UNITED NATIONS E
Economic and Social Distr. Council GENERAL
TRADE/WP.5/1999/9 13 September 1999
ORIGINAL: ENGLISH
ECONOMIC COMMISSION FOR EUROPE
COMMITTEE FOR TRADE, INDUSTRY AND ENTERPRISE DEVELOPMENT Working Party on International Legal and Commercial Practice Forty-eighth session 29 November-1 December 1999 Item 5 (a) of the provisional agenda
PUBLIC/PRIVATE PARTNERSHIPS: A NEW CONCEPT FOR DEVELOPMENT
INTRODUCTION
1. Public/Private Partnerships (PPPS) have a critical role to play in assisting the countries of central and eastern Europe and the Commonwealth of Independent States (CIS) in implementing their development projects. Numerous infrastructure projects are waiting to happen in the region. Indeed, the same is true all over the world. New roads are needed, new telecommunications systems, new energy and natural resource projects, new water and waste treatment facilities. Apart from green field projects, existing infrastructure needs to be overhauled and updated. Power supply systems need to be refined, rail networks upgraded, ports and airports redeveloped. All this calls for massive commitments of both finance and resources, of money, skills, technology, ideas and enterprise. In many cases, the need is urgent. Yet the reality is that, today, the Governments of the region do not have the resources needed to meet this demand in full.
GE.99-
This is a reproduction of the original text submitted to the UN/ECE by the BOT Group. It has not been formally edited. TRADE/WP.5/1999/9 page 2
2. Public/Private Partnerships offer at least a partial solution to this problem. As their name suggests, these structures are about implementing and carrying infrastructure projects into effect on the basis of a form of partnership between public and private sectors. Each sector is able to contribute what it does best, so that artificial barriers between them are removed or reduced, and the combined skills and resources of each are harnessed to allow projects to be realised as quickly and effectively as possible. The private sector can contribute its innovativeness, its management skills, its efficiency, its finance and investment potential; whilst Government can continue to meet its responsibilities to its citizens, to ensure the provision of public services, to regulate areas of the economy and to shoulder risks which private sector entities cannot bear. Both sectors stand to benefit as a result. New investment can be attracted, Government debt burdens reduced and Government resources released for other uses. Infrastructure projects can proceed on an accelerated basis. The economy as a whole is stimulated. There is an increase in the quality and quantity of infrastructure projects. The ultimate beneficiaries are the taxpaying citizens and their standard of living. The countries of central and eastern Europe and the CIS are thus assisted in their pursuit of economic growth and political stability.
3. The Guidelines written by the BOT Expert Group, to be published shortly, illustrate how PPP structures can be made to work in practice and what their true benefits are. This document explains why we believe these structures to be so important.
The Guidelines and the BOT Expert Group
4. The United Nations Economic Commission for Europe (UN/ECE) will later this year publish a set of guidelines on the implementation of Public/Private Partnerships in central and eastern Europe and the CIS in the field of infrastructure. That publication (the "Guidelines") is the work of a specialist group (the BOT Expert Group) formed by, and working under the aegis of, the UN/ECE.
5. The BOT Expert Group was established in January 1996 as a result of a decision taken by UN/ECE member Governments to promote the concept of PPPs in infrastructure development in central and eastern Europe and the CIS. The BOT Expert Group's membership consists of experts from a number of prominent firms and international organisations and institutions active in the field of infrastructure projects and project finance. Its work has progressed steadily since its inception. Membership and participation are entirely self-financing and voluntary. The views of the participants are those of the individuals involved, not the bodies they represent.
What do we mean by “Infrastructure"?
6. The Guidelines focus on large-scale economic “infrastructure" projects. We interpret this term in a wide, rather than a narrow and technical sense, to include: roads, bridges, power stations, transmission lines, oil and gas facilities, rail networks, water supply and treatment systems, airports, ports, telecoms systems and so on. Our labelling of projects of this kind as infrastructure is very much a matter of convenience, however. Perhaps all they have in common is an element of public service. TRADE/WP.5/1999/9 page 3 7. The techniques described in the Guidelines can be applied to most, if not all, large-scale capital intensive projects (although the Guidelines themselves have a sector-specific emphasis). They also apply to the modernisation and/or rehabilitation of existing projects, as well as the creation of new or “greenfield” ones.
ADDRESSING THE CHALLENGE
A. Evolution of the PPP Concept
8. The last decade or so has witnessed what amounts to a world-wide revolution in the funding of infrastructure projects. For much of the twentieth century, the implementation of such projects tended to be viewed as primarily or even exclusively the responsibility of national Governments. That is no longer true. In virtually every region of the globe, Governments have in recent years (and in some cases much longer) been looking for new ways of implementing these projects, and new techniques for funding them, which place less emphasis on Government resources and involvement. This new approach now frequently entails partnerships between public and private sectors, allowing the skills, efficiency and financial resources of the private sector to be harnessed to the strengths and responsibilities of Government. The free market has been deployed, in other words, to further the provision of public services.
