Transcript Slide 1

PPP
International Best Practice and Regional Application
Tegucigalpa, Honduras
April 23 - 25, 2008
Sponsored by the Spanish Trust Fund
Case Study
Session 5.1
Highways
Sabino Escobedo, TAG Financial Advisors
Session 5.1
Day 2 – Session 6
Readiness of Government
Upstream
Policy
Readiness
of
Government
Private
Sector
View
Day 1: Session 1.1
Capacity
Building
For PPP
Overview of
PPP
Day 1- Session 5
Day 2:Session 5
Case
Studies:
Case
Study:
(1)Highways
(2)WaterHighways
& Sanitation
(3) Ports
Day 1:Session 1.2
Challenges:
Latin America
Day 1:Session 1.3
Considering
Private
Participation
PPP
Approach
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 5.1
PPP’s in the Transport Sector
• PPP’s in the Sector
• Case Studies
Developing Effective PPPs in
the Transport Sector
Main Objective:
Mobilize Private Capital and
Management into Transport
Infrastructure Development
Contents
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Transport Infrastructure Investment
 The Economics of Transport Infrastructure
 Fiscal Space (Public Investment)
 The Real Gap : Cost Recovery and Affordability
 Key Drivers of our clients demands

Public Private Partnerships (PPPs)
 Leveraging Public Money
 Public Sector options for Infrastructure investment
 Risk Assessment and Risk Allocation
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Bank’s response to infrastructure finance needs
 The shift in development burden from central to local entities
 Performance based subsidies
 Innovative risk mitigation products
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Way Forward
The Economics of Transport
Infrastructure Investments
 Infrastructure investments are inherently “lumpy” (involve huge sunk costs
and create assets that are long-lived and location-specific).
 Creation of Infrastructure has economics both of scale and scope (i.e.,
minimum size of facilities, inelastic adjustment of capacity to demand, long
term project completion, etc.).
 Infrastructure supply systems contain elements of natural monopoly
(competition).
 Demand is wide spread (difficult to target).
 Revenues are usually in local currency (mismatch if foreign debt financing).
 Transport services have an essentiality component that raise legitimate
public policy concerns of affordability.
 However ………..
 Sound transport infrastructure allows countries to integrate to the global
economy and increases competitiveness (transport and telecom sectors
are the highest contributors to a country’s competitiveness) impacting
economic growth.
 Transport infrastructure development has a strong impact on
competitiveness, growth, poverty alleviation and MDGs.
Fiscal limits to increased public
investments in infrastructure
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Public Investments needs are sizeable in most countries but difficult to
quantify.
Countries face important trade-offs between infrastructure spending and
other expenditure items (i.e., health and education).
Little empirical evidence that reductions in public investments had an
adverse impact on growth.
Countries with relatively high public debt burden have a limited scope for
increasing investment via public borrowing.
Significant scope to improve the quality of infrastructure investment.
Changes in fiscal accounting cannot create room for additional spending
for infrastructure.
Most of the public enterprises in the pilots did not meet the “commercially
run” criteria.
Effective PPPs is encourage as a way to bring in leveraging and efficiency
in infrastructure investment.
The Service Delivery Gap
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There is limited affordability in the
provision of most of infrastructure
services (when including the costs of the
required infrastructure facilities), specially
when considering low income end-users.
The Service
Delivery Gap
Tariffs
Cost recovery
Infrastructure services has strong
characteristics as a public good and
creates major positive externalities.
Full cost recovery is only possible in
some situations (i.e., air transport). Most
of the basic public services have strong
limitations to reach full cost recovery
even in developed markets (mass
transport systems).
There is a role for the provision of
“smart” subsidies to make possible the
delivery of the service.
Affordability
Time
Output
Based Aid
Approaches
Key Drivers for Client Demands
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Change in the risk profile of our client base:
• 80s : developed and developing countries
• 2000s forward:
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Middle Income Countries
 Transition Economies
 Post Conflict
 Failed States
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Need to fill the service delivery gap (full cost recovery not possible
at the required pace for market driven incentives to support
investments)
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Fiscal Space for Public Investments will be limited at best (limited
new borrowing capacities to allocate to infrastructure development)
Leveraging Public Money
• Need to reconcile infrastructure development needs with
criteria for fiscal prudence.
• Need to mobilize additional private capital to match the
gap if infrastructure development is to keep its pace
sustaining economic growth.
• Need to maximize private capital mobilization per unit of
public sector contribution (e.g., direct investment,
subsidies, guarantees, etc.).
• Need to develop PPPs approaches as a procurement tool
for better and efficient allocation of scarce public sector
resources (the concept of value for money).
• Need to develop an adequate risk management framework
to manage contingent liabilities arising for public money
support to PPPs development.
PPPs : Spectrum of Options
Transport Infrastructure
Facilities
Provision of Transport
Services
PPPs in Transport
•
Pure Public Option:
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Funded via ordinary revenues
Funded via earmarked taxes (i.e., gas taxes for road network
development)
Funded via public debt financing (i.e., future tax payers)
Public Private Partnerships Options:
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Funded via tolls or tariffs (i.e., full cost recovery basis)
Funded via tolls or tariffs with initial co-investment contribution (e.g.,
