – is (especially in a monopoly service) is now negotiating from a position of strength. to cut costs or sweat assets and thereby To anticipate and prevent any abuse, the neglect or reduce quality. To counteract that contract should specify fees and caps perverse incentive, and instead incentivize to discourage unwarranted or excessive the operator to maintain or improve quality, requests. quality regulation is needed.

The review process itself will ideally follow a The responsibilities and tasks of the set of standard principles. These include: project’s promoters or regulators can be grouped under four headings: determining – Prior stakeholder consultation; for the need and strategy for quality regulation, example, with the operator and the customizing the quality targets, designing users of the service; powerful incentives, and developing a cost- – An independent and authoritative effective monitoring system. decision-maker in the case of disputes either an independent regulatory institution or an expert panel (see chapter 4.1);

Steps to Prepare and Accelerate Public-Private Partnerships 49 3 Structuring a Balanced Risk Allocation

Determine the need for quality regulation example, Auckland airport uses a lenient customer satisfaction. In combination, and devise a quality strategy quality regime with voluntary standards these metrics can reliably diagnose – If social objectives are important – backed by the requirement to publish quality issues – the causes could include for instance, a universally affordable key performance indicators (KPIs) and under-resourcing, operational problems, service or specified hygiene standards candid annual reports. increased congestion, or just changing – articulate these at the outset of the customer preferences. contract development. Customize the quality standards and targets – In setting quality targets, strive to – Assess how far the operator has – To diagnose problems more easily, incentivize efficient trade-offs between incentives to deliver high quality anyway select a wide range of informative quality cost and quality. The best way of doing (for example, if the operator can targets. (Figure 31 presents some this is by creating an aggregated index increase traffic through higher quality), KPIs used for different sectors.) These from a variety of data points (but beware and on that basis decide how much targets should relate not just to inputs of the relative weightings, as they may quality regulation is needed to make up (resources used to enable the service) cause unintended incentives). These the shortfall. and outputs (objective measures of can include data from benchmarking, customer surveys, and normative – As one approach, consider an the service) but also to outcomes standards (environmental or public- initially light quality regulation with (user perceptions of the service). For health norms, for instance). The target voluntary standards and operator-user inputs, the targets might include the that the regulators should set is a agreements (plus monitoring of the amount of investment and the quality modest one – not maximum quality, delivered quality) while retaining the right of the maintenance work. For outputs, but the same quality that a competitive to enforce strict quality targets in case of the targets might include breadth of market would produce: “user-optimal” under-performance – this combination coverage, the levels of congestion and quality. will optimize the balance between delay, and the safety record. And for the private operator’s freedom and outcomes, the targets might include the public’s need for safeguards. For customer complaints and levels of

Figure 31: Examples of sector-specific quality KPIs Quality Key Performance Indicators (KPIs) are sector specific

Selected examples Rail Airport Road Electricity Telecom Water

— Cost for winter — Network Cost service maintenance

— Investment in — Investment in Investment superstructure new technology Input — Rail screening — Runway — Lighting/marking/ — Pipe conditions Asset condition pavement condition

* Availability & — On-time — % ﬂights — Lane availability & — SAIDI — Dropped — Supply & sewer ** congestion performance delayed shutdowns — SAIFI call rate interruptions — Trafﬁc speed — Hinterland — % of house- — Fixed lines/ — Restrictions for Coverage/ accessibility holds mobile phones non-payment affordability connected per capita Output — Incidents — Number of — Number of — Water quality Safety apron incidents accidents tests

Customer — Reductions in — Increase in — Reductions in — Speed of — Time till beneﬁts commute times connectivity journey times call centre connected response Customer — Customer — Water quality complaints complaints complaints about bad Outcome Customer — Customer reception satisfaction comments on road quality

* System average interruption duration index: Average time per year that supply to a customer is interrupted. ** System average interruption frequency index: Average number of times per year that supply to a customer is interrupted.

Design a powerful system of incentives and civil society and free press, such in UK water companies, where the enforcement naming-and-shaming (or conversely, targets include not just water quality but appraising-and-praising) serves as also environmental performance and – Devise and invoke appropriate penalties, a simple and low-cost incentive to customer service. such as statutory fines for substandard operators to optimize the quality of their service, or compensation payments service. Develop a cost-effective quality-monitoring to inconvenienced customers. For – Consider a pay-for-performance system instance, in the telecommunications system, with bonuses and penalties – Strike a balance between the cost of sector, operators with licence exclusivity for the concessionaire as a way of collecting the data and the quality of often have to pay penalties if they fail to rewarding or penalizing performance the data collected. To manage the cost, meet universal coverage targets. levels directly. Such systems are used begin by limiting the number of KPIs and – Encourage or enforce comparative in many availability-based road PPPs, the frequency of monitoring; but when public reporting of operators’ where the criteria include traffic jams problems are signalled, increase the performance; in countries with a strong and safety levels. They are also used number and frequency.

50 Steps to Prepare and Accelerate Public-Private Partnerships 3 Structuring a Balanced Risk Allocation

– Ensure that the data is relevant, reliable conflict: while the public sector’s interest lies and verifiable, and that the segmentation 3.6 Intervention in flexibility, the concessionaire’s interest lies of the data (by customer, by geography, in predictability. So once again, a balance across a time-series) is sufficient to Options has to be struck. Figure 32 lists the various identify root causes and to suggest PPPs are generally contracted for 20 years levers that the public-sector partner can pull actionable remedies. or more – a timeframe that potentially to exercise its influence. Already during the – Design clear punitive/remedial will embrace some major changes. So preparation phase, the PPP planners should processes, making sure that they are in PPPs can, during their lifetime, become be conducting comprehensive scenario and line with other regulatory processes. unsuited to satisfying society’s infrastructure megatrend analysis to identify the areas needs. Just consider, for instance, how likeliest to require long-term adaptation. As the needs and duties of a public-transport a ground rule, these intervention options concessionaire might transform, in the should be designed so as to provide face of such developments as rapid sufficient predictability for the private-sector urbanization, new safety laws, or new partner. Any of these public-sector options emerging technologies. It is crucial, should be clearly defined in the contract therefore, to incorporate some adaptability (and should not be introduced later), with into the contract, whereby the public sector well-specified triggers and an established authority can retain some control over decision process requiring consultation with the project. However, there is an inherent the concessionaire.

Figure 32: Overview of intervention options Use megatrend and scenario analysis to identify areas with possible need for public interventions

Scenario & megatrend analysis to identify ... which can be addressed areas with possible adaptation need ... via different intervention options

Example Concession — Termination clauses duration — Renewal/extension options

Corporate — Board representation governance — Golden/preferred shares — Approval of ownership sale Ownership — Limited foreign ownership whole asset

Control over — SPV* co-ownership

Scenario analysis — Option to introduce Competition competition

— Obligatory, event-triggered, Example Capital expenditure indicative capex** plans — Safeguards against (Re-) Financing excessive debt — Reﬁnancing approvals Preserved — Master planning and design responsibilities — Operations standards/laws Control over

speciﬁc functions Preserved — Security-relevant services Megatrend analysis services and activities

* SPV = special purpose vehicle ** capex = capital expenditure

Source: World Economic Forum. “Connected World: Transforming Travel, Transportation and Supply Chains“.

Steps to Prepare and Accelerate Public-Private Partnerships 51 3 Structuring a Balanced Risk Allocation

Public-sector options on concession incumbent airport operator might propose a The former approach risks overinvesting to termination and duration to incentivize high- terminal or runway expansion if the current ensure sufficient capacity while the latter quality service delivery services cannot cope with the traffic level, risks underinvesting. In between the two Termination options should specify different or conversely, the operator might propose extremes are various forms of cooperative levels of breaches and most – except for improving accessibility to hinterland areas or collaborative decision-making, and these blatant abuse – should be activated by the to pre-empt the construction of a rival are often preferable. For unanticipated government only after a cure period (12-18 airport there. Yet the government should investments, the ideal outcome-based months), so that the operator has a chance carefully evaluate such proposals in order contract would specify the trigger (for to bring the service up to the required not to sacrifice value-for-money and instance, a threshold capacity-use ratio) quality standards. If that fails and the public competitiveness for the construction of and the time-scale, though these should sector does then invoke the termination these additional facilities. be indicative rather than rigid, and enforced clause, the compensation paid to the only after consultation. The contract should operator should follow well-defined valuation Public-sector preserved areas of services also specify an adequate return on the guidelines (inclusive of an appropriate and responsibility to maintain control investment. penalty). In contrast, a concession- In some PPP projects, some aspects will extension option can be used as a “carrot” remain under the control of the public- Public-sector influence on refinancing rather than a “stick” for the concessionaire sector authority. These are the aspects The contract may also specify the to maintain high performance and quality which the private sector has little direct conditions for any refinancing arrangements levels year after year. For container- incentive to optimize, but which need by the contractor. Inadequate refinancing terminal concessions at ports, for instance, to be optimized for the overall benefit of can cause excessive debt, and thus a about 15% include renewal options, and society. They include aspects such as reduction of the contractor’s efficiency a further 5-6% have been extended by master planning, system integration and incentives and an increased risk of bail- mutual agreement (out of a sample of 293 security-relevant activities. In some PPPs, outs, tariff increases or service disruptions. concessions).76 however, the private sector is responsible So the regulator may reserve the right to for such aspects. If these aspects are approve refinancing or make the refinancing Public-sector options to introduce subjected to regulatory changes midway conditional on certain pre-specified credit competition at a later stage to provide through the project, the concessionaire ratings or financial ratios of the PPP entity. alternatives for users must be compensated fairly; for instance, Alternatively, the government may assume Exogenous changes over the life of a PPP if new security regulations necessitate the refinancing risk by providing a standby contract may favour the need and potential installation of special scanners at airports, refinancing facility. for competition: an expanding market, the cost should come out of the public industry deregulation, and technological purse rather than out of the operator’s own advances that alter the minimum efficient pocket. scale. Any public sector option to introduce competition at a later stage should set Public sector influence on capital clear conditions for such a change (for expenditure instance, threshold capacity-use ratios) and Control of capital expenditure – whether potential compensation payments. And planned investment at the start of a project the government should first consult with or unanticipated investment midway the current operator and give it a chance through the project – can range from to propose alternative solutions before strict government prescription on the one granting licences to competing operators hand, to a fully independent market-based or building new, rival, state-owned approach by the operator on the other. infrastructure assets. For instance, an

