Institutional Models for Infrastructure Development

1
Institutional Models for Infrastructure
Development

• Public-Private Partnerships
• Monday 7th October 2002
• Sessions 3 4

2
Traditional Roles of Government and Private Sector

• 3 main institutional models for the provision of
  infrastructure until late 1970s
• UK/Australia model fully vertically integrated
  State-owned monopoly provider
• US model private providers subject to
  rate-of-return regulation
• Continental model lease agreements
  (affermage).

3
Rationale for public provision of infrastructure

• Economic considerations
• government better able to bear risks
• fear of abuses of monopoly power
• network characteristics - central planning
  required
• Political considerations
• socialist theories of mixed economies
• employment
• universal service goals
• pricing/equity concerns
• strategic/security concerns
• environmental concerns

4
Drivers for increased private sector involvement
since 1970s

• Political developments
• collapse of socialist states, and renewed faith
  in free markets
• belief in efficiencies of the private sector
• Technological developments
• reduce conditions for natural monopoly
• permit low costr supply options
• increase range and quality of service
• facilitate unbundling of assets and operations
• expand options for demand management
• Internationalisation of finance
• Changed perceptions of the role of government

5
Drivers for increased private sector involvement
(cont)

• Internationalisation of finance
• world capital markets overreaching national
  borders
• eg advent of global bond markets in 1980s.
• Changes in role of government
• tighter budgetary constraints
• government as manager and facilitator rather than
  provider
• perception that private sector can provide
  infrastructure more efficiently

6
Infrastructure and infrastructure Services
7
Potential responsibilities of the public sector

• Functions associated with enabling infrastructure
  to be provided
• sectoral planning (security of supply etc)
• policy making
• ownership
• designing and supervising markets
• regulation where market failure
• financing
• Functions associated with the supply of
  infrastructure
• investment planning/decisions
• financing
• operation
• maintenance

8
Forms of public/private relationships

• Legislation
• Regulation
• Contract
• Ownership

9
Importance of market analysis

• Identifying contestible and non-contestible
  (sub-)markets
• vertical and horizontal unbundling
• forms of unbundling
• market liberalisation
• regulation where market failure

10
Balancing economic with other objectives

• Economic objectives (efficiency) are not the only
  legitimate goal of governments
• Other key concerns may include
• equity (fairness)
• accountability
• environment
• legal/political stability
• World Bank burden on governments to demonstrate
  that competitive market is not appropriate for a
  given activity

11
Possible Institutional Arrangements for
Introducing Efficiencies into Infrastructure
Service Provision international experience

• Market reforms
• Commercialisation
• Corporatisation
• Contracting out (services contracts)
• Management contracts
• Leases
• Concessions
• Private entrepeneurship

12
Commercialisation

• Identify cost structures
• introduce cost accounting
• remove or limit non-profitable or inefficient
  activities
• performance based management
• remove cross-subsidisations replace with
  specific subsidies
• profit centres lines of business.
• Asset management techniques.

13
Corporatisation

• Features
• Establish government departments as (state-owned)
  public corporations
• often an interim step in privatisation process
• corporate governance
• budgets financial statements and performance
• accountability to users and shareholders
• Benefits
• improve quality of management
• financial strength
• good customer relations
• participation nof private capital where
  appropriate
• effective cost acounting

14
Contracting out (services and works contracts)

• Define services or works
• establish perfomance criteria
• competitive bidding (open, restricted negotiated
  only exceptionally)
• award of contract (lowest price or most economic
  bid)
• duration of contract important (must be
  sufficient in any event to enable full
  amortization of equipment)
• supervision of performance
• payment mechanisms (eg. Lump sum unit costs
  incentive mechanisms).
• Government retains main commercial risks.
• Process and criteria may be governed by
  government procurement rules (eg EU APEC World
  Bank).
• Examples railways (ticketing cleaning) waste
  management (waste collection) roads
  (maintenance).

15
Management contracts

• Contractor agrees to manage the performance of
  the public service
• payment mechanisms can transfer some commercial
  risk eg linking payment to improvements in
  perfomance or lessening of costs
• contractor assumes day-to-day management autonomy
• often used as interim arrangement
• examples water (France) electricity (developing
  economies).

16
Leases

• Private contractor pays government for exclusive
  right (franchise or licence) to operate
  facilities
• lessor (public owner) retains ownership of the
  asset and remains responsible for fixed
  investments and debt servicing
• lessee (contractor) responsible for financing
  working capital and replacement of short-lived
  assets
• lessee takes market and operations risk
• contractor normally collects tariffs from users
  (at agreed rates) and retains difference between
  licence fee and revenues
• contract term usually 6-10 years
• examples affermage contracts in France and
  Spain for water supply and sewerage railways
  ports power.

