99114 CREATING A FRAMEWORK FOR PUBLICPRIVATE PARTNERSHIP PPP PROGRAMS A Practical Guide for Decision-makers Jeffrey Delmon Creating a Framework for Public-Private Partnership (PPP) Programs A Practical Guide for Decision-makers By Jeffrey Delmon Table of Contents Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Section 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2: Legal Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1 Setting and Implementing the PPP Legal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 Key Legal Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2.1 Vires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2.2 Government obligations and support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2.3 Creation of limited liability project company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2.4 Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2.5 Land rights and acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2.6 Setting and collecting tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2.7 Penalties, sanctions and bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2.8 Security rights over assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2.9 Dispute resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2.10 Sovereign immunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2.11 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.2.12 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.2.13 Regulatory frameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.2.14 Trusts, agency and other legal relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 2.2.15 Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 Section 3: Institutional Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.1 Coordination of PPP program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.2 Fiscal Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.3 Project Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.4 Project Preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.5 Demonstration Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.6 Preparation of Good Practice Contracts and Bid Documents . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.7 Value for Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.8 Approval Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 4: Procuring and Implementing Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1 Inception/Pre-feasibility/Preliminary Viability Study/Outline Business Case . . . . . . . . . . 19 4.2 Viability/Feasibility Study/Full Business Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.3 Direct Negotiations and Unsolicited Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.4 Pre-qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.5 Bid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.6 Single Bids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.7 Preferred Bidder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.8 Management/Monitoring of Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.8.1 The project team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 iii Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers 4.8.2 Operations manual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.8.3 Monitoring performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.8.4 Refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.8.5 Selling down equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.8.6 Dispute resolution and renegotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.8.7 Expiry, termination and handover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 5: Using Public Support for PPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.1 The Fundamentals of Public Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.2 Purposes for Public Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.3 Funded Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.3.1 Grants / capital contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.3.2 Payments for services rendered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 5.3.3 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.3.4 Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.4 Contingent Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.4.1 Government guarantees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.4.2 Contingent debt/equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.4.3 Contingent contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.4.4 Bilateral / multilateral guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.5 Managing Government Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 5.5.1 Assessing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 5.5.2 Monitoring / accounting for liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 5.5.3 Paying for liabilities once they crystallize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 6: Local Currency Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 6.1 Sources of Long-Term, Local Currency Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 6.2 Government Interventions that Can Facilitate Access to Long-term Local Capital . . . . . . . 40 6.3 Using an Intermediary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 6.3.1 Functionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 6.3.2 A few challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Annex 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5 Annex 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7 iv Acknowledgements I would like to thank the Public-Private Infrastructure Sirtaine, Mark Moseley, Paul Reddel, Tim Brennan, Advisory Facility (PPIAF is a multi-donor technical Sara Sigrist, Kirsten Huttner, Alex Jett, Nozomi assistance facility aimed at helping developing Tokima, Teuta Kacaniku, George Wolf, Heinz Rudolf, countries improve the quality of their infrastructure John Speakman, Bhavna Bhatia, Arnaud Dornel, through private sector involvement – www.ppiaf. Fiona Stewart, Satheesh Sundararajan and Michel org) for their kind support in disseminating this work Noel; and Justina Kajange. Any error or omission to those who might benefit from it most. in this text is that of the author. The findings, inter- pretations, and conclusions expressed herein are This text was adapted from Jeffrey Delmon, Public- those of the author and should not be attributed in Private Partnership Programs: Creating a frame- any manner to the World Bank or to PPIAF, their work for private sector investment in infrastructure affiliated organizations, or to the members of their (Kluwer International 2014). I would like to thank Board of Executive Directors or the countries they my colleagues from the World Bank, who helped represent. This text does not constitute legal advice, review certain parts of this text and provided essen- and does not substitute for obtaining competent legal tial advice and support, in particular Joel Kolker, counsel (readers are advised to seek the same) when Katharina Gassner, Victoria Rigby Delmon, Sophie addressing any of the issues discussed in this text. v Introduction 1 Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do, so throw off the bowlines, sail away from safe harbor, catch the trade winds in your sails. Explore, Dream, Discover. —Mark Twain Public private partnerships (PPP) represent an approach to procuring infrastructure services that is radically different from traditional public procurement. It moves beyond the client-supplier relationship when Government hires private companies to supply assets or a service. PPP is a partnership between public and private to achieve a solution, to deliver an infrastructure service over the long term. It combines the strength of the public sector’s mandate to deliver services and its role as regulator and coordinator of public functions with the private sec- tor’s focus on profitability and therefore commercial efficiency. “PPP” is used here in its most inclusive form, to mean any contrac- tual or legal relationship between public and private entities aimed at improving and/or expanding infrastructure services. Clearly, the more extensive the private involvement, the more supportive the investment climate needs to be. The term “Government” will be used to mean the level of Government responsible for the reform processes, whether it be the federal, state or municipal Government. The two counterparties to the main project contract will be referred to as the “contracting agency” on the public side and the “project company” on the private side. PPP can be implemented as a series of ad hoc projects or as a program of projects coordinated and enabled centrally. This text discusses the latter—“PPP programs”. One of the challenges for Governments wanting to implement a conducive PPP framework is the variety of models and approaches put forward by different countries, advisers and commentators. A common approach is to try to adopt the fully functioning framework used by a country that has been very successful in developing a PPP program, in one fell swoop. This involves taking, for example, the PPP program in England and Wales and replicating it wholesale 1 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers for any given country. But, these “best practice” Figure 1.1 identifies what it takes to achieve a good, PPP programs have developed over many years, sustainable PPP framework: through numerous challenges and frustrations and for a specific legal, political and financial context. • the political will to pursue PPP, and the legal When adopting the processes and procedures of and regulatory regime appropriate to enable one of these countries wholesale into a jurisdiction and encourage PPP with little experience in PPP, the tendency is to • selection, design and development of “good” expect the PPP program to be equally successful in projects—the most appropriate and feasible a short timeframe, as if a robust PPP framework will projects for PPP immediately result in robust PPP projects. Clearly, • allocating risk to the private sector while insulat- this is not accurate. ing investors from those risks best borne by the contracting agency or the Government • ensuring that the financial markets are in a This text suggests that development of a con- position (legally, financially and practically) ducive framework for PPP involves a dynamic, to provide the project with the investment it iterative process supported by different func- needs (debt, equity and otherwise), including tions and actors within the Government, the by providing Government support. private sector and the communities in question. Transparent, competitive selection of the private Generally, simpler is better. As a PPP program partner is fundamental to provide a level playing matures, the PPP framework may become more com- field, foreseeable processes and best price, terms plex. But in the early days, it is generally better to and conditions for the Government. Instead of keep the framework simple. Different constituencies proposing a single model, this text discusses the will need to understand the framework – contracting different elements that together make up an effec- agencies, line ministries, central ministries, inves- tive PPP framework. tors, and the public at large. Simple mechanisms will help these key stakeholders understand and interact with the PPP framework more easily. Figure 1.2 shows a more detailed depiction of the Figure 1.1: The Context of a Conducive PPP diversity of reforms and instruments that together Framework can support a good, sustainable PPP program. The outer square shows the macro issues. The middle square identifies the key participants in achieving Political will each of the macro-drivers. Legal Regulatory The inner square shows the tools available to those participants. One worth highlighting is “experience with PPP”. It is important for the contracting agency, investors and lenders to have access to individuals Project selection, Viable Access to financing experienced with PPPs, to help them understand the preparation and PPP (debt and equity) risk profile, terms and conditions, market standards implementation and financing arrangements typical of such projects. A gap analysis identifies areas in the PPP framework Revenue stream that can be improved. Credit enhancement The main activities to be addressed in this strategic plan for PPP framework reform will include: 2 Introduction Figure 1.2: PPP Investment Climate • establish policy On the contrary, achieving a viable PPP framework • draft and pass necessary laws and regulations involves a complex series of parallel, iterative initia- • create, staff and coordinate institutions, com- tives and efforts. It involves updating the different mittees and task forces elements of the PPP framework discussed in this text • create operating guidelines and best practice as each new lesson is learned from PPP transactions guidance to establish transparent, competitive as they are implemented and national best practice processes as it develops. • select and develop a pipeline of good projects, including strategic demonstration projects Section 1 introduces the framework required to • establish processes, practices and funding for support PPP and provides a summary of the text. Government support, including project prepara- Sections 2–6 then describe five key elements of the tion and fiscal risk management PPP framework and what the Government can do • implement program monitoring, knowledge to improve them: capture, and sharing of lessons learned. • The legal framework—how laws and regula- An action plan for PPP framework reform will tory structures can be used to encourage PPP, focus on practical actions associated with these support the institutions implementing PPP and topics. There is a tendency to approach reform of regulate them (section 2) the PPP framework as a single action, generally • The institutional framework—the people delivered by external consultants in one mas- involved, the decision making power they have sive report, with a few workshops and training and the functions they perform (section 3) sessions (in an effort to deliver the guidance in a • The project procurement process and more digestible form). But such interventions are Government involvement in each phase thereof rarely effective. (section 4) 3 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Key Messages for Policy Makers • Learning by doing—an important part of identifying gaps in the investment climate is learned while “doing”, while implementing PPP projects. • Use small steps without being timid—start with easier projects that are clearly financially viable and have political support. But these projects need to provide a signalling effect; they need to be sufficiently substantial and strategic to ensure Government buy-in, the interests of private investors and a statement to the market that the framework for PPP in the country is conducive. • Learn from the experiences of others, without being dogmatic—there is a tendency to try to replicate the successes of other countries. While it is important to learn from the successes and failures of others, it is generally unwise to try to replicate an entire framework, wholesale. • Keep it simple—complex is not necessarily comprehensive or better, the PPP framework needs to be understood by a wide group of stakeholders. • Using Government funding to support project International 2014).1 Key messages for policy makers viability, maximize competition, reduce finan- are provided throughout the text, with a full list of cial risk and keep project costs low (section 5) these set out in an annex. • Mobilizing long-term local currency financing for PPP projects, for example by using a finan- cial intermediary (section 6). 1 For further discussion of the development and financing of PPP, see Delmon, Public Private Partnership Projects in Infrastructure: This text is adapted from Jeffrey Delmon, Public- An essential guide for policy makers (Cambridge University Press 2011); and Delmon, Private Sector Investment in Infrastructure: Private Partnership Programs: A framework for Project finance, PPP projects and risk (Kluwer International 2ed, private sector investment in infrastructure (Kluwer 2009). 4 1 2 Legal Framework “It is more fun to talk with someone who doesn’t use long, difficult words but rather short, easy words like “What about lunch?” —Winnie-the-Pooh (A.A. Milne) The Government will wish to create a clear and stable legal environ- ment for PPP projects, in order to reduce the perception of risk, attract more competition for projects, attract more lending and therefore reduce project costs. The legal (and regulatory) framework creates the foundation for the institutional, regulatory, commercial and financial environment for PPP with clarity, consistency, transparency and cer- tainty. It is particularly critical for the institutional framework, describ- ing the interactions, relationships and coordination that underpin that framework. For this reason, this text describes the legal framework first. However, the reader will need to read this section in close con- junction with sections 3–6 to understand how the legal framework will create and support the institutional and financial dynamic of the PPP framework.2 2.1 SETTING AND IMPLEMENTING THE PPP LEGAL POLICY Successful PPP frameworks have clear, well-understood and docu- mented policies. The PPP policy must provide clarity to stakeholders (public and private) on how the Government wants to undertake PPPs. The policy should include: 2 For further discussion of these issues, and their application in different jurisdictions, see Delmon and Rigby Delmon, eds., The Law of Project Finance and PPP Projects in Frontier Jurisdictions (Kluwer International 2013). In relation to legal frameworks, the reader may also wish to consult the PPP in Infrastructure Resource Center website, which describes PPP in infrastructure legal frameworks, sample laws, regulations and contracts. www.world- bank.org/PPP; UNCITRAL, Legislative Guide on Privately Financed Infrastructure Projects (UNCITRAL 2000); UNCITRAL, Model Legislative Provisions on Privately Financed Infrastructure Projects (UNCITRAL 2003); UNIDO BOT Guidelines (UNIDO, 1996); European Commission Guidelines for Successful Public-Private partnerships (2003); OECD Basic Elements of a Law on Concession Agreements, (1999–2000); Concession Assessment Project, (European Bank for Reconstruction and Development 2004). 