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ISBN: 978-0-8213-8703-0 eISBN: 978-0-8213-8704-7 DOI: 10.1596/978-0-8213-8703-0 Library of Congress Cataloging-in-Publication Data has been requested. Cover, title page, and photos not listed below: Courtesy of the General Directory of Roads and Motorways, Katowice Branch Cover design: David Bringas, Escriba Editors Photo credits: p. 37: UIO Final: Final approach to Quito Airport, Andy Ricover, 2007 p. 40: HKG Boarding area: Hong Kong Terminal Building boarding area, Andy Ricover, 2007 p. 53: MUC Boarding area: Munich Airport Terminal Building boarding area, Andy Ricover, 2008 p. 56: HKG Entrance: Hong Kong Terminal Building entrance, Andy Ricover, 2007 II CONTENTS ACKNOWLEDGMENTS VI ABBREVIATIONS VII EXECUTIVE SUMMARY VIII PART I - BACKGROUND, APPROACH, AND SECTOR TRENDS 1 1.INTRODUCTION 2 Context of the Study 2 Approach to the Study 3 Report Structure 3 2. BENEFITS AND RISKS OF PPP 5 Policy: What Are Public-Private Partnerships? 5 Strategy: Designing Support Frameworks and Building Capacity 6 3.OVERVIEW OF RECENT TRENDS IN PPP INVESTMENT 8 Global Trends in PPP Investment in Infrastructure 8 PPP Situation in Europe and Central Asia 11 Global Improvement in PPP Activity in 2009 15 Recent Developments in ECA Countries 17 Developments in Western Europe and Rest of the World 23 PART II - HOW THE CRISIS HAS CHANGED THE PPP MARKET 25 4.IMPACT OF THE CRISIS ON GOVERNMENT FINANCING 26 Economic and Fiscal Impact of the Crisis in ECA 26 5.IMPACT OF THE CRISIS ON PPP PROJECTS 32 Policy: Impact on Public Investment 34 Strategy: Impact on Project Scope and Finance 38 Implementation: Impact on Commercial Structure and Procurement 42 PART III - RECOMMENDATIONS FOR GOVERNMENTS 43 6.RECOMMENDATIONS FOR POST-CRISIS PPP ENVIRONMENT 44 Policy 44 Strategy 47 Improving the PPP Framework 49 Implementation 51 Project Preparation 53 Procurement and Financial Close 55 7.MECHANISMS AVAILABLE TO GOVERNMENT TO SUPPORT PPP PROJECTS 57 Cluster A: Project Financing 58 Cluster B: Risk Management 62 Cluster C: Procurement 64 Cluster D: Project Design 67 8.CONCLUSION: SHORT- AND MEDIUM-TERM RESPONSES 68 REFERENCES 71 ANNEX I: LIST OF INTERVIEWS CONDUCTED 75 ANNEX II: PPP INFRASTRUCTURE FINANCE III AND PRE-CRISIS EXPERIENCE 77 ANNEX III: PRINCIPLES IN INFRASTRUCTURE AND PROJECT FINANCE 89 ANNEX IV: IMPACT OF THE FINANCIAL CRISIS ON FISCAL SPACE AND INFRASTRUCTURE SPENDING IN ECA 97 ANNEX V: INSTRUMENT 111 BOXES Box 3-1: Romania’s Comarnic-Brasov Highway Project 18 Box 3-2: Slovak Republic – Flexibility in Financing Terms and Government Payments 19 Box 3-3: St. Petersburg – Pulkovo Expansion Project 20 Box 3-4: Armenia Water Sector – A Successful Progressive Approach to Use of PPP 21 Box 3-5: Recent PPP Experience in Brazil, India, and Mexico 24 Box 5-1: Latvia’s Fiscal Restrictions and Impact on PPP 35 Box 5-2: Russia’s Privatization Plans in the Transport Sector 37 Box 5-3: Spain and Portugal – A Record of Rapid Financial Closure 40 Box 5-4: Investment Funds and Other Government-funded Solutions 41 Box 7-1: Evolution in Contract Design: CREMA – Phases I and II 61 Box 7-2: Refinancing Gain – HM Treasury Guidance 63 Box 7-3: Hedging and Concessionaire’s Capital Grant 64 Box 7-4: Indexation and Compensation to Canada Line 68 Box II-1: Eurostat Accounting of PPP Projects 80 Box II-2: South Africa – Assessing PPP Transactions 82 Box II-3: Chile Management of Contingent Liabilities 83 Box III-1: Environmental and Social impacts of PPPs and the Equator Principles 95 Box III-2: Examples of Financial Instruments to Support PPP 96 FIGURES Figure 1-1. Chapter Outline 4 Figure 2-1: Decision Matrix for PPP Projects 6 Figure 2-2: Traditional PPP Framework 6 Figure 3-1: Global PPP Investment 8 Figure 3-2: Global PPP Investment in Transport 9 Figure 3-3: PPP Sector Investments and Projects by Sector in ECA 11 