Transcript Successes and Failures of PPP Projects Vickram Cuttaree The World Bank

Successes and Failures of
PPP Projects
Vickram Cuttaree
The World Bank
Europe & Central Asia Region
Warsaw – June 17, 2008
Introduction
• Objective of the presentation is to show some
contributors of successful PPP programs
• Mexico and Chile PPP programs illustrate the importance
of proper design of a PPP program
• Experience in the region but also worldwide converge into
the same essential elements:
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Strong public sector capacity
Appropriate PPP and sector Framework
Planning and solid feasibility study
Transparent and Competitive Procurement
Strong monitoring and flexibility towards unpredicted events
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Investment is now less concentrated
in Latin America and East Asia
PPP Investment by Region
140000
120000
US$ million
100000
Middle East and North Africa
Sub-Saharan Africa
80000
South Asia
Europe and Central Asia
60000
Latin America and the Caribbean
East Asia and Pacific
40000
20000
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06
20
04
20
02
20
00
19
98
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96
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94
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92
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90
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Countries with strong public sector institutions have typically performed best. Examples include the
United Kingdom, South Africa, Australia and Chile.
These countries are not only good examples but represent also competition for Poland in PPP
investment
Source: PPIAF Database
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Success Story: Chile Road Concession
Program
• Between 1993 and 2001 Chile awarded 21 road
concession worth US$ 5 billion on a competitive basis
• Bidding started with smaller projects, in order to test the
market and reduce the risk to the private sector
• The bidding attracted 27 consortia and more than 40
Chilean and foreign companies, from 10 countries
• PPP program is viewed as transparent and competitive,
with only one minimum revenue guarantee called
• Surveys of users, consultations with local and national
leaders, and focus groups graded Concessions System
at 6 on scale from 1 to 7
Source: Hodges (2006)
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(In)Famous PPP Failure: Road Concession
Program in Mexico
• Between 1987 and 1995, 52 projects (25 competitively tendered)
was awarded (largest PPP toll road program)
• By the end of 1995, 34 projects had reached financial close for US$
9.9 billion in private investment committed
• Shortest concession period would win (max 15 years), led to very
high tolls
• Concessioned roads obligated to have a parallel toll free road
• Construction cost overruns averaged 25% and average actual
revenues were about 30% below forecasts (only 5 projects met or
exceeded targets)
• Average toll road fee increased from US$ 0.02/km to US$ 0.17 after
concessioning
• Government took over 23 projects and paid outstanding debt to
Mexican Banks (about US$ 5 billion) and construction companies
(about US$ 2.6 billion)
Source: Hodges (2006)
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Lessons learned from Chile and Mexico
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Chile
Procurement process was
transparent
Focus on creating public
awareness (tolling culture)
Government learned as
program developed and made
adjustments
Attracting international firms
brought finance, credibility,
know-how etc…
Source: Hodges (2006)
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Mexico
Combination of small contract
duration and low traffic resulted
in high tolls
Existence of free roads
contributed to financial distress
of concessionaires
Situation aggravated by Tequila
crisis
Program resulted in massive
Government bail-out
International experience helps
identify typical causes of failure
Most PPP failures can be attributed to inadequate
or non-existent feasibility studies, including
unrealistic traffic forecasts and undefined public
contribution of funds.
Other common reasons for failure:
- Poor legal framework and enforcement
- Weak institutional capacity and PPP strategy
- Unrealistic revenue and cost estimations
- Lack of thorough financial and economic analysis
- Inappropriate sharing of risks
- Lack of competitive procurement
- Public resistance (willingness to pay not assessed)
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Lesson: Solid Revenue and Cost
Estimations
Strong emphasis should be put on forecasting revenues
and
costs as part of the feasibility study.
Overestimation of revenues can bankrupt the concession
CASE: Hungary M1/M15
Toll Motorway Project
•Hungary M1/M15 was the first toll motorway
tendered and implemented in Central and Eastern
Europe.
•Construction of motorway was finished in 1995 on
schedule and within budget.
•Traffic volumes were about 40% lower than
anticipated, despite the forecasts being prepared by
independent experts.
•High toll rate did not cover for low volume. Instead,
it led to a court case by dissatisfied road users.
•As a result, the concessionaire was unable to
service its debt and ultimately the government had to
take over the concession at a high cost.
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Lesson: Assess willingness to pay
and prepare a communication plan
Widespread public opposition to a PPP project can
prematurely end the concession.
The absence of an assessment of willingness to pay can
lead to public dissatisfaction, and even violent protests.
