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PUBLIC PRIVATE PARTNERSHIPS IN INFRASTRUCTURE:

BEST PRACTICES AND PROSPECTIVE POLICY FRAMEWORK

J. Luis GuaschHead of World Bank Expert Group on PPP

World Bank and Professor, University of California, San Diego

jguasch@worldbank.org

March, 2010

Forum: PPP and Infrastructure,

Maputo, Mozambique

IBRD

CONTEXT

At last Governments have become convinced of the impact of infrastructure on growth, competitiveness, trade and poverty and of the urgency of implementing appropriate measures

And are also aware of the significant needs and required investments to improve their infrastructure: the coverage and quality of infrastructure services

In contrast to the crisis of the 1990s, governments have not cut, in fact many have increased their investments in infrastructure: many considering scaling up investmnets in both public works and PPPs

INDIANA JONES: MOVING FORWARD

A Map: The Vision

A Guide: The Knowledge

Food and Water: Resources

PART I: OVERVIEW OF PPPs

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Never Forget the Ultimate Objective:

Improve Sector/Service Delivery Performance

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Objectives: Sector Performance

• Final

Efficiency of service provisionAlignment of costs and tariffsCoverage: percentage of population with access to

reliable services/networkQuality and reliability of the serviceOperational and financial firm’s performance

• Through:– Sectoral Policies– Investments– Regulatory Oversight

Objectives: Sector Performance Sector Performance is driven by four components: all critical for success!!!

– Sectoral Policies• Done by Sector Ministry• Embedded in Sector laws and normatives

– Investment• Done by public sector and private sector (PPPs)

– Regulation• Done by mostly Sector Ministry with assistance from Regulator if

exists• Embedded in laws, decrees and/or contracts

– Implementation of the previous three• Of Sectoral Policies, done by Ministry or/and “Regulator”• Of Regulation done by “Regulator”• Of Investment done by line Ministries and/or private sector• Embedded in contracts (sometimes in laws), norms

Sectoral Policies

Inter Alia they include– Strategic planning-and identification and

prioritization of projects– Market structure– Entry and evolution– Mode of service provision– Extent and modes of Subsidies– Coverage targets and access– Cost Recovery– Oversight

Regulation

Two components (plus instruments)– Governance (inter alia, includes)

• Structure and characteristics of oversight: including issues of autonomy, transparency and accountability

• Financial and labor regimes• Procedures• Conflict resolution

– Substance (inter alia includes)• Risk allocation and mitigation• Tariff structure (for both users and providers)• Mode of regulation• Asset Base• Incentives• Renegotiation framework• Financial equilibrium• Information requirements• Output mode

INVESTMENTS

Public Works

Private Sector Participation: Concessions and PPP

Hybrids

But … a process, and evolving, all relevant

What Are PPP and What They Can Do For You?

PPP

The truth about PPP: Opportunities and Limits?

What can PPP do for you?

When and How are PPP the right choice as a modality of infrastrcuture service provision?

What are PPPs?

“Public-Private Partnership” is a generic term for the contractual relationships formed between the private sector and public bodies often with the aim of introducing private sector resources and/or expertise in order to help provide and deliver public sector assets and services. The term PPP is, thus, used to describe a wide variety of working arrangements from loose, informal and strategic partnerships, to design build finance and operate type service contracts and formal joint venture companies

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Options on Modalities of Private Participation in Infrastructure

What can the Private Sector do under a PPP?: Combinations of the following options:

Management and Lease Contracts (Any financing done by the public sector)

Brownfield Projects:– Build, Rehabilitate, Maintenance, Lease, Operate

Transfer Greenfield Projects:

– Design, Build, Operate, Maintenance, Transfer, (some cases own)

Divestitures:– Full or Partial

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Definitions: “PPPs”

PPPs PFI

Concession

Privatization - Regulated

Privatization - continuing

interest

Privatization - purely

commercial

Public provision

O & M Contracts

Management / Service

contracts

Misc. Manufacturing (Philippines)

Textile & Sugar Mills (Bangladesh)

Airline (Jamaica, New Zealand)

Railway (New Zealand)

Electricity Distribution (UK, VIC, Jamaica)

Railtrack (UK)

Water Supply (Manila, Philippines)

Toll Roads (South Africa)

Facility Availability

Service or product

Toll Road (Portugal, VIC)

Bulk water supply (VIC)

Some Schools (UK)

Court Building (VIC)

Jamuna Bridge (Bangladesh)

Tram and Train Contracts (VIC)

Hotels (Jamaica)

Motorways (South Africa, pre-1999)

Market economy

State-owned economy

Schools (Philippines)

Roads (New Zealand)

Schools (USSR pre 1990)

Roads (USSR pre 1990)

PP

P - C

ore

PP

P - B

road

est Defin

ition

Pu

re Pu

blic

Pu

re P

rivate

Key Elements of PPP

Long lasting contract: 10 to 30 years Ownership stays with Governments (rare exceptions) Cost Recovery by investors is through users payments , or

governmnet payments or a hybrid of both The private sector operator has the right to provide the

service for the duration of the contract (that is its only assets-the right to thre flow of payments from users or government)

At the end of contract, the service and assets are transferred back to the Government without any compensation

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Objectives & importance of PPPs

PPP have proven critical as a component of a country infrastructure strategy

They can effectively complement (and partially replace) traditional public works.

The benefits can be, relieving fiscal pressures on government budgets, providing partial financing for infrastructure programs in contexts of tight fiscal space, bringing significant know-how in operations, and technology, reducing unit costs, addressing (through the bundling of construction and maintenance) the recurrent problems of rehabilitation and maintenance.

