World Bank Experience: Road Asset Management and Development through Public-Private Partnerships Cesar Queiroz Highway Advisor World Bank Kyiv, March 21, 2006

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World Bank Experience Road Asset Management and
Development through Public-Private
PartnershipsCesar QueirozHighway AdvisorWorld
BankKyiv, March 21, 2006
First International Conference Perspectives for
Ukraine on Implementation of Public-Private
Partnerships
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Outline

• Brief International Overview
• Lessons Learned from Past Transport PPPs
• How Can the World Bank Group Support PPP
  Development
• Selection of the Strategic Investor
• World Bank Toolkit for PPP in Highways
• Allocation of Risks and Payment Mechanisms (e.g.,
  availability fees, shadow tolls, BOT, BOO)
• Estimating Minimum Toll Rates to Attract Private
  Investors
• The Way Forward

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PPPs are becoming a global business however
reaching financial close remains a challenge
Source Public Works Financing-Major Project
Survey 1995-2004
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PPPs remain concentrated in a select group of
countries
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What Have We Learned?

• Successfully concluding a transport PPP is a
  challenge
• As a result of unrealistic and aggressive bids, a
  large number of projects face re-negotiation
• Government commitment can disappear in periods of
  financial stress
• Historically only 55 of proposed projects have
  reached financing

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What Have We Learned?

• Cost recovery is a major challenge
• Full cost recovery is only achievable in some
  transport sub-sectors
• Revenue projections often suffer from a bias
  towards optimism
• The vulnerability of PPP projects to changing
  political, financial and economic circumstances
  is often underestimated
• Access to local currency funding is a critical
  success factor for infrastructure projects with
  local currency revenues

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Selection of the Strategic Investor or
Concessionaire

• For large projects, it is recommended to carry
  out
• 1. Prequalification
• 2. A Two-Stage Bidding

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Prequalification

• Advertising notice requesting expressions of
  interest to pre-qualify to be published locally
  and internationally
• Investor feedbackmeeting with selected potential
  investors/ concessionaires
• Public informationinformation dissemination on
  the financing and construction of the project
• Pre-qualificationinclude financial and
  operational criteria to ensure bids from only
  qualified candidates

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Two-Stage Bidding
The First Stage
Client prepares functional performance
specifications
Bidders offer unpriced technical proposals
Client evaluates technical proposals, and
indicates what bidders should do to make their
bids responsive
The Second Stage
Client sends memorandum of changes for each
bidder and addendum to bid documents, if necessary
Bidders offer amended bids containing their final
technical proposal and a financial proposal
Client evaluates combined technical and financial
proposals
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Unsolicited Proposals to Governments

• Origin of most controversial private
  infrastructure projects
• In theory, generate beneficial ideas
• In practice, some unfavorable experiences (e.g.,
  attempt to avoid competition, exclusive
  negotiations behind closed doors)
• Usually sole-source negotiations take much longer
  than expected

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Should Governments Forbid Unsolicited Proposals?

• Some governments forbid all unsolicited proposals
  to reduce public sector corruption and
  opportunistic behavior by private companies (e.g.
  Colombia)
• Some countries require market-testing (e.g.,
  Sri Lanka, Australian States)
• Some recognize a good project idea in the tender
  by compensating the original project proponent
  while holding an ICB (e.g., Chile, S. Africa, S.
  Korea)

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Incentive Schemes

• How can the government provide incentives
• for private sector firms to participate?
• Cost sharing and pricing arrangements
• Incentive payments (or penalties) linked to
  performance standards
• Support the provision of guarantees
• (e.g., World Bank Partial Risk Guarantee)

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World Bank Group Instruments Available to Support
PPPs

• The World Bank
• Loans to governments
• Partial credit and partial risk guarantees
• Technical assistance
• International Finance Corporation - IFC
• Loans to the private sector
• Equity investment
• Technical Assistance
• Multilateral Investment Guarantee Agency - MIGA
• Political risk insurance

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Possible Roles of the World Bank

• Financing part of government subsidies to the
  construction cost of a project
• Providing a Partial Risk Guarantee (PRG) to the
  private investors reduced interest rate,
  increased maturity

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World Bank Partial Risk Guarantee Structure
Governt
World Bank
Counter Guarantee
World Bank Guarantee
Concession Agreement
Project Company or Concessionaire
Private Lenders
Loan Agreement
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PRG for a Sub-national Project
Counter Guarantee
WB Guarantee
Private Lenders
Federal Government
Buys Guarantee
Legal Framework
Loan Agreement
Provincial Government
Concession
Project SPV
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Coverage of World Bank PRGs

• Cover specific government obligations to a
  private project
• Guarantee payment against default on private debt
  due to non-performance of government contractual
  obligations
• Relevant when there is a high perceived risk of
  policy reversal
• Coverage examples
• performance of government or state owned
  entities, e.g., government contractual purchase
  and supply obligations
• political events, e.g., changes in law,
  expropriation, nationalization contract
  frustration obstruction in arbitration process
  non-payment of termination amount or arbitral
  award
• certain force majeure events
• foreign exchange convertibility/transferability

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Benefits of WB Partial Risk Guarantees for

• Public sector
• Catalyze private financing and facilitate PPP
• Reduce government risk exposure by shifting
  commercial risk to the private sector
• Encourage larger co-financing

