concessions proof3 20/6/02 9:27 am Page 1 World Bank Technical paper no. 399 Finance, Private Sector, and Infrastructure Network Concessions for Michel Kerf with infrastructure R. David Gray Timothy Irwin A guide to their design Céline Levesque Robert R. Taylor and award Under the direction of Michael Klein TIONAL BA A NK RN E F T O N R I WORLD BANK R E T C N O E N M S P T O R L U E CT EV ION AND D Work in progress for public discussion A joint production of the World Bank and Inter-American Development Bank concessions proof3 20/6/02 9:27 am Page 2 The World Bank Inter-American Development Bank 1818 H Street 1300 New York Avenue, N.W. Washington, D.C.20433 Washington, D.C. 20577 USA USA Telephone: 202 477 1234 Telephone: 202 623 1000 Facsimile: 202 477 6931 Facsimile: 202 623 3096 Telex: MCI 64145 WORLDBANK World Wide web: http://www.iadb.org MCI 248423 WORLDBANK World Wide web: http://www.worldbank.org E-mail: [email protected] concessions proof3 20/6/02 9:27 am Page 3 Copyright ©1998 The material in this publication is copyrighted. Requests The International Bank for Reconstruction for permission to reproduce portions of it should be sent to the and Development/THE WORLD BANK Office of the Publisher at the address shown in the copyright 1818 H Street, N.W. notice above. The World Bank encourages dissemination of its Washington, D.C. 20433, U.S.A. work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a All rights reserved fee. Permission to copy portions for classroom use is granted Manufactured in the United States of America through the Copyright Clearance Center, Inc., Suite 910, 222 First printing March 1998 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. Technical Papers are published to communicate the results of ISSN: 0253-7494 the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not Michel Kerf is a private sector development specialist in the been prepared in accordance with the procedures appropriate Private Sector Development and Finance Group of the World to formal printed texts, and the World Bank accepts no Bank's Middle East and North Africa Region. R. David Gray is a responsibility for errors. Some sources cited in this paper may consultant, Timothy Irwin is an economist, Céline Levesque is a be informal documents that are not readily available. consultant, and Robert R. Taylor is a principal financial analyst, The findings, interpretations, and conclusions expressed all in the Private Participation in Infrastructure Group of the in this paper are entirely those of the author(s) and should not World Bank's Private Sector Development Department. be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors Library of Congress Cataloging-in-Publication Data or the countries they represent. The World Bank does not Concessions for infrastructure: a guide to their design and guarantee the accuracy of the data included in this publication award / Michel Kerf… [et al]. and accepts no responsibility for any consequence of their use. p. cm.—(World Bank technical papers; no. 399) The boundaries, colors, nominations, and other information ISBN 0-8213-4165-0 shown on any map in this volume do not imply on the part of the 1. Infrastructure (Economics). 2. Privatization. 3. Concessions. World Bank Group any judgment on the legal status of any I. Kerf, Michel, 1965— . II. World Bank. III. Series. territory or the endorsement or acceptance of such boundaries. HC79.C3C66 1998 363-dc21 97-50066 CIP concessions proof3 20/6/02 9:27 am Page 4 Contents 1. Introduction 9 2. The Broad Environment for Concessions 20 3. Concession Design 38 4. Concession Award 106 5. Regulatory Institutions 127 6. Government Support 142 Annexes 154 References 189 concessions proof3 20/6/02 9:27 am Page 5 Foreword 5 In recent years countries around the world have met the of the broader legal and regulatory environment. The design challenge of developing and maintaining critical infrastructure and implementation of concession contracts that allocate risks by restructuring public utilities and expanding private sector and responsibilities and the mechanisms for evaluating and participation in the infrastructure sectors. Recognizing the awarding projects are also of paramount importance. The importance of adequate infrastructure services, such as power, government's role as regulator and as a provider of support for telecommunications, transport, water supply, and sanitation, for infrastructure concessions must also be assessed. While some the development of industry and the quality of life, and given countries have established extensive concession programs, the constraints on public budgets to finance these growing others are just beginning to develop these programs. This infrastructure needs, governments have sought to shift part of report provides a guide to the complex range of issues and the burden of new infrastructure investment to the private options involved in the implementation of concession sector. In addition, private sector involvement can bring