Why has this change taken place?
9. The development has a number of roots. The key factors include the following:
A growing disparity has arisen between the funding requirements of infrastructure projects and the financial resources available to Governments to meet those requirements.
This disparity has widened as the pressures created by demographic change and the pace of economic transformation have mounted, whilst the demands made on finite Government resources have grown.
There is a growing perception that market economies have certain strengths and advantages in identified circumstances which state-controlled systems cannot match.
The economic case for exclusive state control or ownership of infrastructure projects has become more difficult to sustain when contrasted with the efficiencies that the private sector can offer.
Economies have become increasingly interlocked and globalized, providing major capital-intensive projects with much greater access to capital and funding sources.
Technological advances have undermined natural monopolies.
Industrial competitiveness in the globalized market is heavily and increasingly dependent on the availability of high quality infrastructure. TRADE/WP.5/1999/9 page 4
10. The result of these changes has been a dramatic evolution in the techniques and concepts applied to the implementation of infrastructure projects and their funding (including in particular project-finance techniques), and in the associated expertise and know-how deployed. The concept of “Public/Private Partnership” lies at the heart of this development.
11. We have tried to avoid too technical a definition of the term “Public/Private Partnership”. In essence, by PPP we mean a form of collaboration or joint endeavour between the public and private sectors for the purposes of implementing a major project, whereby the resources, strengths and capabilities of each are brought together. This is done in a way which allocates risks and responsibilities between them in a rational manner designed to achieve the optimum balance from each perspective. The range of techniques and approaches encompassed in the term is indicated below (paras. 15-16: “What do we mean by PPP?”).
12. In practice, PPP structures usually involve the transfer of much of the responsibility for financing, designing, constructing and operating the project - and most of the risks associated with these activities - to the private sector (usually a consortium of corporate sponsors and their lenders and investors) - whilst allowing certain (often residual) responsibilities and risks to be retained by the public sector. These public sector responsibilities may include the provision of certain assets (such as land), subsidies (where the project is not economically self-standing), political risk guarantees and perhaps - where users are not being charged directly by the private sector for the service in question - a revenue stream. But the aim is to achieve a suitable balance. Both sectors, in other words, will continue to have certain defined functions in relation to the project throughout its life. Each is left to shoulder the risks and responsibilities it is best suited to manage.
13. PPP structures have been used with ever-increasing frequency and skill around the wood in recent years, both in emerging markets and in OECD economies. The concept has now started to take hold in central and eastern Europe and the CIS as well (as the panels opposite and on the next page indicate). The telecoms sector has seen the most rapid proliferation of PPP projects, but progress has also been made in applying this approach to other sectors in the region, such as power, transport and waste/water.
PPP: a new concept with old roots
14. Although PPPs in their modern form are a relatively recent phenomenon, the prototypes go back a long way. The concept of “concession” can be traced back to the Middle Ages. In the nineteenth century, it was common for major infrastructure projects to be undertaken, and investments in public utilities made, by the private sector. It was in the twentieth century, as the role of Government expanded, that the public sector took over responsibility for these projects on a large scale. Recent years have seen a reversal of the trend. What do we mean by PPP? TRADE/WP.5/1999/9 page 5 15. “Public/Private Partnership” is not a precisely defined term. It embraces a range of structures and concepts which involve the sharing of risks and responsibilities between public and private sectors including: Contracting out or management contracts: where the private sector simply provides a service or manages a facility for an agreed period and fee without taking on the financing or revenue risk.
Joint ventures: where the public and private sectors jointly finance, own and operate a facility.
Leasing: where all or a substantial part of the risks associated with funding, developing, managing and operating the facility are transferred to the private sector, which receives lease payments from the public sector for its use.
BOT (Build Operate Transfer): the most familiar form of PPP, whereby the project is developed by the private sector, which takes primary responsibility for funding, designing, building and operating it for a sufficient period of time to service and repay the debt raised for this purpose and earn a suitable return. Control of the project is then transferred back to the public sector (which retains formal ownership of the project assets throughout). In recent years, however, we have seen many variations on this theme, which have spawned a (sometimes bewildering) variety of acronyms. These include BOOT (Build Own Operate Transfer); DBFO (Design Build Finance Operate); DCMF (Design Construct Manage and Finance); BLT (Build, Lease and Transfer) and many others. The distinctions between these terms are not always clear.
BOO (Build Own Operate): where neither control of the project nor ownership of its assets is transferred back to the Government, but remains in private hands.
