State Technical University - MADI

World Bank Toolkit for Public Private Partnership (PPP) in Highways

Cesar Queiroz Lead Highway Engineer World Bank

Moscow, 7 February 2005

Presentation Outline

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Transport and economic development PPP and public policy requirements The main risks of highway projects International experience with highway PPP projects

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Traffic forecasting risks Impacts on revenues The Toolkit for PPP in Highways Case studies Discussions

Developing and Advanced Countries

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Developing countries include low and middle-income economies

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Advanced (developed, industrial, rich) countries denote high income economies

Classification of Economies Economies Low-income GNI per capita $765 or less Middle-Income $766 to $9,385 High-income $9,386 or more Source: www.worldbank.org/data

Classification of Economies Economies Low-income GNI per capita $765 or less Middle-Income Lower Upper $766 to $9,385 $766 to $3,035 $3,036 to $9,385 High-income $9,386 or more Source: www.worldbank.org/data

GNI per capita ($/pop) 50000 43940 40000 30000 33750 27020

Source: http://devdata.worldbank.

org/data-query

20000 16990 1213011830 10000 496044904070 261017801590 970 190 100 0 L u x D e n F in Sp a Po r Sl v Es t L it L at R u s K a z B e l U k r T aj D R C o n

$/pop 50000 43940 40000 EU15, EU8 and CIS EU15 30000 20000 EU8 12130 11830 CIS 10000 0 Lux Por Slv 4960 4490 4070 2610 970 190 Est Lit Lat Rus Ukr Taj

Economic Development and Transport Infrastructure GNI ($/pop) 100000 logGNI = 1.39 logPRD R squared: 0.76

98 countries 10000 1000 100 100 1,000 10,000 Paved Road Density (km/mil pop) Source: Queiroz and Gautam 100,000

PPP: Public Policy Requirements

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Proposed highway projects should be part of Government program Subject to full social cost-benefit assessment

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to ensure public as well as private benefits to establish need, and provide basis for public participation in financing Concession award and agreement should

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be well designed

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be transparent & competitively procured have clear rules for regulation of the concession

“Traffic Risk in Start-Up Toll Facilities” Standard & Poor’s (S&P)

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67 toll case studies comparing forecast performance with actual/observed

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Toll roads, bridges & tunnels

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User-paid & shadow tolls

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Key findings:

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Systematic errors (optimism bias) in forecasts

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Consistency of error-drivers

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Produced a traffic risk index

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Sensitivity testing is essential

S&P Research Results 2002

X <= 0.19010

5.0%

Comparison of Actual/Forecast Traffic Normal(0.72, 0.32); n = 67

X <= 1.2583

95.0% 0 0.2

0.4

1.2

1.4

0.6

0.8

1

Actual (Observed) Traffic Mean ~ 70% Spread: 18% - 146% !

1.6

Traffic Forecasting Risk Index Project Attributes Tolling Regime Tolling Culture Infrastructure More Reliable Shadow tolls Tolls well established Estuarial crossings Less Reliable User-paid tolls No toll roads in country Dense urban networks Green field site Extension of existing road Highly congested corridor Few competing roads Clear competitive advantage Only highway competition Stand-alone facility Limited/no congestion Many alt. routes Weak competitive advantage Multi-modal competition Reliant on other, proposed highway improvements

Error Drivers

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Miscalculation of road user willingness-to pay Recession/economic downturn Future land use scenarios that never transpired Time savings less than expected Improvements to competitive (toll-free) routes Underestimate of ramp-up period (traffic stability), both severity and duration Less usage by trucks

1 0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0 0

Tolling Experience Host Country with No/Limited Tolling Experience Normal (0.56, 0.31)

X <= 1.0000

91.7%

No tolling experience: actual traffic = 56% of forecast

0.2

0.4

0.6

0.8

1 1.2

Host Country with Tolling Experience Normal (0.87, 0.26)

X <= 1.0000

69.0%

Tolling experience: actual traffic = 87% of forecast

1 0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0 0.2

0.4

0.6

1.2

0.8

1 1.4

1.6

Future Challenges

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Point-of-use charging

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depends on ability to pay/willingness to pay New toll collection technologies

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Reliability, take-up, back-office processing Pricing sophistication

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discounts (frequent user programs, resident discount schemes), peak/off peak pricing, day-of-week, season-of year

Main Lessons for Success

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A well defined legal framework Simple and transparent procurement Shared risk-reward concession structure First attempt with toll roads tend to have mixed results Projects should have social benefits as well as commercial viability Particular attention to traffic forecasting and hence revenues Public sector comparator advisable

World Bank Toolkit for Public Private Partnership in Highways

Toolkit’s Objective To provide policy makers from economies in transition with some guidance in the design and implementation of a Public Private Partnership (PPP) in the highway sector

Definition of PPP A Public-Private Partnership (PPP) constitutes a sustained collaborative effort between the public sector (government agencies) and private enterprises to achieve a common objective (e.g., the road project) while they pursue their own individual interests.

The Toolkit The toolkit is structured under five headings and is navigated through a series of tree diagrams under each of these headings. It also includes a library and interactive financial models.