5 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers • Purpose of the PPP policy: vision, mission and infrastructure sector regulations, Government goals finance or privatization. • Definition of PPP, for example, projects will be considered PPP if: The need for a specific law or set of regulations • the private partner provides some combina- associated with PPP will depend on the nature of tion of the design, construction, funding, the legal system and current legal framework. In management, maintenance and operation some legal systems, in particular those applying of infrastructure Civil Law, PPP laws and the like are common, as a • the project provides long-term, performance way to formally sanction PPP and specify the extent based services. to which it is a permissible method of procurement • Identification of responsibilities amongst for Government entities, for example, Russia and Government entities, including Thailand have passed specific PPP laws. • selecting projects for PPP, project promo- tion, development and marketing In some cases a law would be too political, or • Government support allocation and manag- would simply take too long, and therefore PPP ing fiscal risk regimes are established in PPP regulations, as sec- • regulation of performance and monitoring ondary legislation. This was the approach taken in implementation Nigeria, with PPP regulations created under the • gathering of know-how and lessons learned, public procurement law (though a PPP law was standardization, operating guidelines. before Parliament in Nigeria, at the time of writing • Government approval must be sought, at dif- this text). In Indonesia, the PPP “law” was imple- ferent stages of the project. mented through a Presidential decree (a “Perpres”), • Conditions to the allocation of Government which in the legal hierarchy is inferior to laws support or liabilities. and Government regulations. This has created difficulties where sector procurement processes PPP legal frameworks are often anchored in a legal implemented under Government regulations are instrument that implements the PPP policy.3 These inconsistent with the PPP decree; the Government may be called PPP laws, concession laws, BOT is considering a PPP law. laws or otherwise. Or the legal framework may be embedded in other legal instruments (laws, decrees In other systems, in particular Common Law sys- or regulations), for example related to procurement, tems, PPP laws are less common. The UK does not have a separate PPP law. The PPP function was created within the Treasury, thus the PPP processes were enforceable not by law, but by the intervention of a powerful central ministry which created incen- Key Messages for Policy Makers tives to ensure compliance. • PPP policies should be clear, comprehensive, yet flexible—peri- odic updates are a useful way to adopt lessons learned into the Whatever the legal authority supporting PPP, PPP program. detailed operating guidelines are needed to ensure • Keep the legal framework simple and clear. Do not confuse com- consistency of practice amongst those implement- plexity with comprehensiveness. Simple is better, and will give ing PPP, transparency for Government entities more confidence to investors. Detail is best left to secondary and investors as to applicable rules and efficiency legislation that is more easily amended to respond to change. through common practices. For example, in the • Do not use the legal framework to second guess the PPP contract by creating rights and obligations at law that should be addressed Philippines, the amended Build Operate Transfer in the contract on agreed terms. If the Government is keen to establish such terms, standard form documents can achieve this, where the terms can be spelled out in detail. 3 Examples of PPP legal instruments can be found at www.world- bank.org/pppiresource. 6 Legal Framework (BOT) Law is supplemented by detailed and clearly it voidable, e.g. where budget allocations are written implementing rules and regulations, the insufficient. investment and coordination committee guidelines and procedures, and a series of forms and checklists 2.2.3 Creation of limited liability project that must be utilized by the implementing agencies company and local Government units during project selection and development, which are periodically reviewed Project financing relies on the limited liability nature and revised based on lessons learned. In Colombia, of project vehicles to achieve limited recourse Conpes issues written policy decisions, improving financing, and subject to the ability of courts to look the PPP legal framework as it gains experience with through the limited liability nature of the entity, for PPP project implementation. example through piercing the corporate veil.6 2.2.4 Procurement 2.2 KEY LEGAL CONSTRAINTS Procurement requirements are generally aimed at This section provides a brief introduction to the maximizing the efficiency of the process, reduc- most critical legal issues for a PPP framework.4 It ing opportunities for corruption and encouraging describes issues and sets out the kind of questions open competition.7 The selection process should that an investor will ask when doing due diligence be specified, creating a fair and transparent set of on a country’s legal system. tender rules, with limited exceptions allowing direct negotiations, mechanisms for implementing unso- 2.2.1 Vires licited proposals (or rejecting them entirely—see section 4), and the applicable regime for challenging The PPP legal framework will need to describe project awards. which Government authorities and entities have the power to perform different functions associated with 2.2.5 Land rights and acquisition a PPP project. An ultra vires act is one performed outside of a party’s legal rights, for example where PPP projects, particularly in the transport sector, a party enters into an obligation or agreement which can be land intensive. Therefore, the ability of the it is not empowered to undertake. An ultra vires Government to use compulsory acquisition (expro- obligation or agreement may be void by law. This priation) of land without undue delay is essential. doctrine can affect the acts of private companies and This acquisition generally involves judicial and Government bodies. administrative proceedings to set the land aside (to avoid squatters inhabiting the land once the project 2.2.2 Government obligations and support becomes known, or speculators depriving land owners of their entitlements), allow the Government PPP projects are often not viable without some form to seize the land, and establish the amount of com- of Government support, e.g. the provision of land, pensation to be paid to the owner of the land and assets, subsidies, guarantees or other value, in par- any other affected party. Ideally, this regime will ticular when the central Government is not a party to the key project agreements, or the infrastructure 4 A more complete discussion of the legal issues that are impor- service does not in and of itself generate sufficient tant to PPP projects can be found in Delmon and Rigby Delmon revenues.5 eds., International Project Finance and PPPs: A legal guide to key growth markets (2013). 5 See section 5 for further discussion of Government support. 6 See Delmon, Private Sector Investment in infrastructure: Project Investors will need to know the forms Government finance, PPP projects and risk 2ed (Kluwer International 2009) for support can take processes and criteria for approval further discussion of limited recourse structures. 7 For further discussion of public procurement requirements, of Government support, and whether Government see section 4 and 5 of Scriven, Pritchard and Delmon (eds), A support is binding on the Government, or is Contractual Guide to Major Construction Projects (1999). 7 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers allow the Government to acquire the land quickly the event of its bankruptcy or insolvency.8 Each while providing clear rights to compensation and jurisdiction will place different rules on the taking resettlement, to provide certainty to all stakeholders. of security over different project rights or assets (existing or future), for example real or movable 2.2.6 Setting and collecting tariffs assets, contractual rights (including future rights as they crystallize), endorsement of insurance poli- To the extent the project company must rely on cies to the benefit of third parties, rights over bank tariffs from consumers as the basis for its revenue accounts (ideally fixed and floating charges), and stream, the legal framework will need to define: the pledge of shares. • How those tariffs are set, whether they can be 2.2.9 Dispute resolution set by contract, on what basis they are adjusted over time Large infrastructure projects are ripe for complex • Any limitations to the basis on which tariffs and often debilitating disputes, and often involve can be set, for example can they be set based on parties from a variety of legal, social and cultural profit margin/rate of return, foreign exchange backgrounds. Failure to address such disputes early rates or cost of debt? can have devastating impact on a PPP project, and • Is the project company entitled to collect tariffs therefore sophisticated dispute resolution mecha- from consumers? Can the project company nisms are generally adopted. enforce its right to collect tariffs through penal- ties or disconnection/denial of access? Parties to a PPP project generally prefer to submit any disputes that may arise to arbitration, because 2.2.7 Penalties, sanctions and bonuses of its flexibility and greater ease of award execution,9 rather than to state courts. International arbitration The project, in order to align incentives, will include benefits from sophisticated arbitrators, speed of a regime of sanctions or penalties for failure by process and international conventions on enforce- project parties to comply with their contractual ment of international arbitration awards, such as the obligations, for example on the project company for New York Convention,10 which require enforcement sub-standard service delivery and on the construc- of international arbitration awards as if they were tion contractor for late completion. domestic awards, and do not allow the enforcing court to open up the award and make a qualitative Jurisdictions treat penalties or liquidated damages assessment of its merits, except for a few specified differently. Some jurisdictions allow them so long reasons. as they are reasonable, others require them to be a genuine pre-estimates of the damage likely to 2.2.10 Sovereign immunity be suffered, for example in England. Still others allow the court to modify such penalties in order States generally benefit from two forms of immunity: to achieve reasonableness, in particular where one jurisdiction and execution. State entities are immune of the counterparties is a public entity, for example from the jurisdiction of the courts of another state. in France. There may be limitations on charging This immunity results from the belief that it would interest on interest or on imposing a rate of interest be inappropriate for one state’s courts to call another on judgments that is different than that prescribed state under its jurisdiction, since this would erode by the court. 8 See the Annex for further discussion of security rights. 9 2.2.8 Security rights over assets Execution of arbitral awards is supported by a number of interna- tional treaties and conventions, in particular The United Nations Convention on the Enforcement of Arbitral Awards (1958) (the “New York Convention”). The lender will seek remedies or opportunities 10 United Nations Convention on the Recognition and Enforcement to control the management of borrower assets in of Foreign Arbitral Awards (1958). 8 Legal Framework the principle of independent national sovereignty. However, this immunity can generally be waived by Box 2.1: UK Reforms to Improve Transparency the state entity. The state will also have immunity In order to improve transparency the UK Government plans to: from execution, since it would be improper for the courts of one state to seize the property of another • monitor and disclose all commitments arising from off-balance sheet PPP contracts; state. Just as courts do not have jurisdiction over • require the private sector to provide equity return information foreign sovereign states under international law, for publication; they are also prevented from seizing the property • publish an annual report detailing project and financial infor- of such sovereign states.11 Immunity from execution mation on all projects where Government holds a public sector generally may also be waived.12 equity stake; • introduce a business case approval tracker on the Treasury website; and 2.2.11 Employment • improve the information provisions within the standard contractual guidance. Some of the most important reasons for granting the project company the right to operate a public sector Source: Infrastructure UK, “A new approach to public private partnerships” (December 2012). service are to improve efficiency, to streamline the relevant corporate and management structures and to transfer commercial know-how from the private sector. However, this improved efficiency may be 2.2.13 Regulatory frameworks inconsistent with the interests of existing public sector employees. Applicable law may create restric- The Government may be assisted in its monitoring/ tions governing the project company’s relationship management function by third parties. For example, with its employees, whether: an independent specialist may be appointed under the contract to act as the monitor of compliance with • it is possible to transfer or second public employ- contract obligations by the parties.13 Equally, the ees to another entity/ contracting party, sector regulator (e.g. the water sector regulator) will • public sector employees that have been trans- be monitoring the project company’s performance, ferred to the project company retain their rights and may agree to monitor generally the parties’ and benefits, and will new employees enjoy compliance with their obligations under law, which the same rights and benefits as the transferred may well coincide with their obligations under the employees relevant contracts. The difficulty with this approach • employers can remove dishonest or bad work- is the need for the regulator to operate in accordance ers, is it possible to impose disciplinary pro- with its mandate, with the usual discretion given to cedures, and the project company can release regulators. Often, this discretion cannot be limited employees/ make them redundant, and if so, (or “fettered”) and therefore the regulator must com- what sort of compensation is required by law/ ply with its legal mandate first and its contractual if any role as a secondary function. 2.2.12 Tax Where the site country has a history of regulation, the regulatory structure may be predictable and PPP projects raise a number of issues associated with taxation of assets, revenues, interest payments and profits. Limited recourse financing creates 11 O’Connell, International Law (2nd ed., 1970) at p 864. particular challenges for tax liabilities, e.g. transfer 12 Maryan Maryan, “Negotiating with the Monarch; Special pricing, depreciation, VAT offsetting, and taxation Problems when the Sovereign is your Partner” Project Financing in Emerging Markets 1996; Successful Development of Power, of subsidies. In jurisdictions where limited recourse Mining, Oil and Gas, Telecommunications and Transportation Projects at 122 (1996). financing is not common, the application of those tax 13 Tremolet, Shukla and Venton, Contracting Out Utility Regulatory liabilities may not be fully understood. Functions (World Bank 2004). 9 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers may provide comfort to the project company and 2.2.15 Currency especially to the lenders. However, in many cases the regulator’s role may be new, possibly the product of The recurring balance of payment difficulties of a hasty response to the involvement of the private many host countries and their need to conserve for- sector, or it may not yet exist. eign exchange to pay for essential goods and services greatly reduce their ability and willingness to grant 2.2.14 Trusts, agency and other legal investors the unrestricted right to make monetary relationships transfers, hence many countries have exchange- control laws to regulate the conversion and transfer Project financed transactions are highly structured, of currency abroad. The host country may limit the often with multiple lenders and investors need- extent to which local currency can be converted into ing to share in the protections provided by such foreign currency, the rate that can be obtained in such structuring. For these reasons, trust and agency a transaction, how much of such currency can be arrangements are often used, where available, to transferred off-shore, which will be essential to pay help manage common rights and flow of funds. foreign lenders and to repatriate profits off-shore. 10 3 Institutional Framework The rain came down, the streams rose, and the winds blew and beat against that house; yet it did not fall, because it had its foundation on the rock. But everyone who hears these words of mine and does not put them into practice is like a foolish man who built his house on sand. The rain came down, the streams rose, and the winds blew and beat against that house, and it fell with a great crash. —Jesus, Matthew 7:25–27 The creation of a PPP program requires a well-designed institutional framework, with clear and strong political support. A robust institu- tional framework organizes, coordinates and focuses the resources of the Government in the manner best suited to encourage and enable PPP. This section will review the institutional framework needed to promote PPP by describing the responsibilities to be allocated to differ- ent Government entities, the project development process, the different approvals required at key decision points during the project, and how the Government supports PPP transaction preparation, procurement and implementation. Key Messages for Policy Makers • Make sure the different roles are allocated and that the system works, ideological purity is less important. • Institutions are only as good as the people in them, and the funding/mandate they are given. Real capacity building (not just the occasional training or trip abroad) is key to a sustainable programme. • Strong, consistent leadership is key—coordination amongst different institutions and ensuring consistency of practices and focus of efforts generally requires clear direction from the highest levels of Government. • A robust value for money assessment and transparent, competitive procurement can protect the Government and the project from ex-post criticism, and can make the project less vulnerable to change, external shocks and the temptation of future Governments to reverse decisions. 11 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Creating a PPP program requires the mobilization PPP units, the Egyptian PPP unit takes on the role of significant expertise and effort from dedicated of procuring entity, driving the process, much teams, with the resources and political clout to per- like some of the subnational PPP units e.g. British form their functions. Strong “PPP institutions” can Colombia, Canada or Saint Petersburg, Russia. help, as discussed above. 3.1 COORDINATION OF PPP A quick comparison of the PPP programs in India, PROGRAM South Africa, Korea, the Philippines and the UK14 shows a few common themes emerging: PPP involves a significant shift in mind set, processes and practices in Government development, manage- • India, South Africa, Korea and the UK have ment and procurement of infrastructure. This shift multi-stage approvals for their PPP projects and requires a strong effort from Government policy- all relate to the commitment of public funds or makers and staff to drive PPP policy implementation contingent support; all four countries have the and coordinate Government efforts. The coordina- MoF leading on approvals based on economic tion function helps to streamline Government PPP viability (as a project) plus value for money and activities, and ensure consistency of Government risk assessment as a PPP support for PPP. • India, South Africa, Korea, the Philippines and the UK have public finance support mecha- A separate entity or steering committee may be cre- nisms, such as capital grants to PPPs ated to ensure coordination amongst the different • None of the countries’ PPP Units are able Government agencies (usually a high-level group, to effectively select PPP projects and all are possibly cabinet level) with a technical commit- dependent on contracting agencies for project tee supporting it (in particular at a project level). identification Coordinating the different Government ministries • None of them take the risk and responsibility of and agencies that will provide critical inputs into acting as the procuring authority any successful PPP program or project can be a • All are publically owned and funded. particular challenge. The Egyptian PPP Unit provides an interesting contrast, based in the ministry of finance, publicly owned and funded and without the power to select 14 Dachs, International Benchmark Comparator Report February projects, like the others. But unlike most national 2013. Box 3.1: PPP Units Many jurisdictions use a centralized institution to provide capacity (often known as a “Public-Private Partnership (PPP) Unit”), generally located within or attached to a key ministry that provides resources for project development or other incentives to use PPP. Typically PPP units have a number of functions, including: • improving the policy/legal/regulatory context for PPP • ensuring that the PPP programme is integrated with overall planning, fiscal risk management and regulatory systems • ensuring that projects protect government environmental and social interests and comply with relevant requirements • promoting PPP opportunities at national and regional levels, amongst potential investors and the financial markets and developing those projects that maximize value for money, competition and sustainability. The PPP unit can provide a single point of contact for investors and government agencies alike, coordinating PPP activities across sectors so that the PPP program is as uniform and consistent for investors as possible. A PPP unit usually works best when connected with a key ministry or depart- ment (such as the ministry of finance or planning). PPP units with executive powers tend to work better than those who provide solely advisory services as they have more influence over contracting agencies. 