Bridge Rosario-Victoria, Argentina)
Funded via tolls or tariffs with minimum revenue guarantee (e.g.,
Motorway Santiago-Valparaiso, Chile)
Funded via tolls or tariffs with supplemental subsidies (e.g., BA metro
system)
Funded via shadow tolls or subsidies (e.g., Portugal toll roads)
Public Sector Options for
Infrastructure Investments
SSA Toll Roads Case (1):
•
Parameters:
– 40 KM toll road linking two important urban centers (existing
road under very poor conditions)
– Traffic Study : 70,000 vehicles per day
– Total Investment : $ 200 million
– Annual operating & maintenance costs: 5% of total investment
($ 10 million)
– SSA Credit Rating: B+
– If private options are considered:
• Debt : Equity ratio : 75%-25%
• Debt services conditions: 10 year @ 10%
• Equity expected rate of return: risk free rate + premium =
5%+11% (16%)
SSA Toll Roads Case (2):
•
Required Annual Cash Flows (including remuneration to debt &
equity)
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–
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–
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Operating & Maintenance : $ 10 million
Debt Service : $ 24 million
Equity returns: $ 8 million
Total = $ 42.4 needed in annual revenues ($ 3.52 million per
month assuming no seasonality
Required Average tariff per vehicle
– $ 3.52 million / 70,000*30 = $ 1.68 per vehicle
SSA Toll Roads Case (3):
Scenario 1 : Willingness to pay = zero
(A)
Pure Public Investment
Funded via tax payers (government budget) an/or
donors’ assistance
Performance risk is assumed by Government
Upfront investment of $ 200 million
(B)
PPP via 100% shadow toll road equivalent to $ 1.68 per vehicle
Concession structured as an performance based scheme with
shadow toll paid by government budget allocations [tax payers]
on the basis of performance based criteria (i.e., maintenance
and safety of road usage). Shadow toll payments likely to need
strong backstopped by MLAs and Donors (e.g., guarantees,
liquidity facilities)
Upfront investment by the PPP special purpose company.
SSA Toll Roads Case (4):
Scenario 2 : Willingness to pay = between zero and $ 1.68 per
vehicle ($0.84 per vehicle)
(C)
PPP via a collected toll fare ($0.84) plus a supplemental subsidy
($0.84).
Subsidy can be paid as a shadow toll or can be structured as a
traffic minimum revenue guarantee (defining a predetermined
level of total revenues). Performance risk is transfer to the private
sector. No initial disbursement by the public sector.
(D)
PPP via a co-investment between the Public and Private sector.
Size of public co-investment will be equal to the difference
between total investment and the investment amount supported
by the existing tariff (i.e., $ 126.7). Performance risk is transfer to
the private sector. Initial disbursement by public sector.
SSA Toll Roads Case (5):
Scenario 3 : Willingness to pay = equivalent to required tariff ($ 1.68)
(E)
PPP via a collected toll fare ($1.68)
Depending on the robustness of the traffic studies and the
willingness to pay [affordability] analysis, government and/or
donors might need to provide some type of support to the traffic
revenue scheme. Performance risk is transfer to the private sector
PPP : Risk Assessment
Project Specific Risks
Country (Economy wide) Risks
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Completion Risk (engineering &
construction cost / time cost control)
Operational Performance Risk
(technical & operational know-how)
Environmental Risk (future liabilities,
project delays, costs overruns)
Credit Risk (project leverage)
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Demand (traffic) Risk
Pricing Risk (regulated
and non-regulated)
Environmental (past
liabilities) Risk
Inflation, interest rate and exchange
rate fluctuations
Political Risk (expropriation, political
violence, currency convertibility &
transfer)
Regulatory Risks. (Government’s
default on contractual obligations, i.e.,
pricing formulas, right of way )
Legal Environment (rule of law, i.e.,
judicial system, regulatory procedures
and arbitration)
PPP : Risk Allocation
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Principle : Risk should be allocated to those best able to manage them
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Allocating PPP Risk Guidelines:
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Allocate to the party best able to influence the risk factor (e.g.,
constructions costs – completion risk).
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Allocate to the party that can best anticipate or respond to the risk
factor --influence impact or sensitivity of risk factor on project value
(e.g., adapting size of the facility to demand fluctuations)
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Allocate to the party best able to absorb the risk
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Natural hedges (correlation between risk factors and stakeholder
assets and liabilities)
Access to markets offering derivatives and insurance
Access to specialized financial institutions (IFIs, MLAs, Donors, etc.)
Ability to spread the risk among other risk bearers (shareholders and
taxpayers)
Risk Aversion
Toll Road Finance: Risk Mitigation
Non-Sovereign
Risks
Cash
Flow
effect
Impact
Risk
Mitigation
Instrument
Provider
Completion
Risk
Sovereign
Performance
Risk
Environmen
tal Risk
Demand
Risk
Political Risk
Regulatory
Risk (inc.
Land
Acquisition
Risk)
Macroecon
omic Risk
Cost overruns
and delays.
Revenue
generation
and
operational
costs
increase
Hidden
liabilities
Revenue
generation
Expropriation,
transfer,
convertibility
Cease of
revenue
generation
Revenue
generation.
Tariff
Adjustment;
Right of Way,
Termination
payment
Revenue
generation.
Devaluation
/ inflation
impact of
cash flows
High
Low
Low
High
Low
High
High
EPC Contract
and
performance
bonds
Performance
based
contracts
Environment
al
Assessment
Traffic
Minimum
Revenue
Guarantees /
VPN
Concession
Partial
Credit
Guarantees
Political Risk
Insurance
Concession
Contract
Partial Risk
Guarantees
Local
currency
financing
Private
Private
Private
Private/
Public
Private/
Public
Public
TBD
Developing Local Capital
Markets : Chile
•
By the early 1990s, a sizable infrastructure gap had emerged in Chile, and significant
