Public-Private Partnerships: some lessons from global experience Seminar on Public-Private Partnerships and public account sustainability: compatible realities? October 7, 2013 Banco de Portugal, Lisbon Rui Sousa Monteiro (World Bank Institute) Assessing global PPP experience Currently there is a significant global PPP experience Very good results in terms of effectiveness Good results, also, in terms of efficient delivery of services Some concerns regarding affordability and project selection 2 1
What do we call PPPs? 3 What is a PPP Public-private partnerships (PPPs) are long-term contractual relationships between a public sector entity and a private sector entity The private partner commits itself to providing a set of services according to some specified performance levels The public partner monitors the performance and pays the services or grants the private partner the right to collect fees from users Economic reasoning tells us that PPPs should only be used for services that require long-life assets 4 2
Rationale for PPPs Tradit. D-B PPP PPP PPP PPP design of infrastructure construction of infrastructure maintenance of infrastructure core provision of equipment maintenance of equipment provision intermediate services provision services to end-users In each case, services provided according to public sector rules 5 PPP and public service In locking the private partner in a long-term relationship, the public sector is also locked for a long period Because PPPs relate to public service, the public partner is very sensitive to servicedisruption, giving the private partner added bargaining power When change affects the project, the private partner may benefit from it; the private partner may even engage in strategic moves for inducing change for its own benefit 6 3
Foundations of PPP efficiency Output-based long-term contracts: Core: design + construction + maintenance Performance-based payments whole-life costing Private capital at stake credible commitment Good project selection (CBA, VFM, affordability) Competitive procurement Adequate contract management Partnering Contract enforcement Prevention of strategic moves 7 Is the PPP experience relevant? 8 4
Were the Egyptian pyramids PPPs? 9 Initial PPP experience: large programs Worldmapper.org Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan) 10 5
Initial PPP experience: proliferation Worldmapper.org Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan) 11 Current PPP experience: new large programs Worldmapper.org Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan) 12 6
Current PPP experience: proliferation Worldmapper.org Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan) 13 Current PPP experience: countries with PPP programs Worldmapper.org Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan) 14 7
Basis for PPP efficiency long-term contract with effective risk transfer requires demand-based or availability-based credible long-term risk transfer requires private capital at stake, no easy way out keeping efficiency in the long term requires proper contract management and oversight of fiscal risks but, most of all, PPP efficiency requires good project selection, identifying costs, benefits& risks 15 Why do we need PPPs? 16 8
Public infrastructure but often affected by basic for economic growth and for the quality of life poor maintenance The (non-ppp) case of Lima metro, Peru The 7-station elevated metro, equipped with 32 cars, was officially opened in 1990 but never operated, due to poor demand; its operation started only 21 years later, after enlargement to 16 stations. The planned 2 nd line will be a PPP! 18 9
The case of Joá Penteado tunnel 2, Brazil The 300-meter tunnel was inaugurated in 2009, 23 years after the beginning of construction. Linking downtown Campinas (in São Paulo state) to its industrial district on the other side of a hill, its construction stopped after one year, for lack of public funds, when the tunnel was half dug; it took 20 years to obtain funds for digging the remaining 130 meters. 19 The case of Salvador da Bahía metro, Brasil Half-built and not operational for 12 years, completed 2012 and still not operational. 20 10
The (non-ppp) case of Barcelona subway line 9, Spain Cost forecasts: 2,600m in 2003; then 3,700m; later 6,900m; currently 16,000m; beginning of construction: 2003; end of construction: unknown (for lack of financing) 21 A non-ppp case: Requena-Utiel HSR station, Valencia, Spain Cost: 12m; surrounded by vineyards, midway between Requena and Utiel; demand is slowly growing, having reached 50 passengers/day 22 11
The (non-ppp) case of Cuenca HSR station, Spain Cost: 20m; the first green rail station in Spain: noncontaminant materials, geothermal water supply; 250-car parking; demand is so low that Renfe suppressed a few trains 23 The case of Laredo marina, Spain Cost 90m (half of that still owed to the banks by Municipality), but still incomplete; no users; locals complain the beach nearby is being eroded by the changes in sea currents 24 12
The case of the marina of Lugar de Baixo, Madeira (1) Initial expected cost 24m; current cost 44m according to regional gov t (or 100 according to the opposition); opened in 2004, with berths for 291 yachts; destroyed in 2005 25 The case of the marina of Lugar de Baixo, Madeira (2) 26 13
The case of the marina of Lugar de Baixo, Madeira (3) 27 Casa da Música, Porto, Portugal House of Music, Porto, Portugal, 100m 28 14
Ciudad de las Artes y las Ciencias City of Arts and Sciences, Valencia, Spain, $500m 29 The (non-ppp) case of Jaén tram, Spain Cost: 100m, completed in 2011, procured by the regional government, then transferred to the municipality, who operated the service for two weeks and closed it for lack of funds to operate a tram service with scarce users (even with zero fee) 30 15
