The Challenge of Public Private Partnerships (PPPs) and The World Bank EU Conference on Transport PPPs – A Tool for Bridging a Gap Moscow, Russia October 28, 2005 Good Morning A pleasure to be here and have the opportunity to share with you some of our recent thoughts on infrastructure development, the financing gap and the need to rebuild the PPI model for better and more effective mobilization of private capital and management Excuses from Paati Ofosu-Amaah (our VP for Corporate Secretary) who had a conflicting meeting at the UN in NY. Peter D. Thomson Director Infrastructure Department Europe and Central Asia Region The World Bank

Contents Brief International Overview Lessons Learned from past Transport PPPs How can the World Bank Group support PPP development The way forward IEF, April 2005 2

PPPs: A Brief International Overview IEF, April 2005 3

PPPs are becoming a global business – however reaching financial close remains a challenge Only 55% of proposed projects reached financing IEF, April 2005 4 Source: Public Works Financing-Major Project Survey 1995-2004

PPPs remain concentrated in a select group of countries Top Countries: PPPs in Highways Cumulative sum of # projects & estimated costs since 1985 Country Number of Projects Project Cost (US$ billion) United States 74 42.7 United Kingdom 37 30.5 China 53 21.6 Spain 47 21.1 Mexico 78 20.4 Italy 3 18.5 Germany 34 17.1 Republic of Korea 18 16.2 Japan 1 14.4 Greece 11 11.8 Brazil 44 11.4 France 8 10.2 Portugal 15 9.8 Australia 12 8.6 Malaysia 7.8 Canada 22 7.7 Russia 2 6.6 Chile 24 6.3 Argentina 20 3.7 Ireland 14 3.0 Denmark 2.7 South Africa 6 2.3 Czech Republic 2.2 Indonesia 2.1 Thailand 50 100 150 200 250 300 350 Developed World Latin America and the Caribbean East Asia and Pacific Europe Central Asia South Sub- Saharan Africa Middle East and North Number of Projects Project Cost ($bn) Number of Projects – Project Cost (US$ billion) Regional distribution Source: PWF Major Project Survey – October, 2004 IEF, April 2005 5

What have we learned? IEF, April 2005 6

Successfully concluding a transport PPP is a challenge: What Have We Learned – 1 ? Successfully concluding a transport PPP is a challenge: As a result of unrealistic and aggressive bids, a large number of projects face re-negotiation 54% of transport concessions in Latin America were renegotiated Government commitment can disappear in periods of financial stress Historically only 55% of proposed projects have reached financing IEF, April 2005 7

Cost recovery is a major challenge: What Have We Learned – 2 ? Cost recovery is a major challenge: Full cost recovery is only achievable in some transport sub-sectors Revenue projections often suffer from a bias towards optimism The vulnerability of PPP projects to changing political, financial and economic circumstances is often under estimated IEF, April 2005 8

What Have We Learned – 3 ? Access to local currency funding is a critical success factor for infrastructure projects with local currency revenues IEF, April 2005 9

Transport Infrastructure: Developing Local Capital Markets There is no better substitute for foreign exchange risk mitigation than matching currency revenue generation with the currency of debt repayment Financing transport facilities in the foreign debt markets adds substantial risk to the structuring of adequate PPPs Local institutional investors have a natural demand for long-term local currency debt instruments to match their liabilities Therefore, it is in the government’s best interest to stimulate, via adequate securities regulation and institutional investors oversight, the development of local capital markets as a source of long-term local currency funding for needed PPP infrastructure projects. IEF, April 2005 10

How can the World Bank Group support PPP Development? IEF, April 2005 11

The World Bank Group IEF, April 2005 12

The WBG Instruments for PPP Support The World Bank Group IBRD IDA IFC MIGA Investment Loans Finances government contribution to PPPs Partial Credit & Partial Risk Guarantees Covers private debt to PPPs Technical Assistance A and B Loans [to the Private Sector] Partial Credit Guarantees Equity Finance Technical Assistance Political Risk Insurance Technical Assistance IEF, April 2005 13

PPPs in Transport Infrastructure Financing : Risk Assessment key role in the availability and pricing of transport concession finance (i.e. (economic regulation) Project Related Risks (relatively manageable by sponsors and lenders) Completion Risk (engineering & construction cost / time cost control) Operational Performance Risk (technical & operational know-how) “Demand/Market Risk” (Traffic) Financial Risk (Exchange Rate and Interest Rate Fluctuations) Environmental Risk (past and future liabilities, project delays, costs overruns) Non-Project Related Risks (non-manageable by sponsors and lenders) Political Risk (expropriation, political violence, currency convertibility & transfer) Contractual Risk [Regulatory Risks]. (Government’s default on contractual obligations, i.e., pricing formulas, right of way ) Macroeconomics Environment -- Volatility Risk (changes in macro balance in relatively short periods, i.e., exchange rate, inflation, etc...) Legal Environment (rule of law, i.e., judicial system, regulatory procedures and arbitration) Best possible mitigation is to Match local revenue generation With local currency financing IEF, April 2005 14

World Bank Instrument: Partial Credit Guarantees Used for public sector investment projects where sovereigns do not have access to medium and long term capital and commercial loan markets Cover private lenders against all risks in a privately funded public project Flexible instruments that encourage the extension of maturity, and lowering of cost of capital by covering part of the financing during specified periods Risk sharing between the Bank and private investors Substantially improve financial viability and usually result in more affordable tariffs Coverage examples: late maturity principal payments take-out financing rolling guarantees for a fixed no. of payments IEF, April 2005 15