12 Institutional Framework In most countries with successful PPP programs, the program and initial projects were strongly and per- Box 3.2: South Korea’s PPP Unit sonally backed by the president or prime minister. The Republic of Korea introduced the Promotion of Private Capital For example, in both Colombia and the Philippines, into Social Overhead Capital Investment Act (PPP Act) in August the president chairs the inter-ministerial committee 1994. The Ministry of Strategy and Finance is responsible for de- responsible for PPP projects. In the Netherlands, veloping and implementing PPP policies, and chairs the high-level Australia and the United Kingdom, decisions on PPP Review Committee that must give final approval to PPP proj- major PPP projects, as well as the overall PPP pro- ects. The Public and Private Infrastructure Investment Management gram, are made by the cabinet, which is chaired by Center (PIMAC) at the Korea Development Institute (KDI) serves as a secretariat for the PPP Review Committee. PIMAC has four major the prime minister. In India, the Cabinet Committee functions: i) policy research and strategy; ii) technical support to on Infrastructure (CCI) decides on infrastructure review proposed PPPs using feasibility studies and value-for-mon- sector projects and monitors their performance. ey tests; iii) promote PPP to foreign investors; and iv) education This 12-member committee is headed by the Indian programs on PPP for line ministries/local governments and private prime minister. partners. Approximately 80 people staff PIMAC, of whom 42 work in the PPP Division. PIMAC is fully funded by the Ministry of Strat- egy and Finance, with additional resources from fees levied upon In Kenya, a PPP Steering Committee has been cre- line ministries/ local governments for services provided. ated at permanent secretary level with representa- tives from key central ministries and line ministries Source: Dachs, International Benchmark Comparator Report February 2013. as well as the attorney general.15 The steering com- mittee is a high level body that reviews project issues periodically and solves critical problems as they arise, e.g. where a Government agency is Box 3.3: South Africa’s PPP Unit not providing inputs in a timely manner, where a constraint will require additional support from a A Strategic Framework for PPPs was endorsed by the South African Cabinet in December 1999, and in April 2000, Treasury Regulations Government agency, or where an agency’s activities for PPPs were first issued in terms of the Public Finance Manage- are constraining the project. ment Act (Act 1 of 1999). By mid-2000, with technical assistance funding from USAID, GTZ and DFID, the PPP unit was established as The most common approach is to create a single PPP a unit within the Budget Office in the National Treasury unit to promote PPP, assess potential projects and The PPP unit also administers a project development facility (PDF) help manage Government liabilities. For example, as a so-called “trading entity”—a government financing facility South Africa created a PPP unit in the Ministry that funds project development as well as recovers funds from suc- of Finance, as did the United Kingdom, with the cessfully closed PPP projects. The PDF cannot appoint the transac- tion advisors itself, these will either be appointed by the contracting Treasury Taskforce, which became Partnerships UK agency or by an intermediary such as the Development Bank of and recently split into Infrastructure UK and Local Southern Africa (DBSA) on behalf of the contracting agency. Partnerships.16 Source: Dachs, International Benchmark Comparator Report February 2013. However, there is an inherent conflict of interest where the same entity is responsible for promoting PPP and monitoring/regulating the risks borne by principles), should not be underestimated. These the Government. The promotions team is incentiv- issues form a key part of the public consultation, ized to bring projects to market, which may conflict awareness and relations efforts that will be critical to with the need to reject projects that do not represent the success of any PPP program. The PPP agency can value for money for the Government. help sensitize Government entities to these require- ments, ensure consultations are carried out, and help The importance of legal, environmental and social manage back-lash from different constituencies. concerns, including issues as diverse as labour unions and foreign investment criteria (often 15 www.treasury.go.ke established by treaty or compacts like the equator 16 http://www.localpartnerships.org.uk/ 13 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Box 3.4: Lessons from London Underground—The Importance of the Regulator “We consider that the gathering and publication of information by the PPP Arbiter will generally tend to benefit all interested parties: London Underground as client, the Infracos as suppliers and the public as users. The Government should also find such information useful for assessing the benefits and costs of similar proposals in the future. There is some evidence to indicate that an earlier review could have mitigated the impact of Metronet’s collapse, if not averted it entirely. However, it is important that any reporting process is seen as neutral and is designed to provide the information that both the Infracos and London Underground require to address performance issues and to prepare for Periodic Review. It would have been wiser to make the annual review an automatic process rather than one which had to be initiated by a party to the contract.” Source: House of Commons, Transport Committee, “The London Underground and the Public–Private Partnership Agreements,” Second Report of Session 2007–08, HC 45 (January 2008). In addition, PPP desks or nodes are often cre- and local Government units during the project selec- ated in different sector ministries, SOEs and local tion and development process. Governments to capture skills and funding at the project implementation level, with close links to the 3.2 FISCAL SUPPORT central PPP institutions to ensure cross-fertilization, development of best practice and greater economies To encourage line ministries and state owned enter- of scale for advisers, capacity building programs and prises to procure infrastructure services through other knowledge functions. PPP, support may be provided to fund project development costs such as the hiring of suitable Many countries with strong PPP programs make expert transaction advisors or the provision of mistakes in connection with their early PPP proj- budget support like “PPP credits” or capital grants ects and use the lessons from these experiences to defray contracting agency costs. Such incentive to improve their subsequent efforts. South Korea mechanisms assign a value (implicitly or explicitly) revisits its PPP policy annually to adjust for lessons to the benefits to be obtained by the Government and learned. In Colombia, Conpes has issued more than society generally from PPP. Section 5 provides more 100 written policy decisions building on and improv- detailed discussion of Government support for PPP. ing the PPP legal framework as it gains experience implementing PPP projects across multiple infra- The Government needs to decide whether structure sectors and with evolving approaches to Government support would represent value for financing. The Philippine PPP framework is supple- money, should it be provided, if so how much, when, mented by a series of detailed and clearly written by whom and on what conditions. In the Netherlands rules, regulations, procedures, forms and checklists and South Africa, the amount of direct fiscal support that must be utilized by the implementing agencies to a project can be as much as 100 per cent of the cost Box 3.5: Cost of Public Versus Private Capital It is often assumed that public capital is cheaper than private capital, but the two are difficult to compare—the cost of public debt is often (though not always) cheaper than private debt, but the actual cost of public capital should include the hidden risk premium of the implicit guarantee of tax- payers for public debt (the taxpayer risk making the debt cheaper). The equivalent risk premium is already built-in to the cost of private debt. The actual cost of public capital should also include the opportunity cost for the country of using its capital for different purposes. Chile, for example, applies a “social discount rate” when it uses its capital for infrastructure as compared to other sectors that would be less likely to attract private financing Source: Klein, « The risk premium for evaluating public projects », Oxford Review of Economic Policy, vol. 13, no. 4 at 29 (1997). and McKinsey Global institute, “Infrastructure productivity: How to save $1 trillion a year” (January 2013) at 25. 14 Institutional Framework Box 3.6: The Indian PPP Institutional Framework In 2005 the Cabinet Committee on Economic Affairs (CCEA) of India established the procedure for approval of public private partnership (PPP) projects, and the establishment of a Public Private Partnership Approval Committee (PPPAC). The PPPAC is constituted with Secretaries of MoF’s Department of Economic Affairs (a DEA), the Planning Commission, MoF’ Department of Expenditure, Department of Legal Affairs and the Secretary of the department proposing the project. The DEA Secretary chairs the PPPAC. A PPP cell was established in the DEA and undertakes the appraisal on behalf of the PPPAC, screens identified proposals for funding under the India Infrastructure Project Development Fund (IIPDF) and provides an advisory function to support state cells and municipalities. Source: Dachs, International Benchmark Comparator Report, February 2013. of the project—usually in the form of an availability of services to the public, and not as a substitute for payment made over the life of the facility. Such high public finance. For example, in the Philippines, the levels of direct fiscal support are common for educa- National Economic Development Agency (NEDA) tion and health facilities and Government accom- presents all relevant information to a powerful modation PPPs. In India, the Government provides committee of ministers (including the Department direct fiscal support of up to 40 per cent of cost or the of Finance and the sector ministry), who decide amount needed to make them commercially viable simultaneously on whether a project should go (whichever is less), provided the project is justified ahead, whether it should be a PPP, and what fiscal on a cost-benefit basis. In contrast, many Government support it should be allocated. officials believe that PPPs should be largely self- funded, with infrequent and strictly limited use of 3.4 PROJECT PREPARATION direct Government support. The unintended con- sequence of this approach is that opportunities to A properly prepared project can only be achieved stretch public funds and increase their impact are by the investment of time and resources in project lost, time is wasted in preparing projects that never development. The Government will need to form a proceed because direct fiscal support is unavailable, project team, with appropriate skills, focused on the yet projects still continue to obtain hidden subsidies transaction. Many of these skills can be bought in through contingent support. through short term contracts and transaction advis- ers, though the project team will need the capacity 3.3 PROJECT SELECTION to manage those advisers and the underlying issues to be resolved. The committees that make PPP decisions in success- ful countries have a value-for-money ethos, viewing The contracting agency will need experienced and PPPs primarily as a way to increase the total value professional financial, legal, technical, insurance Box 3.7: The UK’s Erstwhile PPP Unit Partnership UK (PUK) was formed by the UK Government in June 2000 following the recommendation in the second Sir Malcolm Bates review of 1999, and absorbed back into HM Treasury in 2012. It was a PPP, majority owned (51%) by private sector shareholders and the remainder retained by Government (HM Treasury 44,6% and Scottish Executive 4,4%). PUK supported: • individual projects before, during and after procurement—by using its commercial experience and expertise. • Government in developing policy and monitoring compliance—by using its market knowledge to ensure that outputs are effective and practical. PUK financed itself by charging fees to the public sector for its services, benchmarked against private advisory companies. Source: www.treasury.gov.uk/public-private-partnerships. 15 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Governments are well advised to select viable, Box 3.8: The Challenges of Large Demonstration Projects strategic projects to test their PPP framework. In implementing such projects, they will identify In Russia, the Government of the City of Saint Petersburg decided legal and institutional gaps and other opportuni- to launch the Western High Speed Diameter toll road as a large, single project with project costs exceeding Euro 12 billion in 2007. ties to improve the framework. These early projects The subsequent tender process resulted in a single bidder, due also send a clear message to the market that the primarily to the size of the project. After efforts at negotiation, the Government is serious about PPP, and is adopting City chose to cancel the bidding process, restructure the project, a reasonable model for risk allocation. and retender based on smaller phases of the project with more creative use of available financing, which lead to the successful There is a tendency to select early PPP projects that implementation of the project. are large, complex and politically popular (“transfor- mational” projects). This is generally a mistake. PPP is a difficult structure to adopt, and large complex and other advisers when identifying, designing and projects can add to that difficulty. Early projects cre- procuring a project. Each of these advisers will be ate precedent that will apply to later projects, and subject to different agendas and incentives which create expectations amongst investors. These early will influence the nature of their advice and the ease projects should therefore be: with which the Government will be able to man- age their involvement. The project team (possibly • Of sufficient size to attract experienced PPP through the PPP institutions) should have access investors, but not so large that they are overly to expertise in managing such advisers. To provide complex, in fact smaller projects may be better capacity to the teams, the United Kingdom arranged • well developed, i.e. feasibility study done or for secondment of staff from commercial banks and agreed, with sufficient funding and staffing for law firms with expertise in project finance into their preparation, and PPP unit. South Africa and Egypt initially hired • politically strategic, but not so high profile that long-term expert consultants who had experience in political interference is likely. successful PPP programs to work in their PPP unit to improve access to global best practices. 3.6 PREPARATION OF GOOD PRACTICE CONTRACTS AND 3.5 DEMONSTRATION PROJECTS BID DOCUMENTS There is no substitute for experience. Most countries The standardization of risk allocation and contract with successful PPP programs adopt a “learn-by- terms helps reduce the cost of financing and project doing” approach, using the experience with early development. The standardization achieved in the projects to improve the PPP framework. Equally, UK17 and South Africa18 demonstrates the benefits most of these countries experienced problems with available, including the reduction of time and cost their early projects, but they learned from these of procurement. They also demonstrate the need for and revised their rules, policies and guidelines to these provisions to evolve over time, as investors avoid repeating those same mistakes. For example, and lenders become more comfortable with the PPP in South Africa, the initial project scope specified framework and program. for the first maximum security prison procured on a PPP basis proved to be fiscally unaffordable. As a The Philippine national planning agency revised result, the project required two years of design and its model PPP agreements for light rail, water, scope changes after the preferred bidder stage was airport, and information technology outsourcing reached to correct this. Learning from this experi- ence, the PPP guidelines now require the strict 17 www.hm-treasury.gov.uk/documents/public-private-partner- testing of fiscal affordability at the earliest stage of ships/ppp_index.cfm. project preparation. 