PublicPrivate Partnerships: Public Policy Requirements and Assessing Risks

1
Public-Private Partnerships Public Policy
Requirements and Assessing Risks

• Henry Kerali
• Lead Transport Specialist
• The World Bank

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Overview

• Private Finance and Public Policy
• Risk Management
• Private Finance Mechanisms
• Allocating Risks
• Traffic and Revenue Risks
• Future Challenges
• Pros Cons of PPP
• Some Lessons for Success

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Private Finance and Public Policy

• A key objective is to capture the entrepreneurial
  skills of the private sector
• Essential to ensure these skills generate
• benefits for the community
• profits for the concessionaire
• Private Finance projects must be consistent with
  public policy and plans
• No project should be accepted just to provide a
  commercial return to its developers

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Private Finance and Public Policy

• Government must
• maintain control over policy, and
• Ensure that private capital balances social
  benefits with the returns to investors
• Any Private Finance project should be subject to
  full social cost-benefit assessment
• to ensure public as well as private benefits
• to establish need, and provide basis, for public
  participation in financing
• Public Sector Comparator must be used to test
  Value-for-Money

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Public Private Partnerships
Low
High
Extent of private sector participation
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Private Finance Mechanisms

• Direct Tolling (BOT, BOOT, BOO)
• Design Build Finance Operate (DBFO)
• investors rewarded through a shadow toll
• investors take, or share, the traffic risk
• Design Build Operate Maintain (DBOM)
• investors rewarded through a rental scheme
• Limited or no traffic risk
• Availability Payments
• Investors paid according to availability of
  facility
• Penalties for closures disruptions to traffic

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Allocating Risks

• Risk transfer is key to any Private Finance
  arrangement, particularly for highways
• There must be a well thought thorough
  definition of risks and structure for risk
  allocation
• Risks should be allocated to the party best able
  to manage them
• Concession bidding should be rational within a
  well defined risk allocation matrix
• not a lottery due to uncertainties in the risks
  assumed by the concessionaire

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PPP Risks

• Political and Policy issues
• Political, economic and demographic risks are
  beyond reasonable control of concessionaires
• Traffic and Revenue forecasts
• Usually with concessionaire, but can be shared
• Engineering design construction
• Design, construction and maintenance, ground
  conditions
• Financing structure parameters
• The main risk should be with the concessionaire,
  but Exchange risks, if internationally funded,
  should be with Government
• Private Sector monopolies
• Legal framework

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Political and Policy Risks

• Political stability
• Government decides to provide additional or
  competing capacity
• Fiscal or other measures affecting the use of
  cars or trucks
• Changes in standards,
• safety and axle weights
• Contract transparency, including in the award
  process
• lack of transparency
• reduces value for money
• deters some bidders

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Allocating Policy Risks

• Political, economic and demographic risks are
  beyond reasonable control of concessionaires
• Project development (obtaining the necessary
  permissions)
• Environmental certificates, social mitigation,
  other safeguards
• Some public underwriting is necessary
• Guarantees can be used to mitigate against
  political policy risks

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Traffic and Revenue Risks

• Closely related to
• National and local economic and local demographic
  growth
• Willingness to pay by road users
• Estimated time savings
• Perceived value of time
• Dependent on accuracy of forecasts
• Long term traffic volumes
• Forecasts are more likely to be optimistic than
  pessimistic

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Allocating Traffic and Revenue Risks

• Usually with concessionaire
• But, traffic is not primarily within
  concessionaires control
• Sound mechanisms for toll rate review are
  essential
• Some concessions have a traffic/revenue risk
  sharing agreement with client
• underwriting a part of losses if traffic is low
• sharing profits if traffic is high
• Avoid expectations of Government protection on
  downside risk, leading to excess optimism and
  thus overbidding

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Traffic Risk Error Drivers (1)

• Miscalculation of road user willingness-to-pay
  (WTP) especially for frequent users/commuters,
  and trucks
• Recession/economic downturn
• Future-year land use scenarios that never
  transpired
• Inaccurate estimate of Value of Time
• Time savings less than expected

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Traffic Risk Error Drivers (2)

• Less usage by trucks
• Complexity of the charging mechanism (hence
  modelling process)
• Underestimate of ramp-up period (traffic
  stability), both severity and duration
• Longer-term traffic forecasts are very sensitive
  to GDP assumptions
• Improvements to competitive (toll-free) routes
• History/experience with toll roads

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Traffic Forecasting Risk Index
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SP Research Results 2003
Mean 70 Spread 18 - 146 !
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Impact of Forecast Assumptions
57
149
GDP 6 GDP 4.5 GDP 3
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Engineering Risks

• Design, construction and maintenance
• should be with concessionaire
• who will pass it on, or share it with, his
  contractors
• Ground conditions
• bidders should share costs of full ground
  investigations until concession award
• then paid by successful concessionaire

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Financing Risks

• The main risk should be with the concessionaire,
  but
• Exchange risks, if internationally funded, should
  be with Government
• Repatriation, if local currency is not fully
  convertible, and international finance is
  required, is best with Government

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Other Risk Factors

• One-off projects require higher provision for
  risks, so cost more than "Basket of Projects"
• Monopolistic Behaviour
• competition is for the concession, not in the
  market once let
• concessionaire may seek to exploit monopoly
• concession agreement must protect public interest

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Allocation of Risks
100
Maintenance Contracts
RISK TO PUBLIC SECTOR
Management Contracts
Operation Maintenance Concessions
BOT
BOO
Decreasing Public Risks, Increasing Private Risks
0
100
RISK TO PRIVATE SECTOR
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Future Challenges

• Point-of-use charging
• depends on ability to pay/willingness to pay
• New toll collection technologies
• Reliability, take-up, back-office processing
• Pricing sophistication
• discounts (frequent user programs, resident
  discount schemes), peak/off-peak pricing,
  day-of-week, season-of-year

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PPP Pros Cons

• Bidding for private sector schemes costs much
  more than for public sector schemes
• design, legal, financing costs
• Preparing concessions for PPP projects cost much
  more than public sector projects
• legal and financial advice costs
• The cost of money for the private sector is
  higher than for the public sector
• especially for "one-off" private projects
• The whole process can be time consuming
• Total cost of private financing may be more than
  equivalent public sector schemes

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PPP Pros Cons (2)

• Many governments seek to increase the capital
  available for investment in highways through off
  balance sheet accounting
• A cost premium might be politically acceptable if
  the project is recorded as off balance sheet
• EuroStat guidelines
• Private partner assumes Construction risk and
  Availability or Traffic demand risk
• IMF criteria for off-balance sheet accounting
• Proven VFM through Public Sector Comparator
• Significant risk transfer to private sector

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Main Lessons for Success

• A well defined legal framework with well
  developed model concession contract
• Simple and transparent procurement
• Shared risk-reward concession structure
• Appropriate Govt revenue support system
• Projects should have social benefits as well as
  commercial viability
• Particular attention to traffic forecasting and
  public willingness-to-pay
• Public sector comparator is a must
• Need for institutional capacity to manage PPP
  projects (PPP unit) with external expert advice