PPP: International Experience and

Lessons for Poland

Jose Luis Guasch

Former Head of the World Bank Global Expert Team on PPP

Professor of Economics, University of California,

Warsaw, Poland, May, 2012

OUTLINE

� Expected Benefits of PPPs

� After 20 years of experience and thousand of PPPs being implemented, have PPPs produced the expected benefits?

� Themes/Sectors where PPP are being implemented

� Key elements for succesful PPPs

� Critical issues for PPPs implemented by sub-national governments

IMPACT

� The benefits of PPP can be quite significant (plenty of evidence through 20 years of experience… but needs to avoid a number of mistakes commonly made. It can be done

� To secure those benefits requires best practice implementation, as it exists today

� But the program needs to be tailored to country (sub-national) conditions

Expected Benefits of PPP and Realized

Outcomes from 20 Years of Experience I

Strong YesLong Term View: Resolving the Rehabilitation and Maintenance Problem: Bundling construction and M&R

Strong Yes, higher standards and more consistent quality of service

Value for Money: Improved quality of service, productivity, access, cheaper

Strong YesAcceleration of Infrastructure Investment Program

Yes with caveat-raised off user charges if possible

Additionality of Financing (from private sector)

Expected Benefits of PPP and Realized

Outcomes from 20 Years of Experience II

YesIncreased Capacity of Local Industry

YesImproved transparency

YesContestability in delivery of public services

YesReduction in Delays and Reduction in Cost Overruns

Expected Benefits of PPP and Realized

Outcomes from 20 Years of Experience III

Not originally, now improving (social tariffs)

Social Inclusion

Mixed-conflicts and incidence of renegotiations, and longer process, and some very visible failures

Smmoth Process

Generally Yes but needs constant management

Risk Transfer

Generally Yes with caveatContract Management Improved

In which

themes/sectors are

PPPs used?

Often Used and Possible

Projects/Sectors for PPP: Traditional

� Transport (Roads, Ports, Airports, Railways, Bridges), Electricity, Rural Electrification, Gas, Telecom, Backbone

� Water and Sanitation: Treatment Plants, upstream and downstream, full service provision, effluents

� Solid Waste Collection and Disposal� Urban Transportation: Buses and Metros,

Suburban Light Rail� Urban Roads� Logistic Terminals� Housing� Schools,� Hospitals

8

Increasingly Used and Possible

Projects/Sectors for PPP: Non-

Traditional

� Slum Upgrading

� Jails/Prisons, Correctional Facilities

� Public Buildings: Municipal Administration, Sports Stadiums, Concert Halls, Cultural Centers

� Access to Common areas

� Street Lighting

� Recreational Parks, Sports Facilities

� Land registration, Cadaster

� Fire Stations

� Day Care Centers

� Cementeries

� Parking's

� Security-Installing, monitoring and managing security cameras around the city 9

Increasingly Used and Possible

Projects/Sectors for PPP: Productive

� Network of Silos/Warehouses with cooling capacity and mobile

� Warehousing Centers� Special Economics Zones� Free Trade Zones� Markets Hubs� Quality Centers and Labs� CITEs-Centers of Knowledge and Technology

Transfer

What Makes a PPP Project

Successful?

Successful PPPs are characterized by having a framework, comprehensive planning, best practice contract clauses, clear contractual rules and contingencies, competitive

procurement and credible contract enforcement.

Successful PPPs are characterized by having a framework, comprehensive planning, best practice contract clauses, clear contractual rules and contingencies, competitive

procurement and credible contract enforcement.

Countries with strong public sector institutions have typically performed best. Examples include the

United Kingdom, Portugal, South Africa, Korea, Australia and Chile, Mexico and Peru.

Countries with strong public sector institutions have typically performed best. Examples include the

United Kingdom, Portugal, South Africa, Korea, Australia and Chile, Mexico and Peru.

A Framework� Anchored in a legal and regulatory base� Credible Government commitment and leadership (deli very unit)� Project selection based on startegic planning� Institutionality: for project preparation and for o versight/regulation� Efficient process/procedures� Proper filters� Clear Jurisdictions� Financial support structure� Risk allocation matrix� Operational instruments:Information requirements, r egulatory accounting,

financial model� Accounting for social issues� Managing liabilities� Conflict resolution framework� Observatory for annual evaluation� Communication strategy� Building capacity and knowledge

Summary of Lessons from International

Experience

Key success factors include:

0. Identification of a pipeline of bankable projec ts with high rates of social/economic rates of return1. Careful planning of PPP project2. Solid revenue and cost estimations3. User willingness to pay and communication plan4. Extensive feasibility study with use of PPP expe rts5. Compliance with contractual agreement6. Strong Legal and Regulatory Framework7. Strong Institutions with appropriate resources8. Competitive and transparent procurement9. Mitigation and flexibility in managing macro-ris ks10. Strong and effective oversight and regulation o f projects11. Accounting for social issues12. Managing liabilities