18 www.ppp.gov.za. 16 Institutional Framework projects on the basis of lessons learned from prior deals, international best practices and in confor- Box 3.9: Lessons from London Underground - Allocating mance with the applicable rules and regulations for Too Much Risk to The Private Sector PPPs. The Netherlands has standard contracts for “Contracts that were supposed to deliver 35 station upgrades over roads, schools and Government buildings. South the first three years in fact delivered 14—40% of the requirement; Africa issued in 2004 a set of “Standardized PPP stations that were supposed to cost Metronet SSL £2 million in fact Provisions,”. India has developed model concession cost £7.5 million—375% of the anticipated price; by November agreements for its national and state highway, port, 2006, only 65% of scheduled track renewal had been achieved. airport and passenger and freight rail projects.19 They have ended in collapse and chaos. It was a spectacular failure.” “The Government should remember … that the private sector will Colombia does not utilize standard or model PPP never wittingly expose itself to substantial risk without ensuring contracts, but it has established broad policy guide- that it is proportionally, if not generously rewarded. Ultimately, the taxpayer pays the price.” lines with respect to risk allocation for PPP projects involving transport, energy, communications and Source: House of Common, Transport Committee, “The London Underground water and wastewater. It also has developed risk and the Public–Private Partnership Agreements,” Second Report of Session 2007–08, HC 45 (January 2008). matrices for each of these sectors specifying which risks are to be assumed by the public and private partners, and the underlying contracts when pre- pared must reflect this information. Box 3.10: The UK’s Latest Views on Quantitative Versus Qualitative VfM Standardization should be implemented gradually, using an iterative process for market feedback. The current approach to appraisal of PFI sets out that qualitative considerations—viability, desirability, achievability—should 3.7 VALUE FOR MONEY frame the approach to the quantitative assessment. The intention is that the quantitative assessment should form part of the overall “Value for money” (VfM) is a measure of the net value for money judgement rather than be seen as a stand-alone value that a Government receives from a PPP project. pass/fail test; neither the quantitative or qualitative assessment should be considered in isolation. The UK National Audit Office has, The assessment of VfM helps the Government decide in the past, expressed concerns that too much weight is given to whether a project should be implemented as a PPP cost modelling; they have put considerable emphasis on the fact and how much support the Government should that financial appraisal is just one part of the overall assessment of provide to that project. Assessing VfM is as much the contracting approach, and have sought to discourage apprais- an art, as a science, given the various and changing ers striving for disproportionate levels of accuracy. concepts of “value” that the Government will want Source: Infrastructure UK, “A new approach to public private partnerships” to access through PPP. (December 2012). Various approaches and models endeavour to quantify VfM, in particular through public sector This can jeopardize the sustainability of the project comparators (see Box 3.11), cost benefit analysis and PPP program. A robust VfM exercise at the time and shadow models (where a financial model is of project selection and procurement can protect a developed from the bidder’s perspective to test project from ex-post challenges. likely bidder concerns). Best practice uses such quantitative analysis as important data, but looks 3.8 APPROVAL PROCESS to a qualitative analysis to respond to all relevant parameters rather than seek measurable accuracy A number of approval processes will apply to a in assessment. (see Box 3.10) PPP project. Approvals help raise key questions VfM is often used as an ex-post rationalization of a political decision to implement a project under PPP. 19 Available at: http://infrastructure.gov.in/mca.htm. 17 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Box 3.11: Public Sector Comparator (PSC) A comparison between the cost of public delivery of the project and that through PPP can provide a useful mechanism is assessing value for money. But a PSC is difficult to assemble with any accuracy. In order to assess PSC properly, full information is needed on how the project would be imple- mented by the public sector, including actual cost of construction, cost of operation, cost of financing and risk borne by the public sector (which is difficult to calculate with any accuracy). For further discussion of PSCs, see the UK Treasury website, www.treasury.gov.uk. and issues during preparation of the project. They (based on the feasibility study), before issue are important for quality control but also for buy-in of bid documents, award/financial close, and from different agencies, achieving greater ownership renegotiation. and certainty for investors. But these layers of dif- • Sector regulator will be responsible for some ferent agencies with approval rights can complicate combination of economic impact (e.g. tariff the process. To the extent possible these approval levels, cross-subsidization amongst consumers requirements should be streamlined, to facilitate and cost allowances), environmental impact efficient application and approval, reduce the cost and consumer protection. Approval rights arise of approvals, and fast-track the investment process. during project selection, award/financial close, and renegotiation. The following describes a few of the key parties • Procurement agency will be responsible for that often have approval rights and the points in monitoring the use of transparent, competitive the project process at which such approvals are procurement. Approval rights arise before issue usually required. of bid documents. • Environmental agency, land agency, Attorney • Sector line ministry in particular during project General, etc.—there are a variety of agencies with selection, feasibility verification (based on the regulatory authority over specific issues, with feasibility study), before issue of bid documents, approval rights during feasibility verification award/financial close, and renegotiation. (based on the feasibility study), before issue • Government fiscal risk management authority of bid documents, award/financial close, and in particular during feasibility verification renegotiation. Box 3.12: Delusion and Deception in Risk Assessment As human beings, our risk assessment tends to be influenced by personal beliefs or biases, for example: • underestimating the time and cost required to complete a task, • believing we understand risk better than we really do, • underestimating risks associated with familiar tasks, for example traffic accidents while driving to work and slipping in the bathtub, • validating prior decisions. There may be collaboration in these influences. This collaboration may have pure motives, for example exaggerating the benefits and underesti- mating costs and time to help decision-makers justify a project they believe is important. And yet, this deception ends up costing the taxpayer, since risks that are ignored are not managed. Source: Flyvbjerg, Garbuio and Lovallo, Delusion and deception in large infrastructure projects: Two models for explaining and preventing executive disaster, California Management Review, vol 51, no 2, winter 2009; Delmon, Project Finance, BOT Projects and Risk (2005); Delmon, Increasing the efficiency of risk allocation in project financed public private partnership (PPP) transactions by reducing the impact of Risk Noise, ICLR (Winter 2014). 18 1 4 Procuring and Implementing Transactions We can easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of the light. —Plato In amongst the roles played by PPP institutions, this section will review methods for the Government to support project preparation and implementation, following pre-feasibility and feasibility studies, project preparation, the procurement process for PPP projects, and the implementation and monitoring of PPP projects. Competitive procurement of PPP involves careful preparation, reviewing risks and their allocation, identifying market requirements and creating a competitive process for selection of the right private partner. In its most basic form, the tender (or bid) process involves a party offering a project to the market and asking for bids from par- ties interested in performing the project, or some part of the project. Tendering (or bid) procedures are meant to achieve efficiency, manage costs, maintain quality, encourage expediency and maximise valuefor- money. PPP transactions take time to prepare, and need the attention of experts to ensure that risks and financing are managed properly and efficiently and taken to market in a form and manner designed to attract as many high quality bidders as possible and thereby keep costs down and improve delivery. Figure 4.1 provides a depiction of institutional functions and maps them against the different phases of project development, as per the PPP program in South Africa. 4.1 INCEPTION/PRE-FEASIBILITY/ PRELIMINARY VIABILITY STUDY/OUTLINE BUSINESS CASE A pre-feasibility study (also known as an outline business case or pre- liminary viability study) tests the fundamentals of the project, based on a preliminary technical survey identifying key constraints and 19 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Key Messages for Policy Makers Figure 4.1: The PPP Project Cycle • Do not cut corners in procurement. It may seem easier to enter into direct negotiations instead of using competitive procure- ment, but it isn’t. It takes longer and costs more money. Maxi- mize competition (where possible) through good, transparent, competitive procurement. • Invest in preparation. PPP preparation takes time and money, if done well. • Be clear to bidders about what you want. Indicate clearly what results, milestones and indicators you want the investor to achieve, in particular in the bid evaluation criteria and their weighting. Help bidders to give you what you want, don’t make them guess. • Be cautious when selecting the winning bid. If a bid seems too good to be true (financially, technically or otherwise), then it probably is. assessing the basic technical and financial project fundamentals such as site selection, concept design and possible forms of implementation, revenue and financing. A first level financial model will be developed at this stage, to test the viability of the project and the potential appetite of investors. This is an essential stage of project development, to avoid wasting preparation costs on projects that do not satisfy this basic test of viability. As part of the pre-feasibility study, the contracting agency makes a preliminary assessment of value for money,20 which tests the value provided by PPP. Once a preliminary decision to undertake the project through private investment has been made, a fea- sibility study is undertaken to identify key project Source: Republic of South Africa website. issues and constraints. Failure to implement the different stages of project 4.2 VIABILITY/FEASIBILITY preparation properly, with sufficient time, funding STUDY/FULL BUSINESS CASE and expert advice has doomed many a PPP project and program; this preparation process should not The decision on implementation of a project be curtailed. As in most such exercises, a balance through PPP will follow a “viability” or “feasibil- needs to be found between the time and expense ity” study (also known as a “full business case”), of the “perfect” feasibility study, and a feasibil- which is a more detailed version of the pre-feasi- ity study that addresses enough to meet market, bility study. The contracting agency performs a contracting agency and Government approval feasibility study to commence project structuring requirements. and key risk allocation decision making. It is at this stage that the fundamental design of the PPP solution is defined. 20 For further discussion of value for money, see section 3.2.5. 20 Procuring and Implementing Transactions Box 4.1: Optimism Bias or Bad Incentives—How Planning Goes Wrong Planning and forecasting need to reflect benefit to the Government, through cost-benefit or value for money assessments. But such assessments tend to involve incentives for those performing them to emphasize benefits and de-emphasize costs, whether consciously or not.a There is a similar bias towards new build, rather than refurbishing what exists and maintaining it properly. Maintaining a road properly is more than three times less expensive than maintaining it poorly and rebuilding later. But the socio-political incentive is to build something big and new that can carry the name or be identified with a politician or political party. Khan and Levinson (2011) highlight the failure in the US national highway system to main- tain roads properly due in part to the tendency for federal monies to be allocated to new build projects rather than maintenance or refurbishment.b The Private Infrastructure Investment Management Center in South Korea routinely rejects 46% of proposed projects (compared with 3% before its creation) at a savings of 35% to the Government on poorly planned or selected projects. Similarly, Chile’s national Public Investment System rejects 25–35% of projects proposed.c Source: McKinsey Global institute, “Infrastructure productivity: How to save $1 trillion a year” (January 2013). a See Flyvbjerg, “Survival of the unfittest: Why the worst infrastructure gets built—and what we can do about it,“ Oxford Review of Economic Policy, volume 25, number 3, 2009; McKinsey Global institute, “Infrastructure productivity: How to save $1 trillion a year” (January 2013). b Kahn and Levinson, “Fix it first, expand it second, reward it third: A strategy for America’s highways,” The Hamilton Project discussion paper 2011-2013 (February 2011); McKinsey Global institute, “Infrastructure productivity: How to save $1 trillion a year” (January 2013). c McKinsey Global institute, “Infrastructure productivity: How to save $1 trillion a year” (January 2013). Interested parties, such as potential investors, 4.3 DIRECT NEGOTIATIONS AND funders or contractors, may offer to develop, or may UNSOLICITED PROPOSALS produce of their own accord, “feasibility studies”. Government needs to be cautious. Even with the best Governments often receive proposals directly from of intentions, such studies will be biased towards the private investors. These proposals can be a good interests and context of the proponent. Government source of innovative ideas for the Government, and will need its own, independent study to ensure can help Governments identify new project concepts. feasibility is properly tested, key choices are well However, unsolicited proposals are difficult to man- founded and the Government has critical informa- age and can be a source of significant mischief. tion needed to negotiate with eventual investors and funders. Following the feasibility study, and associ- Direct negotiations generally take longer, are more ated approvals, the contracting agency is ready to expensive and are more likely to fail than projects commence the tender process. procured through competitive processes.21 Directly negotiated arrangements are also more vulnerable Having the project approved as a PPP at this advanced stage of development ensures political buy-in of the process before the Government and 21 See inter alia: “Getting value for money from procurement,” National Audit Office (UK); Inadomi, Independent Power Projects potential bidders start investing further in project in Developing Countries: Legal investment protection and conse- development. quences for development (2010). Key Messages for Policy Makers • Select good projects. Garbage-in-garbage-out; say “no” to bad projects • Select robust, viable projects for PPP, these are more likely to be financed on a competitive basis and are therefore more likely to provide value for money. Projects suffering from bad design, dubious demand or weak fundamentals (even if politically popular) are more likely to fail, and may weaken the entire PPP program in the process. • If a project needs Government support, get approvals early to avoid wasting time and money on projects that do not meet viability and value for money criteria, and the awkward position of Government rejecting support for a project only after preparation. • A good, transparent selection process (for commercial rather than political reasons) can reassure investors and increase competition. Projects selected for political reasons or priorities will create a perception of increased political risk amongst investors. 21 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Key Messages for Policy Makers • Prepare the Government to play its part from project development to expiry. Even where a comprehensive PPP is envisaged, the Government will play an essential role in monitoring and regulating the project and the sector. • Be ready for challenges. In any long-term relationship, change happens. PPP is, above all, a partnership, and it needs to be designed with chal- lenges, changes and resolution in mind. Problems need to be elevated to appropriate levels of management before they become disputes or worse. • Consider all stakeholders. PPP will have a direct influence on some stakeholders (in particular employees and management) and may raise politi- cal or philosophical concerns amongst many more. While absolute consensus will never be reached, the Government needs to consult widely, understand fundamental concerns and address them. to challenges by new Governments or opposition Whenever a project is proposed to be awarded groups—without the validation of a transparent, without competitive procurement, the mechanism competitive process, direct negotiations are more to apply for such a waiver should be managed by vulnerable to claims of bias, corruption, incom- an appropriately high level authority. The decision petence and inappropriate use of Government process should be made public and transparent; to resources. allow other stakeholders to comment if they have issues, and there should be a mechanism for those Where permitted, the circumstances allowing the disgruntled stakeholders to appeal against the award of the project without competitive procure- decision. These mechanisms help protect the deci- ment should be limited. The cases where this might sion and the project from vulnerability to legal and be acceptable would satisfy most or all of the fol- political challenge. lowing criteria: Where competition is not possible or practicable, • where the project is of short duration and a legislation often provides for market testing to ensure small value that the pricing and terms agreed for an unsolicited • the project is critical to national defence or proposal meet market standards (are consistent with national security what the Government would have achieved through • there is only one possible source of the services competition). A robust, independent feasibility study (due to the skill set of the provider or intellectual in invaluable in such circumstances. Wherever pos- property) sible, unsolicited proposals should be subjected to • where there have been repeated efforts to imple- competitive bidding, in pursuit of the best deal for ment a competitive process, but with no success, the contracting agency and to manage the perception yet there is one party willing to undertake the of corrupt practices through transparent competition. project on the same terms that failed to attract competition Some countries reject unsolicited proposals outright, providing no benefit or compensation to those offering such proposals. In particular in countries without the resources and sophistication to manage Box 4.2: Benchmarking unsolicited proposals, this offers a robust method to Where a project is not subject to competitive pressures, or that avoid the complications and dangers of unsolicited competition is insufficiently robust, the Government should proposals; but also deprives the Government of the submit that project to benchmarking to verify that the price advantages. represents best value as compared to similar projects, in the sector and in similar countries. This can be a challenging process where Mechanisms have been developed to encourage equivalent projects are not readily available, or where relevant unsolicited proposals, while also ensuring that information is not available. competitive tendering is used, where possible, 22 Procuring and Implementing Transactions Box 4.3: Unsolicited Bids in Colombia The Ministry of Transport, DNP (the planning agency) and the MoF enacted detailed regulations regarding the acceptance of unsolicited propos- als from the private sector.a If accepted as a viable project, an unsolicited proposal must then go through a competitive, open procurement.b The proponent participates in this selection process like any other bidder. If the proponent’s bid is not selected, however, then the winning bidder must reimburse the proponent for certain of its expenses, as approved by the responsible Government agency prior to the start of the tender process. In such case, the proponent is responsible to the winning bidder for the quality of the relevant studies. a MOT Decree No. 4533 of 2008. b See requirements of Laws 80 of 1993 and 1150 of 2007. when selecting the best investor.22 These mecha- The unsolicited proponent is often viewed as having nisms involve a careful review of such unsolicited an unfair advantage, so any preference given (such as proposals to ensure they are complete, viable, a right of first refusal or bonus during bid evaluation) strategic and desirable. The project is then put may stifle competition.23 A more robust approach out to competitive tender, with the proponent of is to use competitive tendering, but without any the unsolicited proposal receiving some benefit, advantage to the unsolicited proponent. Instead a fee for example: is paid to the proponent if he does not win the bid, as compensation for the value added by his efforts to • proponent pre-qualified automatically, develop the project. The fee should be sized to reflect • a bonus on the proponent’s scoring in the formal actual benefit of the proposal to the Government. bid evaluation (i.e. additional points allocated to the proponent’s total score when its bid proposal 4.4 PRE-QUALIFICATION is evaluated), • a first right of refusal, enabling the proponent to match the best bid received (also known as the The bidding process is generally lengthy and costly, “Swiss challenge”), in some cases only where for the bidders and for the contracting agency. In the proponent’s bid score is within a defined order to manage the cost and time outlay, the con- margin of the best bid, tracting agency may wish to prequalify those parties the right to automatically participate in the final most likely to provide an attractive bid, and avoid • round of bidding, where there are multiple 22 Hodges and Dellacha, Unsolicited Infrastructure Proposals: How rounds of bidding (the “best and final offer” Some Countries Introduce Competition and Transparency An system), and International Experience Review, 2007. 