1. 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

2. Contents Brief International Overview
Lessons Learned from past Transport PPPs
How can the World Bank Group support PPP development
The way forward
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3. PPPs: A Brief International Overview
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4. PPPs are becoming a global business – however reaching financial close remains a challenge
Only 55% of proposed projects reached financing
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Source: Public Works Financing-Major Project Survey

5. 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
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6. What have we learned?
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7. 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
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8. 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
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9. What Have We Learned – 3 ?
Access to local currency funding is a critical success factor for infrastructure projects with local currency revenues
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10. 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.
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11. How can the World Bank Group support PPP Development?
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12. The World Bank Group
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13. 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
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14. 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
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15. 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
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16. 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
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17. 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
$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%
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18. 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
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19. 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
$300m
Non-
accelerabe
PV=56 % * *
PV=3 %
Guarantee of Principal
Conditional Rolling Guarantee of a Single Coupon 10
yrs
*Discount rate: Bank’s Cost of Capital as of October 6, 1998
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20. IBRD/IDA Partial Risk Guarantees
Cover specific government obligations to a private project
Guarantee payment against default on private debt due to non-performance of government contractual obligations
Relevant when there is a high perceived risk of policy reversal
Coverage examples:
performance of government or state owned entities
government contractual purchase and supply obligations
political events
changes in law, expropriation, nationalization; contract frustration; obstruction in arbitration process; non-payment of termination amount or arbitral award
certain force majeure events
foreign exchange convertibility/transferability
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21. Partial Risk Guarantee Facility for Peru’s Infrastructure PPP Program
Facility Size – US$ 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
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22. 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
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23. 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
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24. 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
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25. The Way Forward
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26. 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
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