CASE: Bolivia
Cochabamba Water System
•In 1999, the Bolivian government privatized the
water system in Cochabamba by granting a 40-year
concession to an international consortium called
Aguas del Tunari
•Rate structures were immediately modified, which
resulted in increases of up to $20 in water bills for
local families, many of whom often earn as little as
$100/month
• In October 1998, groups gathered in protests,
which led to an outbreak of violence, when the
Bolivian army killed as many as nine, injured
hundreds and arrested several local leaders
•Finally, Aguas del Tunari announced that the
consortium was withdrawing from the project
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Lesson: Comply with contractual
agreement
Financial profitability and sustainability is heavily dependent on
Government’s respect of contractual agreements
CASE: Thailand Don
Muang Tollway
•In 1989, the Don Muang Tollway (DMT) company
received a 25-year concession from the Department
of Highways of Thailand to build a $407 million
segment of an elevated highway.
•The DMT faced several problems due to nonfulfillment of pre-construction obligations by the
government, which failed to remove a local road
competing with toll revenues.
•As a result, traffic volumes and revenues were less
than forecast, and by October 1996 the tollway
company could no longer service its debt.
•The government had no option but to authorize a
substantial toll increase and take over some of the
DMT’s existing loans
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Lesson: Solid Legal Framework
A solid legal framework for PPP is needed to specify the
“rules of the game” for the private sector and reduce the project risk
, thus improving the success
rate of PPP projects.
CASE: Poland A1 Toll
MotorwayProject
•In August 1997, Gdansk Transport Company
obtained the concession to finance, build and
operate a section of the Autostrada A1 from Gdansk
to Torun.
•However, the Concession Agreement could not be
signed because key piece of PPP legislation was
missing.
•Multiple rounds of renegotiations and frequent
adjustments to legislation took place in the following
years.
•The Concession Agreement was signed in August
2004, 7 years after the beginning of negotiations.
•The specifications of the project were significantly
changed and the construction was divided into two
projects, instead of the original plan of one project
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Lesson: Strong Institutional
Arrangements
Institutional Arrangement should ensure coordination, technical
support and that checks and balances are appropriately applied
CASE: Portugal weak
management of its PPP
program
•Portugal pursued its first PPPs in the mid-1990s to
more efficiently build new infrastructure
•The government PPP unit suffered from lack of
experience with PPP projects and inexperienced
staff
•As a result, Portugal’s early PPPs were subject o
constant delays and cost overruns– by 2003, the
country’s PPP-related liabilities amounted to 10% of
GDP
•Weak public sector capacity was evident in
insufficient risk transfer to the private sector and
delays in giving government approvals on essential
land and environmental aspects
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Lesson: Value of Competitive
Procurement
Uncompetitive procurement gives a strong position to the
negotiating private party and can lead to long delays and
excessive cost to the government.
CASE: Bulgaria Trakia
Motorway Project
•The Bulgarian Government awarded a concession
without competitive bidding for financing,
rehabilitating, constructing, tolling and operating the
a section of the A1 motorway in 2004
•Opposition parties attacked the project on the basis
of a lack of transparency, and high government
contribution and construction price
•The concessionaire asked to increase construction
costs due to legal obstacles causing substantial
delays and did not want to assume the risk of lowerthan-expected traffic
•As a result, the talks with the concessionaire
collapsed in November 2006 and the financial
closure is yet to be achieved
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Lesson: Mitigate Macro-economic
risk and remain flexible
An external macroeconomic shock can create an unexpected
situation for the government, whereby it cannot comply with
its contractual duties in PPP
CASE: Argentina Water
System
•As part of a massive privatization program, the
highest profile concession was signed in 1993 with a
consortium called Aguas Argentinas for water
services of Buenos Aires
•After the 2001 economic crisis, many concessions
were renegotiated. Some were even terminated and
the responsibility for service provision reverted to
public entities, as was the case in Buenos Aires
•When the government rescinded the concession in
March 2006, it argued that Aguas Argentinas did not
comply with obligations on expansion and quality.
•The company replied that a freeze in tariffs when
the Peso depreciated in 2001 substantially reduced
the real value of tariff revenues and thus made it
difficult to achieve the original targets
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Summary of Lessons from Successes
and Failures
Strong international competition requires to use international best
practices in preparing, procuring and monitoring PPP projects
Key success factors include:
1. Careful planning of PPP project
2. Solid revenue and cost estimate
3. User willingness to pay and communication plan
4. Extensive feasibility study with use of PPP experts
5. Compliance with contractual agreement
6. Appropriate Legal and Regulatory Framework
7. Strong Institutions with appropriate resources
8. Competitive and transparent procurement
9. Mitigation and flexibility in managing macro-risks
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Success and Failures of PPP projects
THANK YOU !!!
Vickram Cuttaree
The World Bank
[email protected]
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