Private Sector Participation in Highways Some Insights STATE HIGHWAYS WORKSHOP By The World Bank 2 nd November, 2006
Presentation Structure Why Private Finance International Experience Key Lessons for State Agencies GoI Initiatives World Bank Involvement
Private Sector Participation Linkage with Development Growth Private Sector Development Poverty Reduction Fiscal space Private participation could free a lot of resources for poverty reduction However, PPP s are not a panacea
Public-Private risk sharing PRIVATE PUBLIC Commercial Construction Operations Financing Political Land Acquisition, R&R, utility shifting Government Support Equitable risk sharing between the public and private parties critical for the success of the project.
PPP so Far in India Transport and Urban Project cost of awarded PPPs by sector (total = Rs 339.5 bn) PPP projects by states & central agencies (total = Rs 339.5 bn) Source: World Bank, India: Building Capacities for Public Private Partnerships. May 2005.
International Experience
Worldwide Substantial PPP activity in Toll Roads worldwide Largest quantum of PPP s in the East Asia Pacific and Latin America regions Source: World Bank, PPI Database 1990-2004
Caution: There have been problems and failures worldwide
Problems and Controversies By 2004, 90 PSP infrastructure projects had seen exit of private sector Another 45 were in international arbitration or one side had requested termination Renegotiations frequent in Latin America, over 50% of transport and water concessions renegotiated
Cancellations/Renegotiations Cancelled Projects 1984-2003 Country Total Investment 2003 US$ million Mexico 11,003 China 1,538 Thailand 890 Indonesia 653 Hungary 471 Argentina 181 Lao PDR 115 Grand Total 14,851 Percentage of Projects 1990-2003 Source: PPI Database Cancelled Concluded 8% 7% Construction 3% Distressed 2% Operational 80% high incidence of renegotiations: 54% of transport concessions in LAC were renegotiated 85% before 4th year, +60% before 3rd year Source: J.L. Guash
Key Issues & Lessons Planning & Institutional Issues Legal & Regulatory framework Government Support Traffic Forecasting Setting & Adjusting Tolls
Planning & Institutional Well established strategic network planning framework Identifies & refines the strategic road network Develops clear phasing of corridor development Economic and financial viability to identify PPP Strong agencies with the requisite planning, project preparation, and implementation capacity KEY is PREDICTABILITY Country Japan France Italy Spain LT Planning Framework Inter-City Expressway Master Plan, based on National Development Arterial Expressway Construction Law 1957 Govt required to prepare 5-year plans for roads since 1951 1960-15 yr National Arterial Roads Plan developed and revised in 1970, 77, 90 Domestic Network Plan developed rapidly following laws enacted in 1955/ 61 Long term plan prepared in 1967 involving construction of 4800 km by 1985 PPP projects should be part of an overall long term strategic network plan, with a nodal agency/unit responsible for their development
Planning Project Development Project Identification Techno- Economic Feasibility Financial Feasibility & Govt Support Land Acquisition, R&R, utility RFQ & Shortlisting Tendering & Evaluation Contract Award Traffic Studies & Revenue Forecast Construction Cost Estimates Preliminary Project Design LA Plan R&R Economic / Financial Feasibility Critical to undertake the initial preparatory studies and do the necessary market and project due diligence to avoid poor project configuration and therefore either a poor response or problems after award
Legal & Regulatory Framework Conducive legal & regulatory framework Bidding & Selection Procedures Simple and transparent procedures Competitive Selection Concession Agreements Tightly negotiated, unambiguous risk allocation. No creeping expropriation. Standardized documents Dispute resolution Well defined procedures and speedy resolution Preconstruction Land Acquisition, utility shifting, tree cutting Financial Security legislation Protection and enforcement of security package (mortgages, liens) important for banker buy in. Regulation of FDI Laws pertaining to participation level, repatriation etc. PPP projects should be developed within a well defined legal and regulatory framework
Government Support High Equity Guarantee Debt Guarantee Exchange Rate Guarantee IMPACT ON ABILITY TO RAISE FINANCE Grant Subordinate debt Shadow Tolls Minimum Traffic Revenue Enhancements Development Rights Concession Extension High GOVERNMENT FINANCIAL EXPOSURE Some form of Government support is usually required but the Government should guard against creation of large future contingent liabilities. Grants and Sub Debt are preferred forms of support.
