Private Investment in Infrastructure: Dealing with ... · Private Investment in Infrastructure:...
Transcript of Private Investment in Infrastructure: Dealing with ... · Private Investment in Infrastructure:...
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Private Investment in Infrastructure: Dealing with uncertainty in contracts
June 2018, Paris
Dejan Makovšek, Economist, OECD/ITF
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What was the WG’s objective?
• Clarify basics – what is the role of with PI?
• Take stock of most recent evidence (does it work?)
• Map how uncertainty matters in contracts
• See how private finance approaches handle uncertainty
• Provide guidance to policymakers
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What is the role of PI? (I)
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The state
State Owned (infra) Company
Lenders Road/Railway
users
Construction contractors
Maintenance contractors
Share capital
Repayment
Loan
Tolls/fares
Performance Contracts
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When the state is judge and party
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Road maintenance trends in selected countries, 2005-
2014, (2005=100)
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60
70
80
90
100
110
120
130
2006 2007 2008 2009 2010 2011 2012 2013 2014
Med
ian
of
ann
ual
ind
ices
Maintenance expenditures in EU-19 (2005=100)
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Base year
fixed (2005)
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Evidence about PI in transport infrastructure
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?
Mixed/limited experience
Positive
Positive
“Positive” is subject to conditions
+ +
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What is the role of PI in transport? (II)
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Efficiency type Relevance
Productive (cost efficiency)
Allocative (preventing bridges to nowhere)
Dynamic (extending the public borrowing constraint)
X
X
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Pursuing PI on the right merits matters!
Competition for the
contract
Credible commitment
to the contract
Proven superior
performance
Public acceptance
of the approach
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Why is it important to know what PI can do?
• Making choices about PI on the wrong merits will lead to
adverse outcomes.
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• Choosing PI on the right
merits is still unsustainable,
if we can’t explain them to
the civil society or provide
evidence!
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PI is concentrated in a few countries
Cumulative Private investment in transport infrastructure per European
OECD country and mode, 1995-2016, US$ million
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>85%
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How uncertainty affects contracts?
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Transferred Risk
P = Efficiency
gains - Value for Money x
Transferred Risk x
Project phase bundling (life-
cycle costing), less cost
overruns/delays, …
The nature of any contract is risk transfer
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Return/Risk
Uncertainty Risk
High losses t
High returns
+
-
Two conditions for efficiency:
1. Credible commitment
2. Competition
When is the price of risk “efficient”
3. Information (about risk)
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The starting point
.
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SPV
Uncertainty matters beyond finance
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• Observed (median) construction risk for the SPV (outturn
cost vs. contract value at financial close) is zero.
• “Insurance” against construction risk is effective.
Median
-10
0
10
20
30
40
50
60
70
-80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280
Project finance construction risk - financial close (NATIXIS dataset, n=75, 1993-2012)
Source: Blanc-Brude & Makovsek (2013).
Short-term contracts and complexity (I)
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What if we place a very strict requirement (e.g. 100 %
insurance) on an agent (contractor) with limited risk info?
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Impact
Pr(x) Median (full
diversification)
EUR 100 m EUR 70 m EUR 190 m
Winning bid for a
fixed price contract?
High-powered incentives and risk?
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Short-term contracts and complexity (II)
Applying a fixed price contract on a complex project
• Construction risk: risk premium in roads above ex-post risk
(+20% in EU), LCC does not explain diff.)
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Traditional procurement
Public-Private Partnership
Total cost
Cost overrun Cost at contract signature
Unexplained
cost difference?
Source: Makovšek & Moszoro 2018.
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The accessibility to jobs within 30 minutes in Lisbon – current and in
the “taxi-bot” model
ITF (2016).
Long-term contracts – disruptive events
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New market entrants
• 20% of them now offered lower
bids (bid more aggressively)
• On average they stayed longer
in the market (+37%).
The market
(bidders) Additional info
(less uncertainty)
What happens if more information is made available to the
bidders? (e.g. publication of a detailed cost estimate)
How does uncertainty matter - competition
Source: De Silva et al (2009).
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Uncertainty in contracts matters beyond risk pricing!
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Contract
signature
Risk pricing
Competition
Circumstance surprises
Uncertainty
Project ↑E(revenues) ↓E(cost)
LT contract execution
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LT contracts, complexity, and unknown unknowns
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Year 20
End of
contract
Competition
for the
contract Market type A
Roads, hospitals,
railways, schools…
Market type B
Sea ports, airports,
…
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Reducing risk pricing inefficiency in the construction phase
• Greater information provision upfront (e.g.
fully costed reference design)
• Use of select collaborative principles during
bid preparation (e.g. joint-risk register)
• A critical need to build in-house capacity (e.g.
IPA/UK, Sund&Belt Partner/DK…)
• ….
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How to ensure continuous pressure for efficiency in a monopoly?
Inefficiency
t
Traditional procurement/management
Competition for the contract
Outturn efficiency
PPP
A bet on the future
Inefficiency
t
Traditional procurement/management
Incentives (targets/resets)
Outturn efficiency
RAB
A series of smaller/short term bets on the future
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Thank you! Dejan Makovšek, Economist Procurement and Private Investment in Infrastructure Lead
International Transport Forum at the OECD