23 This is not the case in countries like Chile, with a very sophisti- • compensation paid to the proponent by the cated regime that gives confidence to other bidders that the propo- Government, the winning bidder or both. nent will not have an unfair advantage in the process. Box 4.4: Prequalification Criteria for an Airport Concession Each sector and project has its own specificities. For example prequalification criteria for an airport PPP may include: • level of owned total assets in excess of a set amount • recent experience managing the construction and operation of an airport of similar size and complexity in a similar market • recent experience raising similar amounts of debt and equity • exclusion of air carriers, or of companies owned by air carriers, or of operators of airports located close to the site (e.g. within 800 km) (which would create a natural conflict of interest) Clearly these criteria will need to be adjusted based on market context. 23 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers the time and cost of managing bidders who do not bid scenario is encountered, benchmarking of the bid have the fundamental qualifications or financial may be a useful mechanism to help the Government substance that would enable them to undertake understand if it is getting good value, and to help the project. Prequalification also encourages good reassure other stakeholders that the lack of competi- bidders, who will prefer a smaller field of equally tion is not a fatal flaw in the process. qualified competitors. 4.7 PREFERRED BIDDER 4.5 BID Once bids are received, the contracting agency will The contracting agency provides the prequalified evaluate those bids and select the preferred bidder. bidders with tender documents (including project The contracting agency will negotiate with the pre- documents and technical specifications) and access ferred bidder any open issues (to the extent permitted to relevant data. Bids received will be evaluated the bid documents or by law), finalize the commercial against specified criteria. The criteria need to be and financial arrangements, award the project, sign described thoroughly in the bidding documents to the concession agreement and other key contracts help bidders understand the contracting agency’s (subject to the conditions precedent discussed needs, and to improve the quality of bids received. below), and reach financial close. More than one pre- ferred bidder may be selected for additional rounds 4.6 SINGLE BIDS of competition, for example through best and final offer (BAFO—see Box 4.6) or competitive dialogue Even in the most sophisticated markets, creating (see Box 4.7, below). Additional rounds need to be investor appetite can be a challenge. Even before carefully managed, to maintain transparency, avoid the financial crisis, some 30% of PPP projects in the any perception of favouritism or corruption, and UK only received 2 bids.24 The procurement process limit the added cost and delay such a process implies. should put the contracting agency into a strong nego- tiating position if there is only one bidder, limiting Lenders will not be finally committed to the project the opportunity of that bidder to hold the contracting until financial close is achieved. Before financial agency hostage. The contracting agency needs to be close, lenders will want to confirm that the risk allo- prepared to start the bidding process over if it is not cation for the project is “bankable”, a general term happy with the bidder’s proposal. Where a single referring to the level of comfort that a lender will require from a project given the context of the project (sector, location, size, etc.).25 The lenders will then Box 4.5: Sample Bid Evaluation Criteria for an Airport PPP Box 4.6: BAFO For an airport PPP, bid evaluation criteria may include: • A technical solution compliant with the airport masterplan and The contracting agency may choose to include additional stages of with specifications provided. competition, for example reducing the competition to two bidders • A legal solution compliant with bid documents. who will then be asked to further refine their bids and submit • A financial proposal indicating the extent of Government fund- a best and final offer (BAFO), further to which the contracting ing, investment, or guarantee needed or the share of project agency chooses the preferred bidder. This process allows the revenues. contracting agency to use the available competitive pressure • A financing plan showing how and from whom the bidder to further motivate bidders, and possibly obtain firm financing intends to mobilize debt, equity and other financial instru- commitments. ments to fund the project and how much due diligence has been completed. 24 National Audit Office (UK), “Improving the PFI Tendering Source: Ricover, Cuttaree and Delmon, Airport Development through Public Process”, (March 2007). Private Partnerships: Guide for decision makers (World Bank, 2013). 25 See Delmon, rivate Sector Investment in infrastructure: Project finance, PPP projects and risk (2ed Kluwer International 2009). 24 Procuring and Implementing Transactions agree with the project company and the Government early and any conflicts are addressed before they a list of conditions precedent (CPs) that must be become disputes. These requirements change over satisfied before the lending arrangements become the life of the projects, from monitoring completion final, and before first drawdown can be made. and managing variation claims during construction, to regulating service delivery and operations, and 4.8 MANAGEMENT/MONITORING finally expiry of the project, asset hand-over and OF IMPLEMENTATION decommissioning. Financial close is not the end of the process for the 4.8.2 Operations manual Government; it is only the beginning. Managing the PPP agreement starts at the inception phase of the The operations manual will provide guidance on PPP project cycle, designing appropriate solutions every aspect of the project implementation pro- and managing input from different advisers. It con- cess, following each element of the PPP agreement tinues through the selection of the investors and then including standard form documentation, model during implementation of the project. Government process schedules and other practical assistance for must allocate resources and staff to ensure that the project implementation. The Government can use project is well managed during implementation, in the transaction advisers it appoints to help procure particular where variations, renegotiation and refi- the project to help it prepare the operations manual. nancing are concerned. Each of the issues discussed below needs to be considered by the Government 4.8.3 Monitoring performance before starting procurement, to ensure processes are in place, established by contract and/or by law and The Government may be assisted in its monitoring/ properly funded. management function by third parties. For example, an independent specialist may be appointed under 4.8.1 The project team the contract to act as the monitor of compliance with contract obligations by the parties.26 Equally, the During implementation, the project team must sector regulator (e.g. the water sector regulator) will adjust to a rhythm and access to technical capacity needed to ensure that the contracting agency and project company comply with their obligations in Box 4.8: Squeezing the Stone the manner and time required. The regime estab- lished needs to conform to local practices, and The UK has identified potential savings during implementation, monitoring and control functions to ensure that the including Government complies with its obligations that any • Renegotiating the scope of contracts, removing services no non-compliance by the project company is caught longer required. • Improving risk allocation by taking back energy consumption risk and improving energy efficiency through improved technol- ogy and using government purchasing power to lower utility Box 4.7: Competitive Dialogue and consumables costs. • Cutting waste by finding alternative uses for under-utilised The European Union uses a “competitive dialog procedure” which assets allows Governments to enter into a dialogue with prequalified • Avoiding additional costs through better contract management. bidders before finalizing the tender documentation. It allows structured discussions with each of the prequalified bidders and Source: Infrastructure UK, “A new approach to public private partnerships” helps identify key issues and amendments needed for the project.a (December 2012). a European PPP Expertise Centre, The Guide to Guidance: How to Prepare, Procure and Deliver PPP Projects (European Investment Bank 2012). www.eib.org/epec/resources/guide-to-guidance-en.pdf 26 Tremolet, Shukla and Venton, Contracting Out Utility Regulatory Functions (World Bank 2004). 25 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers be monitoring the project company’s compliance exit opportunities. Investors will therefore look for with their obligations under law, which may well the right to sell down their equity positions as soon coincide with their obligations under the relevant as possible. The contracting agency will want the contracts. The difficulty with this approach is the shareholders to remain invested until key project need for the regulator to operate in accordance with risks have been addressed, in particular construc- its mandate, with the usual discretion given to regu- tion risks. Some time after completion of construc- lators. Often, this discretion cannot be limited (or tion (usually 1–3 years) investors are generally “fettered”) and therefore the regulator must comply permitted to sell-down part of their equity. Strategic with his legal mandate first and the contractual role shareholders are those who provide critical skills/ as a secondary function. inputs to the project company. The contracting agency will want to ensure that strategic investors 4.8.4 Refinancing retain sufficient financial interests in the success of the project, to align their interests, for a period long After completion of construction, once construction enough to ensure that design and construction meet risk in the project has been significantly reduced, requirements. the project company will generally look to refinance project debt at a lower cost and on better terms, 4.8.6 Dispute resolution and given the lower risk premium. This refinancing renegotiations process can significantly increase equity return, with the excess debt margin released and the resultant PPP projects have characteristics propitious to recur- leverage effect. While wanting to incentivize the rent disputes;27 they represent long term, complex project company to pursue improved financial commercial and financial arrangements, which may engineering, in particular through refinancing, the require renegotiation to resolve. Renegotiation is contracting agency will want to share in the project often perceived as failure, as a fundamental flaw company’s refinancing gains (for example in the in the project, or in PPP generally. This perception form of a 50–50 split), and may or may not want arises in particular from poorly managed or imple- the right to insist on refinancing when desirable. mented renegotiation processes. 4.8.5 Selling down equity Many of the key sponsors are not normally long- 27 Straub, Laffont, and Guasch, Infrastructure Concessions in Latin term equity infrastructure investors, for example the America: Government-led renegotiations, 2005. PPP database (preliminary figures): for 2003, 34% of contracts (by investment construction companies who are often the key inves- amounts) in the water sector were classified as distressed and 12% were cancelled, in transport 15% were distressed/ and 9% can- tors in road PPP, or the equity funds that look for celled), while in energy 12% were distressed and 3% cancelled. See investments with short—medium term (3–7 year) http://PPP.worldbank.org. Key Lessons for Policy Makers • Be proactive. Establish mechanisms intended to catch disputes as early as possible. Early in the process, options are varied, relative cost is low, and the likelihood of immediate value-added resolution is higher. • Facilitation can help. Softer processes are designed to use and develop relationships as the basis for finding mutually satisfactory solutions and can work better than more formal processes. • Renegotiation can be an opportunity, and can improve the PPP arrangements and protect the poor, if it is contemplated in advance, transparent and well managed when needed. • Get good advice. Do not try to manage disputes or renegotiations with internal staff alone, no matter how good they are. Get the best, external advice. It will cost money, but will save money in the long run. 26 Procuring and Implementing Transactions There is no doubt that renegotiation is a difficult and 4.8.7 Expiry, termination and handover easily abused process, but it is typical for long term arrangements (be they PPP contracts, commercial After delivery, whether the project is terminated partnerships or marriages) to face change or conflict early, or expires in accordance with expectations, the and need adjustment to address new information Government will need to manage the exit phase, for and circumstances. Renegotiation is a natural part example the Government team will need to evaluate of most projects and can be an opportunity to adjust exit options, advise the Government on agreement the terms of a project to address the needs of the termination/expiry and manage termination/hand- project (and the public) and actual circumstances over. The project implementation team will need encountered by the parties, to the benefit of the access to appropriate expert advice and support parties and the intended beneficiaries of the project. to ensure that termination and hand-over are well PPP projects must therefore be designed to address managed. change and conflict quickly and effectively, and to facilitate renegotiation in a balanced, transparent 28 Delmon and Phillips, “Renegotiation of Private Participation in manner in accordance with the spirit of the project.28 Infrastructure and the World Bank” (World Bank, 2007). 27 1 5 Using Public Support for PPP You miss 100% of the shots you don’t take. —Wayne Gretzky Governments can and should use public resources to support and enable PPP programs where this provides value for money as an integral part of the PPP framework. Figure 5.1 maps out key oppor- tunities to use public money to mobilize PPP, including through the project development cycle, supporting project preparation, through the bidding process, investment mechanisms that can support project financing and finally contingent support to reinforce and target the incentives fundamental to the project revenue stream and possibly refinancing. Moving chronologically through the project process, the following are some of the key areas the Government can support to help imple- ment PPP: • Project preparation—funding and technical support for feasibility studies, hiring and managing transaction advisors. • Capital grants and in-kind support—for example offsetting con- struction costs, acquiring land, rights of way, etc. • Debt or equity into the project—to supplement available private capital. • Contingent support—to address key project risks, for example guarantees of demand risk, foreign exchange risk or payment risk. • Revenue support during implementation,—e.g. as key milestones are achieved, possibly as a feed-in/shadow tariff or availability payment. 5.1 THE FUNDAMENTALS OF PUBLIC SUPPORT The Government will need to consider carefully which projects to support, how much support to provide, the terms of such support (in particular, incentives to create and how to maximize leverage of private investment) and how to ensure that support is properly managed. 29 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Figure 5.1: Mechanisms to Encourage PPP Government Financial Intermediary Annuity payments, Grants/ Contingent Debt/equity Contingent output based debt debt/ guarantees investment debt/ guarantees subsides Improve project quality, Mitigate key risks, Access to long-term Buy-down project cost, Facilitate refinance prefeas study, feasibility Govt buy-in, tenor finance, signal to mitigate demand risk, release lender study, bid process extension market of Govt buy-in incentivize performance liquidity, encourage and docs capital markets Project preparation Bid process Financing Implementation Public funds should be targeted toward the most when the Government’s negotiating strength is strategic, economically viable and feasible projects. low; achieving maximum leverage and minimum exposure will be even more difficult. Allocation There is a temptation to approach a project assuming of Government support must be decided and that no Government support will be needed, and to announced before the bid date to maximize benefits only contemplate such support when negotiations for the contracting agency, and avoid perceptions of with investors and lenders fail without it. However, discrimination by those who would have bid had this results in an ad hoc support package, developed they known that such support was available. Box 5.1: The UK’s Erstwhile PFI Credits Until relatively recently, the UK Treasury allocated PFI Credits for both local Government and central level Government departments—a specified amount of funding for a specific project over a period of time beyond that of the immediate budget allocation framework. It allowed the local authority (or department in the case of central Government) certainty as to a revenue stream from the central budget for meeting its obligations under a PPP agreement and provided a strong incentive for departments and local authorities to implement projects as PPPs. The use of PFI credits was heavily criticized for creating significant long-term liabilities for the Government. The program has been abandoned officially. Source: www.treasury.gov.uk/public-private-partnerships (See also Box 5.7). 