Transcript Slide 1

PPP
International Best Practice and Regional Application
Tegucigalpa, Honduras
April 23 - 25, 2008
Sponsored by the Spanish Trust Fund
Building Sustainable PPP’s
Session 1.2
Considering Private Sector
Participation
David Stiggers - Independent PPP specialist
Session 1.3
Day 2 – Session 6
Day 1: Session 1.1
Setting
Upstream Policy
Overview of
PPP
Day 2:Session 5.3
Case Study
Ports
Day 2:Session 5.2
Case Study:
Water & Sanitation
Day 1:Session 1.2
Challenges:
Latin
Day
1- America
Session
1.3
Considering
Private
Day 1:Session 1.3
Participation
Considering
PPP
Approach
Private
Participation
Day 2:Session 5.1
Case Study:
Highways
Day 1:Session 2.1
Day 1:Session 3
Case Study:
Transmission
Day 2 :Session 4.2
Selecting an
Operator
Planning the
Process
Day 2 :Session 4.1
Day 1:Session 2.3
Day 1:Session 2.2
Standards,
Tariffs, Subsidy,
Financials
Involving
Stakeholders
Regulation &
Institutions
Session 1.3 - What will we look at?
Session 1.3 - Considering
Private Sector Participation
Before introducing Private Participation, Governments need to:
Document particular problems their service utilities face
Diagnose the underlying cases of the problems
Determine whether private participation can address the
problems
Session 1.3 - Considering
Private Participation (PP)
“We will look at four main areas…...”
REVIEW:
Underlying
Policy Problems
UNDERSTAND:
Effects of
Privatization
ACHIEVE:
Getting PP to
work
HOW?:
Different PP Models
Underlying Policy
Problems
REVIEW:
Underlying
Policy Problems
UNDERSTAND:
In this section we REVIEW underlying
Effects
policy problems related
toof
provision of
Utility services, including
Privatization
Customer Connections
ACHIEVE:
Supply – Quality and Level of Service
Sanitation services
Getting PP to
Money
work
Assets and Investment
Service providers
HOW?
Different PP Models
Underlying Policy
Problems
“Often the provision of utility services is unsatisfactory. A number of basic issues….”
Basic issues affecting utility services can include:
 Connection rates – Many households don’t receive services from the utility,
although they are prepared to pay for service.
 Quality of service – Those few connected get power service for only a few hours
per day, of limited duration, water not safe to drink, and little
sewage treatment.
 Lack of money
– Solutions would be easier if customers could pay more or
governments could raise more tax.
 External benefits – Improved services create benefits for others (e.g.
reducing disease), but customers may be unwilling to pay
 Assets
– With condition of underground assets hard to determine,
private providers may be unable to make sensible bids for
improvements
 Local, provincial and central government may have overlapping responsibilities
Underlying Policy:
3 Other Factors
“………. but three additional factors may create serious obstacles.”
Basic issues affecting water services include:
Three
other factors
create
seriousdon’t
obstacles
 Connection
rates may
– Many
households
receive: water or sanitation services
from the utility, although they prepared to pay for service.
These factors, alone or combined, may create obstacles to plans for water and
 Qualityservice
of service
– Those few connected get water for only a few hours per day,
sanitation
improvement:
with water not safe to drink, and little sewage treatment.
Water– services
are
critical
all consumers
 Lack of money
Solutions
would
beto
easier
if customers could pay more or
Servicesgovernments
are often provided
undermore
a natural
could raise
tax. monopoly; supply by
one well run firm may be more effective than two or more firms
 External benefits
– Improved
waterare
services
benefits
for othersif(e.g.
Required
investments
large, create
and cannot
be reversed
returns
reducing
disease),
but
customers
may
be
unwilling
to
pay
prove to be less than estimated
 Assets
– With condition of underground assets hard to determine,
private providers may be unable to make sensible bids for
The combination of these
factors potentially leads to trouble
improvements
 Local, provincial and central government may have overlapping responsibilities
Underlying Policy Problems
- The Challenge
“Given that the provision of utility services is unsatisfactory, and a number of
issues influence this…..”