PCGs help access private finance at sustainable terms Debt Maturity Interest Spread Colombia 10 6.5% 5% Philippines 15 7 2.5% 3% 5 Thailand 2.9% 8.5% Lebanon Jordan 1% 2 with Guarantee without Guarantee IEF, April 2005 16

China: Ertan II – Hydroelectric Project 3,300 MW Hydroelectric Power Project Lenders – Commercial Bank loans of US$ 150 million World Bank PCG coverage – US$ 50 million principal payments in years 12-15. $150 million Average financing term for China without World Bank Guarantee Additional uncovered risk taken by commercial banks World Bank Guaranteed $50 million 33% 3 6 9 12 15 Total risk assumed by commercial banks US$ 20MM 14% IEF, April 2005 17

Thailand - EGAT World Bank Partial Credit Guarantee Transmission and Generation Investments Borrower Electric Generating Authority of Thailand Lenders Eurobonds/144A US$300 million bullet World Bank Guarantee US$300 million principal payment in year 10 plus one rolling interest payment Benefits Enabled EGAT to obtain market financing at reasonable spread and maturity (10 yrs at UST+285bps) Set benchmark for future bond issues by reintroducing EGAT to capital markets Exposed EGAT to the rigors of market discipline and facilitated commercialization Supported EGAT’s investment program thereby enabling it to complete its generation facilities Largest bond issue post East Asian Financial Crisis after Korea, April 1998 IEF, April 2005 18

Thailand - EGAT World Bank Partial Credit Guarantee PCG enhanced rating of bond S&P: A-, 3 notches above Thailand’s BBB- Moody’s: A3, 4 notches above Thailand’s Ba1 $300m Non- accelerabe PV=56 % * * PV=3 % Guarantee of Principal Conditional Rolling Guarantee of a Single Coupon 10 yrs *Discount rate: Bank’s Cost of Capital as of October 6, 1998 IEF, April 2005 19

IBRD/IDA Partial Risk Guarantees Cover specific government obligations to a private project Guarantee payment against default on private debt due to non-performance of government contractual obligations Relevant when there is a high perceived risk of policy reversal Coverage examples: performance of government or state owned entities government contractual purchase and supply obligations political events changes in law, expropriation, nationalization; contract frustration; obstruction in arbitration process; non-payment of termination amount or arbitral award certain force majeure events foreign exchange convertibility/transferability IEF, April 2005 20

Partial Risk Guarantee Facility for Peru’s Infrastructure PPP Program Facility Size – US$ 200 million Maximum individual guarantee amount – US$ 50 million Project Eligibility Criteria Projects in the transport (roads, airports and ports), telecommunications, gas, energy, water or sanitation sectors Offered through PPP concession (or similar) contract Be economically and socially desirable and technically viable, but financially viable only with appropriate government support Be in compliance with applicable World Bank safeguard policies and be satisfactorily appraised Coverage Upto 50 percent of project debt against political, regulatory and breach of contract risks to project lenders and bond holders on a wholesale basis Duration Five years of govt. obligations on a rolling basis for a maximum of 15 years Currency Local currency or US$ denominated debt IEF, April 2005 21

Peru- Partial Risk Guarantee Facility The Facility will offer protection against political, regulatory and breach of contract risks to project lenders and bond holders on a wholesale basis Direct impact: Improves credit rating of projects by several notches Enables banks and pension funds to provide project finance to non viable projects Increases the volume and tenors of available financing and decreases its cost Benefits for project sponsors: Decreases required equity (higher leverage) Decreases exposure to foreign exchange risk (higher local currency financing) Eliminates exposure to government risk Long term benefits for Peru: Increases probability of success of PPI program Decreases cost for government and tariffs for consumers (resulting from lower financing costs and increased bidding competition) Enables pension funds to diversify from sovereign risk without increasing risk Develops local capital market IEF, April 2005 22

Technical Assistance - Developing Local Capital Markets WBG Capital Market Development Support Developing long-term institutional investment markets for providing local currency financing for infrastructure Training banks and capital market intermediaries on infrastructure project risk identification and mitigation techniques Training transport project sponsors on effective debt management techniques Institution building – Creating adequate regulatory and oversight mechanisms for monitoring institutional investor markets IEF, April 2005 23

How PRGs can Support PPPs/Privatizations Government Indemnity Guarantee Sale Proceeds Government Agreement Support Regulator License Agreement / Regulatory Contract Commercial Loans (US$ 25m) Partly covered by WB-PRG Commercial Lenders Private Investor Equity (US$50m) Privatized Distribution Company (US$100m) Shareholder Loans (US$ 25m) Partly covered by WB-PRG IEF, April 2005 24

The Way Forward IEF, April 2005 25

Transport Infrastructure : Way Forward in Russia Developing local currency markets for contributing to transport infrastructure development Learning from lessons of experience from Regional transition economies e.g., motorways in Hungary, ports in Poland Structuring PPPs is a complex, time demanding exercise that requires dedicated resources from the public sector - consideration should be given to establishing a Transport PPP Unit Selecting a small number of transactions with the highest potential for success in the short term and focus government resources in taking to fruitful market completion Developing a consistent and organized approach to assess, evaluate and monitor contingent liabilities arising from public financial support to PPP transport projects Developing smart and effective risk mitigation products for supporting PPPs IEF, April 2005 26