World Bank Experience: Road Asset Management and Development through Public-Private Partnerships Cesar Queiroz Highway Advisor World Bank Kyiv, March 21, 2006 First International Conference Perspectives for Ukraine on Implementation of Public-Private Partnerships

Outline Brief International Overview Brief International Overview Lessons Learned from Past Transport PPPs Lessons Learned from Past Transport PPPs How Can the World Bank Group Support PPP Development How Can the World Bank Group Support PPP Development Selection of the Strategic Investor Selection of the Strategic Investor World Bank Toolkit for PPP in Highways World Bank Toolkit for PPP in Highways Allocation of Risks and Payment Mechanisms (e.g., availability fees, shadow tolls, BOT, BOO) Allocation of Risks and Payment Mechanisms (e.g., availability fees, shadow tolls, BOT, BOO) Estimating Minimum Toll Rates to Attract Private Investors Estimating Minimum Toll Rates to Attract Private Investors The Way Forward The Way Forward

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

PPPs remain concentrated in a select group of countries Developed World Latin America and the Caribbean East Asia and Pacific Europe and Central Asia South Asia Sub- Saharan Africa Middle East and North Africa Number of Projects Project Cost ($bn)

Successfully concluding a transport PPP is a challenge: As a result of unrealistic and aggressive bids, a large number of projects face re-negotiation Government commitment can disappear in periods of financial stress Historically only 55% of proposed projects have reached financing What Have We Learned?

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 underestimated Access to local currency funding is a critical success factor for infrastructure projects with local currency revenues What Have We Learned?

Selection of the Strategic Investor or Concessionaire For large projects, it is recommended to carry out: 1. Prequalification 2. A Two-Stage Bidding

Prequalification Advertising notice requesting expressions of interest to pre-qualify to be published locally and internationally Investor feedback meeting with selected potential investors/ concessionaires Public information information dissemination on the financing and construction of the project Pre-qualification include financial and operational criteria to ensure bids from only qualified candidates

Two-Stage Bidding The First Stage Client prepares functional performance specifications Bidders offer unprice d technic al proposa ls Client evaluates technical proposals, and indicates what bidders should do to make their bids responsive The Second Stage Client sends memorandum of changes for each bidder and addendum to bid documents, if necessary Bidders offer amended bids containing their final technical proposal and a financial proposal Client evaluates combined technical and financial proposals

Unsolicited Proposals to Governments Origin of most controversial private infrastructure projectsOrigin of most controversial private infrastructure projects In theory, generate beneficial ideasIn theory, generate beneficial ideas In practice, some unfavorable experiences (e.g., attempt to avoid competition, exclusive negotiations behind closed doors)In practice, some unfavorable experiences (e.g., attempt to avoid competition, exclusive negotiations behind closed doors) Usually sole-source negotiations take much longer than expectedUsually sole-source negotiations take much longer than expected

Should Governments Forbid Unsolicited Proposals? Some governments forbid all unsolicited proposals to reduce public sector corruption and opportunistic behavior by private companies (e.g. Colombia)Some governments forbid all unsolicited proposals to reduce public sector corruption and opportunistic behavior by private companies (e.g. Colombia) Some countries require “market-testing” (e.g., Sri Lanka, Australian States)Some countries require “market-testing” (e.g., Sri Lanka, Australian States) Some recognize a good project idea in the tender by compensating the original project proponent while holding an ICB (e.g., Chile, S. Africa, S. Korea)Some recognize a good project idea in the tender by compensating the original project proponent while holding an ICB (e.g., Chile, S. Africa, S. Korea)

Incentive Schemes How can the government provide incentives for private sector firms to participate? Cost sharing and pricing arrangements Incentive payments (or penalties) linked to performance standards Support the provision of guarantees (e.g., World Bank Partial Risk Guarantee)

World Bank Group Instruments Available to Support PPPs The World Bank The World Bank Loans to governments Loans to governments Partial credit and partial risk guarantees Partial credit and partial risk guarantees Technical assistance Technical assistance International Finance Corporation - IFC International Finance Corporation - IFC Loans to the private sector Loans to the private sector Equity investment Equity investment Technical Assistance Technical Assistance Multilateral Investment Guarantee Agency - MIGA Multilateral Investment Guarantee Agency - MIGA Political risk insurance Political risk insurance

Possible Roles of the World Bank Financing part of government subsidies to the construction cost of a project Financing part of government subsidies to the construction cost of a project Providing a Partial Risk Guarantee (PRG) to the private investors: reduced interest rate, increased maturity Providing a Partial Risk Guarantee (PRG) to the private investors: reduced interest rate, increased maturity

World Bank Partial Risk Guarantee Structure Govern’t Private Lenders Project Company or Concessionaire World Bank Loan Agreement Concession Agreement Counter Guarantee World Bank Guarantee

PRG for a Sub-national Project Concession Private Lenders Loan Agreement WB Guarantee Counter Guarantee Federal Government Provincial Government Project SPV Legal Framework Buys Guarantee

