PUBLIC-PRIVATE PARTNERSHIPS Version 3 Reference Guide PUBLIC-PRIVATE PARTNERSHIPS Version 3 Reference Guide PPP REFERENCE GUIDE This version of the PPP Reference Guide is available in its entirety, including referenced documents, in the PPP Knowledge Lab. The PPP Knowledge Lab brings together the most relevant and authoritative resources on public-private partnerships in one location to empower governments and their advisors to decide whether a PPP is the best option to deliver infrastructure services and, if so, help them design and deliver best in class infrastructure projects. Whether you are just learning how and when to use PPPs or need more specific information on a country or sector, the PPP Lab has the resources to support you. Launched in 2015 by the African Development Bank (AFDB), the Asian Development Bank (ADB), the European Bank for Re- construction and Development (EBRD), the Inter-American Development Bank (IADB), the Islamic Development Bank (IsDB), and the World Bank Group, with the support of the Public-Private Infrastructure Advisory Facility (PPIAF), the PPP Knowledge Lab serves the needs of governments and practitioners alike, filling the gap in reliable, trustworthy knowledge about public-private partnerships. Since launch, five new partners have joined the Lab: the European Investment Bank (EIB), the Global Partnership on Output-Based Aid (GPOBA), the Organisation for Economic Co-operation and Development (OECD), the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), and the United Nations Economic Commission for Europe (UNECE). © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW | Washington DC 20433 | Telephone: 202-473-1000 | Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org Photo credits: People Images/istockphoto (p5), hxdb2xy/istockphoto.com (p57), snvv/istockphoto.com (p113). Foreword We are delighted to present the third edition of the PPP Reference Guide. The two previous editions were jointly developed by the World Bank Group, the Asian Development Bank (ADB) and the Inter-American Development Bank (IADB). For this version, in addition to the ADB and IADB, we have had the pleasure of collaborating with the European Bank for Reconstruction and Development (EBRD), Global Infrastructure Hub (GI Hub), Islamic Development Bank (IsDB), Organisation for Economic Co-operation and Development (OECD), United Nations Economic Commission for Europe (UNECE), and United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP). Since the last edition of the Guide, governments have endorsed the Sustainable Development Goals (SDGs), and have reached agreement at the International Conference on Financing for Development (FfD) that public finance alone will not suffice to deliver the infrastructure necessary to eliminate extreme poverty, and meet the SDGs and COP21 objectives. Government officials and multilateral institutions are increasingly looking for innovative ways to mobilize private sector contributions, blend public and private finance to scale up infrastructure investments, and enhance the efficiency and quality of public service delivery. PPPs are at the very core of this endeavor. A major objective of the World Bank Group and the other multilateral organizations that have contributed to this product is to help governments make well-informed decisions regarding their infrastructure programs, based on sound analysis, and commensurate with their macroeconomic objectives and institutional capabilities. To this end, we are generating global knowledge and diagnostic tools, offering advisory services, and technical assistance. This book is part of this effort to help decision makers and PPP practitioners. It aims to disseminate good practices on infrastructure and PPP policies and implementation. The third edition of the Guide is particularly interested in the development of efficient legal and institutional frameworks that help governments identify and select PPP projects, and structure and procure affordable, sustainable PPP contracts that deliver needed services to populations. We are also pleased to witness the expansion of this Reference Guide into new subject areas, particularly Stakeholder Communication and Engagement, Environmental & Social Studies and climate change. Additional relevant sections also now address municipal PPPs, climate change issues, and private participation in fragile and conflict-affected states. This Reference Guide now has an online version, allowing for regular updates, on the PPP Knowledge Lab, the online PPP knowledge dissemination platform that the World Bank Group shares with other multilateral organizations. On behalf of the World Bank Group and its partner institutions, we hope that you will find the information in this Reference Guide interesting, pragmatic and useful. Laurence Carter Ryuichi Kaga Thomas Maier Chris Heathcote José Agustín Aguerre World Bank Asian European Bank for Global Inter-American Group Development Bank Reconstruction and Infrastructure Hub Development Bank Development Walid Abdelwahab Rolf Alter Geoffrey Hamilton Shamshad Akhtar Islamic Development Organisation for United Nations United Nations Bank Economic Co-operation Economic Commission Economic and Social and Development for Europe Commission for Asia and the Pacific PPP REFERENCE GUIDE Acknowledgements The PPP Reference Guide Version 3 is a joint product of the World Bank Group, ADB, EBRD, GI Hub, IADB, IsDB, OECD, UNECE, and UNESCAP. The Infrastructure, Guarantees, and PPP Cross-Cutting Solutions Area (CCSA) of the World Bank Group (WBG) steered this project. It was prepared by a team led by Rui Monteiro under the direction of Olivier Fremond. Members of the core team included: Rupinder Kaur Rai, Joshua Anastassios Si- monidis, Paris Gkartzonikas, Lama Kiyasseh, and Jeanine Delay. The editorial team would like to acknowledge the support of Laurence Carter and Clive Harris of the Infrastructure, Guarantees, and PPP CCSA, François Bergère from PPIAF, and Chiaki Yamamoto from the PPP Knowledge Lab. Numerous individuals contributed to the development of this Guide but the team would particularly like to thank the following for their significant contributions: James Ballingall, Pedro Barros, David Baxter, Philippe Burger, David Ehrhardt, Karineh Grigorian, Andrés Rebollo, Andrew Sprott, James Stewart, Stephane Straub, and Ned Yescombe. Additionally, the team would like to thank the many experts who contributed their insightful comments and input: Farida Aboulmagd (WBG), Anna Aghabab- yan (WBG), Aijaz Ahmad (WBG), Sara Ahmed (WBG), Cigdem Aslan (WBG), Mairée Uran Bidegain (WBG), Jyoti Bisbey (WBG), David Bloomgarden (IADB), Dennis Blumenfeld (IADB), Tony Bonnici (UNECE), Ashraf Bouajina (WBG), Laura Bozanigo (WBG), Richard Cabello (WBG), Rodrigo Silvei- ra Veiga Cabral (WBG), Mehmet Coskun Cangoz (WBG), Carlota Cenalmor (EIB), Sharmila Chavaly (MOF India), James Close (WBG), Andrew Davies (OECD), Kirti Devi (WBG), Jeffrey John Delmon (WBG), Victoria Delmon (WBG), David Duarte (WBG), Ben Eijbergen (WBG), Edward Farquharson (EPEC EIB), Joshua Gallo (WBG), Nadine Ghannam (WBG), Bjorn Gillsater (WBG), Gabriel Goldschmidt (WBG), Sudarshan Gooptu (WBG), Geoffrey Hamilton (UNECE), Ian Hawkesworth (OECD), Hassan Idris (IsDB), Jane Jamieson (WBG), Marcin Jędrasik (MED Poland), Edith Jibunoh (WBG), Matthew Jordan-Tank (EBRD), Ellis J. Juan (IADB), Mouhamadou Madana Kane (IsDB), Ali Kayar (IsDB), Geoffrey Keele (WBG), Dongjin Kim (WBG), Jay-Hyung Kim (WBG), Jens Kromann Kristensen (WBG), Olivier Lambert (WBG), Morgan Landy (WBG), Carolina Maria Lembo (IADB), Lili Liu (WBG), Claire Lockhart, Ramatou Magagi (WBG), Thomas Maier (EBRD), Cledan Mandri-Perrot (WBG), Isabel Marques-de-Sá (WBG), Daniella Carrera Marquis (IADB), Helen Martin (WBG), Rocío Medina-Bolívar (IADB), Sylvain Adokpo Migan (WBG), Shamiela Mir (WBG), Leo- poldo Montañez (IADB), Giovanna Monti (WBG), Mark Moseley (GI Hub), Giulia Motolese (WBG), Mohammad Asheque Moyeed (IsDB), Nathalie Munzberg (WBG), Miguel Navarro-Martin (WBG), Philippe Neves (WBG), Adesinaola Odugbemi (WBG), Daniela Henrike Klau Panhans (WBG), Silvina Panizza (MEF Uruguay), Christina Paul (WBG), Axel Peuker (WBG), Veronica Piatkov (WBG), Amr Qari (ADB), Fida Rana (IsDB), Isabel Rial (IMF), María Patricia Sandoval (FDN Colombia), Pablo Pereira dos Santos (IADB), Julie Rozenberg (WBG), Nicola Saporiti (WBG), Natalí Sequeira (WBG), Marco Scuriatti (WBG), Shyamala Shukla (WBG), Fiona Stewart (WBG), Sarvesh Suri (WBG), Adeel Abbas Syed (WBG), Sri Kumar Tadimalla (WBG), Volker Treichel (WBG), Clemente del Valle (FDN Colombia), Jos Verbeek (WBG), Mathieu Verougstraete (UNESCAP), Sameh Naguib Wahba (WBG), Roland White (WBG), and Sara Marzal Yetano (WBG). The team is also grateful to the many directors and managers who, in the above mentioned organizations, helped identify the rele- vant experts. The Public-Private Infrastructure Advisory Facility (PPIAF) co-financed the online version of this Guide. The PPP Refer- ence Guide Version 3 was edited by David William Lawrence and designed by Jeanine Delay with the support of Victoria Adams-Kotsch. The online version of the Guide can be accessed at: https://pppknowledgelab.org/guide Contents Introduction 1 PPP Basics 5 1.1 What is a PPP: Defining “Public-Private Partnership” 5 1.1.1 PPP Contract Types and Terminology 6 1.1.2 What PPP is Not: Other Types of Private Involvement 10 1.1.3 How PPPs Are Used: Sectors and Services 12 1.2 Infrastructure Challenges and How PPPs Can Help 15 1.2.1 Insufficient Funds 18 1.2.2 Poor Planning and Project Selection 23 1.2.3 Weak Management 26 1.2.4 Inadequate Maintenance 29 1.2.5 Infrastructure in Fragile and Conflict-Affected States 30 1.2.6 Climate Change and Natural Disasters 33 1.3 How PPPs Are Financed 40 1.3.1 Finance Structures for PPP 40 1.3.2 Considerations for Government 44 1.3.3 The Role of Public Finance in PPPs 49 1.3.4 Third Party Risk Mitigation and Credit Enhancement 53 PPP REFERENCE GUIDE Establishing the PPP Framework 57 2.1 PPP Policy 61 2.1.1 PPP Program Objectives 61 2.1.2 PPP Program Scope 62 2.2 PPP Legal Framework 66 2.2.1 Scope of the PPP Legal Framework 66 2.2.2 PPP Laws 67 2.3 PPP Processes and Institutional Responsibilities 69 2.3.1 PPP Process 69 2.3.2 Institutional Responsibilities: Implementation 72 2.3.3 Institutional Responsibilities: Review and Approval 75 2.3.4 Dedicated PPP Units 76 2.4 Public Financial Management Frameworks for PPPs 84 2.4.1 Assessing Fiscal Implications of a PPP Project 84 2.4.2 Controlling Aggregate Exposure to PPPs 87 2.4.3 Budgeting for Government Commitments to PPPs 87 2.4.4 Fiscal Accounting and Reporting for PPPs 91 2.5 Broader PPP Program Governance 96 2.5.1 Stakeholder Communication and Engagement 96 2.5.2 Disclosure of PPP Project and Program Information 100 2.5.3 Role of Supreme Auditing Institutions 101 2.5.4 Role of Legislative Bodies 103 2.5.5 Role of Independent Regulators 104 2.6 Municipal and other subnational PPPs 106 PPP Cycle 113 3.1 Identifying PPP Projects 115 3.1.1 Identifying Priority Public Investment Projects 115 3.1.2 Screening for PPP Potential 117 3.1.3 Building an Initial PPP Pipeline 118 3.2 Appraising Potential PPP Projects 120 3.2.1 Assessing Project Feasibility and Economic Viability 121 3.2.2 Environmental and Social Studies and Standards 125 3.2.3 Assessing Commercial Viability 127 3.2.4 Assessing Value for Money of the PPP 129 3.2.5 Assessing Fiscal Implications 132 3.2.6 Assessing the Ability to Manage the Project 134 3.3 Structuring PPP Projects 140 3.3.1 Identifying Risks 140 3.3.2 Allocating Risks 141 3.3.3 Translating Risk Allocation into Contract Structure 144 3.4 Designing PPP Contracts 148 3.4.1 Performance Requirements 149 3.4.2 Payment Mechanism 151 3.4.3 Adjustment Mechanisms 153 3.4.4 Dispute Resolution Mechanisms 154 3.4.5 Termination Provisions 155 3.5 Managing PPP Transactions 160 3.5.1 Deciding the Procurement Strategy 161 3.5.2 Marketing the PPP 167 3.5.3 Qualifying Bidders 168 3.5.4 Managing the Bid Process 170 PPP REFERENCE GUIDE 3.5.5 Achieving Contract Effectiveness and Financial Close 174 3.6 Managing PPP Contracts 178 3.6.1 Establishing Contract Management Structures 179 3.6.2 Monitoring and Managing PPP Delivery and Risk 182 3.6.3 Dealing with Change 184 3.6.4 Contract Expiry and Asset Handover 186 3.7 Dealing with Unsolicited Proposals 190 3.7.1 Benefits and Pitfalls of Unsolicited Proposals 190 3.7.2 Creating Competitive Tension 191 3.7.3 Dealing with Intellectual Property and Confidentiality 192 3.7.4 Defining Clear Policy and Processes 193 Boxes Box 1.1 The Sustainable Development Goals and PPPs 17 Box 1.2 PPP Value Drivers 19 Box 1.3 Funding versus Financing 21 Box 1.4 Excessive Fiscal Risk—Examples from Colombia, Korea, Mexico, United Kingdom 23 Box 1.5 Mumbai Water—Example of Poor Planning in Infrastructure 25 Box 1.6 When PPPs fail—The case of the 1993 water concession in Buenos Aires 28 Box 1.7 Performance Based Road Contracts—Improving Maintenance of Infrastructure 30 Box 1.8 The Pamir Private Power Project 32 Box 1.9 The Uruguay Weather Derivative 35 Box 1.10 Examples of Project Finance Structure with Corporate Guarantees 47 Box 1.11 Example of a Thinly-Capitalized PPP—Victoria Trams and Trains 49 Box 1.12 CRPAOs in Peru 52 Box 1.13 Mexico’s FONADIN 53 Box 2.1 Good Governance for PPPs 66 Box 2.2 The PPP Framework of Chile 67 Box 2.3 The PPP Framework of South Africa 68 Box 2.4 PPP Implementing Principles in Peru 73 Box 2.5 PPP Legal Framework in Germany 78 Box 2.6 External advisors 86 Box 2.7 PPP Training 90 Box 2.8 Types of Fiscal Commitments to PPPs 99 Box 2.9 The Viability Gap Fund Program in India 103 Box 2.10 Types of Government Financial Reporting 106 Box 2.11 The Delhi Water Project 119 Box 2.12 Audit Entity Access to PPP Company Information 121 Box 2.13 Municipal Water PPPs in Benin 128 Box 3.1 PPP Selection in the Public Investment Planning Process 131 Box 3.2 PPP Potential Screening Factors in South Africa 132 Box 3.3 The Five Case Model 136 Box 3.4 World Bank Environmental and Social Framework 143 Box 3.5 How the Public Sector Comparator is calculated 147 Box 3.6 Types of Direct Payment Commitments to PPP Projects 149 Box 3.7 PPP Risk Categories 161 Box 3.8 Allocating Land Acquisition Risk 162 Box 3.9 What is the PPP Contract? 169 Box 3.10 International Centre for Settlement of Investment Disputes (ICSID) 177 Box 3.11 Competitive Procurement or Direct Negotiation 184 Box 3.12 Firm Qualification Criteria 192 Box 3.13 Evaluation Criteria 196 Box 3.14 Example of Weak Risk Monitoring—Victoria Trams and Trains 210 Box 3.15 Costs of Direct Negotiation—Independent Power Tanzania 219 PPP REFERENCE GUIDE Tables Table 1.1 Infrastructure Contract Nomenclature 5 Table 1.2 PPPs by Sector—Examples and Resources 11 Table 1.3 Comparing PPP and Public Procurement in Australia 26 Table 1.4 Example of Third-Party Risk Mitigation or Credit Enhancement Instruments 55 Table 2.1 Example PPP Program Objectives 69 Table 2.2 Example Definitions of PPP Policy Scope 70 Table 2.3 Example PPP Laws 77 Table 2.4 Example PPP Approval Requirements 86 Table 2.5 Options for Assessing the Affordability of Fiscal Commitments to PPPs 96 Table 2.6 Fiscal Risk Matrix: For Liabilities 96 Table 2.7 Fiscal Hedge Matrix: Assets and Contingent Financing 97 Table 3.1 Examples of Standardized PPP Contracts and Contract Clauses 173 Table 3.2 Types of Early Termination and Termination Payments 181 Table 3.3 Examples of PPP Procurement Procedures 188 Table 3.4 Examples and Guidance on Preparing RFP Documents 196 Table 3.5 Distinction between Service Delivery Issues and Disputes 214 Table 3.6 Examples of Procurement Strategies for Unsolicited Proposals 223 Figures Figure 1.1 Examples of PPP Contract Types 9 Figure 1.2 The Challenges with infrastructure and How PPPs Can Help 19 Figure 1.3a Typical PPP Project Structure 41 Figure 1.3b Flow of Funds 42 Figure 1.4 Non-Recourse and Full-Recourse Corporate Project Finance Structures 43 Figure 2.1 Typical PPP Process 71 Figure 2.2 The South African Gateway Process for PPPs 76 Figure 3.1 PPP Development and Implementation Process 114 Figure 3.2 Identifying PPP Projects 116 Figure 3.3 Appraising PPP Projects 120 Figure 3.4 Structuring PPP Projects 141 Figure 3.5 PPP Contract Design Stage 149 Figure 3.6 Managing PPP Transactions 160 Figure 3.7 Transaction Steps 162 Figure 3.7a Procurement Stategy 162 Figure 3.7b Marketing the PPP 168 Figure 3.7c Bidder Qualification 168 Figure 3.7d Bid Process Management 170 Figure 3.7e Financial Close 175 Figure 3.8 Contract Management Stage of PPP Process 179 Figure 3.9 USP Process Flow 197 PPP REFERENCE GUIDE pub·lic-pri·vate part·ner·ship n \'pə-blik 'pri-vət 'pӓrt-nər-ship\ a long-term contract between a private party and a government enti- ty, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remunera- tion is linked to performance Introduction There is no single, internationally accepted definition of Public-Pri- The project functions transferred to the private party—such as de- vate Partnership. This Reference Guide takes a broad view of what a sign, construction, financing, operations, and maintenance—may PPP is, defining it as: vary from contract to contract, but in all cases the private party is accountable for project performance and bears significant risk and A long-term contract between a private party management responsibility. PPP contracts typically allocate each and a government entity, for providing a public risk to the party that can best manage and handle it—risk transfer asset or service, in which the private party bears to the private party is not a goal, but is instrumental for full trans- significant risk and management responsibility fer of management responsibility and for the alignment of private and remuneration is linked to performance. interests with the public interest. Section 1.1 - What is a PPP: De- fining ‘Public-Private Partnership’ provides more information on the This definition range of contract types that constitute PPPs under this definition and the different nomenclature used to describe them. ŠŠEncompasses PPPs that provide for both new and existing assets and related services; Throughout this Reference Guide, the term “infrastructure” is used to cover the range of sectors and services for which PPPs are used. ŠŠIncludes PPPs in which the private party is paid entirely by ser- In this context, “infrastructure” encompasses economic, social, vice users, and those in which a government agency makes some and government infrastructure—that is, the “basic physical and or all payments; organizational structures” needed to make economic, social, and ŠŠEncompasses contracts in many sectors and for many services, government activity possible (using the Oxford English Dictionary provided there is a public interest in the provision of these ser- definition). Section 1.1.3 - How PPPs Are Used: Sectors and Services vices and the project involves long-life assets linked to the long further describes the range of sectors and services for which PPPs term nature of the PPP contract. are used. 2 PPP REFERENCE GUIDE : INTRODUCTION At a minimum, a PPP will include a long-term commitment to an 2017), and the World Bank sectoral toolkits (WB 2016f )—for provide infrastructure services—this implies the design and con- instance, the toolkit on roadways (WB 2009a). struction of infrastructure, or the renewal of existing assets, and the provision of long-term asset-maintenance. Most PPPs include What is in the Reference Guide additional services, including the full operation of the infrastruc- The Reference Guide is divided into three modules: ture when the private operator is able to