16. In fact, the approaches and techniques involved range from the simple commercialization of a set of assets that remain under public ownership right through to virtual privatisation (as in the case of many power projects). The way in which risks, responsibilities and powers are allocated between the public and private sectors will vary enormously from structure to structure across this spectrum. There is now a growing tendency to categorise all these terms together as “Public/Private Partnerships” or “PPPs”. That is the term we have adopted in the Guidelines.
The Water Sector1
17. In 1995, some 22 major water projects worth roughly US$3.5 billion were signed up around the wood.
18. In 1996. a further 30 major transactions in this sector, worth another $3.5 billion, reached financial close in regions including the United Kingdom, eastern Europe, the United States, south-east Asia, China, Australia, Africa and Latin America.
1 Sources: Project & Trade Finance; EBRD; Lyonnaise des Eaux. TRADE/WP.5/1999/9 page 6
19. An analysis of new deals “in the pipeline” suggests that there are perhaps as many as 250 major projects of this kind under development around the globe, worth approximately US$40 billion in aggregate.
20. The city of Maribor, Slovenia, is in the course of negotiating a BOT contract for a waste water treatment plant with a consortium led by the French company, Lyonnaise des Eaux, which was selected in February 1997 after competitive bidding. The signing of the concession agreement and financial close are expected before the end of 1997. The construction price is estimated at DM 65 million to be financed in part with a European Bank for Reconstruction and Development loan. The special purpose company to be created will be responsible for the design, construction, operation, maintenance and renewal of the plant. The city will pay the company an indexed periodic service fee, and the required funds will be generated from user tariffs. This will be Maribor's first major waste water treatment plant. At present, untreated sewage flows into the River Drava.
BOT Road Schemes2
21. Hungary started to develop a secure legal framework for private sector involvement in the provision of public services including road construction and operation in 1991 by passing a specific law on concessions. In April1993, following an international tender, a concession contract was signed with foreign investors and operators on a BOT basis with a 35-year concession for the MI/M15 toll motorway project. The total project cost was US$ 380 million. In January 1996, the 43 km Ml section was opened. A second concession contract was signed in May 1994 with an international consortium to build and operate the M5 toll motorway from Budapest to the Serbian border. The viability of this scheme depended upon substantial governmental support, including a standby operation subsidy, as well as land acquisition as a contribution in kind and public funding for feeder roads.
22. In 1994, Poland announced an ambitious (2,000 km) motorway construction and upgrading programme to be financed through PPP structures. Legislation was passed to provide a reliable legal framework for toll motorway concessions. Following international tendering, preferred bidders were also selected in March 1997 for sections of the A2 motorway (totalling 364 km) and for the existing Krakow- Katowice section of the A4 motorway (65 km). Negotiations over the concession agreements are currently under way.
23. Romania and Croatia are also pursuing BOT initiatives to upgrade or extend their road networks.
B. New Challenges
24. The modern global economy presents Governments everywhere with new and formidable challenges. This is particularly so in central and eastern Europe and the CIS, as the countries of the region undergo a difficult transformation from centrally planned to market economies against a background of
2 Source: EBRD. TRADE/WP.5/1999/9 page 7 sweeping political change and high expectations from citizens. The challenges are as clear in the infrastructure field as anywhere else. Let us consider some examples.
Access to technology
25. In order to benefit from participation in the global economy, technological advances need to be embraced, especially in the field of telecommunications, where progress has been rapid in recent years. Widespread access by companies and individuals to sophisticated information technology is essential. Without it, an economy's ability to grow and compete in the modern world is seriously impaired. The development of consumer telecommunications was often treated as a relatively low political priority under the former command economies in central and eastern Europe and the CIS. Partly for that reason, it is this sector that has so far tended to attract the highest levels of project finance in that region (see diagram 1 in annex).
Transportation networks
26. Similarly, obtaining access to wider regional and international markets requires the development of flexible, reliable and efficient transport networks, often within the context of a transnational strategy. In addition, since the collapse of COMECON, new trading patterns have developed with a strong focus on western Europe, resulting in a pressing need for improvements in east-west transport routes. The European Commission has estimated that the costs of implementing the necessary road and rail schemes in central and eastern Europe over the next decade will equate to between 2 and 3% of the region's gross domestic product (GDP).
Infrastructure and GDP
27. Performance of the whole economy is heavily influenced by the quality and quantity of available infrastructure services. The quality of these services is therefore a key factor in determining private sector output and productivity. There is inevitably a strong association between the availability of services such as electric power, telecommunications and clean water, and per capita GDP. Indeed, the two are in many ways mutually dependent.
The environment
28. The need to repair environmental damage in central and eastern Europe and the CIS, and to ensure that new infrastructure projects are environmentally sensitive and responsible, is manifest. There are problems of air pollution, poor water quality, waste control, inadequate sewage treatment, land and sea contamination, endangered species, nature conservation and so on. TRADE/WP.5/1999/9 page 8
29. Part of the reason for the damage lies in the emphasis placed under central planning on expanding industrial resources, with little regard for economic or environmental cost. Ineffective pricing mechanisms were a contributing factor.
