How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets

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How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets How to Engage with Public Disclosure Authorized the Private Sector in Public-Private Partnerships in Emerging Markets Public Disclosure Authorized Public Disclosure Authorized Edward Farquharson Clemencia Torres de Mästle and E.R. Yescombe with Javier Encinas Public Disclosure Authorized How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets Edward Farquharson Clemencia Torres de Mästle and E.R. Yescombe with Javier Encinas © 2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 14 13 12 11 This volume is a product of the staff of the International Bank for Reconstruction and Develop- ment / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the govern- ments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any terri- tory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-7863-2 eISBN: 978-0-8213-8552-4 DOI: 10.1596/978-0-8213-7863-2 Library of Congress Cataloging-in-Publication Data Farquharson, Edward, 1962– How to engage with the private sector in public-private partnerships in emerging markets / Edward Farquharson, Clemencia Torres de Mästle, and E.R. Yescombe ; with Javier Encinas. p. cm. Includes bibliographical references. ISBN 978-0-8213-7863-2 — ISBN 978-0-8213-8552-4 (electronic) 1. Public-private sector cooperation. 2. Infrastructure (Economics)—Finance. 3. Public works—Finance. I. Torres de Mästle, Clemencia, 1962– II. Yescombe, E. R. III. Title. HD3871.F37 2010 352.2’9—dc22 2010044905 Cover photos: © World Bank. Cover design: Naylor Design, Inc. CONTENTS ACKNOWLEDGMENTS xi ABOUT THE AUTHORS xiii ABBREVIATIONS xv 1. INTRODUCTION 1 Role of Public-Private Partnerships 3 Scope of the Guide 6 Limits to the Guide 7 2. DEFINING PUBLIC-PRIVATE PARTNERSHIPS 9 Privatization and Management Contracts 9 Small Private Providers of Infrastructure Services 10 User-Fee and Availability-Based Public-Private Partnerships 11 3. SETTING THE FRAMEWORK 15 Policy Rationale 15 Legal and Regulatory Framework 16 Investment Framework 21 Implementation Framework 23 v Summary 26 Case Study: Water and Electricity Services Provision in Gabon 28 4. SELECTING PROJECTS 31 Project Scope and Requirements 33 Can the Project Be Delivered as a Public-Private Partnership? 34 Should the Project Be Delivered as a Public-Private Partnership? 41 Initial Market Assessment 43 Lessons from Experience: How the Private Sector Has Addressed Key Risks in Projects 44 Case Study: Hospital Regional de Alta Especialidad del Bajío, Guanajuato State, Mexico 50 5. FINANCING PPP PROJECTS 53 Lenders and Risk: Bankability 54 Contract Terms: Bankability 57 Equity Investment 57 Contractual Relationships 57 Refinancing 59 Risk Mitigation and Other Sources of Project Funding 61 Output-Based Aid 67 Case Study: São Paulo Metro Line 4, Brazil 69 Case Study: Improved Access to Water Services in the East Zone of Metro Manila, the Philippines 73 6. PREPARING PROJECTS FOR MARKET 77 Management of the Process 78 Funding for Project Preparation 84 Unsolicited Proposals 85 Project Assessment 86 Case Study: PPP Program in the National Highways Sector, India 89 vi Contents 7. PROJECT ADVISERS 93 Role of Advisers 93 When to Use Advisers 95 Appointment of Advisers 96 Role of Public-Private Partnership Units 97 Management of Advisers 97 Case Study: Queen Alia Airport Expansion, Amman, Jordan 99 8. MANAGING THE INITIAL INTERFACE WITH THE PRIVATE SECTOR 103 Preparation for Market Sounding 104 Before the Launch 105 Perception of the Project 107 Role of Development Finance Institutions and Donors 107 Transition to the Procurement Phase 108 9. MANAGING PROCUREMENT 111 Outcome of the Procurement Phase 112 Role of Advisers 112 Role of Development Finance Institutions 113 Bid Stages 113 Project Launch 113 Prequalification 118 Request for Proposals 121 Preferred Bidder and Financial Close 124 Case Study: Inkosi Albert Luthuli Central Hospital, South Africa 126 10. AFTER SIGNING 133 Managing Contracts 133 Evaluating PPP Projects and Programs 138 Case Study: Sofia Water, Bulgaria 139 Contents vii 11. CONCLUSION 145 APPENDIXES 149 A World Bank and PPIAF Private Participation in Infrastructure Project Database 149 B Sample Extract of a Risk Management Register for Managing the PPP Project Process 153 C List of PPP Web Sites 159 REFERENCES 167 INDEX 171 BOXES 1.1 