commit to service quality and performance, and the procuring authority is able to define that ŠŠModule 1: PPP Basics—What and Why? Provides an over- same quality and performance. These additional services should view of Public-Private Partnerships (PPPs)—what they are, how also take place over the long term. they are used to provide infrastructure assets and services, their benefits, and their pitfalls Practitioners can, if their projects are well-selected and their PPPs carefully structured, design and implement projects that optimize ŠŠModule 2: Establishing the PPP Framework. Describes the cost effectiveness and social well-being by aligning private partner elements of a sound legal and institutional PPP framework— profit objectives with public sector service objectives that support that is, the policy, processes, institutions, and rules that together the public interest. define how PPPs will be identified and implemented, and that promote good governance of PPP programs A substantial body of knowledge on Public-Private Partnerships (PPPs) has been generated across the world by a broad spectrum ŠŠModule 3: Implementing PPP Projects. Provides guidance of practitioners from government, the private sector, internation- on each stage of developing and implementing a PPP project— al development institutions, academia, and expert advisors. This from initially identifying candidate projects to managing PPP Reference Guide helps readers navigate this body of knowledge. It contracts through the project lifetime introduces key topics on PPP, sets out options, and directs readers Each module begins with an introduction, providing an overall to examples and references where they can learn more. framework for the module’s content, and listing any helpful over- A growing number of governments are interested in partnering view references. The modules are divided into sections, each cover- with the private sector to provide public infrastructure assets and ing a different topic. services. This Reference Guide is meant to assist them. It aims to help government officials and other interested parties in answering Who should use the Reference Guide these questions: This Reference Guide targets government officials who wish to im- ŠŠWhat are PPPs, and why use them? prove their knowledge of PPPs. Other parties, including civil soci- ety organizations, private sector participants, universities, or other ŠŠWhat kind of policy, legal, and institutional framework is need readers will find different parts of this Reference Guide useful at to ensure PPPs achieve their stated objectives efficiently and ef- different times. As noted previously, the Reference Guide is part syn- fectively? thesis and part bibliography. As such, it may be useful for both the ŠŠWhat is the process for developing and implementing a PPP newcomer to the PPP area looking for a structured introduction to project? key PPP topics, and the expert who may find additional references in some specific area. The Reference Guide attempts to provide the most relevant exam- ples, references and resources to help readers inform themselves on Using references key PPP topics. It is not a toolkit or a step-by-step guidebook; nor should readers expect to find a presentation of the status of PPPs These references are highlighted in bold type, and followed, in pa- in any given country or sector here. Those who wish to educate renthesis, by an author and a year, for example: ‘(Delmon 2016)’ or themselves on PPPs more thoroughly will find the APMG PPP ‘(OECD 2015b)’, where ‘b’ differentiates between different works Certification Guide (APMG 2016) a useful resource. Examples published in the same year by the same author. When convenient, of well-formulated PPP manuals and toolkits are the South Africa a location within the reference will be added after a comma, such PPP Manual (ZA 2004a), the Caribbean PPP Toolkit (Caribbe- as (Delmon 2016, chapter 15). All references can be found in the  3 Reference List at the end of this book. The number in square brack- the Reference Guide online, and download the latest version of the ets following the reference indicates the unique ID number of the book in PDF format which includes hyperlinks to all references. document on the PPP Knowledge Lab library. Key references for each section will be written out with their com- The PPP Reference Guide is also available online at the PPP Knowl- plete citation at the end of the section. An example of a “key ref- edge Lab, a fully curated, comprehensive site for PPPs developed by erences” table is provided below. In some cases, the key references the world’s leading multilateral development agencies, with fund- are organized by subject area, within the overall topic. Readers who ing from the Public-Private Infrastructure Advisory Facility. The just want to quickly get a sense of the most important references on PPP Knowledge Lab allows users to read and search the content of the topic can refer directly to these key references. PPP Reference Guide Modules and Who Should Read Them Module Who Should Read It? Module 1: • Anyone who wants to learn more about what PPPs are, and how they can be used to provide infrastructure assets and PPP Basics: What and Why services • PPP practitioners looking for material to help articulate the benefits and risks of a PPP program to stakeholders within and outside governments Module 2: • Government officials in the process of, or considering, developing or refining the policy, legal, and institutional Establishing the PPP Framework framework that governs how PPPs are implemented • Finance ministry officials or other stakeholders concerned about public financial management for PPP programs Module 3: • Government officials responsible for developing or refining PPP processes PPP Cycle • Those responsible for developing, assessing, or implementing PPP projects, or for engaging advisors to support the PPP process—including PPP practitioners looking for tips from global experience • Other stakeholders interested in learning more about how PPPs work Key References: Example Reference Description Yescombe, E.R. 2007. Public-Private Partnerships: This book provides a comprehensive review of PPPs, including guidance to practitioners about key aspects Principles of Policy and Finance. Oxford: of designing and implementing PPP policy and projects. Chapter 5 provides guidelines for public-sector Butterworth-Heinemann. appraisal of PPP projects. Farquharson, Edward, Clemencia Torres de Mästle, This guide for public sector practitioners describes how to develop and implement a PPP successfully, by E. R. Yescombe, and Javier Encinas. 2011. How developing a marketable project and attracting the right private partners. Chapter 4 provides guidelines for to Engage with the Private Sector in Public-Private PPP project selection. Partnerships in Emerging Markets. Washington, DC: World Bank. Module 1 PPP Basics What and Why The module provides an overview of PPPs, and discusses projects Therefore, private sector financing provides two key functions in and contracts where there is a public interest in the provision of a PPP. First, it complements public sector financing and allows services and where the project involves long-life assets linked to projects to go forward that otherwise would have been discarded the long-term nature of the PPP contract. Section 1.1 - What is a due to fiscal constraints. Second, it creates an incentive mechanism PPP: Defining “Public-Private Partnership” outlines the variety of aligning private and public interests. Section 1.3 - How PPPs are contract types, and the terminology used to describe them. This Financed describes the various finance structures utilized for PPPs, section also presents types of partnerships to which the definition and how governments can adjust contractual provisions to the fi- and guidance material in this Reference Guide would generally not nancial environment, help develop markets, mitigate risks, and en- apply. Some of them present similitudes to PPPs, others are signifi- hance credit. cantly different. Section 1.2 - Infrastructure Challenges and How PPPs Can Help dis- 1.1 What is a PPP: Defining cusses opportunities brought by PPP procurement, and the pitfalls “Public-Private Partnership” practitioners may experience. PPPs are presented not only as a way of bringing needed additional investment to public infrastructure The introduction to this Reference Guide provided a broad defini- but also as a mechanism for improving infrastructure planning and tion of a PPP: project selection. It is also a mechanism for enhancing project man- agement and guaranteeing adequate maintenance, avoiding cycles A long-term contract between a private party of construction followed by persistent neglect and then high-cost and a government entity, for providing a public reconstruction. Well-structured PPPs bring private capital for in- asset or service, in which the private party bears vestment, private-sector expertise, and commercial management significant risk and management responsibility incentives needed for enhancing service provision to users. and remuneration is linked to performance. 6 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS This section fleshes out this definition with more detail, describing ing, building, and managing new public assets, from schools and PPP contract types (Section 1.1.1 - PPP Contract Types and Termi- hospitals to defense facilities. PPPs can also be used to transfer re- nology), the terminology used to describe them; and clarifying relat- sponsibility for upgrading and managing existing assets to a private ed types of partnership between public and private sector parties to company—or brownfield projects. In either case, a key feature of which the definition and guidance material in this Reference Guide a PPP is that the assets or services provided are specified in terms would generally not apply (Section 1.1.2 - What PPP is Not: Other of outputs rather than inputs—that is, defining what is required, Types of Private Involvement). rather than how it is to be done. A central characteristic of a PPP contract is that it bundles together 1.1.1 PPP Contract Types multiple project phases or functions. Nonetheless, the functions and Terminology for which the private party is responsible vary and depend on the type of asset and service involved. Typical functions include: This section describes in more detail the range of PPP contract types under the definition of PPP used in this Reference Guide; and ŠŠDesign (also called engineering work)—involves developing the some of the common terminology used globally to describe PPPs. project from initial concept and output requirements to con- struction-ready design specifications. Most PPP projects present a contractual term between 20 and 30 years; others have shorter terms; and a few last longer than 30 years. ŠŠBuild, or Rehabilitate—when PPPs are used for new infra- The term should always be long enough for the private party to structure assets, they typically require the private party to con- have an incentive to integrate service delivery costs considerations struct the asset and install all equipment. Where PPPs involve into the design phase of the project. This includes maintenance existing assets, the private party may be responsible for rehabili- considerations as well, in order for the trade-offs between initial tating or extending the asset. investment cost and future maintenance and operation costs to be optimized. The “whole-life” approach, considering whole-life costs ŠŠFinance—when a PPP includes building or rehabilitating the and whole-life benefits, maximizes the efficiency of service delivery. asset, the private party is typically also required to finance all or It is at the core of the rationale for using PPPs for the delivery part of the necessary capital expenditure, as described further in of public services. The precise length of the contract depends on Section 1.3 - How PPPs Are Financed. the type of project and policy considerations. Policy makers need to satisfy themselves that the demand for the services delivered by ŠŠMaintain—PPPs assign responsibility to the private party for the project will be sustained over the whole life of the contract; maintaining an infrastructure asset to a specified standard over the private party should be able to accept responsibility for service the life of the contract. This is a fundamental feature of PPP delivery over its term; and the procuring authority should be able contracts. to commit to the project for its term. The availability of finance, and its conditions, may also influence the term of the PPP contract. ŠŠOperate—the operating responsibilities of the private party to a PPP can vary widely, depending on the nature of the underlying PPP contract types asset and associated service. For example, the private party could be responsible for: Throughout the Reference Guide, PPPs are described in terms of three broad parameters: first, the type of asset involved; second, yyTechnical operation of an asset, and providing a bulk service what functions the private party is responsible for; and third, how to a government off-taker—for example, a bulk water treat- the private party is paid. ment plant Many PPPs involve new assets—often called greenfield projects. yyTechnical operation of an asset, and providing services di- For example, the United Kingdom’s PPP program—the Private rectly to users—for example, a PPP for a water distribution Finance Initiative (PFI)—involved private companies in financ- system Section 1.1 What is a PPP: Defining “Public-Private Partnership” 7 Table 1.1 Infrastructure Contract Nomenclature Contract Type of Functions Payment Nomenclature Overview Description and Reference Asset Transferred Source Design-Build- Under this nomenclature, the range of PPP contract types is New As captured by contract Can be either Finance-Operate- described by the functions transferred to the private sector. The infrastructure name government or user Maintain maintain function may be left out of the description (so instead of pays (DBFOM); Design- DBFOM, a contract transferring all those functions may simply be Build-Finance- described as DBFO, with responsibility for maintenance implied as Operate (DBFO); part of operations). An alternative description along similar lines is Design-Construct- Design-Construct-Manage-Finance (DCMF), which is equivalent to Manage-Finance a DBFOM contract. (DCMF) Build-Operate- This approach to describing PPPs for new assets captures legal New Typically, design, build, Can be either Transfer (BOT), ownership and control of the project assets. Under a BOT infrastructure finance, maintain, and government or user Build-Own-Operate- project, the private company owns the project assets until they some or all operations pays Transfer (BOOT), are transferred at the end of the contract. BOOT is often used Under some definitions, Build-Transfer- interchangeably with BOT, as Yescombe (Yescombe 2007) describes. BOT or BTO may not Operate (BTO) In contrast, a Build-Transfer-Operate (BTO) contract, asset include private finance, ownership is transferred once construction is complete. As Delmon whereas BOOT always (Delmon 2015, 20–21) describes, ownership rights mainly affect includes private finance how handover of assets is managed at the end of the contract. Rehabilitate- In either of the naming conventions described above, Rehabilitate Existing As above, but rehabilitate As above Operate-Transfer may take the place of Build where the private party is responsible for infrastructure instead of build (ROT) rehabilitating, upgrading, or extending existing assets. Concession Concession is used for a range of types of contract, as described in New or existing Design, rehabilitate, extend Usually user pays— Delmon (Delmon 2010, Box 1 on page 9). In some jurisdictions, infrastructure or build, finance, maintain, in some countries, concession may imply a specific type of contract; while in others it and operate—typically depending on the is used more widely. In the PPP context, a concession is mostly used providing services to users financial viability of the to describe a user-pays PPP. For example, in Brazil, the Concession concession, the private Law applies only to user-pays contracts; a distinct PPP Law regulates party might pay a fee to contracts that require some payment from government. On the government or might other hand, concession is sometimes used as a catch-all term to receive a subsidy describe a wide range of PPP types—for example, all recent PPPs in Chile have been implemented under the Concession Law, including fully government-pays contracts. Private Finance The United Kingdom was one of the first countries to introduce New Design, build, finance, Government pays Initiative (PFI) the PPP concept under the term Private Finance Initiative, or PFI. infrastructure maintain— may include It is typically used to describe a PPP as a way to finance, build and some operations, but often manage new infrastructure. not providing services directly to users Operations and O&M contracts for existing assets may come under the definition Existing Operations and Government pays Maintenance of PPP where these are performance-based, long-term, and involve infrastructure maintenance (O&M) significant private investment (sometimes also called performance- based maintenance contracts). Affermage An affermage contract is similar to a concession, but with the Existing Maintain and operate, User pays—private government typically remaining responsible for capital expenditures. providing services to users party typically remits Affermage in particular may have a specific meaning in some part of user fees to jurisdictions. The World Bank’s explanatory notes on water government to cover regulation (Groom et al. 2006, 36–42) describe lease contracts, as capital expenditures well as concessions. Such contracts may or may not come under the definition of PPP, depending on the duration of the contract. 