52 Steps to Prepare and Accelerate Public-Private Partnerships

4 Creating a Conducive Enabling Environment

For a PPP programme to proceed smoothly, it needs a favourable environment Rigorous in addition to adequate project-specific project preparation 4.1. Establish a solid legal 4.2. Enhance individual preparation. Both sides of the partnership process Public- framework and capacity with training, and – public and private – have to be ready and § sector independent regulators/ build institutional capacity able to deliver a pipeline of projects. The readiness dispute resolution in PPP units public sector has two broad challenges to Bankable deal with: establishing a sound legal and feasibility institutional framework, and building the study 4.3. Facilitate access to 4.4. Develop a necessary capacity among civil servants. As Private- local currency, long-term competitive and capable for the private sector, if it is to deliver PPPs sector ﬁnance and guarantees local industry/workforce readiness efficiently it needs the backing of policies and pursue trade reforms that will improve its access to finance Balanced risk allocation and foster a competitive and capable and regulation industry. And as for civil society at large, the 4.5. Insist on 4.6. Optimize public transparency and enforce communication, challenges are: helping ensure that the PPP Civil-society programme progresses in a transparent readiness anti-corruption standards information and and corruption-free way, and getting Conducive participation stakeholders to accept the programme.77 enabling environment

forms of creeping expropriation, such as their potential. Even in countries with well- 4.1 Public Sector tax law changes, impartial regulatory price regarded bureaucratic structures, things reviews, or an increase in land charges. can go wrong: the A1 motorway in Poland Readiness: Political and regulatory risk is not confined to suffered a seven-year delay because of ill- developing or fragile countries; just consider defined laws and other problems; and in Legal and the unexpected changes of renewable feed- Thailand, a confusing institutional framework Institutional in tariffs in several European countries, or the for land transport has led to overlapping and proposed cuts in gas-transportation tariffs unclear responsibilities between the various Framework in Norway. But clearly, if the country lacks ministries, transit authorities, commissions a sound legal and institutional framework and departments involved. Infrastructure projects require a long view with reliable mediation and arbitration – their duration is far greater than that of mechanisms in the event of disputes, To ensure the strongest possible framework most governments, so PPPs need a stable investors might not have sufficient trust to for PPPs, and to maximize the appeal of legal and institutional underpinning that is enter such a long-term partnership. such projects for investors, governments resistant to political volatility. If investors have to work on four main areas: formulating perceive serious weaknesses in the legal Besides mitigating regulatory risk, a sound a comprehensive PPP policy, designing and institutional framework, they will be legal and institutional framework has a a robust and stable legal framework, reluctant to invest their money in long- further crucial role to play: enhancing optimizing the institutional set-up, and term infrastructure projects − or will ask for procedural clarity and efficiency. That is, enabling efficient and reliable dispute excessive equity returns to compensate for the relevant laws must be clear and avoid resolution. More specifically, the tasks and the political risk. In fact, political and policy imposing undue restrictions on such responsibilities that governments should risk is often the most relevant (and the requirements as transfer of ownership, attend to are: most unpredictable) risk in emerging and foreign investment, sub-contracting, and developing countries. It includes the danger user charges. The institutions involved in Formulate a comprehensive PPP policy. In a of renationalization, as recently happened a PPP – both the contracting agencies comprehensive PPP policy, the government with the railways in Zambia and Tanzania or and the regulators – need to be efficient defines what it intends to do and what it with airports in Bolivia, but it can also take and reliable, or the projects will fall short of chooses not to do with regard to PPPs. It

54 Steps to Prepare and Accelerate Public-Private Partnerships 4 Creating a Conducive Enabling Environment clarifies and publicizes the objectives and Design a robust and stable legal and Optimize the institutional framework roles of PPPs in the overall infrastructure- regulatory framework. by assigning clear roles and distinct policy context, as well as the advantages – Promote specific PPP legislation, or responsibilities. and the limits of the PPP approach. And it at least precise PPP regulations that – Accelerate planning and decision making guides the creation of a full PPP programme, conform to the country’s general laws. processes by auditing the existing and helps to transform that programme into Note that user charges, for instance, or approach and standardizing it to best- an active pipeline. To formulate this policy, private ownership of infrastructure assets practices. the PPP planners should take the following could create conflicts with the law as it measures: – Assign separate authorities for policy- stands. making, contracting/monitoring, and – Articulate the various objectives of the – Develop a legal framework that is dispute resolution to prevent conflict of PPP programme – not only focusing on characterized by simplicity, integrity and interests. financing but also considering efficiency predictability. The relevant laws would and social and environmental aspects. – Establish a transparent governance ideally be few in number, consistent structure, with responsibilities and – Define the scope of prospective projects with existing laws and norms, and competencies clearly defined. South clearly – the sectors, the minimum unambiguous, but would also be Korean PPP governance serves as a project size, the contract types, and so adaptable to different project types. useful model in this regard, as illustrated on. – Strike a balance between setting in figure 33. – Establish transparent principles of regulatory norms in the legal framework – Harmonize PPP governance and implementation, such as rigorous and allowing project-specific institutions across regions, and clarify procedures for value-for-money testing, modifications in each contract with the responsibilities of the various levels procurement and public-interest regard to the risk allocation, the bid of government – central, provincial and safeguards in regulation. evaluation criteria, and so on. municipal. – Specify the rules on operational aspects, – Strive for legislation that applies across – Limit the number of sector regulators – including labour rights and health and sectors and regions. that is, institutions responsible for setting safety. the regulatory framework, technical – Seek regular input from all stakeholders standards or specific price caps. – relevant ministries, private companies, and representatives of civil society – to fine-tune the policy and ensure benefits for both sides of the partnership.

Figure 33: Example of PPP governance in South Korea Each government agency needs clear roles and responsibilities

Agency Roles and responsibilities

1 Develop PPP Ministry of Strategy and Review project policy, annual plan Grant approval proposal Finance & guidelines

2 Establish Announce RfP*, Submit project sector-speciﬁc select bidder & proposal PPP plan contract award Procuring ministries Conduct Perform value- pre-feasibility & for-money test feasibility study

3 Public and Private Research, Provide Assist RfP, tender Infrastructure Investment education & technical evaluation and Management Centre (PIMAC) promotion assistance negotiations

4 Board of Audit Audit of projects and Inspection and processes

* RfP = Request for proposal

Source: Jooste, Stephan F. and W. Richard Scott. Organizations Enabling Public Private Partnerships: An Organization Field Approach. October, 2009. Collaboratory for Research on Global Projects.

Steps to Prepare and Accelerate Public-Private Partnerships 55 4 Creating a Conducive Enabling Environment

Enable efficient and reliable dispute alternative to regulatory institutions, an – Make a variety of provisions that will resolution. expert panel; Chile, for example, uses discourage opportunistic renegotiations. – Establish dispute-resolution such panels, where three experts are These provisions might include review mechanisms that are tiered according jointly nominated by both contractual and arbitration panels, freeze periods to the severity of the dispute; for parties. Such independent regulatory after the initial signing of the contract, example, an internal mediator for low- institutions and panels can have a charges for contract-change requests, level disputes; binding or non-binding positive welfare effect, as they reduce periods of prohibition of future contracts expert panels and arbitrators for the regulatory/political risk premium that for contractors that are in gross non- more serious issues; and courtroom equity investors demand. And they are compliance, and maximum renegotiation jurisdiction (national or international) for useful in complementing “regulation by amounts; for example, Colombia very serious disputes. Focus first on contract” with an element of “regulation restricts renegotiations to 20% of speedy and informal dispute-resolution by institution”, when disputes arise government funding. approaches, with the overarching due to the incompleteness of long- – In the event of disputes, carefully objective of understanding the other term PPP contracts. It is essential balance the private sector’s interest in side’s position and actively looking for to ensure the political independence financial sustainability with the public win-win solutions, and avoiding damage of these institutions: keep them at value-for-money objective. Bear in to the long-term partnership. Initiate an arm’s length from any vested interests mind that bankruptcies and a possible informal dispute resolution soon after – government or private – by such service disruption are costly – but the issue arises – do not wait for it to means as guaranteed funding that is only in selected circumstances should become pressing and to escalate. not reliant on the public budget, public governments offer “bail-outs” through monitoring, fixed appointment terms for – Set up independent regulatory contract renegotiations. If they give commissioners, and transparent and institutions similar to those used the impression that such bail-outs are inclusive processes for appointing those in energy and telecoms in many readily available, that would reduce the commissioners. developed countries. Consider, as an private sector’s long-term incentives.

Figure 34: Options for dispute resolution Different dispute resolution options can be used

International dispute resolution provides unbiased decisions International — Example: International Centre for Settlement of Investment Disputes jurisdiction/ — Settlement through binding expert reviews and analyses arbitration

Local court system provides binding decision, yet may be slow or biased — Court system needs to be accepted by both parties: Government may prefer to National be subject to its own court system but (foreign) operators might fear a bias jurisdiction — Sometimes slow and costly

Arbitration by expert panels and regulators can provide immediate, binding decisions — Need to ensure that the panel/regulator consists of independent experts without vested Binding expert interest and no regulatory capture panel/regulator — Can be more costly as it is a permanent, professional institution Cost and duration

Non-binding expert panels can provide quick and actionable solutions — Needs to be staffed with neutral experts with speciﬁc technical and business know-how Non-binding — Choice of experts is critical and must be done jointly by private and public sector initially when expert panel contract is signed; for example, in Chile three independent experts are chosen by both parties

Internal mediators can provide an efﬁcient ﬁrst step to dispute settlement and maintain a good relationship — Mediator is determined on a case-by-case basis as the need arises Mediator — Focus is on mutual resolution of disputes before escalating to litigation or arbitration (internal) — Clear escalation channels and clear deadlines and procedures are required

Sources: – Best Practices on Contract Design in Public-Private Partnerships. September, 2007. Washington DC: The World Bank. – Public-Private Infrastructure Advisory Facility (PPIAF). Dispute Resolution – Checklist and Sample Wording. April, 2008. Washington DC: The World Bank. – Private-Public Partnerships Reference Guide Version 1.0. 2012. Washington DC: The World Bank.

– PPI & Solution of Regulatory Conflicts: Expert Panels in Chile. February, 2007. New Delhi: International Conference on India’s Infrastructure Needs with PPPs.

particularly local or regional governments in 4.2 Public Sector low-income countries, simply do not have enough of that vital resource. But even in Readiness: high-income countries where PPP skills may Capacity be available in central units of government, civil servants in the agencies implementing Building PPPs will often lack the necessary expertise – in particular, they might lack skills that For the public sector, PPP projects may be non-essential in traditional public impose large capacity requirements. At procurement but that are crucial to PPPs each phase of the life cycle, considerable (such as financial, legal, and transaction skilled manpower is needed – for planning, skills). And if governments cannot match the engineering, legal, financial, economic or skills of their private-sector counterparts, administrative work. Many governments, it could result in unbalanced contractual agreements.