Port Concessioning and Competition in Colombia 5 3.1 Lessons 24 4.1 Liverpool Direct 35 4.2 Regional Projects 47 5.1 Major Concerns of Project Lenders 56 5.2 Major Concerns of Contractors and Investors 58 6.1 Common Problems in Project Governance 82 6.2 Common Mistakes in Project Preparation 84 8.1 Top 10 Tips for a Successful Market-Sounding Exercise 106 9.1 Project Information Memorandum 116 9.2 Bidders’ Conference 117 9.3 Summary of RfQ for Public-Private Partnership Projects, Government of India 119 10.1 Tips on Managing Contracts 136 FIGURES 1.1 Investment Commitments to New and Existing Infrastructure Projects with Private Participation in Developing Countries, by Sector, 1990–2008 2 1.2 Investment Commitments to New PPI Projects Reaching Closure in Developing Countries, by Region, 1995–2009 2 viii Contents 1.3 Key Phases of the Public-Private Partnership Project Process 7 3.1 Relationship between When to Standardize Contract Terms and Benefits from the Project 22 4.1 Stages of Project Selection 32 4.2 Elements of a Risk Management Plan 40 4.3 Number of Projects with Private Participation in Infrastructure, by Sector and Type of Contract, 1996–2008 45 4.4 Number of Transport Projects in Sub-Saharan Africa in the World Bank PPI Database, by Sector, 1996–2007 48 5.1 Typical Contractual Structure of a Public-Private Partnership 59 6.1 Project Preparation Process 79 6.2 Outline of a Structure of Project Governance 81 9.1 Outline of the Procurement Process 114 9.2 Outline of the Prequalification Phase 118 9.3 Outline of the Request-for-Proposals and Financial Close Phase 122 TABLES 4.1 An Example of Output Specifications for an Accommodation Public-Private Partnership 36 7.1 Role of External Advisers 94 8.1 Checklist before Launching the Procurement Phase 109 Contents ix ACKNOWLEDGMENTS This book was made possible by a grant from the Public-Private Infrastruc- ture Advisory Facility (PPIAF). It builds on an earlier publication, Attract- ing Investors to African Public-Private Partnerships, and the authors would like to acknowledge the contributions of all those who commented on that work. The present book, How to Engage with the Private Sector in Public- Private Partnerships in Emerging Markets, goes beyond the earlier publi- cation by expanding in scope and in depth on some of the key aspects to successful and sustainable public-private partnerships (PPPs), such as the various financing mechanisms for PPPs and the diversity of PPP contractual arrangements in countries with different legal traditions. This book broad- ens the discussion to other emerging PPP markets beyond Africa and dis- cusses the nuances that emerge in the recommended paths when taking into account this diversity. It includes a wide range of case studies from several regions and sectors and illustrates the different activities involved in trans- forming a desirable project in a government’s eyes to an attractive invest- ment opportunity for a private partner, and ultimately into a PPP project that would benefit all parties involved. Many people have contributed valuable comments and feedback to make this book as complete as it is, yet accessible to those interested in understanding and undertaking PPPs. The authors are particularly grate- ful to colleagues inside and outside the World Bank Group who dedicated many hours to provide detailed and constructive comments on the indi- vidual chapters and whose contributions have resulted in a stronger and richer book. They include Jeff Delmon, Vicky Delmon, Katharina Gassner, Michael Gerrard, José Luis Guasch, Clive Harris, Cledan Mandri-Parrot, xi Mark Moseley, Cathy Russell, and Derek Woodhouse. Special thanks to Michael Gerrard and Mark Moseley also for the many hours spent dis- cussing and brainstorming on many fine points of the whole subject. Many thanks as well to Karina Izaguirre and Edouard Pérard for their assistance with the use of numbers and graphs from the World Bank/PPIAF Database. Any errors in the text remain the authors’ sole responsibility. The authors would also like to thank various people who helped make this book a reality. Special thanks in PPIAF to Andrew Jones for his most efficient collaboration in the finalization of the book, to Janique Racine for her guidance in the early stages of this project, and to Amsale Bumbaugh for her continuous support during the production process.
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