The biggest challenge for governments is to address these
issues and thus to encourage investment, in order to:
Improve service quality
Lower costs
Extend access to services
Possible Effects
of Private Participation
REVIEW:
Underlying
Policy Problems
UNDERSTAND
UNDERSTAND:
Effects
Effects of
of
Privatization
Privatization
ACHIEVE:
In this
section we show some of the
possible effects of Private
Getting PP to
Participation in Utility services in
work countries.
developing
We look at three main areas:
 Operation
HOW?
 Investment
Different PP Models
 Policy & enforcement
Possible Effects
of Private Participation
“Private participation changes the sector, with an operator being independent of
government, and with incentive to be profitable. ”
Private providers cannot be directed in the same way as a public provider,
and the profit incentives can cause it to take actions not in the public interest.
However independence and profit can help the government to achieve its
objectives.
Private participation may have effects in three areas:
 The Operating Performance of the utility
 The utility’s investment decisions
 Policy and its enforcement
Getting Private
Participation to Work
In this section we show some of the potential
REVIEW:
issues in getting Private Participation in water
services to work.
Underlying
Policy Problems
We look at three main challenges:
UNDERSTAND:
 Ability and
incentives to invest
 Protecting operator from risk of change
Effects of in PP Arrangements
 Achieving ‘Fairness’
Privatization
ACHEIVE
ACHIEVE:
Getting PP to
work
HOW?
Different PP Models
Getting Private
Participation to Work
“The experience of the last decade shows how important it is to get
two main issues right – but also how difficult”
TWO MAIN ISSUES:

Giving the provider the ability and the
incentives to make good operating and
investing decisions

Protecting the Operator from risk of losing
through Government changing ground rules
Getting PP to Work:
‘Fairness’
“In the last decade many PP arrangements have run into trouble or been cancelled.
Lessons learnt show that the arrangement must be perceived to be fair and legitimate ”
If the customers or operator feel that the arrangements
haven’t been fairly implemented, then they can run into trouble
Examples: Cochabamba and Manila
To work well, the Government must create an arrangement that
people perceive as being fair. If not:
Customers & voters may pressure Government to override
contractual protections
The Operator may find his property rights or returns are less
secure than expected
Private providers may require a higher rate of return if the
arrangement is not perceived as being fair
Getting PP to Work:
Fairness & Cost
Rate of Return that must be promised
“Additionally, perceived fairness allows a lower rate of return to be promised
for a given legal protection – and possibly lower potential cost”
Rules perceived
as unfair
Rules perceived
as fair
Strength of legal protections
Getting PP to Work:
‘Fairness’
“WB PPP Toolkits explore ways of structuring fairness into PP arrangements, and here
are some examples…. ”
ARRANGEMENT ISSUES
MODULE
Customer Involvement:
Consider how private participation affects customers, and how to involve them in arrangement
design.
3
Tariffs:
Working out how tariffs might change under various scenarios, and considering whether the
change would be acceptable
6
Disputes:
Allowing disputes to be settled by trusted or independent experts or arbitration.
7
Monitoring Performance:
Choosing and designing good institutions for monitoring operator performance or adjusting
tariffs
7
Pricing Rules:
Writing pricing rules that cannot be easily change without both Government and Operator
agreement
8
Transparency:
Ensuring that the contracts are published and the operator is selected in open process
9
Models of
Private Participation
REVIEW
Underlying
Policy Problems
UNDERSTAND
In this section we show the key
Effects
Privateof
Participation models:
Privatization
 Management Contracts
 Affermage – Lease
 ConcessionsACHEIVE
and Divestitures
 Joint Ownership
Getting PP to
work
HOW?
HOW?
Different PP
PP Models
Models
Different
Models of
Private Participation
“It is useful to understand the nature of some key PP models, and implications for the
Challenges of Private Participation.”
Management Contracts
Management Contracts transfer responsibility for managing a utility to an operator – often for 3 to 5
years
Affermage - Leases
In Affermage-Leases the operator is responsible for operating and maintaining the business,
but not financing investment - with a term often from 5 to 14 years
Concessions, BOTs (and variants) and divestitures
Concessions give the operator responsibility for financing investment, as well as operation and
maintenance, with assets returned to government after 25 or 30 years.
