Ensuring an enabling environment for PPPs: OECD experiences

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Ensuring an enabling environment for PPPs
OECD experiences and the energy sector Kensuke
TANAKAOECD Centre for Co-operation with
Non-Members Japan-OECD-Vietnam
Public-Private Partnership Forum 3 March 2008,
Hanoi
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Outline
1. OECD and PPPs

• Why Governments promote
• PPPs?

• How to make PPPs a success?
• - from OECD experience

4. PPPs in the energy sector
5. OECD and Southeast Asia
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1. OECD and PPPs
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Widespread use of PPPs among OECD Members

• Although some OECD Members have a long experience
  of PPPs, most Members started to use this scheme
  during the last two decades.
• Majority of the projects have been in
  transportation infrastructure. Public utility and
  services (water, education etc) are also seen.

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Widespread use of PPPs among OECD Members (cont)

• UK, Korea, Spain, Australia have long years of
  expertise.
• Korea has recently accelerated the use of PPPs.

Top 10 OECD Members in terms of PPP value in 2004
(in US million)
Source OECD
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PPP investment in selected ASEAN countries in
2006 (in US million)
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• Why Governments promote
• PPPs?

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Why Governments promote PPPs?

• Governments have many options for
  delivering
• infrastructure. Why do they promote PPPs?
• 1 ) Additional capital high infrastructure
  demand while limitations in public resources to
  cover investments. Tight governmental budget and
  difficulty to increase tax.
• 2) Increase efficiency and improve service
  delivery.
• 3) Value-added to consumer and public, etc.

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Increasing OECD work on PPPs

• Reflecting on the needs to analyse PPP schemes,
  OECD recently discussed PPPs at several
  directorates.
• Infrastructure to 2030 - OECD Futures Project
  (2006, 2007)
• International Investor Participation in
  Infrastructure (2006) , OECD Principles for
  Private Sector Participation in Infrastructure
  (2007)
• Public-Private Partnerships in Pursuit of Risk
  Sharing and Value for Money (2008)
• Transport Infrastructure Investment (2008)

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• How to make PPPs
• a success?
• - from OECD experience

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How to make PPPs a success ?- from OECD
experience
G
Good PPP contracts
Risk- sharing
Incentive
Affordability
Good environment for PPPs
Institutional framework
Competition
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Two major elements to succeed with PPPs

• 1. Good Contracts to enhance the value for
  money
• a) Affordability
• b) Risk- sharing
• c) Incentive Compatibly
• 2. Good Environment to manage PPPs
• d) Competition
• e) Institutional/Legal framework to manage
  PPPs
• f) Macroeconomic stability, etc.

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Demonstrate affordability - from OECD
experience

• UK sensitivity analysis
• Australia Public Sector Comparator (PSC)
  process
• France reference to the Ministerial programme
• Hungary- imposed budgetary limit to the project

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Optimal risk sharing - How to allocate the PPP
risks?

• Different types of risks should be transferred
  to the party best able to manage it in the most
  cost effective manner.
• - Private and public should identify and
  analyse the possible risk when concluding PPP.
• Optimal risk sharing enhances incentives for
  private companies to finish the project.
• Inappropriate allocation will increase the cost
  of the project through risk premium.

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• Different types of PPPs provide different types
  of risk sharing.
• Identifying the most effective type of PPP is
  crucial.

Fully risk transfer
Very limited risk sharing
Design- Operate- Transfer
Design- Build- Operate- Maintain
Design- Build
Concession
Design- Own- Operator
? Relationship the degree of Risk- sharing and
PPP project type
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Optimal risk sharing - How to allocate the PPP
risks? (cont)

• Different risks
• - global risks, elementary risks, political
  risk, borrowers credit risk, sponsors credit
  risk, sovereign risk, project risk (completion
  risk, operation and management risk, input and
  output risk, financing risk) .
• Private sector is better suited to assume
  commercial risks and public sector is to assume
  political and legal risks (?)

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Optimal risk sharing - How to allocate the PPP
risks? (cont)

• Commercial risks supply and demand risks.
• - Ability of the private sector to bear the
  
• risks.
• - Free-rider problem
• Korea- Minimum Revenue Guarantee (MRG) scheme,
  various tax benefits, etc.

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Ensuring incentive compatibility

• Incentive compatible contracts will give the
  right incentive to both parties to implement the
  project.
• Flexibility and rigidity of the contract?
• - Theoretical argument- contract theory (Hart
  and Moore)
• - Experience of UK providing flexibility in
  the contract

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• PPP contract design should be
• a tailor made process considering several
  elements.

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Total PPP investment by type of private
participation(1990-2006)
(US million)
Source WB PPI database
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• Even if the contract itself is well designed,
  without a good environment, its difficult to
  achieve the objective.

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Enhancing competition

• The level of competition in both the pre-and
  post-contract stage is crucial.
• a) Pre-contract stage (Competition for the
  market )
• - competitive bidding process example of
  UK.
• b) Post-contract stage (Competition in the
  market)
• - contestability of the market - example
  of France.

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Institutional framework to manage PPPs from OECD
experience

• Performance of PPPs should be measured
  appropriately.
• Performance indicators - UK, Australia,
  France, Hungary, etc.
• Supporting PPP schemes PPP unit
• - experience of Netherlands and Australia.
• Comprehensive legal framework - Turkey

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Good environment- other points

• 1) Efficiency gains and differences
• Different interest rates paid by government and
  private sector will effect the net benefit of the
  project to the government.
• 2) Should Infrastructure be paid for by taxes or
  charges?

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4. PPPs in the energy sector
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Total PPP investment by sector in selected ASEAN
countries (1990-2006)
(US million)
Source WB PPI database
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Total PPP investment in the energy sector by type
of private participation in selected ASEAN
countries (1990-2006)
(US million)
Source WB PPI database
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Total number of PPP projects by region and type
(1990-2006)
Source WB PPI database
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PPP investment in projects by region and type
(US million)
Source WB PPI database
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Some examples from OECD Members

• Turkey New PPP legal framework
• Unify the PPP legislations (i.e. comprehensive
  legal framework)
• Provide legal basis for additional PPP models
• Establish a central PPP unit

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Some examples from OECD Members

• Ireland The Alternative Energy Requirement
  (AER) programme
• Government support mechanism for renewable energy
  in the Irish market.
• It provides successful bidders with a 15-year
  power purchase agreement (PPA) , at guaranteed
  prices, which are index linked.

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Some examples from OECD Members

• USA Advanced Turbine System (ATS)
• ATS is to improve fuel efficiency in power
  generation and reduce emissions of harmful
  pollutants.
• Governments can encourage more radical innovation
  in technological fields that are mature and may
  lack sufficient incentives to explore new
  technological approaches.

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5. OECD and Southeast Asia
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OECD and Southeast Asia

• Ministerial Council Meeting 2007, May, I, (iv).
• Invites the Secretary-General to explore and
  develop recommendations to Council on how to
  expand the OECDs relations, including through
  enhanced engagement, with selected countries and
  regions of strategic interest to the
• OECD, identified by Council. In light of
  its growing importance in the world economy,
  priority will be given to South East Asia with a
  view to identifying countries for possible
  membership.

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OECD and Southeast Asia

• Several ways of participation
• Global Forum, Regional Forum, Observer, Ad-hoc
  Observer, etc.
• Regional integration in Southeast Asia

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• Thank you.