Successes and Failures of PPP Projects

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Successes and Failures of PPP Projects

• Vickram Cuttaree
• The World Bank
• Europe Central Asia Region
• Warsaw June 17, 2008

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Introduction

• Objective of the presentation is to show some
  contributors of successful PPP programs
• Mexico and Chile PPP programs illustrate the
  importance of proper design of a PPP program
• Experience in the region but also worldwide
  converge into the same essential elements
• Strong public sector capacity
• Appropriate PPP and sector Framework
• Planning and solid feasibility study
• Transparent and Competitive Procurement
• Strong monitoring and flexibility towards
  unpredicted events

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Investment is now less concentrated in Latin
America and East Asia
Countries with strong public sector institutions
have typically performed best. Examples include
the United Kingdom, South Africa, Australia and
Chile. These countries are not only good
examples but represent also competition for
Poland in PPP investment
Source PPIAF Database
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Success Story Chile Road Concession Program

• Between 1993 and 2001 Chile awarded 21 road
  concession worth US 5 billion on a competitive
  basis
• Bidding started with smaller projects, in order
  to test the market and reduce the risk to the
  private sector
• The bidding attracted 27 consortia and more than
  40 Chilean and foreign companies, from 10
  countries
• PPP program is viewed as transparent and
  competitive, with only one minimum revenue
  guarantee called
• Surveys of users, consultations with local and
  national leaders, and focus groups graded
  Concessions System at 6 on scale from 1 to 7

Source Hodges (2006)
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(In)Famous PPP Failure Road Concession Program
in Mexico

• Between 1987 and 1995, 52 projects (25
  competitively tendered) was awarded (largest PPP
  toll road program)
• By the end of 1995, 34 projects had reached
  financial close for US 9.9 billion in private
  investment committed
• Shortest concession period would win (max 15
  years), led to very high tolls
• Concessioned roads obligated to have a parallel
  toll free road
• Construction cost overruns averaged 25 and
  average actual revenues were about 30 below
  forecasts (only 5 projects met or exceeded
  targets)
• Average toll road fee increased from US 0.02/km
  to US 0.17 after concessioning
• Government took over 23 projects and paid
  outstanding debt to Mexican Banks (about US 5
  billion) and construction companies (about US
  2.6 billion)

Source Hodges (2006)
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Lessons learned from Chile and Mexico

• Chile
• Procurement process was transparent
• Focus on creating public awareness (tolling
  culture)
• Government learned as program developed and made
  adjustments
• Attracting international firms brought finance,
  credibility, know-how etc

• Mexico
• Combination of small contract duration and low
  traffic resulted in high tolls
• Existence of free roads contributed to financial
  distress of concessionaires
• Situation aggravated by Tequila crisis
• Program resulted in massive Government bail-out

Source Hodges (2006)
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International experience helps identify typical
causes of failure
Most PPP failures can be attributed to
inadequate or non-existent feasibility studies,
including unrealistic traffic forecasts and
undefined public contribution of funds.

• Other common reasons for failure
• Poor legal framework and enforcement
• Weak institutional capacity and PPP strategy
• Unrealistic revenue and cost estimations
• Lack of thorough financial and economic analysis
• Inappropriate sharing of risks
• Lack of competitive procurement
• Public resistance (willingness to pay not
  assessed)

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Lesson Solid Revenue and Cost Estimations
Strong emphasis should be put on forecasting
revenues and costs as part of the feasibility
study. Overestimation of revenues can bankrupt
the concession

• Hungary M1/M15 was the first toll motorway
  tendered and implemented in Central and Eastern
  Europe.
• Construction of motorway was finished in 1995 on
  schedule and within budget.
• Traffic volumes were about 40 lower than
  anticipated, despite the forecasts being prepared
  by independent experts.
• High toll rate did not cover for low volume.
  Instead, it led to a court case by dissatisfied
  road users.
• As a result, the concessionaire was unable to
  service its debt and ultimately the government
  had to take over the concession at a high cost.

