Transcript No Slide Title

The role of governments and
international organizations in
oil & gas Public-Private
Partnerships
Lamon Rutten
Chief, Finance & energy
UNCTAD
NOT AN OFFICIAL UNCTAD RECORD
Managing risks and seizing
opportunities for local companies
in the oil and gas sector
Rio de Janeiro, 8-9 June 2004
UNCTAD
Overview
Defining the scope
Structuring energy sector PPPs
Conclusion
Defining the scope: what are PPPs?
The expression PPP is used in many different ways:
• As a catch-all term for any form of cooperation between
investors and all the local stakeholders in a project
• As a term for certain types of Corporate Social Responsibility
activities, e.g., community development or educational efforts
• As a term for projects in which public goods (e.g., water,
electricity, security) are provided by private companies
• As a term for a specific form of investment project, in which the
private sector is brought in to provide public goods, and the
government carries part of the project risk.
Focus of this
presentation
Defining the scope
PPPs have been used in many sectors, e.g.:
• road infrastructure, incl. bridges
• other transport infrastructure (railways, ports, airports)
• public transport
• energy sector projects
• schools, hospitals, prisons and courts
• telecommunications
• social housing, sanitation
• security
There is generally one government framework policy for all
kinds of PPPs, not separate policies for each sector.
PPPs are not new. Until the beginning of the 20th century, most public
infrastructure was built and financed by the private sector – e.g., think
of the widespread issuance of railway bonds, or the private
construction and financing of the Suez and Panama canals.
Governments only took control less than a hundred years ago. And
they kept control until recently…
But the State is shrinking again, and since the mid-1990s, PPPs are
back in fashion. Through PPPs, governments hope to:
- expand public services beyond the wealthier groups
- engage local communities in a more productive manner
- provide a better quality of services at a lower cost to users
- introduce user charges, e.g. to reflect the environmental costs of
certain activities, in a manner that is accepted by the public
- save money.
Defining the scope
PPPs can harness some of the massive private investment
flows for public purposes. The result should be more and
better public services, at a better cost.
But:
• this result does not happen automatically, but only if there is a
proper framework for the PPP
• profits are OK, but excessive profits can lead to a public
backlash
• there may be a public backlash anyway if the government
was previously providing the service at a highly subsidized,
unsustainable rate.
Structuring energy sector PPP – e.g., a power plant
A common format would be an independent power plant (IPP)
Government
Private
investors
Assets,
equity
Equity,
shareholder
loans
Loans
Financiers
Framework
Gas
supply
contract
Power
plant
Equity,
loans
Parastatals
Electricity
offtake
contract
Insurance
Guarantees
International
organizations
Insurance
companies
PPPs in the energy sector usually concern large sums of
money, and as the costs of capital in international markets
tends to be a lot lower than in developing country
financial partners, it generally makes sens to attract
foreign capital.
PPPs, then, will come with both commercial risks and
country risks. And both need to be mitigated.
In PPPs, the allocation of risk is crucial
• Too little risk in private hands leads to rent-seeking and
often, excessive profits.
• Too much risk in private hands results in underinvestments, leading, in turn, to worsening services. It
may also lead to large price rises.
At times, PPPs have been borne out of desperation, and the
framework put in place for the private companies that were
brought in did not give them proper incentives to perform
well and have a long-term vision. It’s this improper
execution of PPPs which has often led to a bad image for
PPPs.
The best way to ensure that both public and private
interests are met in a PPP is by structuring the PPP as a
stand-alone project, using the logic of a project finance.
This makes it possible to explicitly formulate the objectives
and conditions, and to optimize risk allocation. It also
makes it much easier to bring in outside parties, e.g.,
international organizations.
International
organizations
Private
investors
Public equity
holders
PPP
Government
risk mitigants
Benchmarks
and milestones
Commercial
risk mitigants
The structure of the project has to reflect the underlying
activity, and there are many different formats –
management contracts; leases; concession agreements
(for 15 years to 99 years…), build-own-operate; buildown-operate-transfer; etc.
The government’s role in risk mitigation
Governments should be willing to:
• Provide direct risk mitigation – e.g., undertakings on taxation
regimes, currency convertibility
• Create a legal and regulatory environment in which the
private sector can use proper risk mitigation tools – e.g.,
permit the use of offshore escrow accounts, or the use of
foreign insurance companies.
• Assist the investors in reaching an understanding with the
civil society partners in the project.
The international organizations’ role in risk mitigation
International organizations are ready to provide:
• technical assistance and advice
• equity
• loans
• guarantees, especially on political risks
Conclusion
• Many crucial investments will only happen if there is a
real partnership between the government and the private
sector.
• This partnership works best if it is highly structured,
through a project finance-type arrangement.
• Such an arrangement allows clear allocation of risks, and
also leverages access to support from international
organizations (finance, risk mitigation).
• Governments should not deal with PPPs on an ad-hoc
basis, but should have a clear policy framework, a longterm plan, and good monitoring capacity.