56 Steps to Prepare and Accelerate Public-Private Partnerships 4 Creating a Conducive Enabling Environment

Figure 35: Capacity-building strategies Individual learning should be complemented by institutional capacity building. The Individual and institutional capacity building need to complement each other shortfall in government capacity can also be offset by institutionalizing PPP units. These central agencies for PPP know- how can help to excel in the PPP process Individual capacity building across various aspects – policy formulation, —Training and knowledge sharing technical assistance, quality control, and —Talent and leadership development project promotion and marketing. The unit should have executive authority (not just an advisory role) sponsored at a high level, Institutional capacity building ideally located within a strong central- —Establishment of a PPP unit government department. For example, —Standardization of guidelines and tools the South African PPP unit is based —Data collection and ex-post project in the National Treasury, from where it evaluations and audits coordinates PPP activities across sectors and projects, and transfers knowledge to Country-level capacity building other government agencies. In countries —Broad government capacity building with a strong planning or policy-coordination strategy and programme agency, that agency could be the ideal —Tertiary education programmes location for the PPP unit. The PPP unit also needs competent staff with adequate public- and private-sector backgrounds, including economists, accountants, lawyers and engineers. Training is key, but for sustainable individual the Local Government Association and capacity building, governments must Partnerships UK, supports local public Some of the ways that PPP units can complement it with a holistic approach to bodies to improve their PPP capabilities, enhance their effectiveness are: talent management. All too often, the civil and delivers about 1,000 skills events servants assigned to plan and manage a to more than 100 local authorities in – Target specific government failures by PPP are inexperienced and untrained for England each year. In countries with means of the PPP unit. For example, the role. Governments would do well to a federal-state structure, a centralized if procurement incentives are poor, introduce dedicated training programmes training unit would be an advantage: not emphasize quality control; and if tender or to upgrade them if they already exist. For only can it keep overall costs down, it and transaction costs are unduly high, maximum impact these programmes should can also generate some standardization standardization and dissemination of be practical, multidisciplinary, and cost- and cross-fertilization across states. best practices are needed. Experience shows that comprehensive PPP unit effective. Some options worth considering – Consider setting up a fellowship are: functions correlate with higher success: programme with other public-sector For example, PPP units in South – Adopt a structured training programme agencies, multilateral development Korea, the UK, and in Victoria/Australia involving on-site as well as off-site banks or with private-sector firms, to that have a broad policy, technical training and using experiential learning broaden the horizons of government assistance, quality control and project modules and other principles of adult employees involved in PPPs. promotion role have been relatively more learning: Just better guidelines will – Conduct training more widely, so successful than PPP units that have not drive change. In Indonesia, for as to include potential contracting been operating within a more limited example, a monthly training course and agencies as well as other government mandate.79 a quarterly customized programme are agencies whose staff might be involved – Follow a learning-by-doing approach. offered with on-site visits to successful in the project, such as the agencies PPP projects. Gain maximum benefit from the learning responsible for granting approvals. by capturing know-how centrally and – Set and maintain standards for different finding roles for the up-skilled staff in knowledge levels. Align these standards Governments should also look beyond other projects. For example, in Saint with the PPP certification scheme training, and take a longer-term, strategic Petersburg, the central PPP unit was currently being developed by the IFC. approach to capacity building through assigned project implementation – Partner with academic institutes and talent management and development. to speed capacity building and the private sector when appropriate. They need to establish clear policies on standardization. For example, Uruguay cooperates with human resources planning, recruitment – Seek to expand institutional know-how the Polytechnic University of Madrid, and selection, people development, work by developing appropriate toolkits – and the Philippines with Japan’s Toyo rules, processes and culture, and retention. guidelines, template contracts, best- University; and in India, civil servants The conscientious approach taken by practice checklists, and so on. Rather receive training from the Confederation Singapore’s public services is a useful than reinventing the wheel in pursuit of of Indian Industry. model here: it offers dedicated generalist them, leverage existing materials and – Take advantage of international and specialist career tracks, customized customize them where necessary to support. The World Bank Institute, training, university scholarships, attractive conform to local circumstances, laws for instance, hosts Global PPP Days performance-based compensation, and and capacity. a culture of performing.78 To lure high- and e-conferences, and also regional – Build accurate and consistent data on forums. The European PPP Expertise quality staff, for instance, the trick is to shift the emphasis from salary (it might prove the cost and time performance of PPPs Centre (EPEC) runs workshops and a vs traditional procurement to make helpdesk that provides support. difficult to exceed the salary level of other public agencies, and nearly impossible to informed choices on delivery mode and – Adopt a train-the-trainer approach, compete with the private sector) to the to secure the best value for money. or establish a centralized training unit institution’s other attractions – the status This benchmarking should extend to achieve economies of scale. In the and empowerment it might confer, its beyond financial metrics and should also United Kingdom, for example, Local contribution to nation-building, and so on. include metrics on maintenance, quality, Partnerships, a joint venture between throughput and operations.

Steps to Prepare and Accelerate Public-Private Partnerships 57 4 Creating a Conducive Enabling Environment

– Cooperate across borders with other potential projects and regulate them, has to establish a PPP unit and a PPP PPP units – perhaps via regional been crucial in raising the limited awareness review unit, and enhancing public- networks such as the Africa PPP of PPPs in Nigeria and to facilitate one of sector management training (much of Network – to enable peer-learning, the largest PPPs in the country to date, the it with the help of the Australian High facilitate regional projects and harmonize Lekki-Epe highway. Commission, which arranges training PPP approaches and standards. workshops and provides scholarships – To optimize future PPPs, conduct a A PPP unit (or any other governmental for management studies at Australian retrospective evaluation of the PPP infrastructure institution) seldom represents universities). Chile is another good preparation and implementation process an island of excellence in an otherwise weak example of a country that has embarked and assess whether adequate value for public sector. So governments also need to on the long process of comprehensively money has been delivered. develop public-sector capacity across the modernizing its public sector and country. attracting high-quality staff into its public – Leverage the PPP unit to provide PPP- institutions. skills training to public officials in other By arranging country-level capacity-building government agencies and ministries that – Establish a tertiary education initiatives, governments can draw on a may contract PPPs or be involved in programme specializing in PPPs or pool of educated staff. Forward-looking them in some function. infrastructure. The PPP Graduate School policy-makers who consider PPPs a key at Toyo University in Japan serves way of delivering infrastructure projects as a model in this regard. It provides Although they are not PPP units in a should create a conducive climate to boost practical and customized courses to narrow sense, two interesting institutional capacity on a broad basis. Two broad students from a wide variety of private- set-ups are used in Africa to address the measures worth taking are: and public-sector backgrounds. An public sector capacity gap. First, the APIX – Embed capacity building in national evaluation is made of each student’s investment promotion agency in Senegal, strategy, basing it on multistakeholder existing knowledge to identify the which was created in 2002 under the commitment. For example, Ghana has student’s specific education needs with direct supervision of the president’s office, climbed to the top ranking of the Africa regard to economic theory, PPP design, has attracted skilled staff with business Capacity Index,80 thanks to diligently project management and finance. and engineering competences, effectively diagnosing capacity gaps in its 2009 Governments too can cooperate facilitating a number of concessions, PPP Diagnostic and Capacity Building with leading international universities including the Dakar airport and the Dakar- Study and taking measures to bridge to address their capability shortfalls Diamniado toll highway. Second, the them. These measures involved making in planning, economic, technical, Infrastructure Concession Regulatory changes to government structures commercial, regulatory, transaction and Commission in Nigeria, which was and procedures, including the plan project management skills. established to promote PPPs, identify

Figure 36: Example of tertiary PPP education: Toyo PPP Graduate School, Japan Capacity building can be supported with tertiary education programmes

Toyo PPP Graduate School ...... with broad but customized curriculum

Academic graduate programme... — 2-year Master’s Economic theoryeory BusinessBusin admin. — 20+ students p.a. Broad, Public ﬁnancence Publicc prprojects — Established in 2006 balanced curriculum Financial theoryheor Privateate pprojects ... with practical focus ... — Opportunity to study while working during the day PPP system Case studies — Research projects with local governments, construction, ﬁnance and consulting industry Each student ... and students with various backgrounds evaluates existing Private Customized knowledge ... course plan Sectors Public for each student Architecture & Others ... and bases the engineering curriculum on Sociology Subject individual gaps Economics Urban planning Law

Toyo PPP Graduate School is also assisting the Philippines and Malaysia through the international APPPI * programme

*APPPI = Asia Public/Private Partnership Institute.

Source: Creating public sector capacity in Japan. February, 2012. Presentation at PPP Days Geneva. http://www.unece.org/fileadmin/DAM/ceci/documents/2012/ppp/ppp_days/Day2/Nemoto.pdf.

58 Steps to Prepare and Accelerate Public-Private Partnerships 4 Creating a Conducive Enabling Environment

– Arrange country-specific guarantees reduce political and regulatory risk (see 4.3 Private Sector against credit default, such as the Korea chapter 4.1). While investors often focus Infrastructure Credit Guarantee Fund on contractual arrangements to mitigate Readiness: (KICGF) or the Indonesia Infrastructure political risks, they should also reduce the Access to Guarantee Fund. Such guarantees can chances of political interference arising in significantly decrease borrowing interest the first place: they can do that through Finance rates without drawing heavily on public- responsible service delivery, stakeholder sector resources (as opposed to loans) engagement, and keeping adverse social Infrastructure projects are very capital- by crowding-in private financiers such and environmental impacts to a minimum. intensive, with slow payback and significant as insurance firms and pension funds early life-cycle risks – notably construction, that seek investments with a long-term Improve investment opportunities by political and demand risks. As local equity asset-liability match. developing the project pipeline, and and bond markets in low- and middle- – Mitigate risk associated with (re-) enhance access to those opportunities by income countries are often illiquid and financing and interest rates as well creating market platforms and facilitating inefficient, and banking markets tend as exchange rates and currency financial intermediaries. to focus on short-term lending, these convertibility, either via government – Coordinate the various regions and countries often have few willing local guarantees or by developing financial government levels involved to get a long-term lenders and equity investors risk management products. For full picture of the project pipeline, and available. Accordingly, the private party that example, the Netherlands-based share the information thus obtained. contracted the PPP might struggle to raise Currency Exchange Fund (TCX) and Infrastructure Australia is a good the requisite financing. And international the multilateral development banks model here, collating and publicizing all lenders and investors face additional provide risk hedging for currencies and upcoming investment projects. Once currency risks, and so tend to be cautious maturities not covered by commercial assured of the prospective pipeline, – sometimes over-cautious: they are easily banks. And the Chilean government investors will more readily make the discouraged by the gaps in information and compensated concessionaires if the upfront investments in staff and know- the perceived (often misperceived) level of peso lost more than 10% of its value how that are needed to participate in the risk in developing countries. In the wake of against a hard currency (and vice infrastructure market. the financial crisis, risk aversion has even versa if the peso gained more than – Create a dedicated platform for increased in many developed countries 10%). Another approach is to develop infrastructure deals to increase (as manifested in reduced leverage ratios (re-)financing facilities to ensure transparency and publicity; for example, in recent PPP deals), and the new Basel concessionaire access to debt at the Sokoni database informs and III banking regulations are expected to reasonable and predictable rates: for connects sponsors of and potential reduce long-term bank-lending activities example, the India Infrastructure Finance investors in infrastructure projects in even further as banks will be required to Company Limited (IIFCL) provides long- Africa, thereby helping to raise capital hold higher reserves. There is no shortage term debt for a maximum of 20% of and increasing market efficiency. of private finance globally, but many project costs. infrastructure projects just do not offer an – Promote new financial intermediaries – Encourage private-sector solutions for long-term investment to support adequate risk-return profile – particularly for credit enhancements as a way of greenfield projects. risk redistribution and idiosyncratic risk reducing the loan risks. These solutions diversification, as well as to overcome include bond insurance and letters of Since the financing challenges depend on agency problems of fixed-life funds credit – or asset-pooling of different that do not match the infrastructure life the asset’s risk profile – which varies over its projects by financial intermediaries. An life cycle – the solutions are also invariably cycle. This can also be enabled via new innovative approach is that of the debt legislation. For example, master limited specific to the life-cycle stage of the project. fund Hadrian’s Wall, which aims to revive To enhance the private sector’s access to partnerships in the United States, which the European infrastructure bond market are used by many pipeline businesses, sufficient and adequately priced financing, after the demise of the monolines. governments and multilateral development are customized to the infrastructure The fund invests in subordinated debt cash flow profile with high dividend bank support is essential. They should take tranches, with the aim of enhancing measures in three broad areas: mitigating disbursements as they allow for a tax- the below-investment-grade ratings optimized treatment of cash yields. risks through guarantees, increasing of infrastructure projects to allow – Encourage cooperation and joint investment opportunities and access to institutional investors access to these 81 investment among institutional investors them, and unlocking financial markets. investment opportunities. to build the expertise and scale Mitigate risks by issuing guarantees – Avoid misperceptions of the risk required to invest in the complex and and reduce perceived risks by providing level by making more data available heterogeneous infrastructure asset objective information. on infrastructure investments. For class. This collaboration will help to instance, collect and share investment- – Encourage multilateral development meet the investment requirements of performance data and facilitate large deals, and thus crowd in small and banks to develop more standardized independent rating agencies. And solutions for the mitigation of political medium-sized investors. The United strengthen the public-private dialogue Kingdom, for example, is adopting the risk, for example, by accelerating the and private-private dialogue so that procedures and extending the scope model of the Australian investment investors’ concerns are heard and manager IFM, jointly owned by 30 of existing instruments such as partial heeded by the public sector and by risk guarantees and the political risk Australian pension funds, which invests private-sector consortium partners, such one-third of its funds in infrastructure insurance provided by the Multilateral as construction firms. Investment Guarantee Agency (MIGA). assets. Such improved access to the Partial risk guarantees, for example, infrastructure asset class will help to enabled the securing of debt finance by Note that both contractual parties should attract new investor types, and thus help reducing the interest-rate spread from also consider risk-mitigation measures to evolve infrastructure from a specialist 5% to 2% and extending the available beyond financial instruments. Governments asset class into a mainstream one. loan maturity from 5 years to 16 years in can make the asset cash flows more reliable Vietnam.82 and predictable through the PPP contract (see chapter 3), and ensure a dependable legal and institutional framework to

