“Bridging the gaps”
Implementation challenges for
transport PPPs in OIC member
states
March 28, 2013
Vanesa Sanchez, Senior Analyst
Economist Intelligence Unit
What are PPPs?
Introduction
PPPs are public-private partnerships. They are increasingly important in the improvement of infrastructure
and public services in both developed and emerging economies. They have existed in various forms and
countries for centuries however.
An old tool:
Transport PPPs have existed as far back as the Roman
Empire
Concessions on roads and bridges were the first forms
Concessions in railways fuelled by activity in the second
half of the 19th century
Have taken on many forms; There is no one definition
PPPs in transport have had a sustained increased
investment trend over the 22-years between 1990-2011
Source: The World Bank and PPIAF. 2012. "Private investment in transport increases
in 2011, focusing on the road and rail sectors." PPI data update note 75.
A solution is requested (e.g. procured) by a public-sector entity but delivered by a private- sector
entity
Both take on risk
Two key stakeholders
Usually long-term contracts that usually cover the lifecycle of an asset
There is no single definition, but they all broadly cover the aspects above. Examples include those
promulgated by:
The World Bank’s Public-Private reference guide
The US National Council for Public-Private Partnerships
Definition of PPPs: The relationship
What are PPPs?
Private sector Public sectorInfrastructure
asset / service
Public-entity-pay PPP type
Private party recovers its investment and costs from the public entity that contracts the PPP.
These projects often use a structure called Design, Build, Finance and Operate (DBFO). The
private sector will operate the infrastructure until it is paid back by the public sector, allowing cost
recovery.
Another example is a “shadow toll”, where the government pays the private sector on a fee per
user basis and users are not charged directly
User-pay PPP type
Private party recovers its initial investment and on-going costs by charging a fee to the
users of the infrastructure.
The typical PPP structure applied to this project type is a concession, in which the
private party obtains the right to build and deliver a certain infrastructure and to charge
for its use.
What are PPPs?
The manner in which the private sector recuperates their investment is a key defining factor. These
elements lead to one of the key differentiators of PPP types.
Definition of PPPs: Recuperating investment
Both types of payments can be combined, e.g.
public availability payments alongside user fees.
Other projects, while charging users, can receive
government subsidies to improve affordability
Types of PPPs
Relates to changes in permits required, compliance standards or early project
termination.
Definition of PPPs: The risks
Legal and
political risk
Relates to the unpredictability of future demand, for instance, traffic volumes
and the willingness of users to pay. Strongly links to whether a project is user
or public-pay type, or a mix.
We focus on a few key risks (there are many different types):
Operational and
maintenance riskRelates to problems arising with maintenance or operation of the asset.
Demand risk
Refers to eventualities not accounted for at the construction stage.Construction risk
Has to do with incorrect assumptions regarding financing instruments,
financing terms, and interest and exchange rate hedgingFinancing risk
Types of PPPs
Source: OECD. 2008. "Public-Private Partnerships: In Pursuit of Risk Sharing and Value for Money."
Definition of PPPs: The risksRisk is the existence of a possible gap between predicted and actual outcomes. OECD offers a
categorisation of risk:
Types of PPPs
Assigning risks & responsibilities defines contracts and project classifications
Co
ntr
ac
t ty
pe
Concessions span BTOs, BOOTs and BOTs. It is the
most typical form of the user-pay PPP, and ownership
lies with the private sector.
When revenue sources are mixed, the line between
contract types gets blurred. For example, depending
on the legislation some BOTs can take the form of
DBFO, if there is significant public financing and the
project includes design and finance elements.
PrivatePublic
Yes PrivatePublic
Yes Public
Private Private
Private
PrivatePrivate
Private
Yes PrivatePrivate
Private
Yes
Yes
Private
Private Private
Private
Private
Private
Govt
Govt
Users
Users
Users
DBFM
DBFO
BOT
BOOT
BTO
N/APublicNo PrivateN/A GovtO&M
N/APrivateNo PrivateN/A User
Service
concession,
asset
operation
concession
DBFOs are commonly known as “PFI”, or Project
finance initiatives
In most forms of PPP, the private sector takes on
operation risk. However there are examples where
they do not (DBFM, etc).
Many transport PPP forms also include some element
of asset construction, enhancement or renovation.
This table is for illustrative purposes only. It does
not include all possible contract types, risk types or
activities, however it does focus on key points.