30 Using Public Supportfor PPP It is advisable for Government to consider Government support as a package—funded and Key Messages for Policy Makers contingent—to ensure that maximum leverage and • Government support can improve financial viability and make optimal exposure (fiscal risk) is achieved. a project more attractive for investors, but it will not turn a bad project into a good one. The Government needs to be very careful about • Use Government support efficiently, in a targeted manner, to de-risking debt. To the extent debt is de-risked, ensure Government goals are achieved. incentives on lenders to ensure project success are • Ensure funding mechanisms are properly resourced and incen- diminished. tivized to avoid political capture or inertia. • Avoid perverse incentives created by Government support— ensure private and public are motivated to make the project a It is tempting to use available public support to sim- success. ply improve those projects that do not achieve the levels of viability or feasibility required by private investors. To ensure the public support is not wasted on simply compensating private investors for fail- Box 5.2: Targeted Support ures in the Government’s PPP framework, appropri- ate investments should be made in improving the Output or performance based subsidies or aid makes a clear framework for PPP in parallel with maximizing the link between the intended results and payment.a While requir- effectiveness of Government support. ing evidence of the ultimate output (e.g. healthier children or improved industrial output) is impractical for a number of reasons, 5.2 PURPOSES FOR PUBLIC Governments can require the project company to perform a task or provide a service that achievets a stated objective before aid or SUPPORT subsidies are paid out, for example a specified number of addi- tional poor households connected to the electricity grid and using Public resources can be used to achieve a number the service. These outputs need to be targeted to ensure they of different goals associated with PPP projects or achieve the desired impact (e.g. connections alone will not create programs. The nature of the Government support an output unless the service delivery is sustainable).b instruments chosen will depend on the intended a Brook and Petrie, Output-based aid: Precedents, Promises and Challen- impact of that support, the volume and currency ges, http://www.gpoba.org/docs/05intro.pdf. of liquidity (or other funding) available to the b See generally www.gpoba.org. Government, the fiscal position of the Government and the financial gaps identified in the relevant PPP projects or program. Government support can: Box 5.3: Project Development Funds (PDFs) • Improve access to and quality of services pro- vided creating financial incentives to achieve South Africa: The PDF began operations on 21 October 2003. It Government strategic priorities (see Box). is a single-function trading entity (public account), created within Improve quality of projects, which in turn the National Treasury. Disbursed funds may be recovered from the • successful private party bidder when the PPP reaches financial improves competition, drives down prices close, as a “success fee”. The PDF is exposed to the full risk of the and increases the likelihood of success of the project not reaching financial closure. The PDF is capitalized by the PPP program. Funding mechanisms for proj- South African Government, as well as donors. ect development are important to a success- India: The “India Infrastructure Project Development Fund” is a ful PPP program, enabling and encouraging revolving fund which is replenished by the re-imbursement of Government agencies to spend the amounts investments through success fees earned from successful projects. needed for high quality advice. The project development fund will cover up to a maximum of 75% Increased use of PPP. The benefits of PPP (effi- of the project development expenditures incurred by the contract- • ing agencies. The fund is capitalized by contributions from the cient procurement, lifecycle improvements, well Government of India and multilateral institutions. planned maintenance and service improvements) 31 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers may not be captured by the relevant contracting 5.3.1 Grants / capital contributions agency. Government support can provide the incentives required to motivate even reluctant The Government may choose to provide funded users to implement PPP effectively. support that does not give the Government an own- • Reducing the amount of private finance needed. ership interest, for which the Government does not • Improve opportunities for specific parties, for charge interest and may not require reimbursement, example local lenders and local equity investors, often known as a contribution, subsidy or grant. smaller investors and new/poor consumers. The process for selecting which project will receive Government contributions should focus on the rela- 5.3 FUNDED INSTRUMENTS tive benefit of the project to the country given the amount of contribution required. The most common form of Government support involves instruments that provide cash, assets or Similarly, it may be difficult to assess the amount some other form of funding, often known as “funded” of contribution for a given project that represents instruments, e.g. loans, grants, land, assets or equity. value for money. Many jurisdictions use competition This is different from contingent support, where the to set the amount to be allocated, e.g. in India (see Government support must be paid out or crystallizes Box below) the procurement process uses the lowest only in certain circumstances, e.g. standby capital Government contribution as the key criteria to select (debt, equity or grants), guarantees or indemnities. the winning concessionaire. Brazil, Colombia and Mexico use similar competitive pressure to identify the appropriate level of Government contribution to Box 5.4: (Mis)use of the Term “Viability Gap Funding” be provided. But this approach leads to some con- cern that politically motivated but unviable projects The Indian Government has created a mechanism to pool capital are being enabled through such contributions.29 contributions for PPP transactions (open to many sectors, but Russia’s Investment Fund allows the contracting used primarily to date to support the roads sector)—see Box 5.7 agency to use a value for money analysis to set the below. The popularity of this mechanism has resulted in the term “viability gap funding” entering the common parlance in certain level of contribution (using the competitive process circles as a generic term for all Government support or capital to achieve additional advantages). contribution programs. There is a strong risk of confusion with the Indian program (which involves only one form or, and approach to, Government support) and therefore this generic version of the Box 5.6: Russia’s Investment Fund term will not be used in this text. The Russian Government allocates a line item in its national budget to support PPP and other regional projects with grants, managed by the Ministry of Regional Development, and referred Box 5.5: India’s Viability Gap Fund to as the Investment Fund. These funds can cover up to 50% of the project capital cost, and are subject to a variety of rules and pro- In 2004, the Government of India launched the Scheme for cedures on the condition of their allocation and use. To date, the Financial Support of PPPs in Infrastructure, now more commonly Western High-Speed Diameter toll road (which reached financial known as the Viability Gap Funding (VGF) scheme. VGF provides close in mid-2012) is the most high-profile and largest recipient of up-front capital grants at the construction stage. These grants may Investment Fund contributions. not exceed 20% of the project cost and are disbursed only after the private company has made its required equity contribution. Sponsoring ministries or state Governments may provide ad- ditional grants, but these may not exceed an additional 20% of the Some countries run their contribution commitments project cost. No economic cost benefit assessment is performed, through state owned enterprises (who can roll relying instead on sector regulation and competitive procurement budgeting and commitments over from one year to identify the need for Government contribution. to the next), for example the public power utility www.pppindiadatabase.com 29 Ibid. 32 Using Public Supportfor PPP is often used to pay such contributions for power 5.3.2 Payments for services rendered PPPs. In Mexico, Fondo Nacional de Infrastructura (Fonadin—see Box 6.7) is funded through capital set The Government may choose to pay the project aside by the Government and revenues from existing company directly for services rendered (or some public toll roads. It granted over $1 billion worth of part thereof). For example, where a road is being Government contributions to PPP projects during developed through PPP, rather than ask the inves- 2008–2009 alone.30 tor to rely wholly on tolls collected, the Government may pay directly to the investor an availability Russia (see Box 5.6) has created a nominal fund in payment (also called an annuity payment in India). order to establish rules and regulations applicable to The payment is made to the extent the project com- Government contributions, but the funding comes pany provides services to a specific performance directly from annual budget allocations rather than a standard. stand-alone fund. Colombia has a special mechanism for future budget allocations, while Brazil treats Government contributions as “interest payments” 30 World Bank, Best Practices in Public Private Partnership Financing to mitigate the risk that annual legislative budget in Latin America: The role of subsidy mechanisms (2012). approvals might be delayed or rejected.31 31 Ibid. Box 5.7: Availability Payment Mechanism for Roads Availability payment mechanisms place downside risk clearly on the Government, but also ensure the Government benefits from the upside ben- efits (if the road is not used, Government still pays, but if it is very successful, the benefits accrue primarily to the Government). Under a toll based concession, Government reforms can reduce concessionaire revenues, giving the concessionaire the right to claim lost revenues from the Govern- ment. The availability payment allows the Government to make changes without concerns of liabilities to concessionaires. • Govt bears some or all traffic risk • Govt receives tolls $ • AP is concessionaires’ National budget borrowing Government sole source of revenue $ Availability Tolls payment $ Equity Equity sponsors $ Dividends PPP Loans Road users Lenders concessionaire Service $ Repayment Construction Infrastructure, O&M cost cost operations, maintenance $ $ Operation and Construction maintenance 33 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Availability payments provide more certainty of Government equity contributions raise particular revenues to investors, with the Government as challenges for Governments and investors: obligor (which may help the project access cheaper debt). While the downside risk is largely absorbed • conflict of interest—where the Government by the Government through this payment stream, is on both sides of the concession agreement, the upside potential of high profits from tolls or tar- private investors will be concerned that when iffs will also belong to the Government, potentially difficult decisions must be made, Government reducing the incentives on the private investor to will be incentivized in a manner different than ensure success of the project. the commercial priorities of the project. • decision processes—Government procedures The Government can also pre-purchase, or promise are often a poor fit with good corporate gover- to purchase, a certain amount of output. For exam- nance, for example voting procedures, appoint- ple, a fibre-optic network may have a clear advance ing board members, and selecting management. commitment by the Government to purchase a por- • management and monitoring of Government tion of the network’s capacity. Such payments gener- shareholding—often, Government staff are ally reduce demand risk, and provide a guaranteed not familiar with private corporate gover- revenue stream, which in certain cases can be used nance and are unlikely to be able to protect as collateral for debt. the Government’s interests amongst corporate shareholders. 5.3.3 Loans 5.4 CONTINGENT SUPPORT The Government may choose to provide access to debt, in particular in local currency, of an appro- Contingent support only becomes payable (or “crys- priate tenor, grace period and terms. However, tallizes”) in certain situations. Contingent support Government provision of debt may require project can include: assessment skills/capacity that are not typical of the skills found amongst Government personnel. • guarantees, including against breach of contract, non-payment of debt service, adverse move- 5.3.4 Equity ments in exchange rates, lack of convertibility of the local currency or availability of foreign Government support in the form of equity is some- exchange, credit risk of offtake purchaser, tariff times used to offset equity requirements from pri- collection risk, the level of tariffs permitted, the vate investors, maintain control by the Government level of demand for services, payment of termi- over certain project decisions or obtain access nation compensation, etc. to information about the project company that • indemnities, e.g. against failure to pay by state would normally be difficult to achieve. However, entities or damages associated with undue Government intervention • stand-by funding (debt, equity or grants), that the project company can draw on, e.g. in Key Messages for Policy Makers the event demand is insufficient, or for cost • Contingent support can be a powerful instrument, but over-runs. • the risk borne by the Government must be assessed honestly and managed carefully, 5.4.1 Government guarantees • taking too much risk away from private lenders or enabling reduced equity investment, or over-protect- Chile has had great success in developing its ing investors, limits the private investors’“skin in the PPP portfolio. Since 1994, the Government has game”, so when crisis befalls the project, the investor and lender may be less motivated to help. established a solid institutional framework, well- developed procedures to identify, evaluate and 34 Using Public Supportfor PPP Box 5.8: Lessons from London Underground—The Importance of Private Liability The London Underground project involved three parallel concessions to run different metro lines. Two of these “infracos” could claim additional funds if total cost increases exceeded 50 million pounds sterling ($80 million), the third if it exceeded 200 million pounds sterling ($320 million), giving it a powerful incentive to make savings in order to offset any cost increases, rather than seeking additional payments from London Under- ground. This has encouraged a considerable level of innovation by the third “infraco”. Source: House of Common, Transport Committee, “The London Underground and the Public–Private Partnership Agreements,” Second Report of Session 2007–08, HC 45 (January 2008). tender projects and financial markets well-placed to • revenue shortfalls, e.g. where revenues do not provide financing for PPP projects. But even such a meet forecasts, for example during ramp-up, or successful program involved extensive Government where traffic does not meet expectations guarantees and protections for investors in the early • exchange rate shifts, requiring revenue support, days, including guarantees from multi-laterals and e.g. to meet debt service obligations. credit wraps from monoline insurers.32 5.4.3 Contingent contributions Government guarantees tend to be “partial”, as blanket guarantees are generally less than effective, Government grants may also be provided on a con- as they create perverse incentives for the beneficiary tingent basis, once certain construction milestones, not to manage the risk well and should be avoided financial ratios, investment commitments or other in most cases. performance criteria have been met. Examples include funding of capital investment only paid out 5.4.2 Contingent debt/equity on delivery of outputs or performance e.g. connec- tions for poor households and delivering of services Debt and/or equity structures can be created to only to the vulnerable. draw down or be paid in after certain circumstances have arisen, in a specified timeframe and/or when 5.4.4 Bilateral / multilateral guarantees requested by specified persons. These structures are known as standby, contingent or callable capital. This Contingent support mechanisms are also available contingent capital (often subordinated debt) can be from development finance institutions (DFIs) and used to address challenges that may arise, for example donors, for example the contingent support mecha- nisms available from the World Bank33 and MIGA.34 • construction cost over-runs—e.g. to address underestimates in construction costs due to 32 IMF, Public Private Partnerships, 2004. information provided by the Government, or 33 For further discussion, see www.worldbank.org/guarantees and Delmon, Private Sector Investment in Infrastructure: Project where certain construction risks are to be borne finance, PPP projects and Risk (2009). by the Government 34 www.miga.org Box 5.9: Guarantco GuarantCo is an independent, regionally focused provider of partial credit guarantees. It is a private company owned by the members of PIDG,a run and managed on a commercial basis. It provides a variety of contingent products including partial credit and partial risk guarantees. www.guarantco.com a The Private Infrastructure Development Group (“PIDG”) which is a multi-donor, member-managed organisation. Current PIDG members include: the UK Department for International Development (“DFID”), the Swiss State Secretariat for Economic Affairs (“SECO”), the Netherlands Ministry of Foreign Affairs (“DGIS”), the Swedish International Development Cooperation Agency (“Sida”), the World Bank and the Austrian Development Agency (“ADA”). 35 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Some private sector providers of capital view bilat- 5.5.2 Monitoring/accounting for liabilities eral or multi-lateral involvement as improving the likelihood of priority being given to their interests in The Government will either apply a cash account- the event of restructuring by the host Government. ing (where liabilities are accounted for once they This is known in the market as the DFI “umbrella” crystallize) or accrual accounting (where liabilities or “halo”, and is the basis for the popularity of vari- are accounted once they accrue). Cash accounting ous products, in particular the IFC’s A and B loan will not show the contingent liability unless a con- program. tingency fund is created, as discussed below. 5.5 MANAGING GOVERNMENT Even if accrual accounting is not used, Governments LIABILITIES can still use the reporting of such liabilities (creat- ing better transparency) to create the necessary PPP involves important Government liabilities that accountability of policymakers and help to manage must be managed carefully to avoid exposing the the relevant contingent liabilities. This has been public accounts to undue risks. While PPP debt is successfully implemented in a number of countries, generally off-balance sheet for the Government, it for example the Czech Republic and South Africa.36 creates important fiscal risks that Government must assess, monitor, report and manage. 5.5.3 Paying for liabilities once they crystallize 5.5.1 Assessing liabilities The Government will need to decide how to fund The ability to value and assess risk associated with risk liabilities associated with PPP as they arise. It PPP is often created within the debt management may simply be able to find space in its budget from function of the ministry of finance, but it might time to time for the relevant amount, or may have also be tasked to a PPP unit in some other part of other sources of funding. Another useful mecha- Government, for example planning or economic nism is an undertaking by a bank or development coordination. The assessment of Government financial institution that will provide credit to the liabilities should be assessed at different stages of Government in the event the contingent liability the project, to confirm what level of liabilities rep- crystallizes. resents value for money for the Government for a given project. Several countries have established schemes that reduce Government payment risk, creating a fund The Government’s objective is to expose liabilities able to support guarantee payment obligations associated with PPP projects to an appropriate level as they come due, from accumulated budgetary of scrutiny:35 transfers, fees or taxes collected. Canada, Sweden and the Netherlands have such funds (though not • Creating risk awareness—for example collect- specific to PPP). The expected pay-outs under these ing information on PPP contracts and using it contingent liabilities are deducted from the annual to discuss fiscal implications of PPP projects. budgetary allocation for the relevant line ministries, • Disclosure of PPP risks—promoting transpar- and are set aside for use in the event the contingent ency of PPP contracts and the fiscal risks associ- liability crystallizes.37 ated with those contracts. • Risk management—coordinating or even cen- 35 Adapted from Public-Private Partnerships in the New EU Member tralizing fiscal risk monitoring and authoriza- States: Managing Fiscal Risks, World Bank Working Paper No. 114 tion, and providing for auditing mechanisms (2007). 36 Irwin, Government Guarantees: Allocation and Valuing Risk in of the Government’s risk analysis and risk Privately Financed Infrastructure Projects (World Bank 2007). management functions. 