Traffic Forecasting Unreliable revenue forecasting 67 toll-road projects Actual first-year: 70% of forecasts Range: 18%-146% One of the major causes for the problems with PPP projects Source: Standard & Poor, Traffic Risk in Start-Up Toll Facilities, 2002
Traffic Forecasting Risk Index Project Attributes More Reliable Less Reliable Tolling Regime Shadow tolls User-paid tolls Tolling Culture Tolls well established No toll roads in country Infrastructure Estuarial crossings Extension of existing road Highly congested corridor Few competing roads Clear competitive advantage Dense urban networks Green field site Limited/no congestion Many alt. routes Weak competitive advantage Only highway competition Stand-alone facility Multi-modal competition Reliant on other, proposed highway improvements Emphasizes the need for proper due diligence and project preparation. Note that for brownfield highway projects, as in NHDP I and II, the trafiic risk is lower.
Toll Setting & Adjustment Toll Setting should not result in excessive traffic diversion Colombia, Brazil have kept rates at low levels to promote public acceptance Mexico, China by contrast set rates at high levels, leading to much greater than expected diversion of traffic Toll Adjustment Format should be clearly defined and not left to the discretion of the Government Usually a formula partially linked to a price index basic principle compensation for risks beyond operator s control Recognize potential for loss of economic benefits if tolls set too high cause excessive traffic diversion. Tolls should be set at low levels to garner public acceptability and adjusted for increases in O&M costs i.e. Construction Material Price Index
Lessons for State Agencies PPP initiative should be part of long term strategic transport network development plan that is stable and predictable. A well defined legal & regulatory framework should be in place: Does the existing legislation allow for PPPs Does the existing legislation allow for private sector collection and retention of tolls Is a Toll Policy in place? Need for bolstering planning, preparation & implementation capacity to reduce risks. Is there a PPP nodal agency / unit in place? Have detailed studies by engineering and financial experts, including traffic and revenue projections, construction cost estimates, preliminary design documents, financial feasibility studies been conducted? Is there a transparent & competitive bid process in place? Are standardised bid documents/ concession agreement being used? Have LA, R&R and utility shifting activities been taken care of? More conservative approach to toll adjustment recommended. Finally, last but not least, mechanisms in place to safeguard against contingent liabilities!
GoI Initiatives Viability Gap Funding Grant funding model: Upto 20% of Project Cost Requirement for competitively bid projects User charges to be pre-specified Model Concession Agreement for State Highways Standard documents with Central endorsement MCA for O&M in the pipeline Other bid documents under preparation IIFCL SPV for long term debt funding to PPP s GoI has undertaken several measures to support state PPP initiatives
World Bank Involvement
World Bank Assistance Funding for Investment Technical Assistance Knowledge Bank
Engagement in India State Highways Andhra Pradesh Orissa Tamil Nadu National Highways Examining possibility of programmatic lending for PPPs Capacity Building for PPPs at national & state levels Capacity building for Viability Gap Funding Guidelines, State level capacity building for PPPs. Financing Constraints to Highway PPP s Support to PPPAU, Planning Commission Resources India : Addressing Supply Constraints to Infrastructure Financing India : Building Capacities for PPPs Highways Financing Study
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Toll Adjustment Procedures Location France Japan Italy Hong Kong/ Malaysia Philippines Indonesia/ Mexico/ Thailand Adjustment Mechanism Governmental discretion Advisory Committee to PM Automatic Adjustment Automatic Adjustment Automatic Adjustment Uncertainty in procedure Description Approves larger increases to less profitable companies Adjustments reviewed based on total cost recovery for entire network entirely public Linked to inflation in O&M cost categories only Linked to actual traffic realisation in relation to forecast traffic; allowed to advance date for toll adjustment if traffic falls short of forecast Parametric formula linked to CPI, interest rate, currency, construction material PI Ad-hoc system involving approval of various departments etc.