30. So, too, was the lack of information about true adverse effects of many industrial and technological processes. Yet, the problem is a world-wide, rather than a purely regional, one. The growing concern for the environment around the world, and the consequent introduction of strict environmental legislation in certain countries, is likely to be the driving force behind many new projects in central and eastern Europe and the CIS, particularly in relation to electric power and waste facilities. Taking adequate steps to meet that concern is now becoming a prerequisite to attracting international finance, especially from the multilateral agencies.
Competing for scarce resources
31. Governments everywhere, including those of affluent OECD countries, face the constant challenge of competing priorities for public spending. However, at present, the strains on the public purse are particularly acute in the transition economies of central and eastern Europe and the CIS, and it is evident that the Governments of the region are unable to find sufficient local funding for more than a small fraction of the projects that are needed. Indeed, many Governments have reduced public investment sharply during the transition. Unless an alternative source of funding can be exploited, improvements in infrastructure will simply not occur.
C. New Opportunities
32. In response to challenges of this kind, many Governments across the world have seized on the tremendous development potential offered by PPP concepts. The flexibility of the PPP approach to financing infrastructure projects has already enabled many schemes to proceed in OECD countries, emerging markets (such as south-east Asia, Latin America and the Indian subcontinent) and elsewhere. In this way, a multitude of major infrastructure projects have been advanced around the globe.
33. Not only do PPPs offer in large part a private sector substitute for public capital investment, but they carry the potential for achieving a range of collateral benefits. For example, they represent an effective means of tackling problems of inefficiency and sub-optimal performance which can sometimes afflict state-owned enterprises, including unmet demand and unreliable service. By providing access to international banking and capital markets, they greatly enhance the financial resources available to a country and assist in integrating its economy with the expanding “global economy”. They can spawn international joint ventures and other forms of co-operation with private sector companies, possessing advanced levels of expertise and know-how, as well as world-wide experience of comparable projects. In addition, they have proved to be a potent way of disseminating a variety of wider economic, social and environmental benefits. These advantages are discussed in more detail in the next section (see diagram 2 in annex). TRADE/WP.5/1999/9 page 9 The United Kingdom Private Finance Initiative3
34. The British Government launched its own PPP development policy in 1992 under the label “Private Finance Initiative” (PM). Since then, it has been applied systematically to virtually every area of significant departmental capital spending in the United Kingdom. By November 1996, some £7.2 billion worth of projects had been initiated since the inception of PFI, and many more are in the pipeline. WHAT EXACTLY DO PPPS HAVE TO OFFER?
35. In the absence of sufficient Government funding for infrastructure projects, there is in reality little alternative to using PPPs to implement projects of this kind in central and eastern Europe and the CIS. There is perhaps no other way of rising to the financial, commercial and logistical challenge these projects represent. Apart from necessity, however, PPPs can offer a wide range of advantages to the countries that adopt them. These include the following:-
A. Fiscal Benefits
Easing budgetary constraints
36. By harnessing private sector funding, PPPs enable projects to proceed with little or even no capital expenditure by the host Government. (Revenue expenditure and/or some form of subsidy by Governments are often still required, though.) The capital cost of the project would not usually count against the Government's balance sheet or borrowing limits. This can have the effect of easing the debt burden of the host Government and releasing public resources for other purposes, such as spending on welfare or education. In fact, it is even possible on occasion for new budgetary revenues to be created from (for example) revenue sharing arrangements, concession fees and similar charges, and taxation. In many instances, the revenue costs can also be passed on to the consumer - as, for example, in the case of toll roads and bridges where costs may be met in full by the service users. The effect of these steps can be to improve the country's credit rating (and, of course, its commercial image) and thus its ability to attract foreign investment for other purposes.
Value for money
37. This background of fiscal pressure means that issues of efficiency, financial prudence and value for money are fundamental. The private sector's special expertise and know-how can be deployed at all levels on PPPS, and a commercial management approach adopted.
Optimal risk allocation
38. PPPs involve a substantial allocation of risk to the private sector - for example, in relation to the risks of cost overruns, completion delays, operational standards and fails in demand (although, as explained below, certain risks usually have to be retained by the public sector). The effect is that the projects in question will frequently achieve better value for money and benefit from greater efficiency
3 Source: United Kingdom Government. TRADE/WP.5/1999/9 page 10 gains than they otherwise would if retained wholly under government control. Ultimately, this can have a further knock-on effect on government spending levels by lowering the project's revenue cost over its lifetime. The process of allocation of identified risks to the private sector also insulates the Government from those risks. A good part of the burden of project development and maintenance is shifted to the sponsors in the private sector. In turn, this reduces the contingent risks the Government might otherwise have to face. Accurate costing
39. PPPs help Governments to assess the real costs of a project within the framework of the economy as a whole. Accurate costing is essential if private finance is to be attracted. They allow a benchmark to be established to measure the cost and efficiency of other similar projects, which in turn can help in fostering the efficient management of the public sector.