investment was needed to prevent transportation and other bottlenecks from becoming a major
obstacle to future growth
•
A challenge for the government was to close this gap while maintaining fiscal discipline
that had placed public debt on a rapidly declining path. The solution lay in promoting
private sector involvement in the provision of public infrastructure through public-private
partnerships (PPPs). Chile thus embarked on an ambitious concessions program in 1994,
centered around a number of projects to develop the highway network.
•
The concessions program in Chile covers 44 contracted projects with a total value of
US$5.7 billion (about 6¼ percent of 2004 GDP). These include: 8 projects to rehabilitate and
upgrade the Route 5 highway which runs the length of Chile, with financing from tolls (US$2
billion); 11 other highway projects for connecting roads to Route 5 (US$1.3 billion); 10 airport
projects (US$240 million); 6 urban road projects (US$1.8 billion); and 9 other projects (including
prisons, public buildings, a reservoir, for US$360 million). Approximately 75% was funded in
the local capital markets via local currency infrastructure bonds.
•
The government provides guarantees to concession operators. A minimum revenue
guarantee is provided for highway and airport concessions, under which concession firms are
compensated when traffic or traffic revenue falls below an annual threshold. In return for the
minimum revenue guarantee, the concession firm enters into a revenue sharing agreement in
which it shares a percentage of revenue with the government once a threshold is exceeded.
PPP and Risk Management
Framework
PPP Sector Teams
Ministry of
Public Works
Ministry of
Energy
Ministry of
Communication
PPP
Projects
Coordinating Entity
Water
Electricity
Gas
Airport
Ministry of
SOEs
Railways
Other Public
Institutions
MOF
Risk Management
Roads
Ministry of
Transport
Local
Governments
(Minister or Council
of Ministers)
Ports
Sanitation
Central PPP Unit
Coordinating
Role
Procurement Rules
Screening
Monitoring
Communication
Selection
Criteria
Risk Exposure
Pricing
Monitoring
Documentation
Telecom
Public Sector Support for PPP
(guarantees, subsidies, etc.)
Bank’s response to client demands
(PPPs support)
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Shift in development burden from central to local entities :
the challenge of financing sub-national entities (IFC
Municipal Fund, WBG scale up currently under
consideration)
Use of performance based subsidies (OBA approaches)
Innovative Risk Mitigation Products (new applications
partial risk guarantees)
Public Financial Support for PPP’s development (risk
management framework)
Infrastructure Finance Vehicles (guarantee funds)
Infrastructure:
Developing Local Capital Markets
•
There is no best substitute for foreign exchange risk mitigation than matching the
currency revenue generation with the currency of debt payment services (matching assets
and liabilities).
•
Financing transport facilities and services (local currency based) in the foreign debt markets
adds substantial risk to the structuring of adequate PPPs creating the need for additional
public money support.
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Local institutional investors (I.e., pension funds, insurance companies, life annuities, etc.)
have a natural demand for long-term local currency debt instruments to match their
liabilities.
•
In most cases, local capital markets initiate their development via the creation of a
sovereign bond market (long-term yield curve). After the establishment of such market,
investors develop a need to diversify the risk profile of their investments and the return mix,
providing the incentives for the development of a private bond market, creating the
opportunity for the introduction of infrastructure or utilities bonds (long-term annuities).
•
It is in the government’s best interest to stimulate, via adequate securities regulation and
institutional investors overseeing, the development of local capital markets as a source of
long-term local currency funding for needed PPPs infrastructure projects.
Innovative Risk Mitigation Products
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Local Currency Debt Instruments
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Development of Local Capital Markets (e.g., Chile and Korea)
IBRD (on-lending to private sector)
• Currency conversion option in fixed spread loans (FSL)
• Currency swap
• Rolling forward/1
IFC Local Currency
• Loans and Hedging Products
• Partial Credit Guarantees (asset backed securities)
Regulatory risk support
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Partial Risk Guarantee supporting transaction related regulatory framework
• Privatization of electricity utilities in Romania.
• Guarantee Facility for Peru PPPs infrastructure development (15 projects,
wholesaling PRGs)
• Nam Theun 2, PRG supporting LAO’s government commitments (IDA and
MIGA guarantees).
• Tariff Indexation Risk Transfer (supplemental subsidies)
Public Financial Support for
Infrastructure Development
When should governments offer support to
public private partnerships:
 Internalize externalities (e.g., sanitation)
 Redistributing resources (e.g., subsidize access to
services)
 Mitigate political and regulatory risks
 Closing the gap between cost recovery and
affordability
 Market failure in financial markets (e.g., lack of
depth for local currency funding)
Public Financial Support for
Infrastructure Development (2)
Financing vehicles:
•
•
•
•
Need to reconcile infrastructure investments needs with fiscal prudence.
Ring-fenced government sponsored vehicles to limit amount of
contingent liabilities arising from public support to public-private partnerships
projects (i.e., co-investment, guarantees, subsidies, off-take contracts, etc.)
and assist to improve governance and transparency of the allocation of
government contribution (risk management).
Funded by government’s contribution (tax payers) and donors-multilateral
interventions.
Limited experience with government sponsored vehicles (I.e., infrastructure
funds, guarantee funds, etc. )
– Relatively unsuccessful experiences with state-owned development
banks in the 80s and 90s
– Keen interest by some of our larger clients (e.g., Russia, India,
Indonesia, etc..)
Way Forward