8 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Contract Type of Functions Payment Nomenclature Overview Description and Reference Asset Transferred Source Management The state retains asset ownership, and capital expenditure is Existing Operations and Management fees Contract the responsibility of the public sector, whereas operation and maintenance extended to the maintenance is the handled by the private sector. These types of contractor contracts are 3-5 years in duration. Franchise Franchise is sometimes used to describe an arrangement similar to Existing or new May include design, build, User or government either a concession or a lease or affermage contract, as described in and finance, or may be pays Yescombe (Yescombe 2007). limited to maintaining and operating an asset yyProviding support services, with the government agency re- depend on the asset or service being available at a contractu- maining responsible for delivering the public service to us- ally-defined quality (availability payments)—for example, a ers—for example, a PPP for a school building that includes free highway on which the government makes periodic avail- janitorial service ability payments. They can also be volume-based payments for services delivered to users—for example, payment from For the provision of these services, the private party typically creates hospital care effectively delivered. a PPP company, a Special Purpose Vehicle (SPV). A dedicated SPV allows for the segregation of all assets and liabilities linked to These characteristics can be combined in various ways to create a the private provision of services. wide range of PPP contracts. These contracts can be thought of as a continuum between public and private provision of infrastruc- The PPP payment mechanism is a third defining feature. The pri- ture—transferring increasing responsibilities and risk to the private vate party can be paid by collecting fees from service users, by the sector. government, or by a combination of the two—with the common, defining characteristic that payment is contingent on performance. The payment mechanism should be structured in such a way that The options for a payment mechanism can depend on the func- the net remuneration of the private party is linked to perfor- tions of the private party: mance. For the private party to have the right incentives to de- liver services at the performance levels intended by the procuring yyUnder user-pays PPPs, such as toll roads, the private party authority, its remuneration, net of costs, should increase when provides a service to users, and generates revenue by charging approaching these levels. Additionally, sustained significant devia- users for that service. These fees (or tariffs, or tolls) can be tions from the intended performance levels should lead to contract supplemented by government payments—for instance, com- cancellation, with termination payments designed so that quitting plementary payments for services provided to low-income the project is never an easy solution for the private party. users when the tariff is capped; or subsidies to investment at the completion of construction or specific construction PPPs are not the only way the private sector can be involved in in- milestones. The payments may be conditional on the avail- frastructure. These adjacent arrangements are described further in ability of the service at a defined quality level. The social re- Section 1.1.2 - What PPP is Not: Other Types of Private Involvement. turns generated by user-pays PPPs may benefit the broader population, not only those who directly use the asset. For PPP terminology example, the value of real estate near the PPP project may rise as economic activity increases in the area. Non-users are This Reference Guide uses the term PPP to describe the wide range then free-riding unless property taxes are adjusted. of contract types, regardless of the terminology in any specific country or jurisdiction. While PPP contracts can be categorized us- yyIn government-pays PPPs, the government is the sole source ing the parameters above, there is no consistent, international stan- of revenue for the private party. Government payments can dard for naming and describing these different types of contract. Section 1.1 What is a PPP: Defining “Public-Private Partnership” 9 This varying terminology can create confusion when comparing although this Reference Guide makes a distinction between PPP international experience. and privatization, as described further in the following section. Some governments define PPP in their PPP policies or laws to In some cases, PPPs are described by the functions transferred to the mean a specific range of contract types, as described in Section 2.1 private party. For example, a Design-Build-Finance-Operate-Main- - PPP Policy. Other terms are sometimes used as synonyms for PPP, tain, or DBFOM contract would allocate all those functions to the or refer to particular types of PPP—either in law or in common private party. Other nomenclatures such as Build-Operate-Transfer usage. For example: (BOT) focus instead on the legal ownership and control of assets. ŠŠBrazilian law distinguishes between user-pays and govern- The asset may be property of the public or private partner—usually ment-pays projects—the Concessions Law governs PPP proj- decided by the legal constraints in place in any given country. The ects fully paid for by users; other PPP projects are governed relevant factor for PPPs is not who the legal owner of an asset is, but by the PPP Law. Accordingly, only the latter are commonly who holds the economic rights to exploit that asset. The SPV may referred to as PPPs. In France, the term PPP is restricted to use an asset as collateral or simply use the flow of funds generated government-pays contracts implemented under the PPP Law; by the operation of the asset. Therefore, a BOT may not be signifi- user-pays contracts are referred to as concessions. cantly different from a BTO, in which transfer occurs immediately after construction. For example: ŠŠIn the United Kingdom, government-pays PPPs for new assets are known as Private Finance Initiative or PFI projects, while ŠŠIn France, the roles governing the domanialité (defining the PPPs for existing assets (such as hospitals or railways) are some- public domain) stipulate that the public domain can never be times known as franchises. sold, seized by a tribunal, or subject to statutes of limitation. Consequently, the assets built on public land belong to the pub- ŠŠIn some jurisdictions, the term concession is used to refer to spe- lic authority, although the private partner in a PPP can be grant- cific types of PPPs. For example, in Brazil, a concession is a ed specific economic rights to those assets. fully user-pays PPP. In Chile, all PPPs are called concessions and implemented under the country’s Concessions Law. ŠŠIn other countries, public land can be leased to private oper- ators who built and own the asset on that land until its own- ŠŠThe process of entering into a PPP is sometimes referred to as ership is transferred to government at the end of the contract. privatization, or for the resulting assets to be termed private— The ownership is not significant for accounting and statistical Figure 1.1 Examples of PPP Contract Types Extent of private sector participation LOW HIGH Independent Power Producer Airport concession Design-Build- (Design-Build- (Design-Expand- Finance-Maintain Finance-Operate- Finance-Operate- Licensed, Design-Build Management contract for new Affermage for Maintain) for new Maintain) regulated energy contract for new contract for power hospital water utility wind plant (“user pays” via distribution road plant (government pays (government landing fees and company conditional on owned off-taker retail and other availability) pays for electricity revenues). supplied) PUBLIC PRIVATE Public-private partnership 10 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS purposes—IPSAS, the International Public Sector Accounting Section 3.3 - Structuring PPP Projects provides guidance and hyper- Standards, focuses on who controls the use of the infrastructure links on PPP contract structures, and how governments can decide instead of who owns it to determine whether the asset should be which to use for a particular project. consolidated on the government’s balance sheet. 1.1.2 What PPP is Not: Other Types of ŠŠThe 2016 Eurostat Guide to the Statistical Treatment of Private Involvement PPPs (EPEC 2016) states that asset ownership does not influ- ence statistical classification—but ownership of the asset follow- Besides defining the essence and the main features of PPPs, it is also ing the expiration of the PPP contract may. helpful to clarify what they are not. This is useful to help us under- stand why the various features of the PPP model all contribute to Table 1.1 - Infrastructure Contract Nomenclature explains common generating efficient, affordable, and sustainable projects, and why PPP terminology, and how each relates to the description by asset deviation from the standard PPP model can cause project failure. type, functions, and payment mechanisms described above. This does not mean that projects and contracts developed as vari- ants of the PPP model are not useful. On the contrary, they may be The following resources provide more information on PPP con- very useful in certain circumstances; however, often, when projects tract types and nomenclature: and contracts that are structured as a PPP fail, the cause(s) can be tracked to deviations from the defining characteristics of a PPP. ŠŠDelmon’s paper on understanding options for PPPs in in- This can be seen in the UK Audit Office’s report on the failure of frastructure (Delmon 2010) provides the most detailed dis- a PPP to upgrade London’s underground transportation infra- cussion. Delmon classifies PPPs by five factors similar to the structure (NAO 2009a). characteristics described above: (1) whether the PPP is a new or existing business or asset; (2) the responsibility of the private Other types of contract for providing public party for construction; (3) the level of private finance involved; assets and services (4) the nature of the project company’s service delivery obliga- tions (bulk supply or retail level); and (5) the source of revenue Governments enter into a wide range of contracts with private stream. companies. Some of these contract types share some of the typi- cal PPP characteristics—such as being long-term, output based, or ŠŠYescombe chapter “What are Public-Private Partnerships” performance-related—but they are not PPPs as defined above. For (Yescombe 2007) also describes the range of PPP structures and example, these include: how these are classified. ŠŠManagement contracts do not share the long-term character- ŠŠFarquharson et al chapter “Defining Public-Private Partner- istic of PPPs, the significant private capital investment, and the ships” (Farquharson et al. 2011, 9–14) focuses on how PPPs high level of responsibility for long-term performance brought differ from privatization and management contracts; and de- by investment in infrastructure assets. However, they typical- scribes user-fee and availability-based PPPs. ly include similar performance indicators and requirements to PPPs. Performance incentives are created primarily through ŠŠThe World Bank explanatory notes on key topics in water payment and penalties schemes. Being performance-based, they sector regulation (Groom et al. 2006, Note 4) describe com- have a role to play where the private sector is not willing to mon contract types for managing existing assets in the water sec- invest, or where government is not willing to make a long-term tor: concession, lease or affermage, and management contracts. commitment. The World Bank’s explanatory notes on water regulation (Groom et al. 2006, 36–42), for example, describe ŠŠThe World Bank’s PPP in Infrastructure Resource Center how management contracts are used in the water sector. Oper- website (PPPIRC) describes a spectrum of PPP types based on ations and Maintenance (O&M) and performance-based main- the extent of private sector’s participation. tenance contracts may also fall outside the definition of PPP Section 1.1 What is a PPP: Defining “Public-Private Partnership” 11 where they are of short duration and lack substantial investment differences in bidding and operational behavior from the pri- by the private operator. vate party. ŠŠAffermage contracts are contracts under which a government Other concepts of “public-private delegates management of a public service to a private compa- partnerships” ny in return for a specified fee. For example, in an affermage contract in the water sector, the remuneration of the operator The expression public-private partnership is commonly used for sev- is a fixed amount per cubic meter of water sold, although this eral other types of arrangements between public and private enti- amount can be adjusted over the years based on inflation and ties—all of which differ significantly from the contracts we discuss the operator’s performance. Affermage contracts also have no in this Reference Guide. infrastructure investment by the private operator—again, they have been the solution when appetite for investment is low, or A few examples of arrangements not covered in this Guide: when government is able to invest and does not wish to transfer so much management responsibility to a private party. ŠŠPublic-private partnerships for innovation—the U.S. Food and Drug Administration (FDA) and the University of Rochester ŠŠDesign-build or turnkey contracts include similar out- initiated a so-called public-private partnership to improve pain put-based specifications; however, as shorter-term contracts that treatment called Analgesic Clinical Trial Innovations, Opportu- do not include maintenance or operation, they do not create the nities, and Networks (ACTION) in 2011—this multiyear ini- same long-term performance incentives as PPPs. For complex tiative aims to promote and accelerate the development of novel infrastructure, these contractual requirements in a design-build analgesics by identifying faults in the design of clinical trials. contract may not result in optimal design, allowing contractors to cut corners, leading to additional maintenance and opera- ŠŠPublic-private partnerships for environment protection—the tional costs. Design-build contracts are short-term contracts, petroleum industry has a long history of so-called public-private with no long-term responsibilities allocated to the private party. partnerships aimed at finding cooperative solutions to environ- They are commonly used for simple projects, or for projects mental, educational, and community issues—these partnerships where the performance is credibly expected to keep at the same are voluntary activities aimed at ensuring that oil and natural level with proper maintenance, and therefore corner-cutting is gas companies are perceived as an integral and contributing part not relevant. of society and the communities in which the industry operates. ŠŠFinancial lease contracts are long-term contracts for providing ŠŠPublic-private partnerships for public health or against neglect- public assets. However, these contracts transfer significantly less ed diseases—in 2010, COTCO, the oil firm that operates the risk to the private party than PPPs because government main- Chad-Cameroon pipeline in Cameroonian territory, initiated a tains a larger proportion of risk than it normally would in a PPP. so-called public-private partnership project to control malaria Financial lease contracts do not transfer significant responsibil- (a major public health problem in the area) along the pipeline ity for management and performance to the private party. They corridor. are not expected to produce significant improvements in service performance, or to reach efficiency savings. ŠŠPublic-private partnerships for terrorism insurance—in the af- termath of the 9/11 attack, the Terrorism Risk Insurance Act, While the material in this Reference Guide focuses on PPP arrange- also known as TRIA, was approved, creating a so-called pub- ments, the references provided in this Guide may also be useful for lic-private partnership with the purpose of stabilizing the in- governments considering these related contractual arrangements; surance market, ensuring that private terrorism coverage would conversely, some references concerning these contract types may be widely available and providing for an orderly recovery in the provide applicable lessons for PPPs. However, practitioners should event of future catastrophic losses. Under the program, insur- bear in mind that differences in risk allocation will likely trigger ers would have to absorb significant losses—approximately $30 12 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS billion in industry-wide deductibles—before the government of assets and services that can be procured by PPPs together with would step in to provide additional coverage. some references providing more in-depth analysis on the range of worldwide experiences with PPPs. ŠŠPublic-private partnerships against health care fraud—a volun- tary, collaborative partnership between U.S. federal and state Some countries focus their use of PPPs on certain sectors only, as governments, private health insurance organizations, and health described in Section 2.1 - PPP Policy. The rationale for such narrow care anti-fraud groups designed to share information and best focus can include the desire to support the government’s invest- practices to improve fraud detection, prevent payment of fraud- ment priorities; to improve service delivery; or give precedence to ulent health care billings, and find and stop scams. sectors in which PPPs are expected to be most successful. ŠŠPublic-private partnership against terrorism—the United Na- Conversely, some countries define certain sectors or services with- tions Global Counter-Terrorism Strategy encourages “pub- in sectors, for which PPPs may not be used. These are sometimes lic-private partnerships”; the G8 launched a Global Forum for called core services—that is, services that should be provided exclu- Partnerships between States and Businesses to Counter Terror- sively by government. The definition of core services varies across ism (Moscow 2006) which resulted in the G8 Strategy for Part- countries, depending on local preferences and perceptions. For ex- nerships between States and Businesses to Counter Terrorism. ample, in the healthcare sector in the United Kingdom, PPPs have been used to construct hospitals and provide ancillary services such This Reference Guide does not address these types of contracts. as maintenance, but the core medical services remain publicly-run Their characteristics and properties are too different from the PPPs (McKee et al. 2006). On the other hand, in a PPP hospital project referred to in the Guide. In particular, they do not exhibit the link in Lesotho, the private operator provided the full range of health- between high capital investment and strong performance commit- care services (). ments that we witness in the PPPs we are addressing—some of those agreements do not have significant capital investment, others Useful resources providing cross-sector overviews of PPP experi- do not have any kind of credible commitment on performance, ence in developing countries include: but simply a commitment to apply an entity’s best efforts towards a certain goal. ŠŠFarquharson et al’s book on PPPs in emerging markets (Farqu- harson et al. 2011) provides a broad range of case studies. These include a greenfield hospital in Mexico, an upgraded hospital in 1.1.3 How PPPs Are Used: Sectors South Africa, a water concession in the Philippines, a water and and Services electricity services concession in Gabon, a new metro line in Sao Paulo, Brazil, an airport expansion in Jordan, and a review of the PPPs have been used in a wide range of sectors to procure different PPP program in national highways in India. kinds of assets and services. In all cases, the PPP project constitute- sor contributes to the provision of public assets or services; and it ŠŠThe Uongozi Institute’s case studies on PPPs in Sub-Saharan involves long-life assets. Africa (Yescombe 2017) present projects in the water, road, rail, energy, health, and accommodation sectors. The definition of public services may vary across countries, and over time. The material presented in this Reference Guide is neutral ŠŠThe Caribbean PPP Toolkit (Caribbean 2017) includes ref- to this definition; considering as a public service any service that erences to projects in a broad range of sectors, utilizing various the government considers its responsibility to provide or ensure is PPP models. provided. The focus on long-term assets highlights the long-term nature of a PPP contract. PPPs generally involve fixed assets but ŠŠYong’s chapter on PPPs in Commonwealth countries (Yong projects may also include related long-life assets that are purpose 2010, 87–104) includes 11 case studies in the water, transport, or site-specific, such as train rolling stock. Table 1.2 - PPPs by Sec- power, and health sectors in Africa, Asia, and