B. Economic Benefits
Speed of delivery
40. By deploying private sector finance, and freeing projects (at least in part) from constraints on public sector spending, PPPs can accelerate the pace at which infrastructure projects are launched. They would otherwise have to compete for scarce sovereign resources. This can enable projects to happen, in other words, in circumstances where they otherwise might not. In turn, this accelerates the provision of the social and economic benefits which these projects offer.
Reliability
41. They can also be completed more reliably to time and cost. The risk of cost and time overruns is borne (primarily) by the private sector. The tight contractual arrangements involved usually result in the more effective management of this risk.
Modernisation
42. PPPs can thus help promote economic modernisation. New infrastructure can be put in place, new technology given a role to play in growing industries, new telecommunications networks introduced. Their private sector emphasis means that PPPs have to respond to changing commercial or consumer demands. If they do not, they are likely to fail. By contrast, economic systems which emphasise or impose planned levels of output as the primary objective, as opposed to a demand-led approach to service provision, can impede responsiveness to change and inhibit economically sustainable innovations.
Efficiency
43. PPPs, on the other hand, promote and incentivize the efficient development and management of infrastructure services, and place a premium on the flexible and innovative approach of the private sector. TRADE/WP.5/1999/9 page 11 Service provision is commercialised. This encourages high (and internationally competitive) standards of performance and efficiency.
Access to international finance
44. PPPs attract investment from both international and domestic sources. This can be of an advantage in itself in countries which need to encourage investment (as most do), especially hard currency investment from abroad. It will help them access the global banking and capital markets and develop a domestic investment environment.
Fostering local capital markets
45. This in turn helps to stimulate the development of existing local capital markets and acts as a catalyst in the creation of new ones. The funding requirement of PPP projects tends to be comparatively large, and the financing mechanisms involved tend to be necessarily sophisticated. This stimulus to financial activity is both direct - as new funding is raised - and indirect - as “spin-off” benefits accrue.
Indirect benefits
46. PPPs can also generate significant indirect benefits for the economy as a whole. On the supply side, improvements in service provision can enhance private sector productivity. On the demand side, higher incomes can generate increased demand for infrastructure services. The projects themselves also increase demand for local industrial goods and services. This can lead to a “virtuous circle” of infrastructure development and a developing market economy. (Indeed, the two tend to be mutually dependent.)
SPT Telecom in the Czech Republic4
47. The sale of 27% of the Czech national telecom company, SPT Telecom, raised arguably the largest foreign investment in industry in the region. A consortium comprising the Dutch telecom and postal group, KPN, and Swiss Telecom acquired the stake through a capital increase of US$ 1.45 billion. All of the proceeds are being used to finance SPT's modernisation plans. The company has a monopoly over domestic and international network services until the year 2000, during which time it will be required to double the number of phone connections from the current level of just over 2 million. Whilst the consortium has management control, the Government will keep a “golden share” that will allow it to veto certain strategic decisions. Although the financing process has been delayed by certain legal challenges, the new PPP structure is now very much in place and many of the planned changes are forging ahead.
Telephone System in Hungary5
4 Source: EBRD. 5 Sources: EBRD; ITU. TRADE/WP.5/1999/9 page 12
48. Privatization began early in Hungary with the sale of 30% of the national operator, MATAV, to Deutsche Telecom and Ameritech in 1993. More recently, at the end of 1995 these two investors took a further 37% stake in MATAV.
49. Despite some early problems with conflicts and ambiguities between the MATAV licence and those of other competitors, the turnaround in the company has been remarkable. Already the average waiting time for customers to have their line installed has reduced to months and for business customers generally to weeks, whilst the number of lines per 100 of population has increased from less than 10 to more than 25.
C. Technological Benefits
Technology transfer/exchange
50. PPPs attract experts and organisations of international standing and experience contractors, engineers, consultants, financiers, lawyers and other professionals. For that reason, they can have powerful repercussions at the level of technology transfer and exchange. Access can be gained to ideas, information and expertise extending well beyond that which is available within individual countries or organisations.
Training
51. Local staff can be trained and the operational methods and techniques of local firms enhanced.
Innovation
52. The involvement of leading technical experts and experienced financiers also assists the true feasibility of a project to be assessed. Its costs and risks will be meticulously examined. Imaginative solutions to apparently difficult problems can be found.