Steps to Prepare and Accelerate Public-Private Partnerships 59 4 Creating a Conducive Enabling Environment

Figure 37: Example of the benefits of an infrastructure-deal online platform: Sokoni, a market exchange platform for Africa Deal platforms can increase market transparency and efficiency

Developing countries are facing issues Online deal platforms can address in connecting projects and ﬁnanciers these issues effectively

Example of power project in East Africa — Many different players across countries and sectors Without Sokoni With Sokoni High market — Consortia formation is fragmentation complex and time consuming — 1-year search for — Easier to connect Pre-feasibility – opportunities sponsors to find a project — Finally found at market experts AfDB* conference — Information on deals, partners and sources of — 1-year delay finding — Easier to find finance is scarce and costly – Feasibility – feasibility funds preparation facilities Information particularly for global firms proving viability — AfDB as last resort and donors asymmetries — Little benchmarking information — 18-month discussion — Easier to find and Financing – with financiers cheaper debt, equity, raising capital contractor, equipment — Lack of standard presentation formats and high search costs High — 6-month discussion — Easier to find — Teasers and information Refinancing – transaction with investors (int'l) investors memoranda costly selling down costs — Greater liquidity exposure and competition

* AfDB = African Development Bank

Source: Technology Platform for African Infrastructure Projects. 2011. Sokoni.

Unlock equity and debt markets to facilitate refinancing, and develop a broad spectrum of exit channels for each life-cycle phase of the project. For infrastructure ventures, the risks change markedly over the course of the project, with construction and demand risk being sequentially resolved over the years. Accordingly, the typical form and source of financing will change over time to match the risk appetite of each investor. For instance, a short-term bank loan may be used at the start of the project, while long-term bonds become viable after construction and demand ramp-up. Hence the need to develop a broad portfolio of exit channels (or takeout financing methods) for each life-cycle phase, including local equity and bond markets, institutional investors and banks – to enable greenfield developers to free up capital for new projects. Bringing innovative sources of finance to the market will also increase competition for assets among investors and will eventually drive down the costs of finance. For example, India has developed a diverse market for infrastructure financing, including commercial banks, infrastructure finance companies, insurance companies, private equity firms, developers and mutual funds. And Chile has been successful in channelling pension fund money into infrastructure by granting contractual and financial guarantees to projects so that they receive the minimum credit ratings required for this group of institutional investors.

Some of the recommended steps to broaden the financial markets are summarized in figure 38.

60 Steps to Prepare and Accelerate Public-Private Partnerships 4 Creating a Conducive Enabling Environment

Figure 38: Approaches to diversifying exit and financing channels Exit/financing channels for each project life-cycle stage are paramount

Risk exposure and the typical financiers Examples of diversified change over the project life cycle financing/exit channels

Risk Promote investment regulation aimed at lifting restrictions on local pension funds and insurance companies Contract risk — India announced that life insurers will be allowed to invest in special purpose vehicles of private firms and in debt rated Construction risk lower than AAA to boost infrastructure investment

— Pension funds have started to provide debt directly to Traffic risk projects, e.g. for the N33 road widening PPP in the Netherlands where a Dutch pension fund committed to a Operating risk refinancing facility with a 20-year tenor at a fixed rate

Encourage investments by (local) sovereign wealth funds — Khazanah Nasional of Malaysia expands its infrastructure portfolio from direct investments to also include funds

Tender Build Early operations Late operations Develop local bond markets — The Asian Bond Market Initiative created new securitized debt instruments, established credit guarantees, a regional Initial financing (Re-)Financing or exit settlement system, and enhanced credit rating

— Sponsor equity — Pension funds Encourage local firms to participate in initial public offerings — Private equity — Infrastructure funds with to increase stock market liquidity — Infrastructure brownfield focus Equity — Successful IPO of Phnom Penh Water Supply Authority funds with — Insurance firms — Creation of junior market on Jamaican Stock exchange with greenfield focus — Sovereign wealth funds incentives for small firms — Initial public offering (IPO) Reorganize and adjust regulation of banking system to make — Project finance — Bond issue loans available and cheaper — Bank loan, e.g. for — Long-term loan by bank Debt — If necessary, open the sector to foreign competition construction or pension fund

prices are some 200% higher than equipment. For instance, enhance the 4.4 Private Sector in other countries, owing to supply skills of the local workforce through Readiness: bottlenecks – a problem exacerbated by vocational training institutes and a high transportation costs.84 training fund that all firms pay into. Or Local Industry set up equipment banks to overcome Although large contracts are often awarded equipment shortages, and to avoid Development to multinational corporations, a PPP leaving equipment idle. programme should also aim for proper – Improve access to materials by and Trade participation of local industry. That will increasing the efficiency of the goods not only benefit the local economy, but market: liberalize licensing laws and Reforms also increase the acceptance of PPPs reduce or abolish import tariffs as For PPPs to succeed, the private- by civil society. To create the requisite well as non-financial tariffs, such as 85 sector partner must equally be capable competitiveness and competence in its incompatible technical standards. of delivering on the value proposition. private sector, and help local industry – Conduct legal and institutional reforms Unfortunately, many developing countries get ready to deliver PPPs efficiently and to enhance the ease of doing business lack a competitive and capable local private effectively, governments would do well to in a country and that are conducive to sector that is able to deliver infrastructure take a systematic approach: a flourishing construction sector (for efficiently and effectively on a whole life- both PPPs and non-PPPs). Areas of cycle cost basis. Consider these examples: Develop and enable the local industries and reform may include construction permit workforce – Limited competitiveness in the processes, property rights, construction construction sector. For example, – Help small- and medium-sized liability and indemnification frameworks, the Africa Infrastructure Country enterprises to participate in tenders (or and repatriation of profits. Diagnostic revealed that only half of the to sub-contract) by making it easier for – Pursue an industrial policy that infrastructure projects analysed in sub- them to get information and to form encourages the development of Saharan Africa attracted three or more consortiums. A model of facilitation in sufficiently large construction firms – bidders, and only half of those showed this regard is the East African Chamber that is, firms with integrated capabilities a bid spread that was tight enough of Commerce, Industry and Agriculture along the life cycle of an infrastructure to suggest that the tendering was in the five countries of the East African project, including design, construction, competitive.83 Community (EAC): it raises businesses’ operations and maintenance. But take awareness of PPP opportunities, – Low construction productivity. care not to allow this policy to reduce strengthens public-private dialogue, competitiveness in the industry. Productivity is particularly low in many and builds private-sector capacity – Take a flexible approach to setting local developing countries – and it has been (by providing training on responding content requirements (if setting any at stagnating in many developed countries to tenders, forming consortiums, all), so as not to jeopardize the efficiency over the past decades. negotiating “win-win” contracts, and and the quality of the project. In devising – Limited access to skilled staff, building sub-contracting). the procedure for shortlisting bidders, materials and equipment. In several – Cooperate with the private sector countries in sub-Saharan Africa, cement consider adding “soft” criteria such as to enhance its access to staff and technology transfer and traineeships for

Steps to Prepare and Accelerate Public-Private Partnerships 61 4 Creating a Conducive Enabling Environment

local workers, but without prescribing and technologies (such investments will certain market reforms are implemented in fixed values/percentages. For example, not achieve payback from just a single advance. If import duties are heavy and visa the Victorian Industry Participation Policy project). requirements cumbersome, for instance, in Australia applies soft local-content – Approach local and international then a cross-border highway project might criteria in shortlisting bidders and in companies proactively, and enhance lack bankability. Similarly, an airport project deciding between tied bidders, but their access to and interest in project might not prove profitable if landing rights keeps value for money as the primary opportunities by inviting them to project- are difficult to obtain for non-incumbent selection criterion. After awarding related road shows, conferences and airlines. If the project does go ahead and the contract, it also ensures that industry briefings. the reforms are introduced afterwards, that performance and quality are tracked would have the unfortunate effect of giving – Facilitate business associations that consistently and that additional costs the concessionaire undeserved windfall represent private-sector interests and are monitored. profits. that could be regarded as a coordinated voice of business in the policy process. The needed trade reforms are particularly Attract private-sector companies, both Such organizations can also enhance important for cross-border infrastructure local and multinational. PPP projects by the dialogue within the private sector assets such as airports, ports and definition depend on close cooperation (for instance, between investors and highways. The solutions are inherently between the public and private sectors, industrials), and thereby help to form sector-specific: for a port, the key might yet in many countries, such cooperation consortiums and strategic alliances be to reduce the administrative burden for is conspicuously lacking. To provide the more effectively. A good example of how cargo import/export border procedures, information and foster the trust that are to facilitate such dialogue is provided whereas for a cross-border highway, the essential to attracting local and international by the public-private organization key is to institute efficient one-stop border private-sector companies to PPPs, the Infrastructure Partnerships Australia. It posts. The result of such reforms is often two sectors must engage in a continuous produces independent research, collects a boom in demand for infrastructure: the dialogue: best practices and case studies, runs liberalization of the airline business, for – Develop a prioritized and integrated conferences and networking events, instance, enabled low-cost carriers to infrastructure plan, with an indication of including a National Infrastructure flourish, and led to a more competitive the potential financing option for each Award, and drives public debate through market and a surge of passenger traffic at project. Publicize those projects widely policy taskforces on specific topics, a range of airports across Asia, Europe and and early, and formulate a continuous including sustainability and taxation. the United States. For further examples from pipeline. That will enable the potential other sectors, see figure 39. private partners to prepare for individual Unlock demand for infrastructure by projects as well as to make long-term enabling trade reforms. Sometimes a PPP investments in developing capabilities project may be delayed or weakened unless

Figure 39: Examples of enabling trade reforms Enabling trade reforms underpin infrastructure demand and PPP viability

Examples

Sector Within country reforms Cross-country reforms

Low-cost carrier market entry Simpliﬁed visa requirements & procedures Air e.g. led to reduced prices and more e.g. APEC* business travel card allows multi- competition in the US, Europe and Asia visits with single visa for business travelers

Trucking liberalization One-stop border posts Road e.g. reduced transport costs in Zambia e.g. reduced transit times up to 50% in Uganda, Rwanda and Kenya

Cargo rail liberalization Technical standardization Rail e.g. resulted in increase of quality and e.g. standardization of rail gauge and productivity in Russia overhead electricity lines increase rail trafﬁc

Shipping liberalization Customs declaration Ports e.g. improved services and increased e.g. streamlined and transparent requirements competition in the Philippines and procedures in Pakistan encouraged trade

Unbundling of value chain Cross-country power markets Energy e.g. reduced prices and increased e.g. West African Power Pool establishes competition in UK energy market common market for electricity across countries

* APEC = Asia-Paciﬁc Economic Cooperation

Sources: – Trade Facilitation in the East African Community: Recent Developments and Potential Benefits. July, 2012. Washington, DC: US International Trade Commission. – “Liberalization and Deregulation in the Domestic Shipping Industry: Effects on Competition and Market Structure”. In Philippine Journal of Development. 2003. – Reforming Customs Clearance in Pakistan. April, 2010. Investment Climate series, No. 9. Washington DC: The World Bank. – The Impact of Regional Liberalization and Harmonization in Road Transport Services: A Focus on Zambia and Lessons for Landlocked Countries. January, 2008. Washington DC: The World Bank.