• Private sector
• Reduce risk of private transactions
• Mitigate risks difficult for the private sector
  to manage
• Open new markets
• Lower the cost of financing and extend maturities
• Improve project sustainability

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Partial Risk Guarantee Facility for Perus
Infrastructure PPP Program

• Facility Size US 200 million Maximum
  individual guarantee amount US 50 million
• Project Eligibility Criteria
• Projects in the infrastructure sector
• PPP concession (or similar) contracts
• Economically and socially desirable and
  technically viable, but financially viable only
  with appropriate government support
• In compliance with applicable WB safeguard
• Coverage Up to 50 of project debt against
  political, regulatory and breach of contract
  risks to project lenders
• Duration 5 years of government obligations on a
  rolling basis for a maximum of 15 years
• Currency Local currency or US denominated debt

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Basic Assumptions to Estimate the Minimum Toll
Rate to Attract Private Investors for a PPP
Project

• Concession term 20 yrs
• Construction Cost 1M/km to 5M/km
• Operation cost 500,000/km/yr
• Equity 14
• Subsidies 0
• Interest rate 5/yr
• Grace period 4 yrs
• Repayment period 14 years
• Discount rate 10

• Initial traffic 5,000 vpd to 20,000 vpd
• Traffic growth 3
• Inflation 6
• Tax 18
• IRR 12
• ROE 16
• LLCR 1.0
• DSCR 1.0

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Toolkit for PPP in Highways

• The toolkit is structured under five headings and
  includes a library and interactive financial
  simulation model

Available on the World Bank web site
www.worldbank.org/highways
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Estimated Minimum Toll Rate to Attract Private
Investment for a PPP Project
/km
5,000 vpd
10,000 vpd
15,000 vpd
20,000 vpd
Construction cost, million/km
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Value Engineering

• A professionally applied, function oriented,
  creative and systematic team management approach,
  used to analyze and improve value in
  transportation projects
• Provides a balance of quality, performance and
  functionality in a project, minimizing life cycle
  costs of construction, operation and maintenance

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Benefits of Public Disclosure of Concession
Agreements

• Further check on corruption, which in addition to
  its direct benefits can enhance the legitimacy of
  private sector involvement in often sensitive
  sectors
• Provision of consumers with a clearer sense of
  their rights and obligations, and can facilitate
  public monitoring of concessionaire performance

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Payment Mechanisms

• Availability Fee is paid to the concessionaire by
  the government based on the availability of
  required capacity (number of lanes in
  satisfactory condition)
• Shadow Toll is paid to the concessionaire by the
  government, not charged to motorists, on the
  basis of veh-km achieved (volume and composition
  of traffic)
• BOT is a scheme where the government contributes
  land to the project and sometimes a negotiated
  financial support, while the concessionaire
  builds, maintains and operates the motorway and
  transfer the assets after the concession
  completion. The commercial risk rests with the
  concessionaire
• BOO is similar to BOT, but does not involve the
  transfer of the assets to the government

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Allocation of Risks by Forms of Concession
100
Availability Fee
Shadow Tolls
RISK TO PUBLIC SECTOR
BOT
BOO
Decreasing Public Risks, Increasing Private Risks
0
100
RISK TO PRIVATE SECTOR
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Transport Infrastructure Way Forward in Ukraine

• Developing local currency markets for
  contributing to transport infrastructure
  development
• Learning from lessons of experience from regional
  transition economies, e.g., motorways in Hungary,
  ports in Poland
• Structuring PPPs is a complex, time demanding
  exercise that requires dedicated resources from
  the public sector consider establishing a
  Transport PPP Unit
• Selecting a small number of transactions with the
  highest potential for success in the short term
• Developing a consistent and organized approach to
  assess, evaluate and monitor contingent
  liabilities arising from public financial support
  to PPP transport projects
• Developing smart and effective risk mitigation
  products for supporting PPPs

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Thank you!
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Some Basic References

• World Bank (2001). World Bank-Financed
  Procurement Manual Draft. Washington, D.C.
  http//siteresources.worldbank.org/PROCUREMENT/Res
  ources/pm7-3-01.pdf
• Guasch, J. Luis (2004). Granting and
  Renegotiating Infrastructure Concessions Doing It
  Right. Washington, D.C. World Bank.http//www-wd
  s.worldbank.org/servlet/WDSContentServer/WDSP/IB/2
  004/05/06/000090341_20040506150118/Rendered/PDF/28
  8160PAPER0Granting010renegotiating.pdf
• World Bank (2004). Guidelines Procurement
  Under IBRD Loans and IDA Credits. (May).
  Washington, D.C. http//siteresources.worldbank.or
  g/INTPROCUREMENT/Resources/Procurement-May-2004.pd
  f
• Queiroz, Cesar (2005). Launching Public Private
  Partnerships for Highways in Transition
  Economies. Transport Paper TP-9. (September).
  Washington, D.C. World Bank.
• Kerf and et al. (1998). Concessions for
  Infrastructure A Guide to Their Design and
  Award. Technical Paper no. 389.
• World Bank (1998). Bidding for Private
  Concessions. The Use of World Bank Guarantees.
  RMC Discussion Paper Series, no 120. Washington,
  D.C.

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Cesar QueirozHighway AdvisorWorld Bank, 1818 H
Street NWWashington DC 20433 USATel 1
202-473 8053Fax [phone]Email
cqueiroz_at_worldbank.orghttp//www.worldbank.org/tr
ansporthttp//www.worldbank.org/highways