17
Concessions

• Same as lease, except contractor responsible for
  construction (where new assets) financing (new
  assets or extensions/expansions/replacements)
  ownership
• Government may retain responsibility for market
  risk, ownership at end of the concession,
  political and regulatory risk
• tend to be non-recourse project financed
• tariff revenue determined to cover cost of
  capital (including depreciation), OM and return
  on investment
• normal duration 15 - 30 years
• examples BOOT/BOT DBFO
• power rail toll roads

18
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19
Competition for the market and competitive
bidding

• a competitive, transparent process is essential
  for achieving effective competition for the
  market
• applies to all situations where government either
  procures services or grants special or exclusive
  rights eg procurements of services, leases,
  concessions and privatisations
• advertising
• open processes as far as possible
• negotiated processes only where necessary
• specifications must be objective, transparent and
  non-dsicriminatory
• award criteria
• objective and transparent
• lowest price or most economic tender
• dispute resolution

20
Private entrepeneurship

• Deregulation of formerly monopoly activities to
  enable new entry
• appropriate where contestible markets
• licences may be used to control activities
• divestiture (asset or share sales)
• first liberalise contestible parts of the market
  (and establish appropriate regulatory
  institutions where market failure) before
  privatising
• transition process to full privatisation?
• Key success factors for privatisation see pp
  116-120.

21
Examples

• Functional activities - p. 248
• sectors - p 249
• case studies - pp 296 - 298

22
Conclusions

• Unless justifiable reasons to the contrary, limit
  government intervention to cases where, and
  extent to which, potential costs of market
  failure exceed those of government failure
• Distinguish new infrastructure projects
  (greenfields or brownfield) from management and
  operation of existing infrastructure
• distinction between different activities
  associated with (a) assets and (b) services
• different solutions may be appropriate for
  different countries, sectors and market
  conditions.
• No hard and fast forms - innumerable arrangements
  for risk assessment and apportionment

23
Public-private partnerships and the PFI
initiative (Partnerships UK)

• PPP covers all arrangements whereby a public
  sector body agrees with a private sector
  contractor in relation to the provision of an
  asset or services for the public benefit.
• PFI program announced in 1992 by Chancellor of
  the Exchequer Norman Lamont
• PFI is one of several initiatives designed to
  promote PPPs. Others include
• compulsory competitive tendering (CCT)
• contracting out (outsourcing)
• value for money (now Best Value).
• Has been taken up by new Labour Government
  (Blair) in 1997 and further redefined and
  developed.

24
PFI objectives

• 2 main PFI objectives
• enhance value for money and improve quality of
  services
• attract private sector capital to enable projects
  to proceed where public funding (on balance
  sheet) may not otherwise be available.

25
Types of PFI projects

• Financially free standing projects
• contractor recovers costs through direct charges
• no regulation
• Services provided to public sector
• costs recovered wholly or mainly from charges
  payable by public sector entity to private
  contractor
• Joint ventures
• public sector contributes some of the revenue,
  some is recovered by direct charges to users (eg
  multi-use facilities)

26
Infrastructure Projects - Stakeholders
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28
Deferring government expenditure

• The macroeconomic perspective
• governments increasingly unable/unwilling to
  finance new capital infrastructure investment
• central government accounting
• does not allow separate capital expenditure or
  allow costs to be spread over the life of the
  asset
• Maastricht accounting obligations (Euro) -
  incentives to limit public expenditure.
• Under PFI the public sector incurs future
  liabilities for the payment of charges for the
  use of assets and associated services, but not
  direct liability for the initial investment (the
  asset is off balance sheet).
• But this is only possible if sufficient risk is
  passed to the private parties.

29
Value for money

• Increasing criticism of public investment
  decisions and management of infrastructure
• growing emphasis on core business activities
  (management theory) eg governments should be
  delivering health care and education, not
  building and managing hospitals and schools.
• Efficiencies to be gained by -
• life-of-asset approach eg combining design,
  construction and operation.
• Risk transfer
• innovation
• improved asset utilisation.

30
Economic Appraisal and development of PFI projects

• 3 steps
• Outline Business Case (OBC) - defining the need
  and objectives
• Public Sector Comparator (PSC) - identify and
  appraise the options
• procurement process

31
Types of projects

• More than 400 transactions since 1992 valued at
  over 20 billion.
• Transactions closing at rate of 30-40 per year.
• Sectors involved include
• transport (roads, rail)
• health (eg hospitals and medical equipment)
• defence
• accomodation and social housing
• urban regeneration
• IT systems
• prisons
• schools, universities
• water and sewerage (wste-to-energy plants water
  treatment projects)

32
Perceived/claimed benefits of PFI projects

• Lower costs of infrastructure provision - private
  sector more efficient in design and management
• whole of life approach (synergies between design,
  construction and operation) discourages high
  capex, low opex solutions
• what, not how - output specifications encourage
  innovation and avoid gold plating
• guaranteed service delivery
• more efficient and transparent risk allocation
• incentives for more efficient management
• more strategic approach to procurement
• new investment opportunities.

33
Questions

• Can adequate safeguards be put into place to
  ensure the public interest is protected when
  infrastructure services are provided by the
  private sector?
• Are non-economic objectives given adequate weight
  in PPP projects?