The table below is a simplified, illustrative matrix of how risks and activities are allocated and define PPPs*
* Please note: The matrix shows which party usually takes on a particular
risk however in some cases either public or private parties can take on a
risk. A mix of both is also possible. Final classifications depend on
countries’ legal frameworks.
Global trends in PPPs
Structuring and finance
Before the crisis
Long-term project finance
Credit enhancements
Monolines
After the crisis
More demand for public guarantees and govt facilities to ensure payments
Shorter-term financing: mini perms
Search for lower-risk markets
More involvement of development banks (multilateral and state-run)
Islamic finance
Increased borrowing in capital markets, as international banks retreat
Sukuk or Islamic bonds are now an option for infrastructure financing
Malaysia has substantial experience in PPPs with Islamic financing
Global trends in PPPs
Islamic finance instruments
As international banks retreat, increased borrowing from
capital markets in regions like the Gulf is replacing them.
Sukuk are increasingly being used to finance
infrastructure and their markets are expanding.
Satisfying the demands of Sharia would imply no interest
is charged, no uncertainty is involved and a valid contract
between offeror and offeree is established.
Lower taxation regime for transactions with Islamic
finance are one tool to incentivise potential investors
Opportunities Challenges
Islamic bonds can take longer to structure than conventional
ones.
The application of these mechanisms, may be restricted in
certain jurisdictions (e.g. regulations on beneficial rights in
Muslim countries). Different levels of oversight and regulatory
requirements across markets.
Different levels activity from one country to the next.
The new Medina airport is first of its kind in the Middle East. It was entirely financed by Sukuk and
has been given on concession for BTO (Build-Transfer-Operate) during 25 years.
PPPs paid through Islamic finance have gained ground in parts of Asia, particularly Malaysia,
where mechanisms have been developed according to the principles of Sharia
The current state of PPPs worldwide
PPPs are increasingly visible around the world, however their success and application has
varied greatly by region.
Western Europe: UK at the
forefront, especially with DBFO
types. Other countries have
been active as well, though
ooriginal EU procurement
directives had to be adjusted Eastern Europe: transition
economies embracing PPPs.
Hungary was the first to try it
with real tolls.
North America: Canada and US
active in transport PPPs, but mixed
experience.
Canada has used DFBO and DBFM
forms in rail, whereas US uses
more concession and design and
build models
Latin America: transitioning
from privatisation into more
advanced PPPs
Africa: building the
foundations via pilot projects
and with the support of
development institutions
Asia: Australia, South Korea
and India increasingly active
Global trends in PPPs
PPP success factors
There are many key elements which contribute to the success of PPPs in
transport. These are highlighted in the diagram below.
Successful PPPs
Overview of key, broad success factors
Solid legal framework
PPP success factors
Given the complexity and different types of contract, often the legal and regulatory
framework is not adequate for PPPs
Legal reforms
It is important that legal frameworks broadly allow both user-pay and public-entity-pay types of PPP to take full advantage
of all the different contract forms available. It should also apply to construction, expansion, rehabilitation and maintenance
of assets and not be restricted to certain activities only.
A good PPP law can serve as an important communication and marketing tool for investors, because PPPs tend to be
more successful where there is an investor-friendly, transparent and predictable legal environment.
Regulatory frameworks which are compliant with international standards tend to be linked to successful PPP
implementation.
An appropriate legal framework may reduce the need for public-sector guarantees, thereby facilitating the transfer of risks
to the private sector
Traditional procurement laws are often inadequate, as they tend to generate obstacles to certain PPP types or leave key
areas untouched
Good regulations
PPP success factors
Countries need to plan and deliver transport projects differently when using PPP
Regulations and planning
Shift from public investment models to market-based pricing, investment and oversight models
Shift from short-term planning to long-term planning; more strategic and analytical planning process, and more of a lifecycle
approach to project implementation
Enhanced importance of infrastructure pricing and independent sector regulator
Need to reduce regulatory risk to enable long-term project viability
Dispute resolution mechanisms are required
PPP success factors
Selecting the right partner
Regulations to ensure transparent and competitive bids are key to attracting the private sector in the first place
Competition also increases the number and quality of choices the public sector faces when executing a PPP. However
countries may constrain this by preferring local bidders over international ones, or by using unilateral or unsolicited bidding
processes
Transparent bidding processes are important to ensure the accuracy of information bidders have to prepare bids
Transparency is key to generating trust in the PPP bidding process, both from the private sector as well as the general
public
Regulations are necessary to ensure that post-contract awards and contract changes are not excessive
Regulations also need to establish project standards monitoring and contract oversight
Countries need to ensure the right partner is selected to do the PPP, for the right
reasons, and that they are managed appropriately
Regulations and bidding, oversight
Public sector capacity and coordination
Given the complexity of risk identification and allocation (among other aspects),
specialised knowledge of PPPs is required in the public sector
There must be a structure in place for government agencies involved or dedicated to PPP
implementation, with responsibilities clearly defined.