Even in an attractive destination for PPP investmen t, strong international competition requires to use internati onal best

practices in preparing, procuring and monitoring a nd regulating PPP projects

Critical Issues for PPP from Sub-National

Governments

� Capacity, and Knowledge

� Credibility to provide confort in honoring financial obligations

� Viability gap funding structure, and management of subsidies

� Ensuring sufficient bidders and competition in bidding process

� Managing liabilities, contingent and non-contingent

� Political interference

FINAL LESSONS

� The PPP program should be an evolving one, particularly on the role of government on financing, risk allocation and credit enhancement, fit to country conditions

� Need to have strategic planning a framework and along term view� Need to identify a pipeline of bankable projects with high

economic/social rates of return, and the criteria to go PPP route. The extent of pipeline will shape the structure and program

� Adviseable to start with manageable projects not particulalrly complex and not too large to build confidence and credibility

� And to start running is advisable to buy capacity and knowledge as it will take a while to develop it in-house

� But need to have a minimum core capacity (could be imported) andleading unit to guide and move the process and project forward

Lesson 1: Planning is essential to prevent

failures

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)

Most PPP failures can be attributed to inadequateor non-existent feasibility studies, including

unrealistic traffic forecasts and undefined publiccontribution of funds.

Lesson 2: Solid Revenue and Cost

Estimations are central to financial viability

Strong emphasis should be put on forecasting revenu es andcosts as part of the feasibility study.

Overestimation of revenues can bankrupt a concessio n

CASE: Hungary M1/M15 Toll Motorway Project

•First toll motorway tendered and implemented in Central and Eastern Europe.

•Construction of motorway finished in 1995 on schedule and within budget.

•Traffic volumes were about 40% lower than anticipated

•High toll rate did not cover for low volume. Instead, it led to a court case by dissatisfied road users.

•The concessionaire was unable to service its debt and ultimately the government had to take over the concession at a high cost.

Lesson 3: Assess willingness to pay and

prepare a communication plan

The absence of an assessment of willigness to pay c anlead to public dissatisfaction, and even violent pr otests.

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 withincreases of up to $20 in water bills

• In October 1998, groups gathered in protests, which led to an outbreak of violence

•Finally, Aguas del Tunari announced that the consortium was withdrawing from the project

Lesson 4: Need to conduct an extensive

Feasibility Study

The absence of a solid feasibility study is likely to reduce thebenefits of PPP and diminish project attractiveness to

private investors.

CASE: Mexico Toll Road Program

•Ambitious PPP toll road project awarded 52 projects between 1987-1995

•The bid with the shortest concession period would win (max 15 years), which led to very high tolls.

•Construction cost overruns averaged 25%, while average actual revenues were 30% below projections

•Government had to take over 23 projects and commit to a massive bail-out of debt

Lesson 5: Comply with contractual

agreement

Financial profitability and sustainability is heavi ly dependent on Government’s respect of contractual

agreements

CASE: Thailand Don Muang Tollway

• 25-year concession from the Department of Highways of Thailand to build a $407 million segment of an elevated highway.

•Non-fulfillment of pre-construction obligations by the government (incl. removing a competing local road).

•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 to authorize a substantial toll increase and take over some of the DMT’s existing loans

Lesson 6: Solid Legal Framework

A solid legal framework for PPP is needed to specif y the “rules of the game” for the private sector and reduc e the

project risk , thus improving the success rate of PPP projects.

CASE: Poland A1 TollMotorwayProject

•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 renegotiation 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.

Lesson 7: Strong Institutional Arrangements

Institutional Arrangement should ensure coordinatio n, 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

Lesson 8: Value of Competitive Procurement

Uncompetitive procurement gives a strong position t o thenegotiating private party and can lead to long dela ys and

excessive cost to the government.

CASE: Bulgaria TrakiaMotorway Project

•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 lower-than-expected traffic

•As a result, the talks with the concessionaire collapsed in November 2006

Lesson 9: Mitigate Macro-economic risk and

remain flexible

Macroeconomic shock can impact Government ability t o fulfill its contractual duties in PPP

CASE: Argentina WaterSystem

•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.

•When the government rescinded the concession in March 2006, it argued that Aguas Argentinas did not comply with obligations on expansion and quality.

•Legal battle followed this decision

Critical Issue- Decisions

� It is essential to move forwards, delays, paralysis, and indecisions are lethal. Infrastructure cannot wait

� The opportunity cost of not doing things (whatever the selections is, PPP, public works or …) is too high

� And the cost of mistakes relatively small, and can correct course if it proves to complex and difficult