Availability of the Toolkit

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Free of charge

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A multimedia product available on a CD ROM

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Also available at the World Bank’s web site: www.worldbank.org/transport

Contributors Financing Institution Public-Private Infrastructure Advisory Facility (PPIAF) www.ppiaf.org

Executing Agency The World Bank www.worldbank.org

Consultants Groupe Egis (http://www.groupegis.com) in association with Coudert Brothers (http://www.coudert.com)

The Highway Toolkit Includes

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over 5000 pages of reference publications and web links a 500 word glossary case studies and financial simulation software

Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

Toolkit Modules 1. Overview and Diagnosis: rationale for private participation in the highway sector, alternative contractual forms, guide to conduct a diagnostic of the sector 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics: key considerations in the design of a public-private partnership, discussions of well-known PPPs 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation

Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions: analyzes the roles of the public sector and presents the tools at Government's disposal for performing such roles 4. Laws, Rules and Contracts 5. Implementation

Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts: guidance on the design of legal and contractual frameworks for private participation in highways, with boilerplate provisions 5. Implementation

Toolkit Modules 1. Overview and Diagnosis 2. Project Characteristics 3. Public Sector Functions 4. Laws, Rules and Contracts 5. Implementation: outlines the key steps in introducing PSP, bringing elements from previous modules and distinguishing by type of private sector contract

1. Overview and Diagnosis Why Embark on PPP?

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Context and Key Issues Expected Benefits from PPP Why (and where) is the Private Sector more efficient than the Public Sector?

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Overview of PPP experience

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PPI project data base Choosing the right option

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Forms of PPP Making the diagnosis PPP policy and strategy

2. Project Characteristics

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Tailoring appropriate PPP: A continuum of alternatives Examples of well-known PPP

3. Public Sector Functions

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Protect community welfare

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Planning and policy making

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Provide adequate framework

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Facilitator

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Contract award

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Regulation

4. Laws, Rules and Contracts

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Legislation

   

Legislative framework Adjust legal framework Regulatory framework Standards

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Contracts

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Maintenance contracts Operation and maintenance concessions BOT type projects

5. Implementation

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Actors Main Steps

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Managing the Reform

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Selection and contract award

Public Private Partnerships Works & Services Contracts Management & Maintenance Contracts Operation & Maintenance Concessions Build Operate Transfer Concessions Full Privatization Low Extent of private sector participation High

BOT-type of Concessions

The responsibility of the concessionaire comprises an initial construction, upgrading or major asset rehabilitation, and operation and maintenance of the facility.

100 RISK TO PUBLIC SECTOR 0 Allocation of Risks Maintenance Contracts Management Contracts Operation & Maintenance Concessions BOT Decreasing Public Risks, Increasing Private Risks BOO RISK TO PRIVATE SECTOR 100

In addition to the five modules, the Toolkit also includes:

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Financial simulation tool

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Graphic simulation tool

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Case study

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CD Map

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Documentation

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Glossary

Glossary Access control: Limiting the number of points at which vehicles may enter or leave the road …… Zero-coupon swap: A swap in which the fixed-rate payer does not make any payments until the maturity date of the swap but receives floating rate payments at regular payment dates

Glossary Swap agreement: A contract whereby two parties agree to exchange periodic payments. The amount of the payments exchanged is based on a notional principal amount. There are four types of swaps: currency swaps, interest rate swaps, commodity swaps and equity swaps.

And where is the toolkit?

Financial Simulation Case Study

The Government of Farland is considering to build a road between the cities of Farport and Farcapital (located 50 km apart) through a Public Private Partnership (PPP) scheme.

Financial Simulation Case Study Basic data include: Construction cost: US$200 million Source of funds: Subsidies, equity and credit Real interest rate: 10% Concession duration: 30 years Initial traffic: 15,000 vpd Toll rate: US$5.00 (indexed on inflation) Inflation rate: 7% per year

Financial Simulation Case Study

Using the above information and other default data in the Graphic Simulation tool of the Toolkit for Public-Private Partnership in Highways, please answer the questions below:

Financial Simulation Case Study Question 1: In the absence of Government subsidies, ceteris paribus, what would be the return on equity (ROE)? What would be the change in the internal rate of return (IRR) of the project?

Answer: ROE would reduce from 15.63% (with a Government contribution of 44% of the construction cost) to 6.94%. No change in IRR (12.27%).

Financial Simulation Case Study Question 2. While subsidies may be paid by the Government during the construction period, it recovers some of this payment through taxes during the operation period. What would be the Government contribution to this project that would lead to a financial balance for the government throughout the concession period?

Answer: About 23% of the construction cost, as 22% would generate a US$171,000 surplus and 24% would lead to a US$2,464,000 deficit.

Financial Simulation Case Study

Question 3. In the absence of Government subsidies, ceteris paribus, what would be the required initial toll rate to yield a return on equity (ROE) of 16%? Answer: With no subsidies, an initial toll rate of US$8.00/veh yields a 15.08% ROE; an initial toll rate of US$9.00 yields a 17.82% ROE. So an initial toll rate between US$8.00/veh and US$9.00 would be required.

Some WB-related Sites

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Toll Roads and Concessions

http://www.worldbank.org/transport/roads/toll_rds.htm

Toolkit for PPP in Highways

http://rru.worldbank.org/Toolkits/PartnershipsHighways/

Port Reform Toolkit

http://www.worldbank.org/html/fpd/transport/ports/toolki t.htm

How to Hire Expert Advice on PPP

http://rru.worldbank.org/Toolkits/Documents/Advisors/F ull_Toolkit.pdf

Labor Issues in Infrastructure Reform

www.ppiaf.org/Reports/LaborToolkit/toolkit.html

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

Typical Financial Benefit of Partial Risk Guarantees

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Reduce cost of private sector borrowing from LIBOR + 900 to LIBOR + 200

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http://www.worldbank.org/guarantees

Unsolicited proposals to governments

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Origin of most controversial private infrastructure projects In theory, generate beneficial ideas In practice, some unfavorable experiences; attempt to avoid competition; exclusive negotiations behind closed doors Usually sole-source negotiations take much longer than expected

Should governments forbid unsolicited proposals?

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Some governments forbid all unsolicited proposals to reduce public sector corruption and opportunistic behavior by private companies Some governments recognize a good project idea in the tender by compensating the original project proponent