62 Steps to Prepare and Accelerate Public-Private Partnerships 4 Creating a Conducive Enabling Environment 4.5 Civil Society Readiness: Transparency and Anti- corruption

Corruption is endemic in many developing countries: public-sector salaries are low, and the laws are often unclear, complex and inadequately enforced. Large long- term infrastructure projects are particularly vulnerable, owing to their scale and duration and the presence of subsidies and natural monopolies. Estimates are that in developing countries, 10-30% of the total value of infrastructure projects is lost through corruption and non-transparency.86 PPP programmes are no exception, and have been tainted by corruption and bribery. But the scourge of corruption extends beyond low-income countries: just ten years ago, PPP scandals erupted in both Chile and Denmark (the MOP-Gate and the Farum cases respectively).

Figure 40: Prevalence of corruption Corruption is endemic both in developing countries and in infrastructure

High scope for corruption in developing countries ...... and in infrastructure

Transparency International, Transparency International, Corruption Perceptions Index 2011 Bribe Payers Index 2011 0 = 10 = Always bribe Never bribe

Public works & construction 5.3 Utilities 6.1 Real estate 6.1 Oil & gas 6.2 Mining 6.3 Power 6.4 Pharma & healthcare 6.4 Heavy manufacturing 6.5 Defence & military 6.6 Transportation & storage 6.7 Telecommunications 6.7 Score Consumer 6.8 8–10 (clean) 6–7.9 Banking & ﬁnance 6.9 4–5.9 Information technology 7.0 2–3.9 Light manufacturing 7.1 0–1.9 (corrupt) Agriculture 7.1 No data

Sources: – Transparency International Corruption Perceptions Index 2011. December, 2011. Transparency International. – Transparency International Bribe Payers Index 2011. November, 2011. Transparency International.

Steps to Prepare and Accelerate Public-Private Partnerships 63 4 Creating a Conducive Enabling Environment

The consequences of corruption run deep: servants, as in South Korea; a national The joint efforts of government and wasted tax money, a less efficient market audit office, such as the one in the business representatives, along with with lower productivity and investment, United Kingdom, to retrospectively individual activists or pressure groups, weaker public services at higher prices, assess a PPP’s value for money; and could serve to mobilize the media, educate an uneven playing field for companies, a checks-and-balances system, as in the public on the effects of corruption, and a weaker overall economy. To combat Chile, where the Ministry of Finance and expose the culprits. Here are three the problem, governments have various oversees and limits the concession examples that could have a significant measures available: reducing public-sector powers of the Ministry of Public Works. impact. First, the Construction Sector receptiveness to corruption, discouraging – Lead by example, and get public Transparency Initiative (CoST), with eight companies from corrupt practices, and servants to commit to ethical standards. member countries including Ethiopia, taking coordinated multistakeholder actions For instance, the Minister of Public Guatemala, Vietnam and Zambia, 87 against corruption. Works in El Salvador drove changes establishes multistakeholder platforms in contract transparency and ethics, to communicate, interpret, validate and Reduce public-sector receptiveness and thereby reduced the number of monitor information related to large to corruption by taking demand-side contracts challenged by lawsuits from construction projects. One of the early measures. The broad strategy should 80% to zero between 2001 and 2012. success stories includes a rural road involve transparent procedures, tight Benin introduced a “code of ethics”, project in Southern Ethiopia where the supervision, and high-level reforms. Some requiring officials to sign a commitment partnership negotiated a reduction of of the specific measures that would help to to abstain from corruption. 11.5% of the total construction cost address the problem are: by monitoring and comparing tender – At the legislative and policy level, prices.88 Second, the World Bank’s Open – Develop and implement well-defined introduce various reforms, such as Contracting Initiative aims to set global and predictable procurement clearer tax laws and civil- service principles for capacity building and impact processes. The United Kingdom’s reforms. Private Finance Initiative (PFI) is measurement of transparency and intends

a model worth considering, as it to improve country-level practices by Discourage companies from involvement precisely defines procurement stages, enhancing disclosure and supporting citizen in corrupt practices by taking supply-side requirements and deadlines, as well engagement for effective monitoring. Third, measures. By adopting various measures, as providing a transparent decision- voluntary multistakeholder anti-corruption governments can stop companies from making and bid-evaluation framework. initiatives, such as the World Economic taking the initiative in proposing a bribe or Take care, however, not to make Forum’s Partnership Against Corruption securing a contract in any other improper the bureaucratic burden so complex Initiative (PACI), can improve the way that way. and costly as to discourage smaller stakeholders work together, influence public companies from bidding. – Institute and enforce better standards policy, and monitor the compliance of for corporate reporting, accounting and partner organizations. – Publicize tenders widely and well in auditing. advance of deadlines, perhaps making use of an e-procurement portal or – Adopt effective sanctioning techniques. website. For example, the Mexican A good model here is the US Foreign government website Compranet, Corrupt Practices Act, which penalizes 4.6 Civil Society which all federal agencies have to use, companies that bribe officials in foreign provides the essential details, including countries. Readiness: the calls for bids, terms, notes, results – Arrange integrity pacts between the and contracts. Users can track how government and all bidders to abstain Communication, much the government is spending on from bribery and disclose all quotes. Information and individual goods and services, which These undertakings can be enforced agencies are procuring, and which via penalties, including the loss of the Participation corporations have submitted and won contract and blacklisting for future bids. projects. Without the support of the general – Announce awards promptly and openly. – At a project level, implement specific public, PPP programmes will fail, or For example, projects in the Philippines anti-corruption mechanisms. For at least struggle. The basis for the have used Twitter to announce example, in Colombia, a water and public’s initial opposition is that, in many winning bidders swiftly, and in Bolivia, sanitation project took several deliberate countries, civil society shows low levels concessionaire selections have been precautions, such as: channelling of trust in the construction, finance and given live coverage on television. the loan funds through a commercial infrastructure sectors, and low acceptance – Disclose as much project information fiduciary account directly to contractors; of privatization of assets or services that as possible to enable monitoring by the involving central government ministries are widely regarded as public goods. media, civil society and competitors. in overseeing local-government And the reason for that, in turn, is partly Some limits on disclosure might practices; disclosing contract-award a lack of information and a sense of be necessary, however, to protect information on a project website; and exclusion: insufficient effort goes into commercial intellectual property rights enabling complaint procedures for communicating the value proposition and or national security. citizens. inspiring public participation. An opinion poll in Mozambique, for example, revealed – Consider means to enhance a widespread public belief that privatized Take coordinated action against corruption accountability and transparency, not enterprises are sold to foreigners, whereas by facilitating joint initiatives by the public only for the concessionaire selection in fact 92% of private capital was national.89 but also during project implementation, and private sectors. Since all stakeholders for example, by periodically publishing (except the culprits themselves, of course) progress, quality and cost reports. will benefit from a reduction in corruption, coordinated multistakeholder initiatives – Introduce various governance might prove popular and effective. mechanisms and audits to detect conflicts of interest, monitor compliance and deter corruption. Some models to consider are: job rotation for civil

64 Steps to Prepare and Accelerate Public-Private Partnerships 4 Creating a Conducive Enabling Environment

Figure 41: Public acceptance of PPP programmes Civil society acceptance of Public-Private Partnership programmes is often low

Low trust in energy, government and Low acceptance of ﬁnance sectors privatization and PPPs

% of respondents trusting ... % of respondents agreeing that privatization has beneﬁted the country (in 17 Latin American countries)

79 46 - 41%

66 64 35 35 53 30 27 43 45

Technology Auto- Food & Energy Govern- Financial 1998 1990 2000 2001 2002 motive beverage ment services

Sources: – 2012 Edelman Trust Barometer. January, 2012. Edelman Insights. – Strategic Communication for Privatization, PPP and Private Participation in Infrastructure Projects. March, 2008. Washington DC: The World Bank.

Besides conducting stakeholder Require the publication of candid project Stress the private sector’s role in engagement for a specific project, PPP information. responsible service delivery and shaping promoters can pursue the following actions – Maximize the disclosure of relevant the public PPP perception. to overcome public resistance to a broader information – how the projects – Formulate a code of conduct PPP programme: communicating the PPP were selected, why the PPP option for private-sector partners. It value proposition, requiring the publication provides value for money, and how the should include service quality and of project information, enabling public procurement process is executed fairly. environmental and social standards, participation, and stressing the private – Make environmental and social-impact as well as requirements for public sector’s role in responsible service delivery. assessments mandatory, and make communication and consultation. A their results available to the public. good basis for this code of conduct is Proactively communicate the PPP value Facilitate or even commission scrutiny the set of OECD Principles for Private proposition and its relevance for society. by independent third parties – review Sector Participation in Infrastructure. – Highlight the positive experiences panels, auditors, academic institutions, – Motivate the concessionaires to comply from previous infrastructure think tanks and NGOs – and again with these principles and to participate privatizations, particularly those where circulate the findings. in contracts in good faith. Refer to the user charges are accepted, such as – Set operating practice standards and principles when evaluating companies telecommunications. Make clear that protocols – specify what is required participating in the tender, and include someone has to pay for infrastructure: and expected from the private-sector the threat of penalties, such as revoking every cent that is not taken from user party, for instance, with regard to the concession or blacklisting the charges has to come from taxes. labour, environment and community company from future projects. – Portray the PPP programme with involvement. care, listing not just the economic – Set rigorous reporting requirements for advantages, but also the long-term operators, such as the requirement for environmental and social benefits, regular reporting of quality metrics by including job creation and the reduction UK water companies. of congestion – factors that people can – Liaise with the media. In Tanzania, for easily relate to. In Ghana, for example, example, the PPP programme has the water-sector PPP programme an open-door policy with journalists, deftly communicated the benefits of allowing them easy access to increasing coverage such that support information. for the project exceeded 80% of the population, and street marches Enable participation in decision-making. took place to press for speedier – Establish standard processes and completion.90 guidelines for stakeholder engagement – Structure the PPP programme on PPP projects. carefully so that it starts with smaller, – Consult and involve the public on the simpler and less controversial likely impacts of the project. For the projects that stand a better chance Ghana water PPP, for example, the of rapid acceptance. Leverage those promoters conducted user surveys and positive examples when launching an stakeholder workshops. information campaign.