D. Social Benefits
Meeting people’s needs
53. Most of the infrastructure projects which PPPs help to implement have an immediate and direct social dimension. They offer better transportation, cleaner water, new communications systems, more reliable supplies of power, and so on. If they are implemented rapidly and effectively, real benefits accrue.
Raising living standards
54. Indirectly, economic growth often accompanies investment in infrastructure. This in turn can contribute significantly to raising living standards and alleviating poverty in central and eastern Europe and the CIS. TRADE/WP.5/1999/9 page 13
Improving the environment
55. The environment also stands to gain. The introduction of international investment and know-how can achieve major improvements in the environmental performance of infrastructure services and in the levels of health and safety associated with them. The private sector now tends to be sensitive and responsive to growing international concern over environmental issues, whilst increasingly strict legislation is gradually evolving internationally recognised standards of best practice. Both by facilitating the implementation of these projects at an international level, and by helping to shape an appropriate legislative framework in the countries concerned, PPPs advance these developments.
Balancing social and commercial priorities
56. No one would pretend, of course, that the private sector can give absolute priority to the social dimension of infrastructure development. In many respects, the private sector simply cannot operate effectively on the basis of such priorities. Priorities of this kind, however, are precisely the responsibility of Government. PPPs seek to reconcile and synthesise these different approaches, so that the private sector's strengths and resources can be used to best advantage.
Focusing resources
57. Finally, there are the indirect benefits that result from relaxing the fiscal pressures on the public sector. By releasing government funds from the demands of project expenditure, PPPs can help those funds to be focused on needs which the private sector cannot always meet (at least not directly). These include welfare spending, health, education and other essential areas of state provision.
E. Political Benefits
New role for Government
58. PPPs involve a redefinition of the role of Government in the context of infrastructure projects, in terms of supervision and regulation and away from ownership and management. This can promote the efficient, demand-driven delivery of the services which these projects are designed to develop (thus adding to the social benefits). It also plays a wider part, though, in assisting Governments to re-think their role generally (should they choose to do so) in relation to market economies.
Allocation, not abdication
59. On the other hand, PPPs allow Governments to attract private sector funding and involvement, without incurring the adverse political repercussions sometimes associated with full-scale privatization. Government retains a significant role and can guard against any private sector excesses. It can also retain ownership of the assets in question, and avoid charges of “selling out” to foreign buyers. The PPP TRADE/WP.5/1999/9 page 14 approach, in other words, avoids undermining the essentially “public” character of many infrastructure projects.
Curb on distorting influences
60. Infrastructure projects can also be freed from political influences which can on occasion have a distorting effect, resulting in unfortunate impediments and delays. Short-term political expediency can sometimes militate against the commitment of large-scale capital expenditure on projects which may not bear fruit for a number of years. On the other hand, Governments may be tempted to favour new projects at the expense of maintaining existing facilities, which can make them poor stewards of infrastructure.
Stability
61. In addition, the economic and social benefits described above obviously have a political dimension. PPPs provide a means of satisfying pressing local needs which could not be met from resources available locally, and so enhance internal social and political stability. In broader political terms, PPPs also foster international co-operation, both through the need to draw in capital and expertise from other countries and also through the development of transnational strategies for developing infrastructure. Above all, by contributing to the evolution of thriving free-market economics, they play a part in fostering the economic conditions on which the security of the new political systems in the region depends.
WHAT MUST GOVERNMENTS DO TO IMPLEMENT PPPS?
62. PPPs may offer great advantages to countries seeking to implement infrastructure projects. But they are not a simple panacea. They do not offer solutions to the problems we have described without real effort and commitment on the part of the public (as well as the private) sector. PPPs are about an optimal allocation and sharing of risk between public and private sectors, not the wholesale transfer and responsibility of risk from one sector to the other. The steps that Governments need to take to implement them include the following:
Legal framework
63. The country's underlying legal and regulatory framework must be credible. Ideally, a robust system of commercial laws needs to be in place, allowing corporate, commercial and financial activities to thrive. Foreign and capital investment must be protected, commercial contracts must be properly enforceable, certain security interests (or their equivalent) recognised, and so on. If the legal system has not been fully "commercialised", it must at least be possible under the existing system of laws to protect essential private sector interests.
Legal authority TRADE/WP.5/1999/9 page 15 64. Government agencies must have clear authority to grant the concessions, licences or franchises that often make possible the involvement of the private sector in an infrastructure project or public utility. This can be difficult to achieve. Sometimes specific “BOT laws” or “concession laws” - enabling legislation - are introduced bestowing such authority and regulating the procedure involved.
Procurement
65. The formal processes pursuant to which a PPP is constituted (whether on the initiative of the public or private sector) must be transparent, fair, orderly and robust in order to attract the widest possible interest from potential private sector partners. The time and effort needed to get a major project signed up can be considerable. Confidence in the procedures involved is therefore essential. Often, competitive tendering is used. The evaluation of tenders will involve the careful assessment of their financial, legal and technical aspects, and specialist external advice will generally be brought in to assist with this process.
