Asian Development Bank AGM Seminar Geneva, April 1998

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Asian Development Bank - AGM SeminarGeneva,
April 1998
Public - Private Cooperation in Urban
Development

• Dr Michael Porter
• Managing Director
• Tasman Asia Pacific Pty Ltd

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URBAN EXPANSION IN ASIA

• 4 billion people in Asia in 10 - 15 years
• 2 billion in 30 megacities over 5 million
  population .
• but only 6 such megacities in Europe
• Huge backlog of infrastructure and maintenance
• Rural - urban migration and birth rates add to...
• income growth and human demands
• So there is massive pressure to provide new
  infrastructure - and to upgrade current stock
• But public sector funding inadequate

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New larger role for private sector - with
Government as regulator

• Government to focus on customers, regulation and
  environment issues, through expert reform units
• The Units create rules for private sector
  participation
• Define access conditions and connect fees where
  the network asset is a natural monopoly
• Tenders under defined and competitive rules
• Monopoly assets can be private - eg stadiums,
  toll roads, track and wires
• With competitive access to monopoly asset - via
  defined regime - customer choice is generated

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Investor versus Consumer Driven Privatization

• Original Thatcher focus was on shareholders -
  who did well, as did management. But customers
  second!
• New model is more focussed on contestability
  for service provision, on competition FOR the
  market franchise. But this requires clear market
  definition
• Community obligations spelled out in contract
• Government is about rules - favouring competition
  - with franchise periods long enough to encourage
  investment, short enough to foster competition
  for franchises
• Ideas are old (Chadwick 1859) - as are models
  of concessions in France and UK (18th 19th C)

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Examples of private sector financing - good and
bad

• Essential and subsidised services can be
  privately financed. But to benefit customers,
  reform unit should
• Regulate the access charge (allow access to
  network)
• Pre-determine project boundaries, scope of works
• Try and avoid unsolicited bids - but respect
  intellectual property
• Or seek tenders with originator matching rights
  (BOT law in Manila)
• Define required service subsidies and obligations
• Have competition to invest in/maintain grid
• Invite competitive provision on the network
• Retire debt with proceeds of SOE/asset sales
• So that basis for winning or losing is clear

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Expertise and training is key - need SOE reform
units

• Urban infrastructure utilities often lack private
  sector expertise, not glamour sectors with
  specialised skills
• Salaries poor - SOEs often lose key staff
• There is a need for SOE reform units
• They define contestable projects, regulatory
  regimes and monitor tender process
• Can operate across many areas (transport, water,
  electricity, solid waste)
• Devise leases, BOTs, tailored to task
• Can set up initial regulatory framework
• Benchmark utilities and competitors

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Key issue in private sector participation - who
risks what?

• Many BOTs leave demand risk with Government -
  private sector a constructor with guarantee
• Take-or-pay contracts for power, water, waste -
  with state utility as guarantor - very costly
• Many FOREX risks guaranteed as well ...
• made necessary by shallow capital market
• Little attention to competitive process in many
  Asian private sector schemes
• Relationship financing and JVs now seen to have
  problems if non-competitive

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Risk exposure - due to local currency income and
foreign currency costs

• Water, electricity, transport etc. earn local
  income, and have mainly local costs
• But debt market shallow - so investors use
  foreign market - creating FOREX risk
• Recent currency crisis illustrates the problem -
  need deeper local debt markets
• Or else the justifiable pressure from private
  sector will increase FOREX risk
• Or prevent reasonable/affordable bids

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Manila and Melbourne - two examples of progress

• Manila - because it has gone from brownouts and
  water crisis to a BOT Law aimed at best
  practice competition
• First IPPs and now unbundled NAPACOR - with the
  prospect of competitive private electricity
  generation and distribution - and a customer
  focus
• 2 competitively tendered private water
  concessions - with tariffs 27 (E) - 57 (W) of
  MWSS
• Melbourne - because docks, electricity,
  transport, and water have been restructured on a
  pro-competitive basis
• 10-40 cuts in energy charges per KWh
• Investor AND Customer focus the key

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Melbourne Docklands Private-Public 501 - but
highly competitive

• Area is the size of current Melbourne city
• Seven dockland areas declared open to tender
• Bids judged on Design and Amenity, Integration,
  Finance/Risk, Viability and Cost
• A Docklands Authority created - strong on probity
  and tendering processes, monitors ...
• Docklands was run down, unattractive but now to
  see 2.5billion of investment - prime land
• For Victoria Government input of 50m

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Networking our Cities

• The network industries require special policies
• Because of mix of monopoly and competition
• And public and private, joint ventures too
• Internet access means best (and worst) models get
  around fast - costs of learning have fallen
• ADB is now funding best practice studies on all
  key areas of urban networks and access
• Water, power, transport, ports, airports
• Need to establish dialogue - internet and real

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Some Conclusions

• Need to appoint expert reform units
• Build expertise - regulation, monopoly, access
• With private sector skills, financial and
  technical
• To separate the network assets
• (water access, roads, bridges, pipelines, wires
  )
• From contestable service provision
• (phone, electricity, transport, internet,
  concerts )
• With customer service contracts monitored by
  regulatory authority

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