the Caribbean. tor—Examples and Resources provides a few examples of the types Section 1.1 What is a PPP: Defining “Public-Private Partnership” 13 Table 1.2 PPPs by Sector—Examples and Resources Sector Project Types Overview Sources Transport Roads, tunnels, and bridges The USDOT Case Studies of Transportation PPPs (US 2007) reviews international PPP Rail experience with PPPs in transport, including case studies on bridges and highways from the United Mass transit systems Kingdom, Europe, Australia, China, India, Israel, and Argentina. Ports Menzies and Mandri-Perrott’s publication on private sector participation in light rail (Menzies Airports and Mandri-Perrott 2010, Annex 1) includes detailed case studies of PPPs for 12 light rail systems in the United Kingdom, Malaysia, the Philippines, Thailand, Canada, and South Africa. Water and Bulk water treatment Marin (Marin 2009) reviews in detail experience with PPPs for urban water utilities in developing waste Water distribution and sewerage systems countries, drawing from over 65 PPPs. Solid waste management services An IFC report on lessons learned (IFC 2010) presents lessons from several water PPPs. Power Generation assets Eberhard and Gratwick (Eberhard and Gratwick 2010) describes the experience with Independent Distribution systems Power Producers (IPP) in Sub-Saharan Africa. Eberhard et al (Eberhard et al. 2016) present five country cases in the same region. Eberhard et al (Eberhard et al. 2014) focuses on renewable energy IPPs in South Africa. Maria Vagliasindi (Vagliasindi 2013) examines power sector reforms that led to PPPs in China, Peru, Brazil, and Mexico. An IFC report on lessons learned (IFC 2010) presents lessons from several power PPPs. Social and Education—school facilities and services A Deloitte report on how PPPs can help close the infrastructure gap (Deloitte 2006, 19–28) government Health—hospitals and other health facilities provides a helpful overview of PPP experience in a wide range of sectors, particularly social infrastructure and services infrastructure. IFC’s Handshake (WB 2015c) publication presents examples and cases on health Prisons care and other economic and social infrastructure PPPs. Urban regeneration and social housing projects LaRocque’s paper on contracting for the delivery of education services (LaRoque 2005) includes examples of PPPs in the education sector. ŠŠA paper by Farlam on PPP experience in Africa (Farlam 2005) vate sector participation can be envisaged in consonance with presents lessons learnt from eight PPP projects in the transport, India’s policy framework. prisons, telecommunications, water, power, and tourism sectors. ŠŠThe World Bank Group’s Handshake series (WB 2015c) com- ŠŠThe World Bank’s review of lessons learned from Out- prises quarterly publications, each focusing on the use of PPPs put-Based Aid projects (Mumssen et al. 2010) summarizes in a different sector or context. the experience accumulated to date from infrastructure proj- ects involving private sector participation and output based aid ŠŠThe PPIAF website (PPIAF-Resources) includes reviews of PPP provisions—including PPPs —in the communications, roads, projects in several developing countries. For more information energy, water, health, and education sectors. on how PPPs have been used in developed markets, see the Eu- ropean Investment Bank’s European PPP reports (DLA Piper ŠŠThe Asian Development Bank’s scoping study on irrigation 2009), which provide a detailed review of country experience and drainage (Varma et al. 2013) identifies the areas where pri- and list of PPP projects throughout the region. 14 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Key References: What is a PPP? Reference Description Delmon, Jeffrey. 2010. “Understanding Options for Private-Partnership Describes in detail the different PPP contract types and nomenclature, and which Partnerships in Infrastructure: Sorting out the forest from the trees: BOT, also introduces a new classification of PPP contracts intended to clarify and DBFO, DCMS, Concession, Lease....” Policy Research Working Paper 5173. facilitate comparison Washington, DC: World Bank. Yescombe, E.R. 2007. Public-Private Partnerships: Principles of Policy and Chapter 1: “What are Public-Private Partnerships” describes the range of PPP Finance. Oxford: Butterworth-Heinemann. structures and how these are classified. Farlam, Peter. 2005. Working Together: Assessing public-private partnerships in Reviews PPP experience in Africa, with detailed case studies of eight projects in Africa. NEPAD Policy Focus Series. Johannesburg: South African Institute of the transport, prisons, telecommunications, water, power, and tourism sectors. International Affairs. Groom, Eric, Jonathan Halpern, and David Ehrhardt. 2006. “Explanatory Note 4: “Regulation and Private Sector Contracts” describes typical features of Notes on Key Topics in the Regulation of Water and Sanitation concession, lease, and management contracts in the water sector. Services.” Water Supply and Sanitation Sector Board Discussion Paper 6. Washington, DC: World Bank. Yong, H.K., ed. 2010. Public-Private Partnerships Policy and Practice: A Section 7 reviews PPP experience in Commonwealth developing countries. Annex Reference Guide. London: Commonwealth Secretariat. 5 presents case studies of 11 PPP projects, in the water, transport, power, and health sectors in Africa, Asia and the Caribbean. Dobbs, Richard, Herbert Pohl, Diaan-Yi Lin, Jan Mischke, Nicklas Garemo, Describes the deficit in infrastructure investments, and makes the case for Jimmy Hexter, Stefan Matzinger, Robert Palter, and Rushad Nanavatty. improved project selection/management as well as more efficient usage of existing 2013. Infrastructure productivity: How to save $1 trillion a year. New infrastructure. York: McKinsey Global Institute. Woetzel, Jonathan, Nicklas Garemo, Jan Mischke, Martin Hjerpe, and Describes state of global infrastructure needs and opportunities to mitigate the Robert Palter. 2016. Bridging Global Infrastructure Gaps. New York: spending deficit. McKinsey Global Institute. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and Chapter 2: “Defining Public-Private Partnerships” focuses on how PPPs differ Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private from privatization and management contracts; and describes user-fee and Partnerships in Emerging Markets. Washington, DC: World Bank. availability-based PPPs. Several case studies throughout the book provide examples of PPPs in developing countries. Mumssen, Yogita, Lars Johannes, and Geeta Kumar. 2010. Output-Based Reviews experience with private participation in infrastructure projects supported Aid: Lessons Learned and Best Practices. Directions in Development Finance. by output-based aid, in the communications, roads, energy, water, health, and Washington, DC: World Bank. education sectors. DLA Piper. 2009. European PPP Report 2009. London: DLA Piper. Provides an overview of the status and direction of PPP in Europe, detailed reviews by country, and a list of projects in the pipeline and implementation in the report year. US. 2007. Case Studies of Transportation Public-Private Partnerships Around Reviews international PPP experience with PPPs in transport, including case the World. Washington, DC: United States Government, Department of studies on bridges and highways from the United Kingdom, Europe, Australia, Transportation, Federal Highway Administration. China, India, Israel, and Argentina. Menzies, Iain, and Cledan Mandri-Perrott. 2010. “Private Sector Annex 1 provides case studies of light rail PPP projects from the United Participation in Urban Rail: Getting the structure right.” Gridlines Note No. Kingdom, Malaysia, the Philippines, Thailand, Canada, and South Africa. 54. Washington, DC: Public-Private Infrastructure Advisory Facility. Marin, Philippe. 2009. Public-Private Partnerships for Urban Water Utilities: Reviews the experience of 65 PPPs in the water sector in developing countries, A Review of Experience in Developing Countries. Trends and Policy Options finding consistent improvements in efficiency and service quality. No. 8. Washington, DC: World Bank. Section 1.2 Infrastructure Challenges and How PPPs Can Help 15 Reference Description Eberhard, Anton, and Katharine Nawal Gratwick. 2010. IPPs in Sub- Reviews experiences of Independent Power Producers (IPP) in Sub-Saharan Saharan Africa: Determinants of success. Washington, DC: World Bank. Africa, including a comprehensive list and details of all IPP projects in the region. Deloitte. 2006. Closing the Infrastructure Gap: The Role of Public-Private Page 5 provides a succinct description of different PPP contract types. The report Partnerships. New York: Deloitte. also briefly reviews international PPP experience in transport, water and waste, education, housing, hospitals, defense, and prisons. IFC. 2011. “Health and PPPs.” Handshake, A Journal on Public-Private The issue on Healthcare examines international experience in healthcare PPPs, Partnerships. Washington, DC: International Finance Corporation. particularly in developing countries, and draws lessons for how successes can be replicated. Features the Lesotho Hospital PPP, and reviews experience in Ghana, India, and Mexico. LaRoque, Norman. 2005. “Contracting for the Delivery of Education Describes the different ways in which the private sector is engaged in education, Services: A Typology and International Examples.” Paper presented at the including through PPPs. Pages 20–24 focus on international PPP experience PEPG and World Bank Conference, “Mobilizing the Private Sector for in schools. Public Education.” Cambridge, MA, October 5-6. Yescombe, E.R. 2017. PPPs in Sub-Saharan Africa: Case Studies for Presents ten case project studies examining the practical policy issues and lessons Policymakers. Dar es Salaam, Tanzania: Uongozi Institute. from each case. Caribbean. 2017. Caribbean PPP Toolkit. Washington, DC: World Each module presents several project examples and case studies illustrating best Bank, Inter-American Development Bank and Caribbean Development practices in the PPP project cycle. Bank. APMG. 2016. Accessed March 19, 2017. PPP Certification Program Guide. Chapter 1 Section 2 of the PPP Certification Guide discusses the definition of In eight chapters. APMG-International. Website. PPPs and the variety in interpretation that exists. Reyes-Tagle, Gerardo, and Karl Garbacik. 2016. Policymakers’ Decisions on Evaluates the criteria that governments utilize when deciding to procure a project Public-Private Partnership Use: The Role of Institutions and Fiscal Constraints. using a PPP. Washington, DC: Inter-American Development Bank. 1.2 Infrastructure Challenges and unreliable, and some areas are simply not served. As of 2016, it was estimated that: How PPPs Can Help Infrastructure is critical for economic development, reducing ŠŠOver 2.4 billion people lacked access to improved sanitation poverty and inequality, creating jobs, and ensuring environmen- tal sustainability. Infrastructure generates high social returns and ŠŠAt least 663 million people lacked access to safe drinking water is welfare enhancing. Governments are ultimately responsible for the provision of public services and the infrastructure required for ŠŠOver one billion people lived without access to electricity their delivery. Infrastructure investment is often part of the social compact between a government and its citizens. ŠŠAt least one-third of the world’s rural population was not served by an all-weather road Inadequate infrastructure is a constraint on growth and impacts quality of life, particularly in developing countries. When the de- Degradation of infrastructure also implies that actual economic mand for infrastructure services outstrips supply, congestion or growth will be lower than forecasts, as forecasting methodologies service rationing occurs; the quality of service delivery is low or typically assume stable infrastructure performance. 16 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Infrastructure investment poses pervasive challenges to govern- set of pre-agreed performance indicators and by requiring the ments. First, agency problems involving different actors and taking latter to invest significant, long-term capital. different forms throughout the project cycle require complex gov- ernance arrangements. The agency problems are compounded by Thus, the incentive framework embedded in PPP contracts can fos- the fact that infrastructure projects typically involve large sums of ter efficiency gains and those gains should outweigh the additional money and are therefore susceptible to corruption and bribery. For cost of private finance. When the decision to implement a PPP is example, the politicians and public servants who decide on project based on the government’s perceived inability to deliver the service selection and implementation as agents of taxpayers and users may by other means, the PPP route will at least ensure that the service be tempted to buy votes with the promise of new infrastructure, is delivered—but at a higher cost than under efficiency conditions even if this means following unsustainable fiscal policies. Gains (see Section 3.2.4 - Assessing Value for Money of the PPP). The PPP from the announcement of a project are immediate, whereas the may still be effective, though not efficient. pain will only be felt by electors long after they have cast their vote. Flaws in the incentive framework, and more generally, the Countries with relatively long PPP histories have found that PPPs rules governing agency problems throughout the project cycle, are manage construction relatively better than traditional public pro- a major reason why infrastructure projects often fail to meet their curement, with projects coming in on time and on budget more timeline, budget, and service delivery. often. This is because of the incentives created by the PPP struc- ture, which give the private party more control over project design Second, most countries are not spending enough to provide the in- and implementation while simultaneously preventing the reward frastructure needed to reach universal access and meet the Sustain- of cost overruns. able Development Goals (SDGs) (UN SDG) as defined by the United Nations. Moreover, the quality of infrastructure delivery The long-term investment horizon of PPP contracts can also help is often disappointing—construction of new assets costs more and ensure that assets are maintained in a good, serviceable condition. takes longer than expected, and service delivery is poor. Finally, in- frastructure assets are often poorly maintained, increasing costs and In fragile and conflict-affected states (FCS), PPP-like structures can reducing benefits. These issues are discussed further in the report help attract private investment and increase service delivery. This is on Barriers to Infrastructure Service Delivery in Sub-Saharan discussed in greater detail in Section 1.2.5 - Infrastructure in Fragile Africa and South America by Castalia (Castalia 2014). and Conflict-Affected States. How PPPs Can Help The mechanisms by which PPPs can improve infrastructure deliv- ery are often called value drivers—that is, instruments to maximize PPPs can help overcome some of these pervasive challenges, value for money. These value drivers—as described in Box 1.2 - as illustrated in Figure 1.2 - The Challenges with Infrastructure and PPP Value Drivers are often integrated into PPP policies. How PPPs Can Help. For example: PPP limitations, pitfalls, and complementary ŠŠUnder the right circumstances, PPPs can mobilize additional measures needed sources of funding and financing for infrastructure. There are problems that PPPs cannot solve, or that PPPs may exac- ŠŠBy subjecting potential projects to the test of attracting private erbate. First, PPPs may appear to relieve funding problems more- finance, PPPs can enhance project selection. than is the case, as government’s fiscal commitments to PPPs can be unclear. This can lead to governments accepting higher fiscal ŠŠThe incentives of the private sector can be aligned with the in- commitments and risk under PPPs than would be consistent with terests of the contracting authority throughout the entire life prudent public financial management, particularly when PPPs are cycle of the project, including the implementation phase. This treated as off-balance sheet. While PPPs can contribute to better alignment occurs by tying-in the private operator’s revenue to a project analysis and adoption of innovative solutions that foster Section 1.2 Infrastructure Challenges and How PPPs Can Help 17 Box 1.1 The Sustainable Development Goals and PPPs World leaders gathered at the International Conference on design. To meet the SDGs, infrastructure investments must be Financing for Development in 2015 and adopted the 17 Sustainable prioritized based on their environmental, social and economic Development Goals (SDGs) and related 169 targets. The 2030 sustainability. The private sector needs to be incentivized in Agenda for Sustainable Development and the Addis Ababa finding cost-efficient solutions to solve sustainable development Action Agenda on Financing for Development (FfD) provide the challenges. Involving the private sector can help not only to framework for the SDGs. They are intended to galvanize policy increase the stock of infrastructure assets but also strengthen their makers across the world through concrete targets for the 2015– resilience, create more sustainable solutions and improve access to 30 period for poverty reduction, food security, human health infrastructure services. Incorporating sustainability considerations and education, climate change mitigation, the construction of into procurement processes, through project specifications resilient infrastructure, and a range of other objectives across and award criteria, for example, can also enhance the impact of the economic, social, and environmental spheres. The SDGs are infrastructure investments. The SDGs can also help mobilize high- ambitious—they will require a step change in the level of both level political action behind an infrastructure project. public and private investment in all countries. Creative solutions are needed to mobilize private sector investment and innovation, SDG targets often reflect the aims of a specific goal while also and blend commercial financing with public funding. reaching across other goals and targets. Thus, a PPP project may address one primary goal and several secondary goals and targets. The IISD blog on infrastructure’s role in the SDGs highlights For example, when considering a potential water PPP, alignment that infrastructure is both an explicit and implicit component of with government strategy to achieve Goal 6 will strengthen the the SDGs’ goals and targets. Hence, the SDGs may be useful in project; at the same time, the project may contribute to reducing articulating and rallying support for infrastructure development the number of deaths and illnesses from hazardous water policy. Goal 9: ‘Build resilient infrastructure, promote inclusive and pollution (Target 3.9), and the proportion of untreated wastewater sustainable industrialization, and foster innovation’ is particularly (Target 6.3). Upgrading an existing wastewater infrastructure relevant. The Addis Ababa Action Agenda emphasizes in paragraph should contribute to resource-use efficiency and adoption of 44 the role of PPPs in support of the 2030 Agenda. Moreover, the environmentally sound technologies and industrial processes SDGs may help clarify the goals, targets, and indicators around (Target 9.4). which a country will frame its development priorities, including the delivery of public services through PPPs. Demonstrating infrastructure policy alignment with SDGs may also help governments attract attention and financing from multilateral Governments can use the SDGs as a framework to foster an development banks and funds. enabling environment for infrastructure investment and set important targets to trigger changes in project selection and Sources: (UN 2015); (Casier 2015) efficiency, responsibility for planning and project selection remains governance framework fostering transparency and accountability primarily with the public sector—moreover, the unclear fiscal costs are prerequisites for successful public investment projects. Evidence and contractual inflexibility of PPPs can render these tasks more suggests that improved management can reduce infrastructure delicate. The advantages of private sector participation in con- shortfalls by making better use of existing infrastructure facilities structing and managing infrastructure, including improved incen- and more efficient use of public resources on greenfield projects. tives to carry out regular maintenance, also depend on effective Ultimately, many governments may need to commit more resourc- PPP contracting and procurement by the government. es to deliver quality infrastructure projects. These limitations mean that PPPs are not a panacea or a reme- The four problems with infrastructure project implementation dy for all infrastructure performance problems. Figure 1.2 - The shown in Figure 1.2 - The Challenges with Infrastructure and How Challenges with Infrastructure and How PPPs Can Help highlights PPPs Can Help will be described in this section as well as whether important ingredients for improved infrastructure delivery. Sound and how PPPs may be able to help, and PPP limitations or pitfalls public decision-making based on comprehensive analysis and a that may exacerbate the problem. 