Steps to Prepare and Accelerate Public-Private Partnerships 65 5 The Way Forward

PPPs are already playing a significant role in Conducting a review of the PPP programme group’s perceptions and experience, and infrastructure delivery in various developed and standardizing the approach where possible it can be supplemented by and developing countries. Given the vast Governments can maximize the potential KPIs (such as delays in land acquisition, infrastructure needs and constrained of PPPs by conducting a high-level review demand-forecast deviations, corruption public financing, PPPs are bound to of their entire PPP strategy and framework statistics, and the number of PPP-certified play a still greater part in the future and – using the set of past, present and public-sector staff). For the potential output represent a promising way forward for many prospective PPPs. This review should cover of such a review, see the PPP Preparation infrastructure projects. all critical success factors described in this Maturity Assessment Tool in figure 42. For report (or use other benchmark frameworks each country (and even each sector), the Three broad themes will shape the future such as InfraScope or the United Nations relative importance of the 24 best practices of infrastructure PPPs in any country: Economic Commission for Europe (UNECE) may vary according to the maturity level developing a comprehensive PPP strategy PPP Readiness Assessment), and use the of the current policies and processes. For and standardized framework, based on a best-practice checklist to identify those example, in a poll conducted at a session multistakeholder programme review against factors where the current approach is least of the World Economic Forum on India best practices; realizing the value of a effective and where change is required (not 2012, the participants identified the most strategic PPP programme (rather than a all best practices are equally relevant for critical success factors in the Indian context project-by-project approach) in the context successful PPPs in a given country context). as government capacity and the legal of the national infrastructure plan; and and institutional framework, followed by keeping expectations flexible and realistic by Such a review should draw on completed permits and land acquisition, also looking beyond PPPs. multistakeholder discussions; the robust demand forecasting, steady political participants should include various leadership, secured project preparation ministries, the PPP unit, contractors and funding, and a balanced risk allocation. This financiers as well as local infrastructure prioritization of critical success factors may experts and user representatives. The also prove valid and useful for many other programme’s challenges and performance countries. can be assessed on the basis of each

66 Steps to Prepare and Accelerate Public-Private Partnerships 5 The Way Forward

Figure 42: PPP Preparation Maturity Assessment Tool Governments need to evaluate and benchmark their PPP programme in multistakeholder discussions

Rigorous preparation Illustrative relative Bankable feasibility process maturity assessment study

1 Experienced, cross-functional 7 Robust demand forecasting team Innovation-friendly output 8 2 Buy-in and leadership of high- Preparation Feasibility specification level politicians and technocrats process study Optimized mix of user charges 6 7 9 5 3 Clear governance structure 1 8 and other funding sources 4 Bankability testing and market Rigorous project management 9 10 4 2 sounding and multi-stage planning 3 10 Inclusive stakeholder 11 5 Sufficient preparation funding 3 engagement 2 11 Expedited legal feasibility study, 6 Project preparation facilities 4 12 with cost-recovery and advisory 1 permits and land acquisition 12 5 24 Conducive enabling 13 Balanced risk environment 23 allocation & regulation 14 Sound legal/institutional frame- 19 Life-cycle oriented contract work with fair dispute resolution 22 13 15 model aligned with objectives Individual and institutional 20 21 capacity building 16 14 Incentive-based price regulation 20 and competition 17 21 Access to local currency, long- 19 18 term finance and guarantees Enabling Risk 15 Risk sharing and guarantees Competitive and capable local environment allocation 22 Adaptive regulation industry and trade reforms 16

Transparency and anti- Safeguards for social objectives 23 17 corruption initiatives in quality regulation Public-sector view 1 = Best practice Predictable process for 24 Communication, information 18 and participation of civil society Private-sector view 5 = Deﬁcient government interventions

Guided by the review, the planners in the UK: after each substantial milestone environment. According to figures from should proceed to develop an optimal in the preparation process, the organizers the Economist Intelligence Unit, India’s and customized strategy and framework, discuss the main results, review them PPP framework is on a par with Japan’s, following joint stakeholder action plans. against best-practice standards, and then, if for example. And some projects have Most countries cannot expect to achieve satisfied, give approval to proceed. In order succeeded even without an adequate excellence quickly along all the listed best- to raise standards consistently throughout enabling environment, such as the practice dimensions; they should recognize the PPP programme and across sectors, concession for Phnom Penh airport in 1995. that some best practices will be more consider simplifying and speeding up the In fact, many emerging and developing important initially than others, depending preparation and procurement process by countries – even without a mature, PPP on the specific context. The prioritized adopting various standardized features programme – are often attractive to review will oblige governments to focus their and procedures: institutionalize project- infrastructure investors, given the potential attention on the most pressing issues and preparation facilities, financial-guarantee returns from such high economic growth to devise appropriate and context-specific and financing facilities, and viability- and the enormous infrastructure needs. solutions. Obviously, governments should gap funding mechanisms; specify clear Unsurprisingly, several of these countries aim to fulfil as many critical success factors standards, responsibilities and timelines for – such as Turkey, Colombia, South Africa as possible. The more that are present, land acquisition; create documents such and Indonesia – are expected to join some the lower the perceived risk of investors as model concession contracts or model developed and BRIC countries (notably, will be and the lower their demanded terms, rules for user charges, and manuals Brazil and India) in becoming major PPP financial returns will be; and that should of technical specifications; standardize markets, if they can convince institutional lead to enhanced value for money for the process documents such as Terms of investors that their PPPs are rock-solid and public sector. Note that several critical Reference for appointment of advisors, underpinned by a long-term strategy and success factors – particularly those relating RfQ/RfP documents, guidelines and data public-sector commitment. to the preparation process, the feasibility repositories for demand forecasting, and a study, and to some extent the enabling PPP-preparation guidebook. All such efforts To facilitate action towards a comprehensive environment – are also applicable to and to standardize the PPP approach would PPP strategy and programme, three factors important for non-PPP procurement modes, make the overall process for private-sector must be taken into account: and countries may benefit from leveraging participants more predictable, and increase 1. Strong political commitment, with a clear those experiences for the PPP preparation the likelihood of project conversion based vision that encompasses the social, process. on consistent public sector support. economic and environmental benefits 2. An action plan, addressing the four key Once the transition towards best practices The PPP value proposition is achievable requirements for PPP success: has been initiated, government should aim in many countries – not only in developed to standardize and “commodify” the overall ones – provided that the right steps are – Pipeline of bankable projects PPP approach. They should establish a taken. Some lower-income countries can originated and prioritized from the gateway process, such as the one used already boast a remarkably mature enabling

Steps to Prepare and Accelerate Public-Private Partnerships 67 5 The Way Forward

national infrastructure plan and by and economic benefits and those that – Start with central government PPPs, rigorous value-for-money testing; provide value for money. rather than with state or municipal – Preparation of individual projects – Select the most promising sectors first. PPPs (which typically have fewer with robust feasibility studies and a These are infrastructure assets with competences available). balanced risk allocation; the following characteristics: a gradual – Process for transparent procurement pace of change and contractible, Governments should also take a long- and rigorous project execution and stable service outputs (such as term view and concentrate on building contract monitoring; social-infrastructure projects), stand- trusted long-lasting partnerships with the alone instead of network facilities private sector. For example, they should – Policy changes to create a (such as a water-treatment plant vs a aim to achieve best value for money for conducive enabling environment, water-distribution network), and few the complete PPP programme rather than including institutional and legislative externalities and little need for regulation just for each individual project. To build a reforms to enhance public- and (such as ports). positive track-record and gain investor’s private-sector readiness; – Identify the most appropriate and confidence, they should ensure that initial 3. A robust communication strategy to financially attractive assets – and projects are well prepared and bankable – overcome resistance – whether from do not use PPPs to outsource bad even if that means surrendering some value- within ministries or from the public. projects. Initially, prioritize mid-sized for-money. If initial projects fail, confidence assets and transactions (to avoid in the country’s PPP model will weaken, Approaching PPPs as a long-term disproportionate transaction costs on and the concessionaires will demand higher programme instead of as a series of the one hand, and projects that are risk premiums for subsequent projects. independent projects too big for the market’s capabilities Governments also need to modify the Countries would benefit by taking a on the other hand), as well as assets PPP policy and programme as lessons are methodical and staged approach, involving with lower technical complexity, with learned through audits and evaluations, a planned sequence of PPPs, to benefit fewer stakeholder controversies and feedback from PPP units, and discussions from experience, progressively incorporate with an adequate scope of works (such with the private sector. lessons learned, and signal to the private as social infrastructure assets that sector that a continuous pipeline is worth involve the facility itself rather than the Another way of promoting PPPs is the upfront investments in due diligence. For service provision). Favour projects with by creating links between different example, the Australian PPP programme less inherent risk exposure, such as projects within the scope of the national has evolved from an initial focus on brownfield expansion and rehabilitation infrastructure plan. For example, Senegal economic infrastructure assets, such as projects and those with limited launched an “Integrated Infrastructure roads and airports, to social infrastructure risk transfer (such as management Projects Approach” to develop four new assets, such as hospitals and public contracts). For instance, Djibouti first infrastructure assets: an airport, a container transport. Countries may consider the organized a brownfield concession terminal, a power plant and a toll road. following measures: for the existing port, and only then That programme explicitly considered the – Derive the PPP pipeline from the contracted for a greenfield terminal as a interdependencies between the individual integrated infrastructure country plan PPP. projects, as illustrated in figure 43. and focus on projects with high social

Figure 43: Example of an integrated PPP programme: Integrated Infrastructure Projects Approach, Senegal A well-planned PPP programme can have a catalytic economic effect

Dakar Toll Road — Coal transport to power plant — Linking city and airport — Connection to economic zone DakarD

Blaise-Diagne Inter- Dakar Container national Airport Terminal Sendu Power Plant — International — Coal import from — Power supply to connectivity for South Africa airport, port and city & economic city zone

Source: Infrastructure Financing & PPP. June, 2012. African Development Bank Group.

68 Steps to Prepare and Accelerate Public-Private Partnerships 5 The Way Forward

Mining (or oil and gas) activities can One success story here is the Maputo also provide opportunities to stimulate Development Corridor (MDC), a PPP toll- complementary infrastructure development: road system linking South African mines mining operations require considerable and other industries, such as agriculture, to infrastructure assets from “pit-to-port”, the Mozambican port Maputo, and boosting including power, water, rail, roads and ports. economic productivity and growth (see Mining’s demand for these assets can be figure 44).91 used to underpin the viability of some PPPs.