CASE Hungary M1/M15 Toll Motorway Project
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Lesson Assess willingness to pay and prepare a
communication plan
Widespread public opposition to a PPP project
can prematurely end the concession. The absence
of an assessment of willingness to pay can lead
to public dissatisfaction, and even violent
protests.
CASE Bolivia Cochabamba Water System

• In 1999, the Bolivian government privatized the
  water system in Cochabamba by granting a 40-year
  concession to an international consortium called
  Aguas del Tunari
• Rate structures were immediately modified, which
  resulted in increases of up to 20 in water bills
  for local families, many of whom often earn as
  little as 100/month
• In October 1998, groups gathered in protests,
  which led to an outbreak of violence, when the
  Bolivian army killed as many as nine, injured
  hundreds and arrested several local leaders
• Finally, Aguas del Tunari announced that the
  consortium was withdrawing from the project

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Lesson Comply with contractual agreement
Financial profitability and sustainability is
heavily dependent on Governments respect of
contractual agreements

• In 1989, the Don Muang Tollway (DMT) company
  received a 25-year concession from the Department
  of Highways of Thailand to build a 407 million
  segment of an elevated highway.
• The DMT faced several problems due to
  non-fulfillment of pre-construction obligations
  by the government, which failed to remove a local
  road competing with toll revenues.
• As a result, traffic volumes and revenues were
  less than forecast, and by October 1996 the
  tollway company could no longer service its debt.
• The government had no option but to authorize a
  substantial toll increase and take over some of
  the DMTs existing loans

CASE Thailand Don Muang Tollway
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Lesson Solid Legal Framework
A solid legal framework for PPP is needed to
specify the rules of the game for the private
sector and reduce the project risk , thus
improving the success rate of PPP projects.

• In August 1997, Gdansk Transport Company obtained
  the concession to finance, build and operate a
  section of the Autostrada A1 from Gdansk to
  Torun.
• However, the Concession Agreement could not be
  signed because key piece of PPP legislation was
  missing.
• Multiple rounds of renegotiations and frequent
  adjustments to legislation took place in the
  following years.
• The Concession Agreement was signed in August
  2004, 7 years after the beginning of
  negotiations.
• The specifications of the project were
  significantly changed and the construction was
  divided into two projects, instead of the
  original plan of one project

CASE Poland A1 Toll MotorwayProject
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Lesson Strong Institutional Arrangements
Institutional Arrangement should ensure
coordination, technical support and that checks
and balances are appropriately applied
CASE Portugal weak management of its PPP program

• Portugal pursued its first PPPs in the mid-1990s
  to more efficiently build new infrastructure
• The government PPP unit suffered from lack of
  experience with PPP projects and inexperienced
  staff
• As a result, Portugals early PPPs were subject o
  constant delays and cost overruns by 2003, the
  countrys PPP-related liabilities amounted to 10
  of GDP
• Weak public sector capacity was evident in
  insufficient risk transfer to the private sector
  and delays in giving government approvals on
  essential land and environmental aspects

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Lesson Value of Competitive Procurement
Uncompetitive procurement gives a strong position
to the negotiating private party and can lead to
long delays and excessive cost to the government.
CASE Bulgaria Trakia Motorway Project

• The Bulgarian Government awarded a concession
  without competitive bidding for financing,
  rehabilitating, constructing, tolling and
  operating the a section of the A1 motorway in
  2004
• Opposition parties attacked the project on the
  basis of a lack of transparency, and high
  government contribution and construction price
• The concessionaire asked to increase construction
  costs due to legal obstacles causing substantial
  delays and did not want to assume the risk of
  lower-than-expected traffic
• As a result, the talks with the concessionaire
  collapsed in November 2006 and the financial
  closure is yet to be achieved

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Lesson Mitigate Macro-economic risk and remain
flexible
An external macroeconomic shock can create an
unexpected situation for the government, whereby
it cannot comply with its contractual duties in
PPP

• As part of a massive privatization program, the
  highest profile concession was signed in 1993
  with a consortium called Aguas Argentinas for
  water services of Buenos Aires
• After the 2001 economic crisis, many concessions
  were renegotiated. Some were even terminated and
  the responsibility for service provision reverted
  to public entities, as was the case in Buenos
  Aires
• When the government rescinded the concession in
  March 2006, it argued that Aguas Argentinas did
  not comply with obligations on expansion and
  quality.
• The company replied that a freeze in tariffs when
  the Peso depreciated in 2001 substantially
  reduced the real value of tariff revenues and
  thus made it difficult to achieve the original
  targets

CASE Argentina Water System
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Summary of Lessons from Successes and Failures
Strong international competition requires to use
international best practices in preparing,
procuring and monitoring PPP projects
Key success factors include 1. Careful planning
of PPP project 2. Solid revenue and cost
estimate 3. User willingness to pay and
communication plan 4. Extensive feasibility study
with use of PPP experts 5. Compliance with
contractual agreement 6. Appropriate Legal and
Regulatory Framework 7. Strong Institutions with
appropriate resources 8. Competitive and
transparent procurement 9. Mitigation and
flexibility in managing macro-risks
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Success and Failures of PPP projects
THANK YOU !!! Vickram Cuttaree The World
Bank vcuttaree_at_worldbank.org