Divestiture gives the same responsibilities, but ownership of the assets stays with private investor
Joint Ownership
Joint Public / Private Ownership of the Operating Company is a possibility, and offers certain
advantages
PP Models
More details
Definition
Type of
of operator
arrangement duties
Selected
responsibilities of
the operator
Stylized typical
profit function
for operator
Selected risks
typically borne
by operator - and
typical share of
total project risk
Management Supplies management
services to the utility in
Contract
return for a fee
Providing management
services to the utility
Fixed fee + Bonus
- managers’ salaries
and related expenses
Ownership
of
opera ting
assets
Ownership of
infrastructure
assets
Depends onthe nature
of the performance
bonus – very small
Contracting
authority
Contracting
authority
Affermage
Runs the business,
Employing staff.
retains a fee (generally nt Operating and
equal to the customer
maintaining utility
tariff) based on volume of
water sold, but does not
finance investments in
infrastructure assets
(Affermage fee
x volume of water
sold) – operating and
maintenance costs
Operating and
commercial risks
- significant
Operator
Contracting
authority
Lease
Runs the business,
retains revenues from
customer tariffs, pays
lease fee to the
contracting authority, but
does not finance
investments in
infrastructure assets
Revenue from
customers- operating
and maintenance
costs - lease fee
Operating and
commercial risks
-significant
Operator
Contracting
authority
Concession
Runs the business and
finances the investment
but does not own the
infrastructure assets
Employing staff.
Operating and
maintaining utility.
Financing and managing
investment.
Revenue from
customers
- operating and
maintenance costs
- finance costs
- any concession fee
Operating, commercial Operator
and investment related
risks
- major
Contracting
authority
Divestiture
Runs the business,
finances investment, and
owns theinfra structure
assets
Employing staff.
Operating and
maintaining utility.
Financing and managing
investment.
Employing staff.
Operating and
maintaining utility
Revenue from
customers
- operating and
maintenance costs
- finance costs
- any license fee
Operating, commercial
and investment related Operator
risks
- major
Operator
Note: The use of terms such as "affermage," "lease," "concession," and "divestiture" varies, and arrangements that go by these names do not always have the features set out
Other
in the
things
table.
being equal, the operator bears
more demand risk in an affermage because the government's payment is fixed in a lease, and variable in an affermage
Reviewing Session 1.3
‘This session has looked at a whole range of issues for
analysis and allocation of responsibilities & risks in PP
design………….
REVIEW:
Underlying
Policy Problems
UNDERSTAND:
Effects of
Privatization
ACHIEVE:
Getting PP to
work
HOW?:
Different PP
models
Checklist: Considering PP
‘……..and what to do before beginning this process is
discussed in this Checklist”
Prepare an analysis that answers the following questions:
What is the Government’s objective? How would it like to
improve the provision of Utilityservices?
What deeper policy problems seem to underlie the service
problems?
What are the options for addressing the problems –
including reform of public providers, reform of “upstream
policy” (see later Session), and private participation?
What could each of the options be expected to achieve?
What are their likely costs and benefits?
What has happened with reforms on similar places (also
see “More Information” slide)
Building Sustainable PPP’s
Session 1.2
THANK YOU !
Considering Private Sector
Participation
David Stiggers - Independent PPP specialist
Session 1.3
More information:
Considering Private Participation:
Other References:
Fundamental political-economy problems in the provision of water services and
broad strategies for addressing them: Gómez-Ibáňez 2003, Nickson and Franceys
2003, Savedoff and Spiller 1999, and Smith 1997a
Recent trends in private participation in water: World Bank 2003
Evidence and arguments about the effects of private participation, including case
studies: Abdala 1996, Barlow and Clarke 2002,Bitran and Valenzuela 2003,
Brocklehurst and Janssens 2004, Clarke and others 2004, Crampes and Estache
1996, Estache and Rossi 2002, Gray 2001, Harris 2003, Lobina and Hall 2003,
Megginson and Netter 2001, Nickson and Vargas 2002, Palaniappan and others
1999, Plummer 2002, Public Citizen 2003, Rivera 1996, Saghir and others 1999, 200,
Sirtaine and others 2005, Shirley 2002, Shirley and Walsh 2000, Sirtaine and others
2005
Concessions and management contracts in particular: World Bank 1997b
Contacts
For comments or further details contact:
Junglim Hahm
Cledan Mandri Perrott
Richard Cabello
Sabino Escobedo
David Stiggers
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Building Sustainable PPP’s
Session 1.2
Considering Private Sector
Participation
David Stiggers - Independent PPP specialist