Contributing assets
66. The public sector will often need to contribute certain assets to the PPP structure (or the right to use them) to make it feasible and financeable. These assets may include land, existing physical assets, an existing public revenue stream, subsidies and grants, designs and intellectual property, and teams of dedicated staff. They may extend to "opportunity assets" such as tax and duty exemptions and other commercial incentives.
Creating a favourable climate
67. The country in question will need to have achieved a certain degree of attractiveness to foreign investors. This presupposes an appropriate level of economic activity, a credible investment climate and a level of political stability. The project itself must be financially viable and also (at least to a large extent) commercially viable. Taken together, these factors must give lenders and investors a real prospect of a return which is commensurate with the risks involved (see diagram 3 in annex).
Political commitment
68. At government level, a clear, long-term political commitment is usually needed to facilitate the successful implementation of PPPS. Faith in a stable development policy of this kind must survive in the long term, or the private sector will not commit itself. If there is a perception that, following radical policy changes, Governments are likely to come to interfere with or obstruct PPPS, it will become correspondingly difficult to attract outside investment.
Tariff re-balancing TRADE/WP.5/1999/9 page 16
69. The financial viability of projects can be undermined by service tariffs which do not fully reflect the costs involved. In order to mobilise private finance for new investment in infrastructure, therefore, Governments have a vital role to play in promoting the re-balancing of tariffs for existing services to reflect the actual costs involved.
Managing expectations
70. The pressure of unrealistic expectations as to the levels of service provision can represent a major obstacle to the success of PPP projects. Governments need to make a realistic assessment of what levels of service are affordable and then communicate with citizens candidly and effectively in relation to their resulting policies.
Efficient administration
71. There must be a sufficient degree of confidence in the project's administrative environment. Permits will need to be obtained, government decisions taken and the interface between public and private sectors managed effectively on both sides. The private sector participants must feel that they can work with the public administration in question. PPPs always take time and effort to implement. If excessive bureaucratic confusion is added to the picture, investors will look elsewhere. In addition, civil servants and public officials need to be provided with appropriate training to assist them to promote and manage PPPS.
Realistic risk allocation
72. Crucially, the government entity involved must be prepared to shoulder certain project- specific risks and responsibilities, without which the deal will not go ahead. These may include political risk guarantees (e.g. indemnities against expropriation or political interference), assured permits and consents, financial undertakings (e.g. guarantees of foreign exchange availability and currency convertibility), the underwriting of minimum toll levels, protection against certain events of force majeure and proper protection of the interests of lenders in the project (e.g. direct agreements). If charges for using the facility are not to be 1evied directly on members of the public, the Government may have to provide the project's revenue stream. The project may not be entirely commercially free-standing, in which case the Government will have to take on some commercial risks itself. Many of these protections will last for the whole of the life of the project.
73. It is no wonder, then, that PPPs have not yet been adopted universally or with universal success. Progress has tended to be concentrated in certain geographical regions, and the disparity between demand and completed financing remains large everywhere. Transition countries moving from command to market economies clearly have more to do to ensure that all the above conditions can be met than ones that have a long history of foreign investment, commercial activity and stable politics. TRADE/WP.5/1999/9 page 17 74. The problems sometimes relate to fundamental issues of economic structure. In many countries of central and eastern Europe and the CIS, for example, considerable progress has still to be made in adjusting the prices of services so that they are set at a level which more property reflects the incremental costs of provision, and indeed in re-balancing tariffs so that business users are no longer required to subsidise consumers. Political interference in pricing reduces the cash flow generated by these services and so limits the extent to which private investment can be raised. However, overcoming public resistance to cost- reflective tariffs remains a major political challenge (see diagram 4 in annex).
75. On the other hand it is widely recognised that many countries of the region are likely to have great investment potential in many sectors for years to come. The task of PPPs is to help harness and realise that potential.
Potential vs actual investment in private infrastructure projects by region, 1996
Potential Estimated Already number of cost financed Potential/ Region projects (US$ billion) (US$ billion) actual ______East Asia/Pacific 709 534.7 185.6 2.9 OECD Europe 320 165.4 156.6 1.1 Latin America 409 91.5 58.5 1.6 USA/Canada 229 44.7 31.1 1.4 South Asia 335 146.5 6.3 23.3 Middle East/North Africa 67 23.3 4.7 5.0 Central &Eastern Europe 70 62.8 3.5 17.9 Former Soviet Union 94 137.2 2.55 4.9 Africa 78 8.0 1.2 6.7 ______Source: World Bank Private Infrastructure Database and FIAS, World Bank Group
HOW CAN THE BOT EXPERT GROUP HELP GOVERNMENTS TO IMPLEMENT PPPS?