PPP success factors
To address the complexity of PPP transactions, countries around the world have created specialised institutions that
facilitate project planning coordination and evaluation, quality control, policy formulation and technical advisory.
Know-how also needs to be developed within line ministries and across contracting agencies
Expertise needs to span legal, financial, technical and economic domains
Communication between line ministries, PPP agencies and bodies is paramount
PPP success factors
Institutional design and coordination
This element is often forgotten
For communication between agencies to exist, the institutional roles and responsibilities for PPP planning, implementation
and oversight must be clear
Regulations meant to establish sector and project oversight need to ensure that there are independent institutions that
ensure continuity of oversight or handover of project knowledge internally
There is also a need to ensure tariffs remain viable, which also relates to the presence of a sector regulator
Although PPPs can fill capacity gaps in public service provision, they do not
eliminate the need for institutional capacity and oversight
The private sector needs oversight over the project lifecycle, from procurement to completion
PPP success factors
Risk identification and allocation
Things to keep in mind about the private sector
It is advisable not to transfer all the risks to the private sector, as this will result in less interest
For example, the public sector has certain powers and advantages in the process of land acquisition. Therefore is can be
better suited to taking the associated risks.
Nevertheless…
Construction risk is usually transferred to the private sector, which means it will be responsible for delays and cost-overruns
in completing the works.
The private sector, in a competitive environment, should make use of improved management practices and technology and
may be better suited to managing the design and construction risks.
.
As PPPs are long-term contractual agreements with a partnership element,
responsibilities and risk allocation should be clearly defined.
Different stakeholders are better at controlling some risks and not as good at controlling others
Private-sector interest is key
PPP success factors
Things to keep in mind about the private sector
The private sector will do what it is paid to do and no more than that, therefore incentives and performance requirements
should be included in the contract.
Finance will only be available where the operating cash flows of the concessionaire are expected to provide an acceptable
return on investment.
Bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes.
There is no unlimited risk bearing –private firms will be cautious about accepting major risks beyond their control, such as
exchange-rate risks, the risk of existing assets, and some demand risks. Country instability and institutional instability are
major deterrents, especially without risk guarantees.
Countries that have developed a coherent, transparent pipeline of projects will be more attractive, as this generates
confidence in the PPP system of a country and also generates the possibility of conducting multiple projects
Without the private sector, there is no PPP
There must be a basic understanding of how the private sector operates and is motivated for public
entities to attract the private sector properly when designing and implementing PPPs.
PPP success factors
Trade-offs: PPPs are not free
Areas to consider include*:
-The overall financial impact? – Is the PPP delivering value?
-Fiscal implications – Does the PPP deliver a viable fiscal solution?
Assessment of the validity of PPP model can be conducted through:
Value for money (VfM): comparing the PPP project to other options for procuring the same service (usually comparing with
public investment options) to determine whether the PPP option provides positive value in comparison.
Public sector comparator (PSC): estimating the cost of a PPP to the net present cost to government if it was to deliver the
project under a more traditional procurement method, for example, design and construct.
Weighing the positive and the negative of
conducting a PPP is what ultimately
determines decisions
+ Contributes additional financing
+ Contributes additional human resources and
expertise
+ Increases modernisation of technology and
practices
+ Improved investment environment
+ Can enhance the efficiency and self-
sustainability of the infrastructure
-- Higher complexity in procurement: costlier
and longer
-- Higher cost of finance
-- Reduced control in service delivery and low
flexibility during project
-- Generate higher general public scrutiny and
is thus more politicised
-- Does not fully remove regulatory burden of
public sector, and requires development of PPP
expertise and institutions
-Risk allocation – Are risks assigned to the party best able
to manage them?
-Management issues – Are private managers doing a
better job than public managers could be expected to?
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