The case of Ciudad Real airport, Spain Cost 1,100m; 4,000m runway; the first private international airport in Spain; capacity: 2,500,000 pass; demand in 2010: 33,520; closed in April 2012 after three years in operation 31 The case of Huesca airport, Spain Cost 40m; opened in 2007; with no commercial activity since February 2011; demand: zero passengers August 2011, four in September, all from small private planes 32 16
The case of Castellon airport, Valencia, Spain Cost: 150m; officially declared open in March 2011; not licensed due to design errors; a $375,000, 79-feet tall statue of Carlos Fabra, a local politician, was erected in the airport 33 The case of Pamplona-Noáin airport, Spain Cost 50m; capacity for 1,100,000 passengers/year; demand in 2010: 291,553 34 17
The case of León airport, Spain Three times enlarged in the past decade; after the last enlargement, costing 29m, it presents capacity for 500,000 passengers, i.e. 5 times current demand 35 Spanish ghost airports ( aeropuertos fantasmas ) Spain has more international airports for commercial flights than any other country in Europe: 48 public and 2 private 20 of those airports handle fewer than 100,000 passengers/year Too many airports? (And also too many rail lines, ports, and highways? And too many sport and entertainment facilities?) Or were they simply built in the wrong location, in order to serve local politicians interests? 36 18
PPP projects: Highways in Spain Significant cost overruns, in some cases over 50 percent; low demand, reaching 1/10 of expected traffic. In 2012, AP41 Madrid-Toledo, Radial 4R4, and Cartagena-Vera concessionaires filed for bankrupcy. Several more are close to bankrupcy. 37 The empirical evidence: unintended consequences 38 19
The empirical evidence A large track-record of poorly managed projects: Poor project selection Cost overruns Insufficient demand Collapsed and struggling projects Insufficient governance But also examples of well managed projects (many of them PPP projects) And mixed cases of great service effectiveness (users ) and poor use of public resources (taxpayers ) 39 We have hundreds of successful PPP projects Worldmapper.org Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan) 40 20
Chile is an example 41 And also a few successful non-ppp projects Worldmapper.org Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan) 42 21
10/11/2013 Øresund bridge, between Sweden and Denmark Cost: $5700m User-fees will repay the bridge until 2035 43 The new railway station in Stuttgart (Germany) (1) 44 22
The new railway station in Stuttgart (Germany) (2) Original cost estimate: 3100 million. In December 2009, Stuttgart21 project approved (by Deutsche Bahn and the federal, state and municipal governments) with a cost estimate of 4100 million, on condition that its cost does not exceed 4500 million The approving entities (DB and governments) did commit on funding the expected cost, and on a 400 million contingency provision Works started February 2010 45 The new railway station in Stuttgart (Germany) (3) Cost expectation 4100m + 400m = 4500m But currently, after three years of construction, the cost estimate reached 6800 million (with a 4-year delay) State and municipal governments refused to provide more funds, and the Finance Ministry did consider the option of cancelling Stuttgart21 But Stuttgart21 will be completed because the cost of cancelling the project will be higher than the cost of completing it. 46 23
Stuttgart21 and fiscal risks This Stuttgart21 project provides an example of the fiscal risks that always affect public infrastructure projects But we should emphasize a few points: Its budget included a provision for contingencies (in the current case, an insufficient one) The realization of cost overruns did induce strategic behavior by all involved public entities (DB and the federal, state and municipal governments) Besides fiscal risks, political risks are present: the opposition complained, as well as environmentalists 47 Public infrastructure and fiscal risks Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter did investigate public infrastructure all over the world and identified a tendency for cost under-estimation: managers and decision makers present low cost estimates and hide risks, in order for their projects to obtain government approval Adverse selection: "Those who provide honest estimates for projects from the very beginning have little chance of getting them off the ground See (2003) Megaprojects and Risk: An Anatomy of Ambition, Cambridge University Press 48 24
New Berlin-Brandenburg airport PPP option abandoned; first tender canceled Cost: 2000m en 2006 4300m + compensations Completion date: 2011 2014? 49 Rail tunnel in Leipzig Cost: 572m 960m Completion date: 2009 Dec 2013 50 25
New North-South metro line, in Koln Cost: 600m in 2000 1040m Collapse of municipal archive ( 1000m damage) Vibration in the Cathedral 51 Second rail tunnel in Munich Cost: 2047m in November 2012, plus 500m for contingencies; but the current estimate is 2433m Completion date: 2020 2021 or 2022 52 26
Some good practices Cost of public projects (including PPPs) is presented in the budget and fiscal reports German governments, federal and sub-national, do not adopt the out-of-the-book approach Large projects require co-funding schemes between different levels of government (federal, state, municipal), inducing better analysis Provisions for risks are budgeted Role of MoF 53 How can PPPs help? 54 27
