Workshop on PPP in Roads and Highways

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1 Workshop on PPP in Roads and Highways Vickram Cuttaree, PPP-Coordinator, Europe & Central Asia Member of the Global Expert Team on PPP June 7, 2011

2 Agenda Rationale for PPP and International Experience in Highways Justification for a stronger Policy, Strategy and Framework for PPP Good practice in developing a PPP program in highways

3 Budget Effect often used to justify PPP in highways Source: Rebel Advisory

4 Value of Private Participation in Highway Sector beyond investment Contractual incentives Expertise and know-how Increased efficiency Implementation Capacity

5 Challenge to balance Government and Private Sector perspectives Government Priorities - Investment in Highways - Risk Transfer to the private sector - Efficiency of public spending - Fiscal Constraint Private Sector Priorities - Return for Equity Holders - Debt payment to lenders - Management of risks - Political and Macro risks

6 However, sources of funds remain the same

7 Contingent liabilities resulting from minimum revenue guarantees $ million Simulation of Actual Traffic Below Minimum Revenue Guarantee Payment Forecast revenue Actual revenue Guaranteed revenue Source: Mandri-Perrott (PPP workshop in Latvia, May 2006)

8 Risks with Availability Payments (AP) $ Capital Expenditure Reduces uncertainty to the private sector Maintenance Government takes over traffic risks Allows flexibility in policies for Government (but associated cost) AP subject to performance criteria $ Traditional Procurement Long-term affordability of Government payments critical for everyone PPP with Availability Payments

9 Lessons from Experience in the region Need to strengthen Preparation Weak traffic Forecasts and cost estimation Government financial contribution not assessed before procurement Affordability of tolls to users not tested Need for better management of risks From no risk to full risk? Management of key risks needed (demand, FX, ) Need for more competitive bidding Likely higher cost paid by Government and users if not done Lack of Transparency and political/public resistance when not done Source: Private Participation in Transport: Lessons from recent experience in Europe and Central Asia (2009)

10 What did we see in last 2 years? Weak PPP Strategy Fiscal risk of PPP under-estimated Missing efficiency gains in existing services Short-term view impacting future investment Underlying financial issue not addressed by agency in charge of PPP Poor identification, preparation and bidding Project design often over-dimensioned Competitive negotiation vs. bidding Poor quality advisers and politically driven schedule Limited flexibility in risk allocation

11 Size matters: club financing and delays in financial close Highway Projects reaching financial close in (EU and ECA) 2,500 2,500 2,000 2,000 US$ (million) 1,500 1,000 US$ (million) 1,500 1,000 US$ 1 billion Length of financial negotiations No. of banks at financial close Source: PFI online, World Bank calculation

12 What Makes a PPP Project Successful? Successful PPPs are characterized by comprehensive planning, clear contractual rules and contingencies, competitive procurement and credible contract enforcement. Countries with strong public sector institutions have typically performed best. Examples include the United Kingdom, South Africa, Australia and Chile. During Crisis, most projects were impacted but those attracting private financing had strong fundamentals

13 Elements of PPP Framework Institutional Financial PPP Program Legal / Regulatory Policy

14 Policy: Justify underlying investment

15 Good PPP Projects meet 3 Criteria Value for Money Is the PPP option cheaper (long-term)? Does the private sector bring more than investment? Is there competition for the market? Risk Transfer Risk allocated to party best able to manage it? Have demand and currency risk been properly managed (risk guarantees)? Are Government guarantees at least monitored? Affordability Are tolls affordable to users? Can Government pay subsidies over life of concession? What if guarantees are triggered?

16 Financial Framework can leverage more private investment Government Debt IFI/ Billateral Infra Funds Private Investment Guarantees Road Dev Fund

17 Institutional aspect is broader than technical expertise Human and Financial resources for project preparation and bidding Project team with specialized skills Advisers (feasibility until financial close) Decision making and management involvement Checks and Balances to minimize risks and speed up preparation Process Role and Functions of departments

18 Conclusion Global and regional experience shows importance of well prepared projects with justified underlying investment Most PPP projects in highways will require either financial contribution and/or guarantees Clear policy, strategy and framework will increase likelihood of success Crisis is making private sector more risk averse and policy clarity may reduce such risk Institutional strengthening requires human and financial resources

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