37 Ibid. 36 Local Currency Finance 1 6 I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do. —Leonardo da Vinci Financing for PPP ideally involves long tenor debt, at fixed rates. This allows the high upfront cost of infrastructure to be spread out over its long lifecycle (as much as 30–50 years), and therefore makes the infrastructure more affordable; the fixed rates help avoid sud- den changes in financing costs and therefore user tariffs. Long-term financing (12–18 years tenor), either with fixed interest rates or with variable interest rates that are supported by interest rate swaps to become fixed, are generally available in the global currencies, e.g. US Dollar, Euro, Yen and Pound Sterling (with notable exceptions during the credit crunches in 2008/9 and 2011/12), but is more difficult to access in developing financial markets. Long-term infrastructure investments can provide opportunities to debt capital markets, help to increase the depth and breadth of the markets, establish robust yield curves, and provide long-term place- ment opportunities in local markets that are often starved of such opportunities. Long-term capital for infrastructure can provide a platform for reforms and market dynamism. Accessing long term financing for infrastructure in local currency is not so simple. Commercial banks in many countries do not have access to long-term liquidity. They fund themselves primarily through short term deposits. The debt capital markets may offer only short to medium term positions (e.g. 3–5 years), depriving banks of the opportunity to lay off long-term loans against long term bond issuances. These banks will face a “liability mismatch” to the extent they lend long-term (long-term loans funded with (the volatility of) short term deposits). Governments can do much to mobilize long-term local currency debt. Governments regulate financial markets, setting rules for banking and capital markets, to protect different market actors and encourage 37 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers activity in those markets. They also enable and pro- long-term financing. While often less sophisticated vide market information, clearing functions, rating than their global brethren, local banks have more of credit risk, exchanges for different instruments, access to local currency. Local banks also tend etc. One of the key sources of long term local cur- to be less risk averse when assessing projects in rency financing is institutional investors, such as their own country, taking a more pragmatic view pension and insurance funds. Government reform of Government and political risk, and having the programs can do much to protect institutional confidence that local bureaucratic and technocratic investors, and thereby enable them to invest in challenges can be resolved in a satisfactory manner. good projects. Global commercial banks—Global commercial banks While not a focus of this section, it should be are often more sophisticated, with experience in highlighted that, in PPP one of the most important construction risk, operation of infrastructure and efforts a Government can make to mobilize local structured finance that will give them a clear com- currency financing is to prepare projects well, petitive edge (though this capacity may be located in ensuring financially viable projects with bankable other offices and not in the local office). Global banks risk allocation. Government reforms of financial may also have superior access to the global financial markets can help address these challenges and markets, with its deep pools of liquidity and long release the capacity of financial markets to support tenors, well suited to infrastructure finance. Global PPP development. banks may have local activities, giving them access to local currency liquidity, but generally in limited This section discusses Government efforts to mobi- volumes. There are exceptions where the global lize long-term local currency finance for PPP, in bank has a strong local subsidiary or branch, but the particular through the use of “intermediaries”, local offices of global banks may have competing such as state owned enterprises (SOEs). Section 6.1 interests and are unlikely to have serious capacity summarizes the sources of long term private capital. on infrastructure in the local office, as they will be Section 6.2 discusses different types of Government staffed for local operations. For these reasons, global intervention to help mobilize long term capital. banks tend to focus on foreign currency finance for Section 6.3 analyses the use of intermediaries (e.g. infrastructure and are less competitive in local cur- state owned enterprises) to mobilize long-term pri- rency finance for infrastructure. vate capital, and section 6.4 concludes. Development financial institutions—External devel- 6.1 SOURCES OF LONG-TERM, opment financial institutions (DFIs), including LOCAL CURRENCY FUNDING multilateral institutions like the World Bank and the IFC, and bilateral institutions like Agence This section discusses sources of long-term local Francaise de Developpement (AFD) of France, are capital and how to attract such resources to ideally placed to support infrastructure finance infrastructure. and are increasingly critical to PPP in developing countries. They tend to have relatively low interest Local commercial banks—Local banks (public and rates, long tenors, and grace periods. In addition to private) may provide a very convenient source of debt, they can also provide guarantees and insur- ance that may address specific financing risks faced by the project. However, DFI financing tends to be “For a [development bank] not to take enough risk is as bad as it taking too much risk.” in foreign currencies and can involve additional costs, related to the conditions imposed (such as Source: Gutierrez, Rudolph, Homa and Beneit, “Development Banks: Role and procurement, safeguards, financial management), mechanisms to increase efficiency” (World Bank Policy Research Working complying with DFI practices and the time it takes Paper July 2011) to access finance. 38 Local Currency Finance Institutional and retail investors—Long term liquidity may be available in local currency, in particular from Box 6.1: Prudential Rules for Pension Funds institutional investors like pension and insurance In general, Anglo-Saxon countries adopt the prudent person rule funds. Institutional investors like pension funds (PPR) in pension fund investment which requires only that funds would seem to offer an ideal opportunity for infra- be invested “prudently” rather than limited according to category. structure finance. Pension funds hold large volumes Furthermore, there are few restrictions on investment in specific of long-term capital; in most countries they have assets. Such a system in fact requires an efficient court system difficulty finding long-term placements outside with well-trained and informed judges, capable of establishing of Government bonds and real estate. Long term clear jurisprudence on prudent investor behaviour and of guar- anteeing its swift enforcement for market participants. In many liquidity may also be available from retail investors, other countries, different quantitative restrictions have tradition- such as high wealth individuals otherwise tempted ally been applied, normally stipulating upper limits on investment to move capital off-shore, retirees looking for long in specific asset classes, including equity. term security, etc., in particular where other long- term investment opportunities are not available in Source: OECD, Pension fund investment in infrastructure: A survey (September 2011). local currency. Access to these investors is often facilitated through capital markets. Global capital markets—The global capital markets Debt capital markets—Capital markets often hold have access to deep and long-term capital, from depth of liquidity in addition to, and often in excess sophisticated investors likely to be more interested of, that available from commercial banks. Debt capi- in infrastructure investments. However, these inves- tal markets (through the issuance of debt securities tors are likely to have limited appetite for local cur- often called “bonds”) may provide access to credit rency placements. Even in foreign currency, these at lower interest rates and longer tenors than com- investors will be subject to certain limitations on mercial banks by providing access to retail inves- the credit rating of the securities they purchase, in tors and to institutional investors. However, the particular the prominence of pension, insurance financing available through capital markets is often and other prudential funds in the global markets less flexible than the financial instruments available may limit appetite for anything less than investment from commercial banks. E.g. they are not designed grade, or even higher international credit ratings. to provide grace periods (where the lenders agree Global capital markets are unlikely to be a signifi- not to defer payment of debt service during an initial cant source of local currency debt. There have been period and instead to capitalise these payments) nor local currency bonds issued in the global markets to provide debt in tranches (where the borrower (e.g. diaspora bonds), with some success, but usu- must pay a commitment fee from financial close, ally not in large volumes. These efforts often focus but only pays interest once it has drawn down the on currencies from countries with large emigrant amount needed), instead under a bond issuance, communities with close contact with their home the project company must borrow the full amount country and desiring investments in local currency. of debt needed at financial close, and pay inter- est on that full amount until repayment (the extra Domestic capital markets—Local capital markets have interest charged for funds not yet needed is called more appetite for local currency positions, and will “carry cost”). Also, the most active purchasers of be less sensitive to political and other country spe- debt securities (i.e. pension funds, insurance and cific risk. However, for the purposes of financing other institutional investors) do not generally have PPP, local debt capital markets often elicit a number the expert staff and processes of commercial banks, of challenges: designed to assess and manage risk, and respond to changes and requirements of dynamic investments • liquidity—local capital markets, in particular in like infrastructure; and must hire investment banks developing countries, often suffer from a lack and other intermediaries to provide such expertise. of liquidity. 39 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers of contracting agencies or private investors, Box 6.2: Securitization of Infrastructure Revenues depending on the need. Mobilizing debt for infrastructure projects requires particular skills, Dubai hired local and international banks to raise $800 million by for example packaging debt efficiently and securitizing road toll receipts and will use the proceeds to fund infrastructure projects in the Gulf emirate. Securitization requires a managing lender groups and their due diligence reliable revenue stream; careful structuring from experienced and requirements. One of the key advisory roles is well respected advisers and possibly credit enhancement to ensure the “arranger” of debt. An arranger needs to the placement is sufficiently credit worthy to attract debt at the know the market and be known by the market cost and tenor desired. to facilitate arranging and negotiation with other lenders. • Equity and “equity-like” instruments for • tenor—infrastructure is best financed with long infrastructure projects can be large in value term debt. Local capital markets will need a and risky, with long periods before equity robust yield curve, covering the different tenors distributions are realized. Sponsors are often up through long tenors. the construction companies, infrastructure • familiarity with infrastructure—local investors operators or other service providers whose may not be familiar with the risk profile of principal focus is the provision of services infrastructure, and therefore may be particularly to the project. The Government can provide risk averse. equity investment and supply an intermediary • lack of a yield curve—in sum, there are no com- to act as an equity investor. Equity investment parable financial instruments freely traded in in infrastructure is a difficult function to fulfil the local market, so no way to set a price. well; it requires a level of sophistication differ- ent than most equity investment. It is not just a 6.2 GOVERNMENT question of funding, but rather the governance, INTERVENTIONS THAT CAN the ability to make critical decisions in times of FACILITATE ACCESS TO LONG- need, and to provide technical and commercial TERM LOCAL CAPITAL support, given the complexity of an infrastruc- ture transaction. A variety of instruments are available where • Long-term liquidity for equity investors—Equity Government seeks to help mobilize long-term local investors also need access to large amounts of currency financing for infrastructure, including: capital. Project sponsors will normally have less robust balance sheets and will not be able • Advisory services bring the assistance of to leverage like lenders. In many countries, the experienced transaction advisers to the aid lack of equity investment is a major challenge for Box 6.3: Arguments for Government Equity Holdings in Infrastructure Some argue that Government should be an equity holder in infrastructure transactions. The argument usually runs that Government needs: • A share in the upside of very profitable projects, to ensure that Government gets a piece of the action. Counter-argument: But equity distribu- tions in infrastructure are hard to control and harder to forecast. If Government wants to share in the upside, it should require a share of revenues or a fixed lease payment instead. • Control of the sector—to maintain Government influence over the project and the sector. Counter-argument: But private partners are likely to limit real Government control over the project as equity holders to mitigate conflict of interest and ensure that decisions are made on a com- mercial rather than political basis. Government would do better maintaining control through regulations and regulatory powers. • Access to information—Government may see equity as a mechanism for accessing company information. Counter-argument: However, private partners will inevitably establish a governance structure that isolates sensitive information. The Government may find that regulatory powers and data gathering of its own will provide a more practical solution to information access. 40 Local Currency Finance infrastructure programs, reducing competition and making projects expensive. Box 6.4: Chilean Infrastructure Bonds • Debt—The Government may want to, or Chile successfully tapped the bond market for project finance through an intermediary, help provide or debt through infrastructure bonds amounting to an average of mobilize debt for infrastructure projects them- USD 1 billion a year during 1996–2001. This situation was aided selves. Acting as lender is a difficult function for by Government revenue guarantees and even foreign exchange many Governments who do not have the due guarantees in certain cases and political and regulatory risks were diligence, oversight, implementation and other mostly insured by DFIs. key governance functions of financiers. • Long-term liquidity for commercial banks— allow private sector salary scale to attract suit- • Commercial banks may have staff and capacity ably skilled and expert staff and create a centre to finance projects, but may not have access of expertise based on larger volumes of transac- to sufficient long term local currency capital. tions, with commercial selection criteria Often, their deposit base will be short term in • use the leverage available through a financial nature, creating a liability mismatch if they cre- institution to increase the amount of support ate long-term assets. Also, commercial banks made available from a limited capital base. may be nervous about using what long-term capital they have on infrastructure (where com- 6.3.1 Functionality peting opportunities are more profitable). The Government can help by providing financial Three key functions for the intermediary that can institutions (in particular commercial banks) help mobilize local finance include: origination, access to long term liquidity which they can liquidity and refinancing. then on-lend to infrastructure projects, for example helping commercial banks access local Origination: Intermediaries originating infrastruc- capital markets or supplying/lending long- ture finance will assess a project, influence its design term funds directly to commercial banks. and structure, and then build a book of debt either alone, with a club of other lenders, and/or through 6.3 USING AN INTERMEDIARY syndication. The Government may want to provide a vehicle (an Liquidity: Long tenor funds can be made available to “intermediary”) to provide financing for infrastruc- those financiers or as co-financing (senior or subor- ture projects and an intermediary for institutional dinated) to the project. Other instruments, like take- investors who could or would not invest directly out guarantees can be used to extend tenors of debt. in projects. Such an intermediary is often created through state owned enterprises, which provide a convenient nexus between public, government Box 6.5: Tamil Nadu Urban Development Fund (TNUDF) support and commercial, private context. Such an intermediary can help: TNUDF was created as a trust fund with private equity participa- tion and without state guarantees, the first such structure in India. • use Government and donor funding, to leverage Its paid-in capital combined with debt raised from a World Bank private sector funding loan allowed TNUDF to issue the first non-guaranteed, unsecured bond issue by a financial intermediary in India, in 2000. The issue • reduce the transaction costs represented by received a LAA+ rating from ICRA due to credit enhancement and Government and donor funding by creating a structured payment mechanism, low gearing and strong repay- wholesale mechanism ment record. The proceeds from bonds are deposited in the fund, • increase transparency and consistency of and subsequently lent back to the participating local bodies as Government support by establishing an entity sub-loans to finance their infrastructure projects. with governance mechanisms and operational www.tnudf.com guidelines establishing rules of the game 41 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers Refinancing: Liquidity constraints, risk ratios, single mechanism that will be responsive to other market borrower limits and other prudential requirements demands, relevant at that time. can constrain the amount of support that local financiers can provide to infrastructure markets. Governance and management structures—investment Refinancing involves the pre-payment of part or all project selection must be based on sound commercial of a project’s debt by borrowing from a new lender criteria, and not driven by purely political priorities; (possibly at a lower interest rate, longer tenor or on the risk of capture of the intermediary by political easier terms). interests is high. This is generally addressed by developing the FI as a privately owned company, for 6.3.2 A few challenges example the IIFF. At the same time, purely commer- cial motivation may be too risk averse for the invest- PPP financial intermediaries (FI) can be particularly ments available. The Emerging Africa Infrastructure difficult to implement effectively. Some of the key Fund (EAIF) faced this challenge, a partnership challenges when creating an intermediary are dis- between development financiers wanting to take risk cussed below. The annex provides a quick snap shot and commercial financiers with a more risk averse of some of the global TFs. approach to project selection, creating a particular challenge in the early days searching for an appro- Staying demand responsive—the FI must address priate incentive mechanism for the fund manager. identified market gaps, with access to products and instruments designed to address those gaps, but Amount and source of original capital—any effort also with the flexibility to use other instruments to make a significant impact on an infrastructure or approaches that respond to the changing nature