Figure 3-4: PPP Investment and Number of Projects in Other Regions 12 Figure 3-5: PPP Investment in Transport in ECA 13 Figure 3-6: PPP Investment in Energy in ECA 13 Figure 3-7: PPP Investment in Water and Sanitation in ECA 14 Figure 3-8: Recent Global Trends in PPP Investment 15 Figure 3-9: Recent Regional Trends in PPP Investment 15 Figure 3-10: Number of PPP Projects in Tender (Fall 2009) 23 Figure 4-1: Fiscal Balance, Percentage of GDP (2005–2013) 27 Figure 4-2: Real GDP Growth, Annual Percentage Rate (2005–2013) 27 Figure 4-3: Contributions of Changes in Deficits, 2008–2009, % of GDP (median values) 28 IV Figure 4-5: EMBIG Europe Region – Spread over US Treasury in Basis Points (bps) 29 Figure 4-6: Some Government Bond Yields in ECA 30 Figure 4-7: Currency Depreciation in Some European Countries 31 Figure 5-1: Impact of the Crisis on PPP Projects 32 Figure 5-2: Changes in PPP Market 33 Figure 5-3: Pipeline of PPP Projects in Some ECA Countries 36 Figure 5-4: Time to Reach Financial Close in 2008-09 in EU and ECA (Highways) 38 Figure 5-5: Number of Banks Involved in 2008-09 in EU and ECA (Highways) 39 Figure 5-6: Effect of Shorter Maturity on Government Contribution 41 Figure 6-1: Framework for Assessing Country Risk 45 Figure 6-2: Updated Framework for PPP 46 Figure 6-3: Framework for PPP Strategy 47 Figure 6-4: New Framework for PPP 49 Figure 6-5: Framework for Identifying PPP Projects 52 Figure 6-6: Policies/Design Influencing Investment Needs of an Urban Transport Project 54 Figure 7-1: Summary of Supporting Mechanisms to PPP Program 57 Figure II-1: Cash Flow for PPP and Publicly Financed Projects 78 Figure II-2: Sources of Revenue for PPP and Public Highway 84 Figure IV-1: Fiscal Balance, Percentage of GDP (2005-13) 98 Figure IV-2: Real GDP Growth, Annual Percentage Rate (2005-13) 98 Figure IV-3: General Government Revenue, 2000-07 (% of GDP) 99 Figure IV-4: General Government Spending, 2000-07 (% of GDP) 100 Figure IV-5: Improving Fiscal Balances 2000-07 101 Figure IV-6: Contributions of Changes in Deficits, 2008-09, % of GDP (median values) 102 Figure IV-7: Fiscal Space in ECA Countries in 2007 103 Figure IV-8: Spending on Social Assistance and Insurance, % of GDP 104 Figure IV-9: Percentage of Firms Indicating that Electricity is Some Form of Constraint to Business in ECA 105 Figure IV-10: Economic Classification of Government Expenditures, 2008 106 Figure IV-11: High Social Spending Crowds Out Spending on Infrastructure in ECA 107 MAPS Map IV-1: Difference in Level of Capital Expenditure - 2008 to 2009 (% of GDP) 108 Map IV-2: Relative Change in Capital Spending as a Percent of Government Spending 2008 to 2009 108 TABLES Table 3-1: Sources of Funding for Projects Reaching Financial/Contractual Close during January 2008-June 2009 16 Table 4-1: Summary of Crisis Effects on Government 26 Table III-1: Factors Influencing Project Bankability 93 Table IV-1: Trends in Capital Expenditure (% of GDP) in ECA 2000-01 109 V ACKNOWLEDGMENTS This report was written by Vickram Cuttaree (Member of the Global Expert Team on PPP and PPP-Coordinator, Sustainable Development Department, Europe and Central Asia Region) and Cledan Mandri-Perrott (Member of the Global Expert Team on PPP and Senior Infrastructure Specialist, Finance Economic and Urban Department). David Stiggers (Consultant on PPP) undertook the initial research which forms the basis of this report. This work was financed by a grant from the Transport Research Support (TRS). The team acknowledges contributions from: Cesar Queiroz (Consultant), who advised on the highway sector and helped the team reach public sector agencies in the ECA Region; Anita Shrestha (Operations Analyst), Teuta Kacaniku (Consultant), and Jukka-Pekka Strand (Financial Analyst), for providing most of the quantitative analysis presented in this report and contributing to specific chapters.