18 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Box 1.2 PPP Value Drivers PPP value drivers are the mechanisms that can be used to improve constraints typical in the public sector. value for money in infrastructure provision. They include the following: • Innovation—specifying outputs in a contract, rather than prescribing inputs, provides wider opportunity for innovation • Whole-of-life costing—full integration, under the responsibility by the private partner. Competitive procurement of these of one single party, of up-front design and construction contracts incentivizes bidders to develop innovative solutions with ongoing service delivery, operation, maintenance and for meeting these specifications. refurbishment, can reduce project costs. Full integration • Asset utilization—optimizing the utilization of assets for incentivizes the responsible party to complete each project delivery of additional services leading to multiple revenue phase (design, build, operate, maintain) in a way that minimizes streams for the project. For example, the utilization of space total costs and maximizes efficiency. in bus terminals for private vendors or unused space for • Risk transfer—risk retained by the government in owning and advertisements. operating infrastructure typically carries substantial, and often, • Mobilization of additional funding—charging users for services unvalued, hidden cost. Allocating some of the risk to a private can bring in more funding, and can sometimes be done party which can better manage it, can reduce the project’s better or more easily by private operators than the public overall cost to government and minimize risk to the taxpayer. sector. Additionally, PPPs can provide alternative sources of • Upfront commitment to maintenance, and predictability and financing for infrastructure, where governments face financing transparency of whole-of-life costs—a PPP requires an upfront constraints. commitment by the private operator to the whole-of-life cost • Accountability—government payments are conditional on the of providing adequate maintenance for the asset over its private party providing the specified outputs at the agreed lifetime. This commitment strengthens budgetary predictability quality, quantity, and timeframe. If performance requirements over the life of the infrastructure, and reduces the risks of are not met, service payments to the private sector party may funds not being available for maintenance after the project is be abated. constructed. The Partnerships Victoria’s Practitioner’s Guide (VIC 2001) • Focus on service delivery—allows a contracting agency to published in 2001 clearly set value drivers as the basis for the State enter into a long-term contract for services to be delivered of Victoria, Australia’s PPP program. PricewaterhouseCoopers when and as required. The PPP firm can then focus on service (PWC)’s paper on the “PPP promise” (PWC 2005, 13–34) and Deloitte’s paper on PPPs (Deloitte 2006, 5–9) both succinctly delivery without having to consider other objectives or describe these benefits of PPPs. 1.2.1 Insufficient Funds Various studies have identified and tried to quantify this funding gap, for example: Infrastructure investment is typically under-funded—that is, most countries are not investing enough to meet strategic objectives, ŠŠIn 2010, the World Bank’s diagnostic study of infrastructure such as universal access or poverty eradication. This suggests that in Africa estimated that Sub-Saharan Africa needed to spend many economically beneficial projects are not being implemented. $93 billion a year on infrastructure, of which only $45 billion was already being met through existing sources—such as gov- This problem is particularly prevalent in developing countries, as ernment spending, user charges, private sector investment, and noted in the World Bank report: Closing the Infrastructure Gap other external sources—creating a total funding gap of $48 bil- (UN 2016). lion (Foster and Briceño-Garmendia 2010, 6–9, and 65–86). Section 1.2 Infrastructure Challenges and How PPPs Can Help 19 Figure 1.2 The Challenges with Infrastructure and How PPPs Can Help INFRASTRUCTURE CHALLENGES HOW PPPs MAY HELP COMPLEMENTARY ACTIONS Additional sources of funding Better allocation of fiscal Insufficient funds and financing resources Poor planning and project Private sector analysis and selection innovation Low coverage Low quality y Low reliability y Inefficient or ineffective Private sector incentives and Improved public sector capacity delivery life cycle management and governance Long-term investment Inadequate maintenance perspective ŠŠAccording to the 2013 Inter-American Development Bank’s increased productivity to actions that can help increase public infrastructure strategy, the additional investment needed in finance despite fiscal constraints. infrastructure in Latin America amounted to $100 billion per year—two percent of regional GDP over an extended period As noted in the World Bank Africa infrastructure diagnostic (IDB 2014). study (Foster and Briceño-Garmendia 2010, 65–86) referenced above, the funding gap can be a symptom of other problems in ŠŠThis funding gap is not unique to developing countries—a infrastructure delivery. The authors found that $17 billion, or 35 2007 OECD report on Infrastructure to 2030 identified percent of the funding gap, could be attributed to inefficiency in a widening gap between the infrastructure investment need- existing spending due to poor governance, poor planning of in- ed for the future and the capacity of the public sector to meet vestments, under-investment in maintenance, under-charging for those requirements from traditional sources (OECD 2007a, services, and operating inefficiencies. Chapter 1). How PPPs can help—infrastructure funding ŠŠ2013 McKinsey Global Institute report on infrastructure and finance productivity (Dobbs et al. 2013) estimated $57 trillion (updat- ed to $49 trillion in 2016) in infrastructure investment would Many governments turn to PPPs because they recognize that more be globally required until 2030—simply to keep up with pro- investment in infrastructure is needed to meet their strategic ob- jected global GDP growth. The amount required for investment jectives, but face fiscal constraints or high gearing ratios that limit is more than the estimated value of today’s worldwide infra- their ability to undertake additional projects through tradition- structure stock. al public procurement. Although fiscal space is one of the most common motivations for using PPPs, it is also among the most ŠŠThe 2016 McKinsey Global Institute report: Bridging Glob- debated. The extent to which PPPs genuinely enable governments al Infrastructure Gaps (Woetzel et al. 2016) updates data on to increase spending on infrastructure depends on the nature of global infrastructure needs and provides a look at infrastructure the project in question. User-pays contracts create long-term fiscal investment trends since the global recession. The report also space for the government, while contracts that include availability outlines opportunities to alleviate the spending deficit from payments create fiscal space only in the short-term. 20 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Governments often call for private financing for infrastructure discounts, passes for frequent users, combinations of train projects, ignoring the need for sufficient funding (from user fees or and bus tickets, and even special off-peak passes for unem- government budgets) for serving private operator debts and reward- ployed persons. In practice, this freedom, allied to commer- ing equity holders. Some development analysts refer to a funding cial expertise, attracts a larger pool of users, increasing proj- gap instead of a financing gap for infrastructure—private capital ect revenue. will not flow into projects that do not present adequate potential returns. Obtaining additional private finance will always require ŠŠNew revenue streams from greater asset utilization—raising increased funding over time, to recover and remunerate that private revenues from alternative uses for infrastructure assets can re- finance—PPP operators may help generate additional commercial duce the net cost of the infrastructure to government or users. revenue, but user fees and government payments will always be the For example, developing a commercial area inside of an airport, main source of funding. or even a bus terminal. Typically, the private partners have a greater ability to identify and utilize assets and increase project In general, there is scope to increase funding streams for public affordability. infrastructure projects by modeling user charges where appropriate, capturing property value, or selling existing assets. The proceeds ŠŠCustomizing projects to maximize user utility and increase from the sale of assets can also be recycled for financing new infra- cost recovery—Private partners may adapt a project design to structure. improve asset utility to users. As users receive additional value from the asset, they are more willing to contribute toward cost The possibility of collecting user fees should not be, by itself, the recovery. Fertagus rail service, in Portugal, is a good example of reason for establishing a PPP—fees may also by collected in pub- this innovative approach—by combining the rail transportation lically-financed projects, as happens in many toll roads around the project with a bus transportation network in the neighborhood world. Nevertheless, PPPs can sometimes help increase the fund- of each station, together with parking facilities at each station, ing available for infrastructure—that is, bring in more revenue to the PPP operator was able to convert the project into a profit- pay for infrastructure services, including: able commercial venture, eliminating the previous need for gov- ernment subsidization. ŠŠIncreased revenue from better implementation of user fees by introducing targeted user charges, or reducing leakage in the Governments can also implement user charges, collect revenues ef- collection of charges. For example: fectively, or find innovative alternative uses for infrastructure—as described in Engel, Fischer, and Galetovic’s paper PPPs: When yyThe N4 Toll Road in Mozambique and South Africa was and How (Engel et al. 2009, 7–13) and in their book (Engel et developed as a toll road under a PPP, since neither govern- al. 2014). PPPs therefore do not increase the resources available ment had the funds to invest otherwise. A single cross-border for infrastructure over the alternative of traditional government operator allows for cross-subsidization from the South Afri- provision if users are charged the same for the service and those can side to the Mozambican side, making tolls affordable for charges are collected. However, the authors note that governments users; the PPP model has created pressure for operators to can sometimes find it difficult to charge users a cost-reflective tariff maintain the road, serving users, and for governments to pre- for publicly-provided services. vent overloading (Farlam 2005, 9–10), and (PPIAF 2009). The availability of private funds to invest in PPP projects should yyThe Fertagus suburban rail service in Lisbon, Portugal pro- not be a reason for implementing a PPP—the decision should in- vides an example on the role of PPPs in increasing revenues. volve a cost/benefit, value-for-money assessment of the PPP, as de- The PPP contract does not require the operator to charge scribed in Section 3.2.4 - Assessing Value for Money of the PPP. The specific user fees. The operator is simply contractually bound cost of transferring risk and responsibility to a private party may be by a cap on the average fee per passenger per kilometer. This too high, considering alternative implementation modes. Investors’ means that it is free to use commercial criteria in establishing interest should be directed to those projects where the impact on a range of rates within the cap, such as providing off-peak service delivery and value to society will be the highest. Section 1.2 Infrastructure Challenges and How PPPs Can Help 21 abilities that may also affect the sustainability of the government’s debt and fiscal position). Box 1.3 Funding versus Financing The terms funding and financing are often used Engel, Fischer, and Galetovic’s paper (Engel et al. 2009, 9) sug- synonymously, however, there is a technical distinction that gests the extent to which PPPs can help relieve borrowing con- is important to understand: straints depends on the nature of the constraint. PPPs can help relieve short-term liquidity constraints, enabling commercially via- Financing: Money required at project outset to begin ble user-pays PPPs to be built. Engel, Fischer, and Galetovic argue, implementation, primarily for asset construction however, that PPPs are less likely to help when a government is Funding: Money required to meet repayment obligations considered insolvent—in this case, it may be difficult for the gov- and remunerate the project financiers, namely debt and ernment to credibly enter into a long-term contract giving up a equity holders potential source of future revenue. So a PPP may not be considered viable by investors. On the other hand, in a 2011 paper on Chile’s In many languages, the same word is used for financing PPP Experience (Fischer 2011, 17–18, and 27–28), Fischer de- and funding. For example: financiamento in Spanish and Portuguese, financement in French. scribes how multilaterals’ involvement in a PPP can improve the credibility of the government’s commitment to the contract—in- creasing the potential of PPP to help governments overcome debt constraints. Some governments use PPPs as a financing mechanism to over- come short-term cash budget constraints by spreading the cap- The extent to which using PPP can enable governments to over- ital cost of a project over its lifetime. Governments implementing come borrowing constraints also depends on how the PPP is ac- cash-based accounting systems only recognize an expenditure when counted for. As described in Section 2.4.4 - Fiscal Accounting and it is incurred. Thus, the capital costs of traditionally procured in- Reporting for PPPs, while international norms and standards con- frastructure are charged as expenditure when the construction pay- tinue to evolve, PPP assets and liabilities are increasingly recognized ments take place (typically two to three years), even if the asset is fi- in the government’s accounts and financial statistics. If this trend nanced by borrowing. PPPs, by contrast, create cash outflows over a is confirmed, financing of PPPs will become subject to the same long period of time. A PWC paper on PPPs (PWC 2005, 17–19) accounting constraints as public borrowing for infrastructure proj- illustrates how the payment profile for a PPP differs from that of ects—effectiveness and efficiency will then be the sole reasons for a traditionally-financed project. This practice can enable govern- utilizing PPPs. ments facing short-term cash budget constraints to undertake in- frastructure investment sooner. The accounting advantage for PPPs PPP pitfalls—using PPPs to bypass public disappears under a full accrual accounting system, in which capital financial management controls investments are depreciated over time. While there are some instances in which PPPs can increase the fis- Finally, PPPs may be able to help governments overcome public cal space available for infrastructure, in practice these are limited. sector borrowing constraints. Governments often face a bor- In the case of government-pays PPP projects, the cost of the in- rowing constraint which may arise from prudent public financial frastructure is ultimately met from the public purse. For a given management policies or contractual obligations with multilateral project, the stream of availability payments under a PPP is not very institutions. This constraint may prevent commercially viable, fully different from the repayment schedule of a debt-financed public user-pays infrastructure projects to be implemented in the public procurement scheme. sector. Under a PPP, the project is financed by private sector rath- er than public sector borrowing and in some circumstances this Absent real efficiency gains, this means the apparent fiscal advan- may enable a government to overcome its borrowing constraint tages of PPP arise from accounting quirks—the limitations of cash (although as noted in Section 2.4 - Public Financial Management budgeting, or the definition of public sector debt. At best, this can Frameworks for PPPs, such projects typically create contingent li- create budgeting issues; at worst, it can enable governments to use 22 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS PPP to bypass their own prudent public borrowing and budget from public expectations that must be satisfied. In addition, moral limits—creating a temptation to spend more now, in response to hazard may occur if the private investors perceive that the govern- political and other pressures to deliver new and improved infra- ment cannot afford to let their PPP project fail. They may then structure. force a renegotiation of the PPP contract to obtain a tariff revision or to force the government to shoulder the cost of an unexpected Abrantes de Sousa’s paper on Portugal’s PPP experience (Sousa event, even though the general economic equilibrium of the con- 2011) describes how inadequate control of the PPP process allowed tract is not in jeopardy. the Government of Portugal to take on significant fiscal