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

Benefits of WB Partial Risk Guarantees for: Public sector Catalyze private financing and facilitate PPP Catalyze private financing and facilitate PPP Reduce government risk exposure by shifting commercial risk to the private sector Reduce government risk exposure by shifting commercial risk to the private sector Encourage larger co- financing Encourage larger co- financing Private sector Reduce risk of private transactions Mitigate risks difficult for the private sector to manage Open new markets Lower the cost of financing and extend maturities Improve project sustainability

Facility Size – US$ 200 million; Maximum individual guarantee amount – US$ 50 million Project Eligibility Criteria Projects in the infrastructure sector PPP concession (or similar) contracts Economically and socially desirable and technically viable, but financially viable only with appropriate government support In compliance with applicable WB safeguard Coverage: Up to 50% of project debt against political, regulatory and breach of contract risks to project lenders Duration: 5 years of government obligations on a rolling basis for a maximum of 15 years Currency: Local currency or US$ denominated debt Partial Risk Guarantee Facility for Peru’s Infrastructure PPP Program

Basic Assumptions to Estimate the Minimum Toll Rate to Attract Private Investors for a PPP Project Concession term: 20 yrs Concession term: 20 yrs Construction Cost: $1M/km to $5M/km Construction Cost: $1M/km to $5M/km Operation cost: $500,000/km/yr Operation cost: $500,000/km/yr Equity: 14% Equity: 14% Subsidies: 0 Subsidies: 0 Interest rate: 5%/yr Interest rate: 5%/yr Grace period: 4 yrs Grace period: 4 yrs Repayment period: 14 years Repayment period: 14 years Discount rate: 10% Discount rate: 10% Initial traffic: 5,000 vpd to 20,000 vpd Traffic growth: 3% Inflation: 6% Tax: 18% IRR ≥ 12% ROE ≥ 16% LLCR ≥ 1.0 DSCR ≥ 1.0

Toolkit for PPP in Highways The toolkit is structured under five headings and includes a library and interactive financial simulation model Available on the World Bank web site

Estimated Minimum Toll Rate to Attract Private Investment for a PPP Project $/km Construction cost, $ million/km 20,000 vpd 15,000 vpd 10,000 vpd 5,000 vpd

professionally applied, function oriented, creative and systematic team management approach, used to analyze and improve value in transportation projects A professionally applied, function oriented, creative and systematic team management approach, used to analyze and improve value in transportation projects Provides a balance of quality, performance and functionality in a project, minimizing life cycle costs of construction, operation and maintenance Provides a balance of quality, performance and functionality in a project, minimizing life cycle costs of construction, operation and maintenance Value Engineering

Benefits of Public Disclosure of Concession Agreements Further check on corruption, which in addition to its direct benefits can enhance the legitimacy of private sector involvement in often sensitive sectors Further check on corruption, which in addition to its direct benefits can enhance the legitimacy of private sector involvement in often sensitive sectors Provision of consumers with a clearer sense of their rights and obligations, and can facilitate public monitoring of concessionaire performance Provision of consumers with a clearer sense of their rights and obligations, and can facilitate public monitoring of concessionaire performance

Payment Mechanisms Availability Fee is paid to the concessionaire by the government based on the availability of required capacity (number of lanes in satisfactory condition) Shadow Toll is paid to the concessionaire by the government, not charged to motorists, on the basis of veh-km achieved (volume and composition of traffic) BOT is a scheme where the government contributes land to the project and sometimes a negotiated financial support, while the concessionaire builds, maintains and operates the motorway and transfer the assets after the concession completion. The commercial risk rests with the concessionaire BOO is similar to BOT, but does not involve the transfer of the assets to the government

RISK TO PUBLIC SECTOR % RISK TO PRIVATE SECTOR % Availability Fee Shadow Tolls BOO Decreasing Public Risks, Increasing Private Risks 100 Allocation of Risks by Forms of Concession BOT

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 – consider establishing a Transport PPP Unit Selecting a small number of transactions with the highest potential for success in the short term 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 Transport Infrastructure: Way Forward in Ukraine

Thank you!

Some Basic References World Bank (2001). “World Bank-Financed Procurement Manual [Draft].” Washington, D.C. Guasch, J. Luis (2004). Granting and Renegotiating Infrastructure Concessions Doing It Right. Washington, D.C.: World Bank. wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2004/05/06/ _ /Rendered/PDF/288160PAPER0Granting010renegotiating.pdf World Bank (2004). “Guidelines: Procurement Under IBRD Loans and IDA Credits.” (May). Washington, D.C. t-May-2004.pdf Queiroz, Cesar (2005). “Launching Public Private Partnerships for Highways in Transition Economies.” Transport Paper TP-9. (September). Washington, D.C.: World Bank. Kerf and et al. (1998). “Concessions for Infrastructure: A Guide to Their Design and Award.” Technical Paper no World Bank (1998). “Bidding for Private Concessions. The Use of World Bank Guarantees.” RMC Discussion Paper Series, no 120. Washington, D.C.

Cesar Queiroz Highway Advisor World Bank, 1818 H Street NW Washington DC USA Tel Fax