Public Disclosure Authorized Public Disclosure Authorized Public-Private Partnerships Public Disclosure Authorized Reference Guide Version 2.0 Public Disclosure Authorized Multilateral Investment Fund Member of the IDB Group Public-Private Partnerships Reference Guide Version 2.0 © 2014 International Bank for Reconstruction and Development / The World Bank, Asian Development Bank, and Inter-American Development Bank World Bank Asian Development Bank Inter-American Development Bank 1818 H Street NW 6 ADB Avenue, 1300 New York Avenue, N.W. Washington, D.C. 20433 Mandaluyong City 1550, Philippines Washington, D.C. 20577, USA Telephone: +1-202-473-1000 Telephone: +63 2 632 4444 Telephone: +1-202-623-1000 Internet: www.worldbank.org Internet: www.adb.org Internet: www.iadb.org This work is a product of the staff of the World Bank, the Asian Development Bank (ADB) and the Inter- American Development Bank (IDB) with external contributions. 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Design and layout: Sara Tejada Montoya Table of Contents Introduction 13 1 PPP Basics: What and Why 17 1.1 What is a PPP: Defining ‘Public-Private Partnership’ 17 1.1.1 PPP Contract Types and Terminology 18 1.1.2 What PPP is Not: Other Types of Private Involvement 23 1.2 How PPPs Are Used: Sectors and Services 28 1.3 Infrastructure Challenges and How PPPs Can Help 31 1.3.1 Insufficient Funds 33 1.3.2 Poor Planning and Project Selection 38 1.3.3 Weak Management 42 1.3.4 Inadequate Maintenance 45 1.4 How PPPs Are Financed 49 1.4.1 Finance Structures for PPP 50 1.4.2 Considerations for Government 53 1.4.3 The Role of Public Finance in PPPs 57 2 Establishing the PPP Framework 65 2.1 PPP Policy 72 2.1.1 PPP Program Objectives 73 2.1.2 PPP Program Scope 74 2.1.3 Implementing Principles 75 2.2 PPP Legal Framework 78 2.2.1 Scope of the PPP Legal Framework 79 2.2.2 PPP Laws 80 2.3 PPP Processes and Institutional Responsibilities 82 2.3.1 PPP Process 83 2.3.2 Institutional Responsibilities: Implementation 86 2.3.3 Institutional Responsibilities: Review and Approval 90 2.3.4 Dedicated PPP Units 92 2.4 Public Financial Management Frameworks for PPPs 96 2.4.1 Assessing Fiscal Implications of a PPP Project 98 2.4.2 Controlling Aggregate Exposure to PPPs 100 2.4.3 Budgeting for Government Commitments to PPPs 101 2.4.4 Fiscal Accounting and Reporting for PPPs 104 2.5 Broader PPP Program Governance 109 2.5.1 Disclosure of PPP Project and Program Information 110 2.5.2 Role of Supreme Auditing Institutions 111 2.5.3 Role of Legislative Bodies 114 2.5.4 Role of the Public 114 3 Implementing PPP Projects 117 3.1 Identifying PPP Projects 121 3.1.1 Identifying Priority Public Investment Projects 122 3.1.2 Screening for PPP Potential 123 3.1.3 Building an Initial PPP Pipeline 126 3.2 Appraising PPP Projects 127 3.2.1 Assessing Project Feasibility and Economic Viability 129 3.2.2 Assessing Commercial Viability 131 3.2.3 Assessing Value for Money 132 3.2.4 Assessing Fiscal Implications 137 3.3 Structuring PPP Projects 145 3.3.1 Identifying Risks 147 3.3.2 Allocating Risks 149 3.3.3 Translating Risk Allocation into Contract Structure 152 3.4 Designing PPP Contracts 155 3.4.1 Performance Requirements 158 3.4.2 Payment Mechanism 160 3.4.3 Adjustment Mechanisms 162 3.4.4 Dispute Resolution Mechanisms 164 3.4.5 Termination Provisions 166 3.5 Managing PPP Transactions 171 3.5.1 Deciding the Procurement Strategy 173 3.5.2 Marketing the PPP 181 3.5.3 Qualifying Bidders 182 3.5.4 Managing the Bid Process 185 3.5.5 Achieving Contract Effectiveness and Financial Close 192 3.6 Dealing with Unsolicited Proposals 195 3.6.1 Benefits and Pitfalls of Unsolicited Proposals 196 3.6.2 Creating Competitive Tension 197 3.6.3 Dealing with Intellectual Property 200 3.6.4 Defining Clear Processes 200 3.7 Managing PPP Contracts 203 3.7.1 Establishing Contract Management Structures 204 3.7.2 Monitoring and Managing PPP Delivery and Risk 207 3.7.3 Dealing with Change 210 3.7.4 Contract Expiry and Asset Handover 213 Reference list 216 Table of Figures Figure 1: PPP Reference Guide Overview 15 Figure 1.1: Examples of PPP Contract Types 20 Figure 1.2: Examples of PPP Contract Types 23 Figure 1.3: What’s Wrong with Infrastructure and How PPPs Can Help 31 Figure 1.4: Typical PPP Project Structure 51 Figure 2.1: PPP Framework Overview 67 Figure 2.2: Typical PPP Process 84 Figure 3.1: PPP Development and Implementation Process 118 Figure 3.2: Identifying PPP Projects 122 Figure 3.3: Appraise PPP Projects 129 Figure 3.4: Structuring PPP Projects 146 Figure 3.5: PPP Contract Design Stage 156 Figure 3.6: Transaction Stage of PPP Process 171 Figure 3.7: Transaction Steps 173 Figure 3.8: Process for Assessing, Approving and Bidding an Unsolicited Proposal 201 Figure 3.9: Contract Management Stage of PPP Process 203 Table of Tables Table 1: Key Reference Table—Example 16 Table 2: PPP Reference Guide Modules and Who Should Read Them 16 Table 1.1: PPP Nomenclature 22 Table 1.2: PPPs by Sector—Examples and Resources 29 Table 1.3: Comparing PPP and Public Procurement in the United Kingdom 43 Table 1.4: Comparing PPP and Public Procurement in Australia 43 Table 2.1: Example PPP Program Objectives 73 Table 2.2: Example Definitions of PPP Policy Scope 75 Table 2.3: Example PPP Laws 81 Table 2.4: Example PPP Approval Requirements 91 Table 2.5: Options for Assessing the Affordability of Fiscal Commitments to PPPs 100 Table 3.1: Examples of Standardized PPP Contracts and Contract Clauses 158 Table 3.2: Types of Early Termination and Termination Payments 168 Table 3.3: Examples of PPP Procurement Procedures 175 Table 3.4: Examples and Guidance on Preparing RFP Documents 186 Table 3.5: Examples of Procurement Strategies for Unsolicited Proposals 198 Table 3.6: Distinction between Service Delivery Issues and Disputes 212 Table of Boxes Box 1.1: Regulation by Contract 26 Box 1.2: PPP Value Drivers 32 Box 1.3: Excessive Fiscal Risk—Examples from Colombia, Korea, Mexico, United Kingdom 37 Box 1.4: Mumbai Water—Example of Poor Planning in Infrastructure 39 Box 1.5: Hot lanes in Virginia—An Example of Private Sector Innovation 40 Box 1.6: When PPPs fail—The case of the 1993 water concession in Buenos Aires 45 Box 1.7: Performance Based Road Contracts—Improving Maintenance of Infrastructure 46 Box 1.8: Examples of Project Finance Structure with Corporate Guarantees 52 Box 1.9: Example of an Over-Leveraged PPP—Victoria Trams and Trains 55 Box 1.10: Pursuing PPP During the Global Financial Crisis 58 Box 1.11: CRPAOs in Peru 61 Box 1.12: Mexico’s FONADIN 62 Box 2.1: Good Governance for PPPs 65 Box 2.2: The PPP Framework of Chile 68 Box 2.3: The PPP Framework of South Africa 70 Box 2.4: PPP Implementing Principles in Peru 76 Box 2.5: PPP Legal Framework in Germany 80 Box 2.6: Use of external advisors 88 Box 2.7: Types of Fiscal Commitments to PPPs 97 Box 2.8: Viability Gap Fund in India 101 Box 2.9: Types of Government Financial Reporting 105 Box 2.10: Audit Entity Access to PPP Company Information 112 Box 3.1: PPP Selection in the Public Investment Planning Process 123 Box 3.2: PPP Potential Screening Factors in South Africa 124 Box 3.3: PPP Project Appraisal Criteria 127 Box 3.4: How the Public Sector Comparator is Calculated 135 Box 3.5: Direct Payment Commitments to PPP Projects 138 Box 3.6: Contingent Liabilities Under PPP Projects 140 Box 3.7: PPP Risk Categories 147 Box 3.8: Allocating Land Acquisition Risk 149 Box 3.9: What is the ‘PPP Contract’ 155 Box 3.10: International Centre for Settlement of Investment Disputes (ICSID) 165 Box 3.11: Competitive Procurement or Direct Negotiation 172 Box 3.12: Firm Qualification Criteria 184 Box 3.13: Evaluation Criteria 189 Box 3.14: Costs of Direct Negotiation—Independent Power Tanzania 197 Box 3.15: Example of Weak Risk Monitoring—Victoria Trams and Trains 209 11 Foreword This second version of the PPP Reference Guide, as the first one, presents a global overview of the diversity of approaches and experiences in the implementation of PPPs, providing an entry point to the substantial body of knowledge on PPPs that has been built up by practitioners in governments, the private sector, international institutions, and academics.