exposure to its PPP contracts, contributing to its 2011 fiscal crisis. Abrantes Accepting these risks could be consistent with good risk allocation, de Sousa describes how the PPP program has created budget prob- as described in Section 3.3 - Structuring PPP Projects. However, do- lems, and highlights the incentives faced by agencies to use PPPs ing so creates contingent liabilities for government—the cost of simply to loosen budget constraints. The United Kingdom’s Pri- which can be harder to assess than the direct liabilities and upfront vate Finance Initiative (PFI—a large British PPP program) has also capital costs created by a traditional government investment proj- come under criticism for concealing the cost of the government’s ect. As a result, governments often take on significantly more fiscal obligations. A United Kingdom House of Lords Select Commit- risk under PPP projects than they had expected, or than would be tee inquiry into PFI (UK 2009, 16–18) found that many witness- consistent with prudent fiscal management. es imputed the choice to use PFI to the fact that the government’s commitments under these contracts were often not recognized as Fiscal risk can be compounded by the influence of optimism bias part of public debt. on project decision-making (see Section 1.2.2 - Poor Planning and Project Selection). For example, a government may agree to pro- Recognizing these challenges, the treatment of PPP in public sector vide a demand guarantee for a project, as optimistic forecasts may accounts has evolved over time. The latest public sector account- suggest it has no cost. Contracting authorities can also have an in- ing standards require most PPP assets and liabilities to be included centive to overestimate demand to hide the need for subsidies and in government balance sheets, as described in Section 2.4 - Public push through projects that are not viable. The cumulative impact Financial Management Frameworks for PPPs. However, at the time over several PPP projects can create substantial fiscal risk. More- a PPP project is approved, the future payment commitments may over, public resources may go into projects that do not provide val- still not be included in budgets and expenditure plans, which often ue for money, as costs turn out to be higher or benefits lower than do not look more than one to three years ahead. Section 2.4 - Public initially expected. Financial Management Frameworks for PPPs provides guidance on how governments can manage the fiscal implications of PPPs to All this may be exacerbated in contexts of poor fiscal transparency. help avoid these problems. Partial disclosure on the state of public finances may create distor- tions—for instance, disclosure of direct commitments, but not of PPP pitfalls—fiscal risk contingent liabilities, may incentivize the adoption of costly proj- ects, with low base-costs and very high contingent commitments. Even where a PPP is expected to generate additional resources— for example, by charging users for services—governments typically Irwin’s book on government guarantees (Irwin 2007, Chapters bear or share certain project risks. For example, governments may 2 and 3) provides examples of how guarantees have been used, in provide guarantees on risk factors such as demand, exchange rates, some cases creating large exposure for the government, and de- or certain costs; while PPP contracts often contain compensation scribes some of the reasons governments make bad decisions re- clauses in case of termination of the agreement for a range of rea- garding guarantees. sons. Even with no guarantees, every PPP contract will present im- plicit contingent liabilities. For instance, liabilities arising from the As noted above, in addition to the government’s explicit liabilities need to preserve the project in case of SPV bankruptcy, or resulting such as guarantees, PPPs can give rise to implicit liabilities—that is, Section 1.2 Infrastructure Challenges and How PPPs Can Help 23 non-contractual liabilities that arise from moral obligation or pub- 1.2.2 Poor Planning and Project lic expectations for government intervention—that create further Selection fiscal risk—see (Polackova 1998). Weak contracts and ineffective enforcement can mean that governments fail to really achieve risk Scarce resources are too often spent on poorly-selected projects that transfer to the private sector. Again, this means that governments fail to achieve benefits commensurate with their cost. The result end up bearing significantly more risk than they had expected can be under-used assets and poor service delivery at a higher cost when projects were initially implemented. than necessary. These systematic problems result from: Box 1.4 - Excessive Fiscal Risk—Examples from Colombia, Korea, ŠŠPoor planning and coordination—good sector and cross-sec- Mexico, United Kingdom provides examples of PPPs for which the tor planning and coordination are needed to ensure that the government ended up making large, unexpected payments, either best projects—those that represent good value for money, en- as a result of called guarantees (i.e. guarantees which resulted in a able integrated regional development, and provide customers claim) or realization of implicit liabilities. with the services they desire—are consistently selected. Without Box 1.4 Excessive Fiscal Risk—Examples from Colombia, Korea, Mexico, United Kingdom Governments often provide guarantees to PPP projects, which equity” for the construction instead of in cash. Debt financing often cost more than expected. For example: for the projects was on a floating-rate basis and provided by local banks—many of them government-owned—which • In the 1990s, the Government of Colombia guaranteed might have faced government pressure to lend. By 1997, a revenue on toll roads and an airport, as well as payments by combination of lower-than-forecasted traffic volumes and utilities that entered long-term power purchase agreements interest rate rises pushed the government to restructure the with independent power producers. Lower-than-expected entire toll road program and bailout the concessions. In total, demand and other problems required the government to make the government took over 25 concessions and assumed $7.7 payments of $2 billion by 2005. billion in debt. • Also in the 1990s, the South Korean government guaranteed • The United Kingdom National Air Traffic Services (NATS) was 90 percent of forecast revenue for 20 years on a privately partially privatized, to separate the air traffic control functions financed road linking the capital, Seoul, to a new airport at from the Civil Aviation Authority. Under a PPP arrangement, Incheon. When the road opened, traffic revenue turned out to NATS was to be paid a fee based on airline traffic volumes. The be less than half the forecast. The government has had to pay PPP company took on considerable debt for its investments tens of millions of dollars every year. and operations. After the 9/11 attacks, airline traffic fell below PPP projects can also create substantial implicit liabilities for forecasts and the company was in danger of not meeting its governments. When PPP projects are financially distressed, debt obligations. To reduce the perceived risk of a disruption in governments can be under significant pressure to bail them out to service, the United Kingdom government injected £100 million avoid disruptions in service. For example: of equity into the project company. • Between 1989 and 1994, Mexico embarked on an ambitious Sources: (Irwin 2007); (Kim et al. 2011); (Ehrhardt and Irwin 2004) road building program, awarding more than 50 concessions for 5,500 km of toll roads. The concessions were highly leveraged because equity contributions were made in the form of “sweat 24 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS sound plans, responsible agencies will not have the full view of yyPolitics or personal gain interfering with the project selec- potential projects that could be implemented, will not know tion process; increasing costs, or diverting funds to less ben- the sequence in which to implement the projects to achieve eficial projects. An IMF analysis of corruption in public the best value for money, and cross-sector coordination will be investment in infrastructure (Tanzi and Davoodi 1998) weak. Box 1.5 - Mumbai Water—Example of Poor Planning in found corruption tends to create a bias towards capital Infrastructure provides an example of how weak infrastructure spending projects, and increase their size and complexity— planning can mean projects fail to achieve value for money. The reducing the productivity of that investment. 2016 McKinsey report on infrastructure investment (Woet- zel et al. 2016) identifies $49 trillion required globally between The IMF report on infrastructure efficiency (IMF 2015a), focus- 2016 and 2030 to approach fulfilling infrastructure needs. ing on the quality of investment, instead of its volume, identified The 2013 McKinsey Report on infrastructure productivity average inefficiencies in public investment processes of around 30 (Dobbs et al. 2013) notes that scaling up best practice could percent across countries, according to their estimates, better public save an average of $1 trillion a year in infrastructure costs during investment management could increase investment expenditure by that period. as much as two-thirds of the estimated additional needs. ŠŠFlawed analysis—the analysis underpinning project selection These factors often feed into each other. For example, weak analysis is often flawed, so projects that appeared to be cost-benefit jus- or poor planning can enable badly-chosen projects to be pushed tified turn out not to be so in practice. Benefits are often over- through for political or personal gain, as described in the World estimated, resulting in projects that are larger or more complex Bank’s sourcebook on deterring corruption in the water sector than is justified by demand for services, while costs are often (WB 2008, Chapter 6). Flyvbjerg’s studies (Flyvbjerg 2005) also under-estimated. The United Kingdom Government’s Green emphasize that costs and benefits can be deliberately misrepresent- Book on project assessment (UK 2011a, 29–30) acknowledges ed, to push through projects for political or organizational reasons. this as a systematic problem and highlights the need to correct for optimism bias in project analysis. UK Treasury supple- How PPPs can help—project assessment mentary guidance on optimism bias (UK 2015a) presented and design evidence on the extent of optimism bias dating from the early 2000s. A global series of studies of large transport projects by Under the right circumstances, PPPs can help improve infrastruc- Flyvbjerg—(Flyvbjerg et al. 2002); (Flyvbjerg et al. 2003); (Fly- ture project selection, by harnessing the analysis and ideas of pri- vbjerg 2005); (Flyvbjerg et al. 2005)—found that costs are sys- vate sector investors, whose financial returns depend on getting tematically underestimated, and benefits often overestimated: cost and revenue forecasts right. yyA study of 258 transport projects found that actual costs Private investors and lenders undertake their own project analysis were on average 28 percent higher than planned costs—and based on their experience and strong, profit-driven incentive to as- 65 percent higher on average for projects outside Europe and sess benefits and costs. Lenders to project finance transactions, in North America. particular, carry out extensive project due diligence, as described in Section 1.3 - How PPPs Are Financed. A 2002 Standard and yyA study of 25 rail projects found traffic was heavily overesti- Poor’s study (Bain and Wilkins 2002) found that traffic forecasts mated, at over twice actual traffic, on average. The accuracy for toll roads commissioned by banks tended to be less optimistic of traffic forecasts for 183 road projects was also found to be than those commissioned by other agencies, including developers highly variable, but without a tendency to overestimate. and governments, although still biased on average. Guarantees on the debt of the private party, or lax termination payments, may re- Additional evidence and analysis on estimation bias is presented in duce lenders’ due diligence efforts, therefore reducing this relevant Australia’s report on overbidding for toll roads (AU 2012). source of value for the public sector. Section 1.2 Infrastructure Challenges and How PPPs Can Help 25 The PPP tender process can therefore act as a filter for non-viable projects. As described by Engel, Fischer, and Galetovic (Engel et Box 1.5 Mumbai Water—Example al. 2009), if the private sector sponsor and lenders are asked to of Poor Planning in Infrastructure shoulder revenue and cost risks under a PPP, a non-viable project may simply not attract private interest. For example, a McKinsey The experience of the Municipal Corporation of Greater report on infrastructure challenges in India (Gupta et al. 2009, Mumbai provides an example of weak planning in the water 25–27) notes that several of the National Highways Authority of sector. The Corporation was looking for ways to improve the efficiency of its operations. Mumbai is short of water, India (NHAI)’s toll road projects did not attract bidders—in some with supply rationed to around four to six hours a day in cases demand forecasts were too high; in others, bidders found most parts of the city. Corporation planners were working NHAI’s cost estimates to be low, and the project not viable on on new schemes to transport water from hundreds of more conservative cost assumptions. Conversely, Engel, Fischer kilometers outside the city. Consultants engaged through and Galetovic (Engel et al. 2009) note that if the government is the World Bank analyzed the cost of achieving a 24-hour bearing a risk—for example, by providing a demand guarantee— water supply in one ward (K-East) entirely with new supply, and compared this with the cost of achieving 24-hour water then a non-viable project could still be profitable for the private supply through improving the distribution system to reduce partner, reducing the filtering ability of PPPs. leakage and theft. The consultants estimated that the cost of distribution improvements would be one sixth or less of Experienced private companies can also be well-placed to identify the cost of bulk supply increments, for the same level of infrastructure needs, and come up with innovative ideas to meet service improvements. The size of the discrepancy suggests them. Accepting unsolicited proposals for PPP projects from pri- that the Municipal Corporations’ planning had been biased toward large projects. vate companies can be a way to capitalize on these ideas. While unsolicited proposals can be a useful source of ideas to improve Source: (Kulkarni 2008) project selection, they need to be subject to the same analysis and competitive procurement as other major government investments. Section 3.7 - Dealing with Unsolicited Proposals describes how some investment priorities and the unsolicited proposal may exacerbate governments have introduced policies to encourage unsolicited weaknesses in planning and coordination between sectors or across proposals, while subjecting them to rigorous analysis and compe- regional boundaries. Also, in generating project ideas, private firms tition. focus in those that are financially viable, but may not propose eco- nomically beneficial projects that would require government con- PPP limitations and pitfalls—poor planning tributions. and project selection If a PPP program is not well designed, the inflexibility of resulting While the PPP process can provide more information and addi- PPP contracts may create sector planning challenges. As described tional analysis to inform project selection, the government remains in the United Kingdom House of Lords’ review of the PPP responsible for choosing which projects to implement and which program (UK 2009, 28–29), PPP projects constitute a long-term procurement method to use. This limits the extent to which PPPs commitment, which can be expensive to change if needs change can help improve project selection. Indeed, PPPs may even distort (or were misunderstood in the first place). Although changes in investment priorities—low priority projects may go ahead simply traditional public procurement also imply added costs, these are because they are easier to do. typically lower than under a PPP, since the absence of long-term contractual commitments allows easier recourse to the market and Foremost, PPPs do little to improve planning. Where PPP projects competitive pressure. initiate from government, private companies can only respond by avoiding projects that do not appear viable, as described above. By There are limtations on the extent to which PPPs can improve proj- then, considerable time and resources have already been invested ect analysis. First, the private sector is not immune to optimism bias. in the planning phase. Where PPP ideas are generated by private The Standard & Poor’s (S&P’s) (Bain and Wilkins 2002) analysis investors, the projects may not be aligned with the government’s mentioned above shows lenders make more realistic assumptions 26 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Table 1.3 Comparing PPP and Public Procurement in Australia Average Over Budget (% of Average Time Overrun (% original cost estimate) of original time estimate) Source Comparison PPP Public PPP Public Original approval to final 12 35 13 26 Infrastructure Partnerships Australia, 2007 (Duffield and Raisbeck 2007) Contract to final 1 15 -3 24 Original announcement to 24 52 17 15 final Duffield review of PPP performance, 2008 (Duffield 2008) Budget approval to final 8 20 12 18 Contract to final 4 18 1.4 26 than public agencies—nonetheless they still overestimate traffic (Rajaram et al. 2014) presents good practices in this field, and in- forecasts. The more conservative traffic forecasts commissioned by cludes a chapter on PPPs (Chapter 7). banks still overestimate traffic by almost 20 percent—see (Bain and Polakovic 2005). In Spain (Vassallo et al. 2012), traffic estimates by The policies and processes presented in Module 2 - Establishing the concessionaires that were awarded several PPP toll road contracts PPP Framework and Module 3 - PPP Cycle of this Reference Guide, have proven to be even more optimistic—revenue generated by the and in the references listed, can help governments avoid the plan- companies could barely cover the interest of the outstanding debt. ning and project selection challenges that can undermine the effec- tiveness of PPP projects. Secondly, where the private party to a PPP is not bearing traffic risk, or other project risks, the incentive for rigorous analysis is 1.2.3 Weak Management weaker. PPP structures can even weaken government incentives for rigorous analysis, by obscuring the costs and risks the government A common rationale for involving the private sector in infrastruc- bears (see the pitfalls described under Section 1.2.1 - Insufficient ture provision is that the private sector is more efficient and effec- Funds). tive at managing infrastructure construction projects, and at man- aging service delivery once the assets are in place. Finally, PPPs can provide an opportunity for corruption, which may bias project selection. Where project selection is not based on The quality of infrastructure service delivery by government enti- analysis but rather influenced by corruption or pursuit of political ties is often constrained by limited capacity and weak management gain, PPPs are also likely