Rebuild and adapt the PPI Model of the 90s on the basis of the lessons and experiences of the
recent years and the immediate needs to reach MDGs by 2015. Private sector still is a key driver
to sustain infrastructure development and economic growth.

Broader use of PPP schemes as a way to maximize public money leveraging for infrastructure
development. Need to develop adequate risk mitigation instruments to support public
contribution to infrastructure projects. Options other than private ownership of infrastructure assets
are also effective to mobilize private capital and management into infrastructure development.

MLAs and Donors direct engagement with sub-national entities (well run public utilities) without
central government support to assist them accessing private financial markets. Need to improve
accountability and use of performance based incentives (commercially run entities).

Development of local capital markets (local currency debt instruments) as a mechanism for
improving effective access to infrastructure financing by PPPs.
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Increasing use of output based subsidies as a way to utilize better private sector resources via
effective allocation of performance risks (PPPs to deliver services to poorer communities).

Build solid institutional capacities in the public sector to improve “good” infrastructure PPPs as
well as the risk management of contingent liabilities arising from PPP support . Development of
specialized financing vehicles (public sector driven).
Case Study
Session 5.1
THANK YOU!
Highways
Sabino Escobedo, TAG Financial Advisors
Contacts
For comments or further details contact:
Junglim Hahm
Richard Cabello
Sabino Escobedo
David Stiggers
[email protected]
[email protected]
[email protected]
[email protected]
Case Study
Session 5.1
THANK YOU!
Highways
Sabino Escobedo, TAG Financial Advisors