The end results of PPP programs is the acceleration of infrastructure investments and through them reducing the infrastructure gap, increasing coverage and network expansion and increasing productivity and productive opportunities

PPPs

If done well, PPP can bring significant gains-efficiency, welfare, financial and even fiscal– Can accelerate investment program and levels of service– Improve Service Delivery:Quality and Speed– Creating Fiscal Space– Cost Savings– Effective Risk Transfer– Transparency

But it does require, careful thinking-developing the capacity, procedures, filters, institutions, knowledge, oversight and use of best practices on designing transactions/contracts

OVERALL RECORD OF PPPs

PPP’s impact mostly positive: • Raising finance and creating fiscal space• Coverage, quality and efficiency have generally

increased• And it could have been even better if better

designed, yet…

But, have PPP been a “beautiful relationship”? Certainly not, manageable yes, but some concerns have arised, mostly from poor design and implementation, and that, as of today, with our knowledge can be fixed

Private Sector Participation (PSP) is associated with the following:

A 12% increase in residential connection for water utilities;

A 54% increase in residential connections per worker for water utilities and 29%increase for electricity distribution companies;

A 19% increase in residential coverage for sanitation services;

An 18%increase in water sold per worker and a 32% increase in electricity per worker;

A 45% increase in bill collection in electricity;

An 11% reduction in distribution losses for electricity and 41% increase in the number of hours of daily water service.

Potential Impact of PPP in RDC (Congo)

Improving power supply could reduce costs to firms by as much as 80 percent

Providing feeder roads reduce costs of moving agricultural produce by 70 percent

River dredging and upgrading could reduce costs of transport by 50 percent

Road rehabilitation and upgrade could reduce costs of road transport by 40 percent

Port upgrades and reforms could reduce costs of cargo handling by 30 percent

Rail rehabilitation could reduce costs of surface transport by 30 percent

Impact of PPP: Changes in Trends…

Transición Post-transición Transición Post-transición Transición Post-transiciónNúmber of users (*)

Output (*)

Númber of employees

Labor Productivity (*)

Distributional losses

Quality of Service

Coverage (*)

Prices

? ?

Fuente: Andres, Foster y Guasch (2004).Nota: (*) Estas variables fueron reportadas tras considerar los efectos fijos de la firma y otros fenómenos contemporáneos en la economía.

Distribución de la electricidad Telecomunicaciones fijas Distribución del agua

Númber of employees –Sector

Impact of Infrastructure/PPP on Poverty/Inequality and Job Creation

Access to services significantly increases household earnings

Infrastructure does create jobs

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Poverty: Increases in Household Earnings from Access to Infrastructure Services: Complementarities of infrastructure

Peru, 2004

Pipeline water0%

10%

20%

30%

40%

50%

60%

% c

hang

e of

PC

HH In

com

e

Water +electricity

Water + elect +phone

Water + elect +phone + road

Source: Escobal and Torero, 2004.

Infrastructure does have a strong impact on household’s welfare

There exists complementarities in the provision of different types of infrastructure

347.9 347.9

121.8

0

50

100

150

200

250

300

350

400

450

500

Annual Earningsper capita without

roads

Annual Earningsper capita with

roads

Increase in earnings of households benefiting from rural roads

(in $US annual)

Source: ENDES-INEI

Job Creation Impact of Infrastructure Investments by type for US$ Billions

Job Creation per $1B spent in INF

326 1,220

4,4006,055

450532

3,963

5,453

1,0491,240

1,698

2,337

599

1,533

10,141

13,955

0

5,000

10,000

15,000

20,000

25,000

Wind Power Solar Power Hydro Power Highways

Job

s p

er y

ear

Induced Employment

Foreign Indirect EmploymentDomestic Indirect Employment

Direct Employment

Sources: Authors calculations, World Bank project documents, RDEL (2009) and USDOT .

Geographic Zones from Peru: Economic Potential, Productive Efficiency, Access Costs, Poverty

Where-which fields/areas - are PPPs Possible?

Often Used and Possible Projects/Sectors for PPP: Traditional

Transport (Roads, Ports, Airports, Railways, Bridges), Electricity, Rural Electrification, Gas, Telecom, Backbone

Water and Sanitation: Treatment Plants, upstream and downstream, full service provision, effluents

Solid Waste Collection and Disposal Urban Transportation: Buses and Metros, Suburban Light Rail Urban Roads Logistic Terminals Housing Schools, Hospitals

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Increasingly Used and Possible Projects/Sectors for PPP: Non- Traditional

Slum Upgrading Jails/Prisons, Correctional Facilities Public Buildings: Municipal Administration, Sports Stadiums, Concert

Halls, Cultural Centers Access to Common areas Street Lighting Recreational Parks, Sports Facilities Land registration, Cadaster Fire Stations Day Care Centers Parking's Security-Installing, monitoring and managing security cameras around the

city

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What Makes a PPP Project Successful?

Successful PPPs are characterized by comprehensive planning, clear contractual rules and contingencies,

competitive procurement and credible contract enforcement.

Successful PPPs are characterized by comprehensive planning, clear contractual rules and contingencies,

competitive procurement and credible contract enforcement.

Countries with strong public sector institutions have typically performed best. Examples include the

United Kingdom, Portugal, South Africa, Australia and Chile.

Countries with strong public sector institutions have typically performed best. Examples include the

United Kingdom, Portugal, South Africa, Australia and Chile.

Yet, the benefits PPP can provide are not automatic: Critical Factors for Success

Communications Credible Commitment by Government Credible Leadership of the initiative Underpinned by appropriate framework:

– Legal

– Institutions

– Regulatory/Oversight

– Processes

– Conflict Resolution Guided by Best Practices: Capacity, capacity and capacity