to be affected. Guidance on assessing cor- incentives. Training, retaining, and leading qualified professionals ruption risk, and mitigating it, is provided in a series of World Bank is often harder in the public sector. This increases the cost of infra- sourcebooks on governance in the water (WB 2008), electricity structure. For example, the World Bank’s Africa infrastructure (WB 2009b), and roads (WB 2009c) sectors. Lack of a proper diagnostic study (IMF and WB 2016, 71–74) estimates that in- Public Investment Management system, as well as the existence of a efficiencies in state-owned utilities and infrastructure providers in parallel selection process exclusively for PPPs, create additional op- Sub-Saharan Africa cost around $6 billion a year. It also reduces the portunities for mismanagement and corruption—Anand Rajaram benefits users get from the service. et al’s book on the power of Public Investment Management Section 1.2 Infrastructure Challenges and How PPPs Can Help 27 Studies comparing PPPs and publicly-procured or run infrastruc- Construction companies interviewed by the United Kingdom Na- ture have found that PPPs can achieve better results in both con- tional Audit Office indicated that PPPs “impose a greater disci- struction of new infrastructure assets, and in infrastructure service pline” on project cost. This is because PPPs usually do not allow delivery. Still, achieving these benefits, and ensuring they translate for contract modification due to changes in costs, and private fi- into lower infrastructure costs for taxpayers and users, depends on nanciers have greater scrutiny over the specifications of the project. the government structuring, procuring, and implementing the PPP That is, private companies’ returns on a PPP depend on complet- effectively; and could be undermined where weak government or ing the project on time and on budget—creating stronger incen- private sector capacity results in poorly-run tender processes or tives than under public procurement, where changes to project cost poorly drafted contracts, and frequent renegotiation. are often at the expense of the contracting authority. In turn, this means private companies make more careful and conservative esti- How PPPs can help—improved construction mates of costs in the first place, helping reduce the optimism bias of new assets described in Section 1.2.2 - Poor Planning and Project Selection. PPPs have been found to reduce construction time and cost over- How PPPs can help—improved service runs for new infrastructure assets compared to traditional public delivery and management procurement. There have been relatively few studies on the impact of private sec- Evidence suggests that the proportion of PPP projects coming in tor participation on infrastructure operation. Nonetheless, avail- over budget or late is lower than in traditionally-procured projects. able evidence suggests that private sector participation can improve In Australia, two studies have broken down the project develop- service delivery and management efficiency, compared to govern- ment process to allow more detailed comparison. As evidenced in ment-run infrastructure services. Table 1.3 - Comparing PPP and Public Procurement in Australia, PPPs consistently performed better in achieving lower project cost For example, a comprehensive 2009 World Bank study (Gassner over-runs. Comparing the timing of project delivery, both PPPs et al. 2009) analyzed the effect of introducing private sector par- and traditionally-procured projects both took longer than expect- ticipation through concessions or full privatization of utilities. ed. These studies support the claim that the cost estimates embed- The study used econometric analysis to assess performance of over ded in PPP contracts tend to be more accurate than those prepared 1,200 water and electricity utilities, in 71 developing and transi- for traditional procurement. However, they are inconclusive on tion countries. The study found significant efficiency gains when whether the PPPs projects are necessarily more economical than private sector participation was introduced—including reduced traditionally procured projects. The studies suggest delays occur water losses and increased staff efficiency. These gains came along- at different stages of the process. The complex contracting process side improvements in service delivery, with increased coverage and means PPPs can experience delay at an earlier stage in the process, daily hours of service. A study by Marin of private participation but tend to come in on time once contracted. Publicly-procured in urban water utilities (Marin 2009), also in 2009, analyzed the projects may be contracted more quickly, but this is more than performance of 65 large water PPPs and similar contracts (includ- offset, on average, by delays in implementation. ing management contracts) in developing countries worldwide. Marin also found that introducing a private operator consistently Some practitioners suggest that government agencies engaging in improved operational efficiency and service quality. PPP procurement are improving their overall practices by focusing on whole-life cost and benefits. According to the House of Lords’ The Transportation Research Board’s report on highway life-cy- review of the PPP program (UK 2009, 19–20), improvements in cle costs (Flannery et al. 2016) discusses life-cycle cost analysis public procurement in the United Kingdom may be narrowing the for highways and presents the approaches utilized by government gap with PPPs. agencies and PPP bidders/operators. 28 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Box 1.6 When PPPs fail—The case of the 1993 water concession in Buenos Aires In the 1990s Argentina implemented a major concessions program There is evidence that the private operator increased investment, in the water sector. Water and sanitation concession agreements and that it expanded access—Suez claims it extended access with private operators were signed in 28 percent of the country’s to water to two million people, and access to sanitation to one municipalities covering 60 percent of the population. The more million people. In 1999, it started programs to provide access to widely-known contract was the concession for public water and slums—but soon the Argentinian economic crisis disrupted the sewerage services for Greater Buenos Aires, signed in 1993 plans. with a consortium led by the French firm Suez. The concession soon showed positive results—labor productivity almost tripled, After the 2001 economic crisis, the Argentinian government froze service coverage increased, reliability and responsiveness water tariffs, condemning most concessions to renegotiation, improved, and the price of service fell. However, teething and several of them to early termination—as was the case of the problems also appeared—poor availability of information to users Buenos Aires concession, which was terminated in 2006. and the public, lack of transparency in regulatory decisions, and the ad hoc nature of government interventions. Consumers were Sources: (Crampes and Estache 1996); (Estache et al. 1999); not reassured that their welfare was being protected, and the (Alcazar et al. 2000) sustainability of the concession was in doubt. PPP limitations and pitfalls—PPP Reference Guide, governments need to approach the market with a implementation failures well-structured PPP project under an appropriate tender process. Where this is not the case, bidders may simply not participate; or PPPs can achieve efficiency improvements in the delivery of infra- may make bids that are either incomparable with each other (as structure, as described above. However, creating the incentives to based on varying assumptions) or deliberately low, with a view to achieve efficiency gains, and ensuring the public and users reap the resolving uncertainties through post-bid negotiation. This can be a benefit, depends on the government effectively structuring, procur- challenge even in countries with long PPP experience. For example, ing, and managing the PPP project over its lifetime. This achieves the House of Lords’ Review of PPPs in the United Kingdom (UK competitive tension, real risk transfer, and ensures anticipated per- 2009, 20–21) describes how negotiations at the preferred bidder formance improvements materialize in practice. This can be diffi- stage led to price increases in many PPP projects. cult where low public sector capacity means that governments lack the resources and skill to structure and manage PPPs well. Guasch’s comprehensive review of PPP experience in Lat- in America (Guasch 2004) highlights a further challenge with A PPP program may also present a short-term negative impact on achieving the benefits of competition—the incidence of renego- public sector capacity—a NAO audit report on the British prison tiation of PPP contracts. Of a sample of over 1000 concessions PPP program (NAO 2003a) notes that PPP prison directors were granted in the Latin America and Caribbean between 1985 and generally recruited from the ranks of experienced Prison Service 2000, Guasch found that 10 percent of electricity concessions, 55 governors, benefiting from the experience and skills of former pub- percent of transport concessions, and 75 percent of water conces- lic sector employees. Other PPP programs experienced the same sions were renegotiated. These renegotiations took place an average effect. Implementing a PPP program requires active measures to of 2.2 years after the concessions were awarded. create or retain enough expertise for managing the PPP contracts themselves. Guasch suggests this high incidence of renegotiation soon after concession award may reflect flaws in the initial tender processes, Implementing a competitive procurement process for PPPs can be weak regulation, or opportunism on the part of the private party or difficult. As described in detail in Module 3 - PPP Cycle of this government. Most renegotiations were favorable to the operator— Section 1.2 Infrastructure Challenges and How PPPs Can Help 29 for example, resulting in increased tariffs, or reduced or delayed (ASCE 2009, 1–4) estimates that poor road conditions cost motor- investment obligations. In these cases, the efficiency savings from ists $67 billion a year in repairs and increased operating costs, while cost discipline may not have been passed on to the public sector. leaking pipes lose an estimated seven billion gallons of clean drink- ing water a day. The Infrastructure Report Card website (ASCE- Abrantes de Sousa’s review of the PPP program in Portugal IRC) discusses several key criteria regarding infrastructure quality: (Sousa 2011, 9–10) describes a similar tendency. Abrantes de Sou- level of maintenance, capacity, physical condition, funding, public sa notes that the government’s apparent willingness to renegotiate safety, resilience, and innovation. It recommends that all projects contracts undermines the competitive process, with bidders engag- greater than $5 million use life cycle cost analysis and develop a ing in strategic bidding to win the contract, to renegotiate it later plan for funding the project, including its maintenance and opera- without competition. tion, until the end of its service life. Moreover, effective management of a PPP transaction is only the The Pacific Region Infrastructure Facility, after reviewing main- start of the process. For a PPP to be sustainable over the long term tenance in their region, considered that a Build-Neglect-Rebuild requires a consistent level of commitment and capacity from the approach was being used for infrastructure (PRIF 2013). government and private parties over time. Where this is not the case, whether due to changing government priorities or external How PPPs can help—improved maintenance pressures, the PPP may ultimately fail—this is described in Box 1.6 - When PPPs fail—The case of the 1993 water concession in Bue- PPPs can improve maintenance of infrastructure assets by improv- nos Aires. ing incentives for both private contractors and governments to make quality maintenance a priority. 1.2.4 Inadequate Maintenance PPPs bundle construction or rehabilitation and ongoing mainte- Infrastructure assets are often under-maintained, either because nance into a single contract. This incentivizes the private company maintenance is poorly planned or because planned maintenance is to build the asset to a high quality upfront, reducing the need for deferred. Political consideration or pursuit of personal gain often maintenance (resulting in a lower whole of life cost of the asset), biases infrastructure expenditure towards new assets over mainte- as described in a 2010 United Kingdom National Audit Office nance, as described in an IMF analysis of corruption in infra- report on PPP performance (NAO 2010a, 8). structure (Tanzi and Davoodi 1998). The private party then faces a strong incentive to carry out ade- Inadequate maintenance increases lifetime costs while also decreas- quate maintenance. In the case where its revenue depends on user ing benefits. Regular maintenance is usually the lower-cost way to fees, the operator has an incentive to make sure the asset meets per- keep infrastructure assets at serviceable standards, compared to the formance requirements and attracts users. Under government-pays alternative of allowing quality to degrade until major rehabilitation PPPs, the operator’s revenue typically depends both on the avail- work is needed. The World Bank’s Africa infrastructure diagnos- ability of the asset over time, and the operator’s ability to meet tic study (Foster and Briceño-Garmendia 2010, 15) estimates that specific levels of service quality. In this case, PPP contracting also preventative maintenance for the roads sector in Africa could save forces governments to commit upfront to making adequate fund- $2.6 billion a year in capital expenditures rehabilitation. In South ing available to maintain an asset over time. This can help over- Africa, a review of road maintenance by the South African Na- come the tendency to cut maintenance budgets down the line and tional Roads Agency (ZA 2004b, 36) indicates that delaying road thereby delay necessary maintenance and rehabilitation. maintenance for three years leads to increased costs of six times the original costs of preventative maintenance. If road maintenance is PPP operators not only have the incentive to maintain assets, but delayed for five years, costs rise to 18 times the preventive cost. also the means to do so. A life-cycle approach, combined with pri- vate finance, forces bidders to prepare financial models that include The poor performance of under-maintained infrastructure can be allocations for maintenance—whereas government agencies are de- costly for users. For example, a U.S. Engineers’ Association report pendent upon appropriation of budgetary funds. 30 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Engel, Fischer, and Galetovic (Engel et al. 2009) note the im- Box 1.7 Performance Based portance of effective monitoring in achieving the potential ben- efit of improved maintenance. Road Contracts—Improving Maintenance of Infrastructure ŠŠIf the contractor does not have much equity or other financial stake in the project, meaning it would rather walk away from Performance-based road contracts have proved successful a contract than spend on costly maintenance. This risk is de- in improving the quality of road maintenance—a pervasive scribed further in Section 1.3.2 - Considerations for Government, problem in many countries. For example: on the danger of over-leveraged projects. Chad suffers from poor maintenance of its road network because of poor design of maintenance contracts with ŠŠTowards the end of the contract, when the contractor knows it private contractors, as well as lack of domestic funding. In will not reap the benefit of further maintenance investments. 2001, Chad awarded a performance-based maintenance Well-designed contracts require specific clauses dealing with the contract for 441 kilometers of unpaved roads (seven handback during the final phase of the concession. percent of the country’s road network), which pays a lump- sum fee per kilometer of road maintained to pre-defined standards. The roads have since met and even exceeded A 2008 OECD paper discusses maintenance in PPP projects and performance standards. argues that effective transfer of risk and responsibility to the PPP operator will likely not happen in the absence of competitive pro- Argentina also has experience with private-sector curement (OECD 2008a). These limitations can be mitigated performance contracts on their road networks. The through good contract design, as described further in Section 3.4 performance-based contracts have improved maintenance - Designing PPP Contracts. and reliability of the roads up to a specified standard agreed with the government, and have saved the Government of Argentina almost 30 percent in additional capital 1.2.5 Infrastructure in Fragile and expenditures for rehabilitation. Conflict-Affected States Sources: (Hartwig et al. 2005); (Liautaud 2001) Countries are classified as fragile and conflict-affected states (FCS) for diverse reasons. The OECD Principles for Good Internation- al Engagement in Fragile States (OECD 2007c) describe FCS as Some types of PPP or related contracts reward improved mainte- facing development challenges “such as weak governance, limited nance directly. For example, Frauendorfer and Liemberger (Frau- administrative capacity, chronic humanitarian crisis, persistent so- endorfer and Liemberger 2010, 34–37) describe performance-based cial tensions, violence or the legacy of civil war.” Conflict-affected contracts for non-revenue water reduction. Infrastructure provides states differ from post-conflict states, and fragility takes different examples of performance-based maintenance contracts, which forms depending on the strength of their institutions and their abil- share many characteristics of PPP, and which have proved effective ity to enforce the rule of law. A legacy of corruption and cronyism, at improving maintenance in the road sector. as described in the Brookings paper on multinational engage- ment to support economic growth (Nelson 2014, 10), hinders PPP limitations—need for effective contract trust between the public and private sector. design and regulation These conditions create uncertain, high-risk business environments In some circumstances, the ability of PPPs to create incentives to that the private sector is reluctant or even unable to engage with. improve maintenance will be limited. This may be the case: More than 70 percent of FCS rank in the bottom quartile of the World Bank Group’s Doing Business rankings (DB). In addi- ŠŠIn user-pays PPPs, where the PPP company is a monopoly tion, essential infrastructure facilities are usually scarce and in poor provider, or for government-pays PPPs, if quality and safety condition; access to public services is limited; and the quality of standards are not carefully specified, monitored, and enforced. service delivery is poor. Section 1.2 Infrastructure Challenges and How PPPs Can Help 31 The OECD report on service delivery in fragile situations ports and airports are also more likely to attract quality investors, (OECD 2008b, 21) shows that the lack of government capacity as are telecommunications and energy projects, particularly in the to provide services creates a vicious cycle of poverty that reinforces generation sector. fragility and may exacerbate or renew conflict. The most common success factors in attracting the private sector