arrangements, drawing on the experience of both industrial and increased efficiency in investment, management, and operation. developing countries. And restructuring utilities along competitive lines has demonstrated the enormous potential benefits to governments and consumers of unshackling competition for improving and expanding infrastructure services. Many countries have enlisted private sector participation in infrastructure through the use of concession contracts with private operators and developers. A concession, broadly defined, is a legal arrangement in which a firm obtains from the government the right to provide a particular service. Nemat Shafik Concessions can be used to create competition for the market Director under conditions in which the service provider has significant Private Sector Development and Finance Group market power. Concession arrangements can take any number Middle East and North Africa Region of forms involving the shifting of risks and responsibilities from the public to the private sector. Bernardo Frydman Concession arrangements entail a myriad of legal and Deputy Manager economic issues, including the organization of government Private Sector Department entities responsible for concession programs and the adequacy Inter-American Development Bank concessions proof3 20/6/02 9:27 am Page 6 Acknowledgements 6 This report was conceived jointly by the Inter-American Development Bank and the World Bank. It was prepared by the Private Participation in Infrastructure (PPI) Group of the World Bank's Private Sector Development Department and benefited greatly from comments provided at several stages by Bernardo Frydman, Ezequiel Machado, Terry Powers, and John Cahillane of the Inter-American Development Bank. Valuable assistance and comments were also given by Penelope Brook Cowen, Pierre Guislain, Neil Roger, and Warrick Smith. Chapters 5 and 6 of this report draw extensively on previous work by Michael Kein and Warrick Smith. concessions proof3 20/6/02 9:27 am Page 7 Abstract 7 This report is not a step-by-step guide on how to negotiate operators or ensuring that some redistributive social goals are concessions. Nor is it an attempt to identify model contracts or met—can often be achieved through other means. clauses. Rather, it aims at helping policymakers and their While many aspects of a concession are transaction- or advisers to better understand some of the most important and sector-specific, several key principles related to the award, difficult issues related to the design, award, implementation, design, or monitoring of concessions are substantially identical monitoring, and modification of concessions. Here, we broadly across sectors. There will often be important advantages in clearly define concessions as any arrangements in which a firm obtains specifying such principles in cross-sectoral laws or regulations from the government the right to provide a particular service applicable to private infrastructure schemes in general. under conditions of significant market power. The allocation of risks between the involved parties is at While it is impossible to succinctly summarize the multiple the core of concession design. While theoretical principles are issues discussed in the report, and while in many cases there is well known risks should be borne by the party best able to no single "best" answer to a particular question, some key control, manage, or hedge against them-their application in recommendations emerge. They deserve to be emphasized. The practice often raises numerous difficulties. A careful analysis will following ten recommendations constitute a nonexhaustive list. often be necessary to distinguish between costs that are truly The main rationale for concessions is that they can facilitate exogenous to the operator (that is, those against which the the regulation of natural monopolies. In markets that are naturally company cannot protect itself) and those that are not. Only competitive, direct competition between firms can usually work exogenous costs should be passed on to other parties such as well without recourse to concessions. Before awarding consumers, suppliers, or the conceding authority. concessions, governments should therefore first determine Striking an adequate balance between certainty and whether competition can be made to work in the relevant flexibility is another main challenge of concession design. activities, possibly through reforming the market structure. Performance targets, for example, can be designed so as to allow Governments often grant exclusive rights to the for renegotiations under specific, pre-established procedures. concessionaire. But, in many cases, this may not be desirable. Usually, they should focus on the end results to be achieved rather Permitting entry by new competitors helps ensure that direct than on the means to be used in order to preserve the flexibility of competition will take place wherever possible and can pressure the concessionaire's operational arrangements.