market is likely to require a large investment of of such gaps and market needs. The Indonesian capital in the FI. The Indian Infrastructure Finance Infrastructure Finance Facility (IIFF) was created Corporation Limited (IIFCL) and BNDES were after much effort at market analysis and coordi- allocated funding from government bond issuances, nation with other market actors. The Brazilian giving them access to significant amounts of capi- Economic Development Bank (BNDES) was a public tal at a low cost. The National Infrastructure Fund bank that was adapted to address a growing market (FONADIN) of Mexico was allocated the revenues need. In the same way, the FI must focus on the from a portfolio of publicly owned toll roads. The gap, rather than squeezing out private investment, IIFF and EAIF started from a smaller capital base. it must squeeze-in private lenders and investors, Other credit enhancement can be provided by the to give them new opportunities. Once FIs are cre- Government. ated, it is often difficult to get rid of them once they have served their purpose. Provision needs to be Skilled staff and resources—newly formed FIs are a made for the FI to be wound up, sold off, absorbed risky bet for experienced financiers, and yet an FI into another entity or to evolve into some other needs a solid, experienced management team to Box 6.6 : Development Bank of Southern Africa (DBSA) The Development Bank of Southern Africa (DBSA) is a development finance institution wholly owned by the Government of South Africa that focuses on investments and joint ventures/partnerships in public and private sector financing. DBSA can raise money on local and international capital markets and is publicly listed on the New York Stock Exchange. Its bond ratings are the same as South African Sovereign Ratings. DBSA offers a variety of financial products, including grants, equity, debt (senior and subordinated), underwriting guarantees and other credit enhancement. Source: http://www.dbsa.org. 42 Local Currency Finance Box 6.7 : Fondo Nacional de Infrastructura (Fonadin) of Mexico Fonadin is housed within Banobras, Mexico’s national development bank and was created in response to the tight credit market of the financial crisis to address risks that the market was not able to handle. It began with a sum of over 40 billion pesos (US $3.3 billion) in 2008 and has its own revenue source from existing toll road assets that were rescued in a Government bailout in the late 1990’s, and therefore does not rely on Govern- ment support for its financing base. Fonadin’s role is to finance infrastructure. It offers a variety of instruments including: grants, subsidies, guarantees (for stock, credit, damage and political risk), subordinated lines of credit, and grants for technical assistance. www.fonadin.gob.mx give comfort to the financial market and politicians. challenge as the market is unlikely to wait for the FI. They must be able to attract funding from institu- The Investment Promotion and Financing Facility tional investors and display a keen understating of (IPFF) of Bangladesh addressed this challenge by the infrastructure market. The management team focusing on a series of gas-fired power projects in also needs to be committed for a reasonable period, its first phase, projects that were well developed, this is not the job for a political appointee, a retiree easy to market and limited to one sector. Phase two looking for something to keep them busy, or a short expanded to other sectors and more risky projects. term consultant. The role of CEO is key, a politically The IDFC and IIFF spent their first few years pro- acceptable individual but with good banking experi- viding advisory services to the infrastructure sec- ence and the right incentives to take calculated risks. tor and thereby developing their own pipelines of The IIFF and the African Finance Corporation both investments, the former by necessity and the latter had challenges with their management teams in their by design. early days, finding the right set of skills and person- ality. These skilled staff can also be sourced through 6.4 CONCLUSION secondments from shareholders as was done for the Infrastructure Development Finance Company Infrastructure projects (in particular PPPs) provide (IDFC); or through a management contract as was an ideal opportunity for holders of long-term local done for the EAIF. currency. In addition to treasuries and real estate, infrastructure offers one of the better long-term place- Identifying a solid pipeline—it is often tempting to ment opportunities for developing economies. It also focus on the market gap to be resolved by the FI. creates economic opportunities, jobs, and growth. But, the FI’s first investments, the demonstration projects, will be critical and must be carefully pre- However, most developing country financial sectors pared as the FI is being created. This creates a timing are ill-equipped to respond to the opportunities of Box 6.8 : Brazilian Economic Development Bank (BNDES) Formed in 1952, BNDES raises money through the issuance of Government securities in favour of BNDES. It also has access to the capital markets and can raise money through trading securities and all manner of derivatives; it also earns income from its loan portfolio and can issue debentures. With its long term financing BNDES has been fundamental in the growth of PPP in Brazil. But is also subject to criticism, in particular long wait times for ap- proval of loans, being overly risk averse, and requiring security from sponsors more appropriate to corporate financing than PPP. BNDES is also criticised for squeezing out private lenders due to its dominant position. Source: www.bndes.gov.br and author). 43 Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers infrastructure finance. They do not generally have institutions and financiers to achieve together the lending products with the long tenors, fixed interest lending products sought. rates and grace periods needed by infrastructure investments. Also, the risk profile for infrastructure Creating such intermediaries (whether from existing differs from the normal diet of local financiers. entities or by creating new ventures) can be costly and time consuming. There is no easy or standard Intermediaries can help. These are specially approach to intermediation. Each country will need equipped entities that can provide advice, structure to consider carefully its requirements, its legal frame- projects and offer specialised financial instruments work, the make-up of its financial sector and the kind to help address the challenges faced by local finan- of infrastructure that is to be financed, before creat- ciers. These intermediaries can borrow from the local ing such an intermediary. Key lessons have been markets and convert these liabilities into the kind of discussed above, learned from countries that have financial instruments sought by infrastructure proj- significant experience in creating intermediaries for ects, and/or they can co-finance with local financial infrastructure finance. 44 Annex 1 The following provides a snap-shot of a few of the global Financing Intermediaries. Investment Promotion and Financing Facility (IPFF) of Bangladesh is a publicly held vehicle in operation since 2006 that provides long term funding through eligible financial institutions, who on-lend to quali- fying PPP projects on market terms. The equity contribution of the sponsor (minimum of 30%) and the debt share of the local financial institution (minimum of 20%) ensure market-based incentives in select- ing only commercially viable PPP transactions, and their successful implementation. FONADIN (National Infrastructure Fund – Mexico) was established in February 2008, under the management of the national infrastructure bank Banobras. Fonadin was created in response to the tight credit mar- ket of the financial crisis to address risks that the market was not able to handle. It began with a sum of over 40 billion pesos (US $3.3 billion) in 2008 which will build up to approximately 270 billion pesos (US $22.2 billion) in 2012 through toll-road revenues. Fonadin can offer credit guarantees to project companies seeking funding from commercial banks or financial intermediaries or for bonds issued by a concessionaire. Fonadin can cover up to 50% of the loan or issuance with its guarantee. Fondo Nacional de Infrastructura (Fonadin) of Mexico Fonadin’s role is to finance infrastructure. It offers a variety of instruments including: grants, subsidies, guarantees (for stock, credit, damage and political risk), subordinated lines of credit, and grants for technical assistance. www.fonadin.gob.mx Infrastructure Development Finance Company (“IDFC”) of India was set up in 1997 by the Government of India along with various Indian banks, financial institutions and IFIs. IDFC’s task is to connect projects and financial institutions to financial markets and by so doing develop and nurture the creation of a long-term debt market. It offers loans, equity/ quasi equity, advisory, asset management and syndication services www.idfc.com Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers India Infrastructure Finance Company Limited (IIFCL) trading securities and all manner of derivatives; it started operations in April 2006. IIFCL accesses capital also earns income from its loan portfolio and can issue from the Government, IFIs and the financial markets debentures. With its long term financing BNDES has (in some cases benefitting from a Government guar- been fundamental in the growth of PPP in Brazil. It antee). These funds are on-lent to PPP projects. The is a dominant force in Brazil’s infrastructure market IIFCL does not have a sophisticated risk assessment and provides debt for most of its PPP projects. As a function. It follows commercial banks, providing Government owned Bank it received funds from the only part of the debt requirements of the project and Government and uses the Government’s credit posi- therefore ensuring that the incentive to assess projects tion to offer very low rates for long-term debt. BNDES and ensure successful implementation rests squarely is also subject to criticism, in particular for squeezing on the commercial equity and debt providers. out private lenders due to its dominant position, for long wait times for approval of loans, being overly Indonesian Infrastructure Finance Facility (IIFF) is a pri- risk averse, and requiring security from sponsors more vate, non-bank financial institution, commercially ori- appropriate to corporate financing than PPP. ented with private sector governance, mandated and equipped to mobilize local currency private financing. www.bndes.gov.br The IIFF is capitalized through equity investments and subordinated loans from the Government, the Development Bank of Southern Africa (DBSA) is a private sector and multilaterals. It will invest in development finance institution wholly owned PPP projects, with debt, equity and/or guarantees, by the Government of South Africa that focuses and by providing advisory services. (Infrastructure on investments and joint ventures/partnerships Development Finance Company (IDFC)) in public and private sector financing. DBSA can raise money on local and international capital mar- Emerging Africa Infrastructure Fund (EAIF) is a kets and is publicly listed on the New York Stock US$600 million debt fund, which aims to address Exchange. Its bond ratings are the same as South the lack of available long-term foreign currency debt African Sovereign Ratings. DBSA offers a variety finance for infrastructure projects in sub-Saharan of financial products, including grants, equity, debt Africa. The EAIF was created through a joint venture (senior and subordinated), underwriting guarantees of development institutions and commercial banks. and other credit enhancement. By mixing equity from donors, subordinated debt from development partners with senior debt from www.dbsa.org commercial lenders, EAIF seeks to reduce its cost of lending and provide mid-market debt managed by Tamil Nadu Urban Development Fund (TNUDF) was commercial lenders. created as a trust fund with private equity partici- pation and without state guarantees, the first such Indonesian Infrastructure Guarantee Fund (IIGF) is a com- structure in India. Its paid-in capital combined pany, wholly owned by the Indonesian Government, with debt raised from a World Bank loan to the that acts as the single window for guarantees for PPP Government allowed TNUDF to issue the first non- projects. It assists the MoF in its role of monitoring and guaranteed, unsecured bond issue by a financial allocating Government support by assessing projects intermediary in India, in 2000, three to four years and helping to source any guarantees needed for that after being established. The issue received a LAA+ project, for example from the World Bank, MIGA, its rating from ICRA due to credit enhancement and own capital or the Government. structured payment mechanism, low gearing and strong repayment record. The proceeds from bonds Brazilian Economic Development Bank (BNDES) is a pub- are deposited in the fund, and subsequently lent licly owned commercial bank. Formed in 1952, BNDES back to the participating local bodies as sub-loans raises money through the issuance of Government to finance their infrastructure projects. securities in favour of BNDES. It also has access to the capital markets and can raise money through www.tnudf.com 46 Annex 2 Aggregate Key Messages for Decision Makers: • Learning by doing—an important part of identifying gaps in the investment climate is learned while “doing”, while implement- ing PPP projects. • Use small steps without being timid—start with easier projects that are clearly financially viable and have political support. But these projects need to provide a signalling effect; they need to be suf- ficiently substantial and strategic to ensure Government buy-in, the interests of private investors and a statement to the market that the framework for PPP in the country is conducive. • Learn from the experiences of others, without being dogmatic—there is a tendency to try to replicate the successes of other countries. While it is important to learn from the successes and failures of others, it is generally unwise to try to replicate an entire frame- work, wholesale. • Keep it simple—complex is not necessarily comprehensive or bet- ter, the PPP framework needs to be understood by a wide group of stakeholders. • PPP policies should be clear, comprehensive, yet flexible—periodic updates are a useful way to adopt lessons learned into the PPP program. • Keep the legal framework simple and clear. Do not confuse complex- ity with comprehensiveness. Simple is better, and will give more confidence to investors. Detail is best left to secondary legislation that is more easily amended to respond to change. • Do not use the legal framework to second guess the PPP contract by creating rights and obligations at law that should be addressed in the contract on agreed terms. If the Government is keen to establish such terms, standard form documents can achieve this, where the terms can be spelled out in detail. • Make sure the different roles are allocated and that the system works, ideological purity is less important. • Institutions are only as good as the people in them, and the fund- ing/mandate they are given. Real capacity building (not just the occasional training or trip abroad) is key to a sustainable programme. Creating a Framework for Public-Private Partnership (PPP) Programs: A Practical Guide for Decision-makers • Strong, consistent leadership is key—coordination • A good, transparent selection process (for com- amongst different institutions and ensuring mercial rather than political reasons) can reas- consistency of practices and focus of efforts gen- sure investors and increase competition. Projects erally requires clear direction from the highest selected for political reasons or priorities will levels of Government. create a perception of increased political risk • A robust value for money assessment and trans- amongst investors. parent, competitive procurement can protect the • Prepare the Government to play its part from project Government and the project from ex-post criti- development to expiry. Even where a comprehen- cism, and can make the project less vulnerable sive PPP is envisaged, the Government will play to change, external shocks and the temptation of an essential role in monitoring and regulating future Governments to reverse decisions. the project and the sector. • Do not cut corners in procurement . It may • Be ready for challenges. In any long-term rela- seem easier to enter into direct negotiations tionship, change happens. PPP is, above all, a instead of using competitive procurement, partnership, and it needs to be designed with but it isn’t. It takes longer and costs more challenges, changes and resolution in mind. money. Maximize competition (where pos- Problems need to be elevated to appropriate sible) through good, transparent, competitive levels of management before they become dis- procurement. putes or worse. • Invest in preparation. PPP preparation takes time • Consider all stakeholders. PPP will have a direct and money, if done well. influence on some stakeholders (in particular • Be clear to bidders about what you want. Indicate employees and management) and may raise clearly what results, milestones and indicators political or philosophical concerns amongst you want the investor to achieve, in particular in many more. While absolute consensus will the bid evaluation criteria and their weighting. never be reached, the Government needs to con- Help bidders to give you what you want, don’t sult widely, understand fundamental concerns make them guess. and address them. • Be cautious when selecting the winning bid. If a bid • Be proactive. Establish mechanisms intended to seems too good to be true (financially, techni- catch disputes as early as possible. Early in the cally or otherwise), then it probably is. process, options are varied, relative cost is low, • Select good projects. Garbage-in-garbage-out; say and the likelihood of immediate value-added “no” to bad projects resolution is higher. • Select robust, viable projects for PPP, these • Facilitation can help. Softer processes are designed are more likely to be financed on a competi- to use and develop relationships as the basis for tive basis and are therefore more likely to finding mutually satisfactory solutions and can provide value for money. Projects suffering work better than more formal processes. from bad design, dubious demand or weak • Renegotiation can be an opportunity, and can fundamentals (even if politically popular) improve the PPP arrangements and protect the are more likely to fail, and may weaken the poor, if it is contemplated in advance, transpar- entire PPP program in the process. ent and well managed when needed. • If a project needs Government support, get • Get good advice. Do not try to manage disputes approvals early to avoid wasting time and or renegotiations with internal staff alone, no money on projects that do not meet viabil- matter how good they are. Get the best, external ity and value for money criteria, and the advice. It will cost money, but will save money awkward position of Government rejecting in the long run. support for a project only after much effort • Government support can improve financial is spent on its preparation. viability and make a project more attractive 48 Annex 2 for investors, but it will not turn a bad project • Contingent support can be a powerful instrument, into a good one. but • Use Government support efficiently, in a targeted • The risk borne by the Government must be manner, to ensure Government goals are assessed honestly and managed carefully, achieved. • Taking too much risk away from private • Ensure funding mechanisms are properly lenders or enabling reduced equity invest- resourced and incentivized to avoid political ment, or over-protecting investors, limits capture or inertia. the private investors’ “skin in the game”, • Avoid perverse incentives created by Government so when crisis befalls the project, the inves- support—ensure private and public are moti- tor and lender may be less motivated to vated to make the project a success. help. 49