Figure 44: Example of linking infrastructure planning to mining activities Integrating mining and infrastructure planning can boost regional economies

The Maputo Development Corridor Results and impact

Broad commitment ... Positive traffic development — Pioneered by the Ministers of Transport of South — Current traffic levels amount to 9 million tonnes, Africa and Mozambique with an estimated 20 million tonnes for 2020 — Maputo Corridor Logistics Initiative set up in 2004 by 8 founding companies, including mining firms Broad positive economic impact — Areas in close proximity to infrastructure grew at a ... to improving an essential economic corridor higher rate — Connects north-eastern provinces of South Africa — Higher annual increase in employment growth rate and Maputo, capital and main port of Mozambique vs the rest of South Africa — Serves freight to/from South Africa, Zimbabwe, — Created substantial contribution to small and Zambia, Malawi, Botswana and Mozambique medium enterprises in form of contracts, jobs and — Central to South Africa's coal, vanadium, stainless training steel and petrochemical production — Fostered agricultural, trade and mining sectors

... through a toll road PPP Enhanced regional integration of markets — US$ 5 billion investment in Gauteng-Maputo road — Opened South African and Mozambican markets — 30-year build-operate-transfer concession — Access to global markets through Maputo port — Increase in international tourists

Sources: - Driver, Amanda and João Gabriel de Barros. The impact of the Maputo Development Corridor on freight flows: An initial investigation. 2000. Development Policy Research Unit in Cape Town and the Centre for Strategic and International Studies in Maputo. - Maputo Corridor Logistics Initiative official website. http://www.mcli.co.za/index.htm. - Campbell, Maléne, Johan Maritz, Dries (AC) Hauptfleisch.The impact of the Maputo Development Corridor on wealth creation within the region it serves. University of the Free State and the Council of Scientific and Industrial Research, Built Environment. - Söderbaum, Fredrik. Institutional Aspects of the Maputo Development Corridor. April, 2001. Development Policy Research Unit, University of Cape Town. - Roodt, Monty J. “The impact of regional integration initiatives and investment in a southern African cross border region: The Maputo Development Corridor”. African Sociological Review 12, 1, 2008, pp. 90-104.

The MDC also provides a good case study modes are sometimes more appropriate Beyond contractual PPPs, there are of cross-country cooperation within PPP for certain sectors, assets and countries. looser public-private collaborations that programmes. Such projects, spanning To guide future project-delivery decisions, can help to improve infrastructure. One two or more countries, should be given sound empirical evidence is needed. Thus example is the Business Working Group of particularly favourable consideration, as greater efforts should be made to collect the international business leaders, organized they tend to produce the largest economic performance data of different contracting by the World Economic Forum: it provides and social benefits by furthering regional modes in a systematic and internationally coordinated private-sector input into ways integration and enabling international comparable way. of accelerating some of the projects in the trade. However, these regional projects Programme for Infrastructure Development – when implemented under traditional But even where PPPs are contra-indicated, in Africa Priority Action Plan (PIDA-PAP). The forms of procurement, and even more they can still influence infrastructure private sector can serve in many other ways so when implemented as PPPs – have projects. PPP best practices – in project to support the public sector in prioritizing their particular challenges and risks: the management, technology choices, and and delivering infrastructure – in project countries involved require compatible so on – have inspired improvements in origination, for instance, or in joint initiatives (or even common) institutional, legal traditional procurement. And there is to train the workforce. and regulatory frameworks, compatible further potential to improve traditional technical specifications and standards, procurement, particularly by mainstreaming A far-sighted integrated PPP programme – and coordinated project preparation and life-cycle orientation and output/outcome- in conjunction with other policies that foster execution backed by political interests. specifications into standard contracting. effective infrastructure project prioritization, In addition, the PPP experience fosters efficient delivery and productive use of Taking a broader perspective, beyond PPPs public discussion on the efficiency and assets – could contribute invaluably to The infrastructure needs of almost every effectiveness of alternative delivery modes, closing the infrastructure gap, thereby country are so vast and varied that no and reveals which aspects of traditional easing a particularly pressing concern in single silver-bullet solution is available to public projects need to improve. And the many developed and developing countries. cover all aspects. PPPs have an important competition between different financing By adopting policies based on the place, and in the right circumstances and delivery modes spurs better analysis practices laid out in this report, countries they can provide better value for money of the relative advantages (and drawbacks) would advance their competitiveness and than alternative procurement and delivery of each approach when evaluating specific speed up their broader socio-economic modes. But PPPs do not always deliver the projects. development, to the benefit of all best value for money. Other contracting stakeholders.

Steps to Prepare and Accelerate Public-Private Partnerships 69 Overview of Further PPP Guidance

– Attracting Investors to African Public-Private Partnerships: – Public-Private Partnerships (PPP), A Decision Maker’s Guide. A Project Preparation Guide. 2009. World Bank Group and 2007. Burnett, Michael. Maastricht: European Institute of Public Infrastructure Consortium for Africa. Administration. – Granting and Renegotiating Infrastructure Concessions, Doing – Public-Private Partnerships: In Pursuit of Risk Sharing and Value It Right. 2004. Guasch, J. L. Washington DC: The World Bank for Money. June, 2008. Paris: Organisation for Economic Co- Institute. operation and Development. – The Guide to Guidance, How to Prepare, Procure and Deliver – Public-Private Partnerships: Principles of Policy and Finance. PPP Projects. July, 2011. Luxembourg: European Investment 2007. Yescombe, E. R. Butterworth-Heinemann. Bank. – Public-Private Partnerships Reference Guide. 2012. Washington – A Guidebook on Public-Private Partnership in Infrastructure. DC. The World Bank. June, 2009. Bangkok: Economic and Social Commission for – Toolkit for Public-Private Partnerships in Roads and Highways. Asia and the Pacific. United Nations. March, 2009. Public-Private Infrastructure Advisory Facility – Guidelines for Successful Public – Private Partnerships. March, (PPIAF)/World Bank. 2003. Brussels: European Commission, Directorate-General Regional Policy. – National Public Private Partnership Guidelines Volume 2: Practitioners’ Guide. March, 2011. Australia: Infrastructure Australia. – OECD Principles for Private Sector Participation in Infrastructure. 2007. Paris: Organisation for Economic Co-operation and Development. – Public-Private Partnership Handbook. 2008. Manila: Asian Development Bank.

70 Steps to Prepare and Accelerate Public-Private Partnerships Abbreviations

AfDB African Development Bank APEC Asia-Pacific Economic Cooperation APPPI Asia Public/Private Partnership Institute BOT build-operate-transfer BRIC Brazil, Russia, India, China capex capital expenditure CCTV closed-circuit television CoST Construction Sector Transparency Initiative DB design-build DBD design-bid-build DBFO design-build-finance-operate DBO design-build-operate EAC East African Community EGL Energie des Grands Lacs EPC engineering, procurement and construction EPEC European PPP Expertise Centre GDP gross domestic product HOT high-occupancy/toll (referring to highway traffic lanes) ICT information and communications technology IFC International Finance Corporation IFM Industry Funds Management IIFC Infrastructure Investment Facilitation Center IIFCL India Infrastructure Finance Company Limited IIPDF India Infrastructure Project Development Fund IMF International Monetary Fund IPPF Infrastructure Project Preparation Facility IPO initial public offering IRR internal rate of return KICGF Korea Infrastructure Credit Guarantee Fund KPI key performance indicator LPVR least present value of revenues MDC Maputo Development Corridor MIGA Multilateral Investment Guarantee Agency MoE Ministry of Energy MoF Ministry of Finance MoP Ministry of Planning MoT Ministry of Transport NEPAD The New Partnership for Africa’s Development NGO non-governmental organization OECD Organisation for Economic Co-operation and Development PACI Partnership Against Corruption Initiative PDF project development fund/facility PICI Presidential Infrastructure Champion Initiative PIDA Programme for Infrastructure Development in Africa PIDA-PAP Programme for Infrastructure Development in Africa Priority Action Plan PFI Private Finance Initiative (UK) PIMAC Public and Private Infrastructure Management Center PMO project management office PPF project preparation fund/facility PPIAF Public-Private Infrastructure Advisory Facility PPP Public-Private Partnership RfP request for proposal RfQ request for qualification SAIDI system average interruption duration index SAIFI system average interruption frequency index SME small and medium-sized enterprises SPV special purpose vehicle TCX The Currency Exchange Fund UNECE United Nations Economic Commission for Europe UMPP ultra mega power plant