Objectives
76. The BOT Expert Group has set itself a number of long-term objectives and priorities in publicising the Guidelines, all of which are designed to encourage the proliferation of PPPS. These include the following:
to provide up-to-date and incisive guidance (to both public and private sectors) on the range of financing techniques which have evolved around the world in recent years for funding PPP projects; to promote an understanding of those techniques; and to explain some of the key steps involved in applying them and the roles of the principal participants;
in this way, to "demystify' PPPs and BOT structures and promote a clear understanding of how to evaluate and apply them; TRADE/WP.5/1999/9 page 18
to discuss some of the principal political, financial, economic and legal issues commonly raised by the application of these techniques;
to identify the main challenges that potentially stand in the way of implementing projects on a PPP basis, and recommend possible solutions;
to explain and clarify the process of “risk allocation” (and the analysis and modelling of risk) that is central to the successful implementation of a PPP project; to give practical illustrations of the application of PPP structures and project finance to real projects in key sectors;
to assist Governments and their advisers to create a favourable environment for private investment in infrastructure, supported by an effective, institutional, commercial and legal framework;
to take a pragmatic approach to specific projects and challenges in the region and assist in applying flexible, imaginative and appropriate solutions to them;
to provide an independent and unbiased opinion on government plans to attract investment in infrastructure;
to draw on some of the experience of certain major international organisations active in this field, in both public and private sectors, including multilateral agencies such as the European Bank for Reconstruction and Development (EBRD), the World Bank and the United Nations;
in this way, to act as a "bridge" between public and private sectors by indicating how the two can co- operate successfully in a way which recognises and reconciles their different priorities and concerns.
77. It should be noted that a number of other multilateral agencies and departments of those agencies (such as the EBRD, the United Nations Commission on International Trade Law, the United Nations Industrial Development Organisation and the World Bank have been active in the field over the last few years. The BOT Expert Group should thus be seen as an essential component of the international work in this area. No-one can claim primacy in addressing issues of this kind. The challenge is one faced by us all.
Guidelines for BOT Projects
78. These are likewise the underlying objectives for the forthcoming UN/ECE Guidelines which the BOT Expert Group has been preparing.
The Next Steps TRADE/WP.5/1999/9 page 19 79. The work of the BOT Expert Group will continue as necessary into the future. It now consists of an informal association of professional experts supported by an extensive and growing body of “know-how” - who bring with them wide experience of applying PPP structures to deliver major projects. These experts, who include businessmen, bankers, lawyers, economists, consultants, sector analysts and academics, have indicated their willingness to continue to work with the United Nations to promote the use of PPP structures in central and eastern Europe and the CIS. They are prepared to provide Governments in the region, and others active in this field, with further advice and assistance (on a case-by-case basis) to help PPPs succeed. When assistance is needed on specific projects, the intention is that a team or “task-force”, combining an appropriate blend of skills and expertise, could be quickly formed from this pool of experts to supply the skills and expertise sought. Interested Governments and organisations should approach the UN/ECE.
CONCLUSION – THE CHALLENGE AHEAD
80. The demand for infrastructure development in central and eastern Europe and the CIS is acute. For Governments and private sector concerns alike, this represents both a challenge and an opportunity. The challenge is unquestionably complex, but the potential rewards are immense: not only do PPPs provide a means of meeting an immediate need for services and facilities, but their implementation will serve to promote economic and commercial growth and development.
81. Although progress in this field to date has been limited, there is now a widespread recognition that PPPs represent one of the keys to development in the transition economies.
82. Crucially, the success of PPP projects depends on a synthesis of public and private sector strengths, skills and resources, which satisfies the priorities of both. Vision and determination are needed on the part of both sectors to make them work.
83. The BOT Expert Group aims through publication of the Guidelines, and by means of its other activities, to encourage and facilitate PPP structures and project financings in central and eastern Europe and the CIS, and so to play a part in fostering prosperity and stability throughout the region. We hope that the BOT Expert Group's work will continue into the future in the way described with this objective in mind, supported by the conviction that PPPs can and soon will be flourishing throughout the region.
Private infrastructure projects by region, 1985-95 ______Cost Region Number of Projects (US$ billion) ______East Asia/Pacific 223 185.6 OECD Europe 252 156.6 Latin America 233 58.5 USA/Canada 290 31.1 South Asia 27 6.3 TRADE/WP.5/1999/9 page 20
Middle East/North Africa 13 4.7 Central &Eastern Europe 38 3,5 Former Soviet Union 30 2.5 Africa 69 1.2 Total 17175 450.0 ______Source: World Bank Private Infrastructure Database and FIAS, World Bank Group TRADE/WP.5/1999/9 page 21