PPPs as credible commitment PPPs present a credible commitment for implementing a transport project project revenue is dependent on reaching the operational phase, creating a strong incentive for completion the private partner starts the project with a full financing scheme, avoiding the usual public finance troubles 55 PPPs and economic rationality Allocating project implementation to a private entity allows for the private partner to use full economic rationality in designing and building infrastructures and in selecting and procuring equipment, services and staff And PPPs may present additional benefits 56 28
A non-standard approach: PPPs as project filtering The case of Dublin s metro The case of UK s light rail projects The case of Fertagus rail service 57 The case of Dublin subway Project decided in 1996 studies by the state-owned public transport operator In 2001, new agency a rail procurement agency PPP studies: subway lines cancelled tram lines approved (38km Luas) Luas started operating 2004 Subway lines (Dublin Metro) deferred again in 2011 58 29
The case of UK slight rail 59 The case of Fertagus railway 60 30
The case of Fertagus rail service The project The solutions The negotiation (2004) challenging the private operator facing lobbies: rail-line design regulation trains safety systems 61 The case of St Barts hospital 62 31
How can PPPs harm? 63 Case: Canal du Midi / Garonne mettreen risque monbien et monhonneurà défaultde réussiteet, par contre-coup, acquérantun peude l'unet un peude l'autre, en cas que j'en sorte heureusement Riquet, a local tax collector, presented to Louis XIV this unsolicited proposal: building a canal connecting the Atlantic Ocean to the Mediterranean at no cost to the taxpayer or royal purse 64 32
Case: Canal du Midi / Garonne Riquet was awarded a perpetuous concession in 1666, withthe right to collect a special purpose new tax. The canal, built in 1666-1683, was a success, but the public partner paid two thirdsof its cost. 65 Vasco da Gama bridge 66 33
Skye bridge 67 Sources of fiscal risks Bad projects Poorly researched projects Bad contracts Technological or commercial change Demographic change Political or legal change Poor contract management Lack of global affordability 68 34
Alternative perspectives on PPPs PPPs may be perceived as a convenient way for some decision-makers to circumvent existing budgetary rules PPPs may be perceived as a way for some private firms to capture government and create long-term sources of rents or 69 PPPs, rent-seeking and corruption PPPs as a rent-seeking tool rents extracted from users, or rents extracted from the government The role of MoF project appraisal (CBA or similar) contractual review (evaluation of fiscal risks) project prioritization (affordability checks) PPPs as a corruption tool The role of transparency and external auditing 70 35
Preventing and managing Good project appraisal Careful draft contract design Gateway processes: costs and risks The role of audit offices / courts of auditors Continuous evaluation of fiscal risks & costs Contract management 71 PPP and fiscal accountability Budgetary costs: certain contingent Budgetary risks are much more than contingent liabilities Fiscal accountability requires much more than accounting rules effective fiscal management contract disclosure contract oversight and fiscal risk management 72 36
On the sustainability of non-contingent liabilities or: The fiscal iceberg 73 Transport in Portugal: the fiscal iceberg 74 37
Transport in Portugal: the fiscal iceberg Translating: Transport expenditure (Min. Public Works) 449m Transport expenditure (Min. Finance) 251m Total reported expenditure 2008: 700m Net change in assets in transport sector SOE: 2,500m to 3,000m Net change in (out-of-budget) PPP commitments: 3,000m 75 Effectiveness and efficiency effective 76 38
Effectiveness and efficiency effective 77 Effectiveness and efficiency efficient from the viewpoint of public purse effective 78 39
Effectiveness and efficiency efficient from the viewpoint of public purse effective efficient from the viewpoint of society 79 Effectiveness and efficiency efficient from the viewpoint of public purse effective efficient from the viewpoint of society 80 40
Sydney s BD tunnel 81 Managing fiscal risks Fiscal risks refer to the possibility of deviations in fiscal variables from what was expected at the time of the budget or other forecast 82 41
Selecting the adequate infrastructure projects cost-benefit analysis long-term resilience technological change policy change demographical change prioritization 83 Checking for affordability assessing long-term expected costs assessing long-term contingent costs fiscal and political commitment 84 42
Designing proper PPP schemes and contracts allocating risks designing incentive schemes measuring performance 85 Preventing free-riding by sub-national governments affordability challenges efficiency concerns fiscal and financial reporting 86 43
Promoting competition double concern: - selecting the best partner - at the lowest cost 87 Preparing for contract management contract enforcement partnering strategic analysis 88 44
Change management and risk management assessing change identifying risks mitigating impacts 89 Managing contingent liabilities assessing liabilities reporting liabilities managing liabilities 90 45
Overseeing and controlling PPP commitments Ministry of Finance Auditing entities Media, taxpayers, general public 91 Institutional capacity: government Is government able to assess project risks? Is government able to define the KPI? (Tendering is the easiest part) Is government able to manage the contract? Is there a gateway process? Is government able to increase its capacity? 92 46
Thank you Rui Sousa Monteiro senior public-private partnerships specialist World Bank Institute 1818 H Street, N.W. Washington, D.C. 20433, USA tel: +1-202-473-9450 e-mail: RMonteiro@WorldBank.org 93 47