Steps to Prepare and Accelerate Public-Private Partnerships 71 Endnotes

1 The infrastructure gap is calculated from infrastructure spending data taken 26 Infrastructure Spotlight. July, 2012. London: Preqin. from the IHS Global Insight Construction Database and infrastructure-needs 27 See for example, European PPP Expertise Centre. Market Update: data from the OECD report Infrastructure to 2030. See the introduction for Review of the European PPP Market in 2012. Luxembourg: European details. Investment Bank. Available at www.eib.org/epec/resources/epec_market_ 2 This planning fallacy is a characteristic not just of PPP projects, but of all update_2012_en.pdf. infrastructure projects. 28 Public-Private Partnerships Reference Guide. 2012. Washington DC: The 3 While funding refers to the money provided by the ultimate payers (either International Bank for Reconstruction and Development/The World Bank. the government or the users) for the infrastructure asset during the course 29 The World Bank. “Private Participation in Infrastructure (PPI) Project of its life cycle, financing refers to the money raised upfront, for the capital Database”. 2012. Available at ppi.worldbank.org. investment, from financiers (who receive a return on their investment during 30 the life cycle). Guasch, J. Luis. Granting and Renegotiating Infrastructure Concessions: Doing it Right. World Bank Institute, March, 2004. 4 Romp, W. and J. de Haan. “Public Capital and Economic Growth: a Critical Survey”. In Perspektiven der Wirtschaftspolitik, 8:6–52. Orr, R.J. and B. Metzger. “The Legacy of Failed Global Projects: A Review and Reconceptualization of the Legal Paradigm”. Proceedings of the 5 Africa’s infrastructure: A time for Transformation. 2010. Washington DC: General Councils’ Roundtable. The International Bank for Reconstruction and Development/The World 31 Bank. India, building capacities for Public Private Partnerships. June, 2006. The World Bank. 6 Sustainable Infrastructure Action Plan FY 2009-2011. July, 2008. 32 Washington DC: World Bank Group. Attracting Investors to African Public-Private Partnerships: A Project Preparation Guide. 2009. World Bank Group and Infrastructure Consortium 7 PPPs: An Introduction. Public-Private Infrastructure Advisory Facility for Africa. (PPIAF). Available at http://www.ppiaf.org/page/knowledge-center/ppp- 33 training-resources. “PPP in Infrastructure Resource Center for Contracts, Laws and Regulations (PPPIRC)”. The World Bank. Available at http://ppp.worldbank. 8 Stalk, George. “The Threat of Global Gridlock”. Harvard Business Review. org/public-private-partnership. July/August, 2009. 34 Public-Private Partnerships Reference Guide. 2012. Washington DC: The 9 World Urbanization Prospects. The 2011 Revision. March, 2012. International Bank for Reconstruction and Development/The World Bank. New York: United Nations, Department of Economic and Social Affairs, 35 Population Division. Ibid. 36 10 Ibid. Examples of project preparation facilities include: IFC Infraventures, India Infrastructure Project Development Fund (IIPDF), New Partnership for 11 World Bank. Data on GDP. 2012. Organisation for Economic Co-operation Africa’s Development Infrastructure Project Preparation Facility (NEPAD- and Development (OECD). Annual average real GDP growth rates: Baseline, IPPF), Public-Private Infrastructure Advisory Facility (PPIAF), and InfraCo 2010-2050. 2012. Africa. 12 Data is expressed in US$ for 2010 (non-PPP adjusted) from “Global 37 Assessment of Project Preparation Facilities for Africa. November, 2012. Insight Construction”. March, 2012. IHS Global Insight Construction Infrastructure Consortium for Africa. Database as of March, 2012. 38 Bain, R., L. Polakovic. “Traffic forecasting risk study update 2005: through 13 Data is expressed in US$ for 2010 (non-PPP adjusted) from Infrastructure ramp-up and beyond”. 2005. Standard & Poor’s. http://www.robbain.com/ to 2030. June, 2007. Paris: OECD. Traffic%20Forecasting%20Risk%202005.pdf. 14 “Ships wait 15-20 days to load Brazilian grains”. Reuters. Available Flyvbjerg, B. “Curbing Optimism Bias and Strategic Misrepresentation in at http://www.reuters.com/article/2012/02/28/soy-shipping-brazil- Planning: Reference Class Forecasting in Practice”. In European Planning idUSL2E8DSBGO20120228. Studies, 2008, 16:3-21. 15 Africa’s infrastructure: A time for Transformation. 2010. Washington DC: 39 “M1/M15 Motorway, Hungary”. In Toolkit for Public-Private Partnerships The International Bank for Reconstruction and Development/The World in roads & highways. March, 2009. Public-Private Infrastructure Advisory Bank. Facility (PPIAF). 16 Airoldi, Marco, Lamberto Biscarini, Vito Saracino. The Global Infrastructure 40 Optimism bias is the psychological basis for forecasting inaccuracy. It Challenge – Top Priorities for the Public and Private Sectors. July, 2010. consists of the common cognitive predisposition to judge future events in Boston: The Boston Consulting Group. a more positive light than is warranted by actual experience. In contrast, 17 The Global Competitiveness Report 2011–2012. 2011. Geneva: World strategic misrepresentation refers to the tendency of forecasters to Economic Forum. deliberately and strategically overestimate benefits and underestimate 18 costs in order to increase the likelihood of approval for their project when Global Risks 2012 – Seventh Edition. 2012. Geneva: World Economic there are political or organizational pressures and a lack of incentive Forum. alignment. (Source: Flyvbjerg, Bent. “Curbing Optimism Bias and Strategic 19 Global Agenda Survey 2012. 2012. Geneva: World Economic Forum. Misrepresentation in Planning: Reference Class Forecasting in Practice”. 20 Flyvbjerg, B., M. K. Skamris Holm, S. Buhl. “How common and how large European Planning Studies, 16:1, pp. 3-21. 2008.) are cost overruns in transport infrastructure projects?” In Transport Review, 41 Ramp-up effects are consistently underestimated despite the broad 2003, 23:71-88. experience available from debt rating agencies. 21 The Global Infrastructure Challenge. July, 2010. Boston: The Boston 42 Bain, R., L. Polakovic. “Traffic Forecasting Risk Study Update 2005: Consulting Group. Through Ramp-Up And Beyond”. 2005. Standard & Poor’s. http://www. 22 For an overview of PPPs, see also Prieto, Bob. “Perspectives on Public robbain.com/Traffic%20Forecasting%20Risk%202005.pdf. Private Partnerships”. January, 2009. New York: American Bar Association. 43 A Vickrey auction is a type of sealed-bid auction where bidders submit 23 “Global Pension Statistics” and “Institutional Investors” databases, bids without knowing the quotes of other bidders. The highest bidder wins Organisation for Economic Co-operation and Development (OECD), the auction, but pays the price of the second-highest bidder. This auction and OECD estimates. http://www.oecd.org/finance/private-pensions/ type gives the bidders an incentive to bid their true value. globalpensionstatistics.htm. 44 See also figure 2 “Hierarchy of Quick Infrastructure Wins” in Strategic 24 SWF Institute. “Fund rankings”. (As of 31 March 2013.) Available at http:// Infrastructure: Steps to Prioritize and Deliver Infrastructure Effectively and www.swfinstitute.org/fund-rankings/. Efficiently. September, 2012. Geneva: World Economic Forum. 25 Basel III and Solvency II regulation may render such long-term investments 45 “Private sector participation in urban rail”. Gridlines. Note No. 54. April, less attractive for some institutional investors. See “Financial Regulation – 2010. Public-Private Infrastructure Advisory Facility (PPIAF). Biased against Clean Energy and Green Infrastructure?” February, 2013. 46 “A river runs through it. A natural experiment in infrastructure”. In Geneva: World Economic Forum. The Economist. 2 March, 2013. www.economist.com/news/united- states/21572794-natural-experiment-infrastructure-river-runs-through-it.

72 Steps to Prepare and Accelerate Public-Private Partnerships 47 While funding refers to the money provided by the ultimate payers (either 68 See also appendix 11 in Strategic Infrastructure: Steps to Prioritize and the government or the users) for the infrastructure asset during the course Deliver Infrastructure Effectively and Efficiently. September, 2012. Geneva: of its life cycle, financing refers to the money raised upfront, for the capital World Economic Forum. investment, from financiers (which receive a return on their investment 69 “Sydney’s new motorway opens”. In The Sydney Morning Herald. 2005. during the life cycle). 70 Slovak Republic: ISPA as a potential tool for the undue profit of private 48 Note that the PPP model is first and foremost a project-delivery model firms. April, 2005. CEE Bankwatch Network. that aggregates risk across the life cycle and leverages private finance. This 71 does not necessarily imply non-traditional funding mechanisms such as Cruz, Carlos O. and Rui C. Marques. “Revisiting the Portuguese user charges or ancillary revenue sources. For example, availability-based experience with public-private partnerships”. African Journal of Business concessions rely mainly on public budget funding. Management. Vol. 5 (11). June, 2011. 72 49 The World Bank, Public-Private Infrastructure Advisory Facility (PPIAF). For an overview of typical risks see Prieto, Bob. “Perspectives on Public “Private Participation in Infrastructure”. 2012. Available at: ppi.worldbank. Private Partnerships”. January, 2009. New York: American Bar Association. org. 73 PFI refinancing update. June, 2003. London: House of Commons. 50 Zenglein, M., J. Müller. “Non-Aviation Revenue in the Airport Business – 74 “M6 Toll, United Kingdom”. March, 2009. Public-Private Infrastructure Evaluating Performance Measurement for a Changing Value Proposition”. In Advisory Facility (PPIAF). Performance Measurement Paper. 2007. Berlin. 75 Working Together Assessing Public–Private Partnerships in Africa. 51 Capturing the Value of Transit. November, 2008. Oakland, CA: U.S.: February, 2005. The South African Institute of International Affairs. Centre for Transit-Oriented Development. 76 Farrell, S. Observations on PPP Models in the Ports Sector. November, 52 Who pays what for urban transport? Handbook of good practices. 2010. London: Port Operations Research & Technology Centre Imperial November, 2009. Agence Française de Développement (AFD) and the College London. French Ministry of Ecology, Energy, Sustainable Development and the Sea 77 To measure stakeholder readiness along various dimensions, the (MEEDDM). first report of the Strategic Infrastructure Initiative proposes a Strategic 53 Scheme and Guidelines for Financial Support to Public Private Infrastructure Planner Tool that evaluates the following dimensions, among Partnerships in Infrastructure. 2008. New Delhi: Indian Department of others: rule of law and effectiveness of law-making bodies, government’s Economic Affairs, Government of India. openness and impartiality, access to finance, access to labour and 54 Farlam, Peter. Working Together: Assessing Public-Private Partnerships materials, and maturity of civil society. in Africa. February, 2005. The South African Institute of International Affairs. 78 Chua, Jeffrey, Larry Kamener, Michael Shanahan. The Making of a Talent http://www.oecd.org/investment/investmentfordevelopment/34867724.pdf Magnet: Lessons from Singapore’s Public Service. May, 2012. Boston: The 55 A staged bidding process (consisting of expressions of interest, a pre- Boston Consulting Group. qualification round, and shortlisting of preferred bidders for the final round) 79 Sanghi, Apurva et. al. Designing and Using Public-Private Partnership can prevent a particular problem from arising – namely, that too many Units in Infrastructure. September, 2007. Gridlines, Note No. 27. Public private-sector companies spend heavily on bid preparation even though Private Infrastructure Advisory Facility. they have very little chance of winning. 80 The African Capacity Building Foundation. Africa Capacity Indicators 56 India - Building Capacities for Private Public Partnerships. June, 2006. 2011: Capacity Development in Fragile States. 2011. Available at http:// The World Bank. www.acbf-pact.org/Data/Sites/1/docs/acireport25022011.pdf. 57 A real option is the right (but not the obligation) to undertake certain 81 See also chapter B.3. “How Should Governments Maximize the Efficiency business initiatives, such as deferring, abandoning, staging or contracting of Finance?” Strategic Infrastructure: Steps to Prioritize and Deliver a capital investment project. This flexibility to react to changing demand Infrastructure Effectively and Efficiently. September, 2012. Geneva: World or other circumstances constitutes a value to the owner of the underlying Economic Forum. asset. 82 Delmon, Jeff. Mobilizing Private Finance with IBRD/IDA Guarantees to 58 See chapter B.1. “Value for Money Procurement of Government-Funded Bridge the Infrastructure Funding Gap. June, 2007. The World Bank. Infrastructure”. Strategic Infrastructure: Steps to Prioritize and Deliver 83 Africa Infrastructure Country Diagnostic. Unit Costs of Infrastructure Infrastructure Effectively and Efficiently. September, 2012. Geneva: World Projects in Sub-Saharan Africa. June, 2008. The World Bank. Economic Forum. 84 Zunga, Nontanda and Anthony Lopes-Pinto. “Sub-Saharan Africa the 59 See appendix 4 in Strategic Infrastructure: Steps to Prioritize and Deliver world’s last cement frontier”. How We Made it in Africa. 27 February 2011. Infrastructure Effectively and Efficiently. September, 2012. Geneva: World Available at www.howwemadeitinafrica.com/sub-saharan-africa-the-worlds- Economic Forum. last-cement-frontier/7944/February. 60 Public Private Partnership Projects in India, Compendium of Case Studies. 85 The Global Enabling Trade Report 2012. 2012. Geneva: World Economic December, 2010. New Delhi: PPP Cell, Department of Economic Affairs, Forum. Ministry of Finance, Government of India. 86 Construction Sector Transparency Initiative based on OECD, 61 Prieto, Bob. “Stakeholder Management in Large Engineering & Transparency International and American Society of Civil Engineering. Construction Programs”. PM World Today. October, 2011. Vol. XIII, Issue X. 87 For a detailed overview, refer to Disclosure of Project and Contract 62 Environmental Licensing of Hydroelectric Projects in Brazil: A Contribution Information in Public-Private Partnerships. January, 2013. Washington DC: to the Debate. March, 2008. The World Bank. World Bank Institute. 63 The World Bank. “Finding Solutions to Constraints in Host Country’s Legal 88 Construction Sector Transparency Initiative. “CoST Pilot Experience in Environment”. 2011. Available at http://ppp.worldbank.org/public-private- Ethiopia: Briefing Note”. July, 2011. partnership/legislation-regulation/framework-assessment/legal-systems/ 89 solutions-to-legal-constraints. Bhatia, A., and O. Campbell-White. Privatization in Africa. Directions in Development Series. 1998. Washington DC: The World Bank. 64 Public Private Partnership Projects in India, Compendium of Case Studies. 90 December, 2010. New Delhi: PPP Cell, Department of Economic Affairs, Calabrese, Daniele. Strategic Communication for Privatization, Public- Ministry of Finance, Government of India. Private Partnerships, and Private Participation in Infrastructure Projects. World Bank Working Paper, No. 139. 65 Ibid. 91 Responsible Mineral Development Initiative 2013. April, 2013. Geneva: 66 Regulation can either be done by contract or by institution, i.e. a regulator World Economic Forum. with agreed rules. 67 A Win-Win Approach to Regulating Public-Private Partnerships. September, 2012. Boston: The Boston Consulting Group.

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