These create challenges for PPPs, where the long pay-back phase are: for the private sector investor/lenders leaves them exposed to public sector risk over an extended period. This means that classic PPP ŠŠOpen and transparent procurement processes, free of bribery models are not well suited to such situations and either and corruption ŠŠMore traditional government-pay models may be needed; or ŠŠRights of redress at international courts, especially in case of change in government and/or expropriation of assets or removal ŠŠThe normal PPP models will need to be heavily modified or of concession rights underpinned; or ŠŠAbility to collect revenues and tariffs ŠŠA more limited ambition to create some form of private sector service provision (short of PPP) may be pursued as an interim ŠŠAbility to ring-fence and expatriate foreign currency revenues phase of development. ŠŠAffordability of the tariffs for local users and if not, local govern- More likely, a mixture of all three solutions will need to be consid- ment and donor support to bridge the gap ered as part of an overall program of reform. Additionally, in those situations in which private finance is obtained at a high-risk premi- ŠŠFairness of local employment laws um, it is important to include mechanisms within the contract to trigger refinancing as and when risk within the given FCS country ŠŠMost importantly, security and the rule of law decreases. Refinancing project debt is discussed in greater detail in Section 1.3.2 - Considerations for Government. Three examples of successful private sector engagement in the pro- Private provision of public services can alleviate these sources of fra- vision of services in FCS are set out below: gility and create economic opportunities to spur economic growth. Even where private investment is limited or contracts cannot be ŠŠPurely private investment – In Somalia (Feldman 2007), the long-term, private involvement in the provision of services—man- collapse of the central government in 1991 resulted in the de- aging operations and delivering service—can be critical to creating struction of the telecommunications sector. Slowly, private op- the conditions for the emergence of a virtuous cycle of peace, stabil- erators began providing satellite communication devices to meet ity, growth, poverty alleviation, and shared prosperity. the demand. This ultimately culminated in the creation of a network of private operators in 1998. By 2007, despite the lack As countries have varying degrees of institutional development, of a cohesive government in place, the country’s telephone cov- governance, or capacity already in place, private sector engagement erage reached 87 percent. should be tailored to each country’s specific context. Various forms of private engagement can be used. Those that have lower capital ŠŠManagement contract – The World Bank-financed Power Re- requirements and short-term horizons, such as management con- covery Project in Guinea (IFC 2016) brought in Veolia-Seu- tracts, affermage, lease contracts, and O&M contracts, are partic- reca, a private French consortium, to manage the operations of ularly appropriate. The affermage, lease contracts, and O&M con- Électricité de Guinée. This management contract is designed tracts, are particularly appropriate. The APMG PPP Certification to improve EDG’s technical, commercial and financial perfor- Guide (APMG 2016, Section 3.2) discusses each of these solu- mance and enhance the electricity services for approximately tions. Business opportunities generating foreign currencies such as 300,000 households. 32 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS ŠŠO&M contract - In Haiti (Brault et al. 2015), the Rural Water If, however, PPP-like structures as defined in this Guide are to be Supply and Sanitation Project significantly increased access and used, for instance in post-conflict countries, it may be necessary to sustainability of water services by utilizing O&M contracts with include multilateral institutions that can provide guarantees and small, private operators throughout the Sud region. insurance products that reduce the risk for private investors. Like- wise, mechanisms can be put in place to ringfence foreign revenues; These types of engagements may allow FCS governments to gain arbitration can be moved offshore; profit repatriation can be regu- proficiency in negotiating contracts with private sector companies. lated by treaties. They can also contribute to building trust and credibility with pri- vate sector partners. With the support of PPIAF, the World Bank and several academ- ic institutions created the Body of Knowledge on Infrastructure Including the private sector in a reform dialogue that supports the Regulation (PURC 2012), a website which provides guidance and implementation of transparent, inclusive, and efficient policies links to more than 500 references on regulation. The site helps gov- and regulatory practices may enhance the investment climate and ernments define regulatory standards, and includes a section with incentivize private investment. Cambodia has regularly convened specific guidance on infrastructure in FCS. the Government-Private Sector Forum since 2001. The resulting reforms generated $69.2 million in cost savings to the private sector Several examples of project development organizations that may as of 2015. The CIPE article on public-private dialogue (Bet- act as offer such products are: tcher et al. 2015) provides a methodology for conducting this di- alogue. ŠŠIFC Infraventures (Infraventures), a global infrastructure proj- ect development fund that provides early stage risk capital and FCS also often suffer from capacity deficits in the public and local experienced project development support (Infraventures 2015) private sector, making public-private engagement and collabora- tion challenging. It may be difficult to select an appropriate partner ŠŠInfraCo, comprised of (InfraCo Africa) and (InfraCo Asia), and design a good agreement—particularly when some firms are project developers in lower-income countries established by the willing to pay bribes or when officials request bribes to influence Private Infrastructure Development Group (PIDG) procurement. Governments have benefited from the advice of ex- perienced transaction advisors to design and implement competi- ŠŠPacific Region Infrastructure Facility (PRIF), which supports tive tender processes. infrastructure development and maintenance in Pacific Island Box 1.8 The Pamir Private Power Project In Tajikistan, the Gorno-Badakhshan Autonomous Region suffered Although the project faced numerous challenges in implementation from major energy shortages following independence from the due to difficulty in securing contractors and materials, it was Soviet Union in 1991 and a subsequent five-year civil war. Economic finished on time and on budget in 2006. It later faced issues and human development were choked by this lack of energy. with the population’s adjustment to higher energy tariffs and a culture of non-payment but these challenges were overcome To improve this situation, the Government of Tajikistan signed over time and Pamir was eventually even able to grow energy a 25-year PPP agreement with Pamir Energy to upgrade and output enough to export to Afghanistan. As of 2016, the project operate the region’s out-of-date hydroelectric utility with financial is providing renewable energy for 226,000 people in Tajikistan and and technical assistance from the Aga Khan Fund for Economic 28,500 in northern Afghanistan with an eye for expansion to a Development, the World Bank, the Swiss Economic Cooperation further 170,000 in Afghanistan over the next five years. Office and the IFC. Sources: (Jumaev 2016); (WB 2012b) Section 1.2 Infrastructure Challenges and How PPPs Can Help 33 ŠŠCountries through investment coordination, research and tech- Traditionally, hazards from weather and disaster-related events nical assistance were estimated through probability distributions of historic data and trends. However, today’s changing climate is posing unpredict- Some countries also find it useful to outsource contract enforce- able risks. Incidence patterns of tropical storms, floods and heat ment to an independent party in attract quality investors. Although waves cannot be extrapolated from past records nor can their se- investing in the capacity of the public and private sectors should verity. Many factors contribute to the uncertainty, including the be the long-term goal, governments may use skilled intermediaries path of future emissions and the sensitivity of the climate system to and transaction advisors in the short term to compensate for these concentrations of atmospheric greenhouse gas (GHG) emissions. deficiencies as recommended in the Brookings paper on multina- A changing climate not only represents a risk in terms of increased tional engagement to support economic growth (Nelson 2014, frequency and intensity of extreme weather events, but also through 11). gradual, longer-term incremental changes. The diversity of situations in FCS countries does not allow for gen- As of 2017, the most sophisticated climate forecasting models are eralizations on the proper path for infrastructure delivery. Improv- not reliable at the regional level, let alone the project level. For ex- ing legislation, building capacity, and fostering a good investment ample, there remains a high degree of uncertainty regarding rainfall climate may not be enough. In some cases, PPPs can survive very in western Africa; some models predict a significant increase, others difficult conflict situations—as in Cote d’Ivoire where the PPP a massive decrease. Faced with such uncertainty, governments need utility company continued to deliver electricity to its customers to build their infrastructure facilities to withstand scenarios that during its civil war. And PPP projects may be successful when the could derail their projects, rather than build for one specific sce- investment climate for private sector participation is sufficiently nario. The World Bank report on Investment Decision-Making enhanced, as in the Pamir Private Power Project in Tajikistan pre- under Deep Uncertainty (Hallegatte et al. 2012) outlines a path sented in Box 1.8 - The Pamir Private Power Project. for practitioners to build robust infrastructure in the face of these highly uncertain outcomes, keeping the cost of being wrong about future events as low as possible. 1.2.6 Climate Change and Natural Disasters A World Bank study: The Costs of Adapting to Climate Change for Infrastructure (WB 2010, 10) highlights how climate change The risk of natural disasters affects infrastructure projects and must poses a dynamic risk factor to multiple infrastructure investments. be considered throughout the project cycle. Climate change intro- PPP policy frameworks and procurement processes need to be de- duces additional challenges by increasing uncertainty and the prob- signed and managed to take account of climate-related uncertain- ability of extreme weather events. PPPs, as long-term contracts, re- ties, especially in the case of large-scale infrastructure investments. quire particular care in the identification, mitigation and allocation of risk. This section focuses on whether and how PPPs can be uti- As PPP contracts are long-term and generally inflexible arrange- lized when facing climate change and natural disaster-related risks. ments with lock-in effects, failure to address climate risks exposes stakeholders to long-term vulnerabilities over the life of the asset. Impacts of climate change on infrastructure are expected to wors- If unaddressed at the beginning of the investment decision-mak- en in the future. Therefore, climate change considerations should ing process, the public sector, by default, remains the party of last be factored into government decisions regarding infrastructure, resort when an infrastructure asset delivering public services stops irrespective of delivery or financing mechanisms. The scientific functioning properly because of a climate event. Private partners community predicts that the intensity and frequency of extreme will seek redress from the public sector to compensate their losses weather conditions around the globe will increase in the medium unless the PPP contract stipulates otherwise. term. Thus, the critical infrastructure at the foundation of basic economic activity is at risk. For example, in the energy sector, rising temperatures and extreme weather conditions can lead to unmet energy demand, rising costs for cooling and asset damage. 34 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Climate change and PPP policies treme weather conditions and natural disasters, including the oc- currence of stranded assets. At the national level, good practice consists of incorporating cli- mate change policies and commitments into PPP policy frame- The traditional measures to address climate change risks such as works and/or Public Investment Management (PIM) guidelines. relief and compensation Agreements, force majeure, asset insur- An OECD policy paper (OECD 2009) discusses how to main- ance, and other contractual provisions that trigger renegotiations stream climate change at the national, sectoral, project and local are generally enforced at the project level. They are discussed in level. This is a critical step towards building a systematic institu- detail in the World Bank Report on Recommended Contractual tional approach to climate change. The lessons from national level Provisions (WB 2017e). These measures are mainly ex-post reac- efforts in the UK and Australia are summarized in a World Bank tive measures. They seek to redress the impacts and damages to the study on alignment of climate change policies in the PPP poli- infrastructure after the event. However, parties involved in the PPP cy frameworks (WB-Risk). They may provide guidance to policy contracts may use legal and other contractual loopholes such as un- makers in middle income and developing countries. Further, policy insurable events and force majeure clauses to disclaim responsibility makers can utilize country-level climate change and disaster risk for the cost of repairs/rebuilding and leave the government with indices and screening tools to frame their sectoral infrastructure the burden of shouldering these costs. Embedding the systematic policies in line with the specific potential risks and impacts of their adoption of some type of insurance in the national infrastructure geographic zone. or PPP policy will increase the cost of infrastructure but reduce the fiscal hardships caused by extreme climate events and natural Governments can seek policy, financial and technical support from disasters. multilateral institutions in many areas including screening for cli- mate change and disaster risks. International financing instruments Chile has addressed this issue by stipulating that earthquakes are not include the Green Climate Fund (GCF), which allocates resources considered force majeure in the country because of their frequency; to climate-resilient and low emission projects and programs. Also, indeed, earthquakes are evidently not unexpected events there. The several Climate Investment Funds (CIF) support governments at Chilean PPP law (CL 2010b) states that catastrophic risk must the development planning and project financing stages. These in- be covered by insurance—in practice exempting earthquakes from struments can be used to finance infrastructure resilience and can consideration as an event of force majeure. In the 1980s, Chile faced potentially absorb the cost of adaptation. significant fiscal costs due to infrastructure damage following fre- quent earthquakes. However, in recent decades, Chile developed its Adaptation and mitigation measures road network utilizing PPPs, requiring mandatory insurance from private partners. As a result, the 8.8 magnitude earthquake in Chile Mitigation and adaptation measures are needed when addressing in 2010, where infrastructure losses totaled $21 billion, had almost climate change. Adaptation refers to the impact of climate change no fiscal impact on roads built through PPPs. This is good prac- on infrastructure assets and what can be done to reduce their vulner- tice—the Chilean approach should be emulated wherever possible. ability, and enhance their resilience. Mitigation addresses strategies or actions taken to remove or reduce the level of GHG emissions. Countries where the incidence of natural disasters is high should re- The Intergovernmental Panel on Climate Change (IPCC 2017) quire insurance protection for major events. For example, as earth- sets out strategic considerations for adaptation and global-scale quakes are common in Chile, so are hurricanes in the Caribbean. mitigation, and presents near-term response options. NASA pro- For projects where insurance is not available, governments could vides scientific data supporting this two-pronged approach. The consider protecting against disaster-related force majeure events by European Climate Adaptation Platform (CLIMATE-ADAPT obtaining catastrophic protection through a Catastrophe Deferred 2017) provides tools and methodology for addressing adaptation. Section 1.3.4 - Third Party Risk Mitigation and Credit Enhancement. Broad policy and institutional reforms integrating both mitigation and adaptation approaches into the PPP framework are critical to However, due to the unpredictability of low-probability, high-cost ensure that infrastructure projects are designed to consider costs climate change-related events, this approach will not be feasible for and measures that provide a buffer from the consequences of ex- such events as sea level rise or changing extreme weather patterns. Section 1.2 Infrastructure Challenges and How PPPs Can Help 35 The costs of adaptation measures at the early stages of an infrastruc- the private sector. In these circumstances, risks cannot be trans- ture project are small compared to the future costs of rebuilding or ferred to third parties and must be faced by governments—PPP op- repairing infrastructure. Retrofitting infrastructure, i.e. redesigning erators will not assume those risks. They will be explicitly allocated the asset after construction, is extremely expensive and sometimes to government in the contract, or implicitly through force majeure impossible. A World Bank study (ESMAP, 5) estimates that ad- provisions. As PPP operators do not bear the consequences of ex- aptation measures cost no more than two percent of the total cost treme risk events, their incentives to design resilient infrastructure of infrastructure assets. This estimate may vary depending on the will be limited. type of infrastructure, location, and other factors. However, pre- ventive adaptation actions at an early stage of the project cycle can When procuring PPPs, governments usually transfer responsibility generally help avoid high future costs if climate conditions worsen. for asset design to the private sector, which will obey economic Moreover, the probability that an infrastructure asset will continue rationality to satisfy the contractually-defined project goals. When to provide its services over its intended lifespan is enhanced when significant risks affect government rather than the private sector, it is financed and built with climate risk considerations. An ac- the contracting authority needs to play a more active role in defin- ademic study on Climate Change and Infrastructure Impacts ing minimum project characteristics to protect the public sector (Schweikert et al. 2014) on roads shows how pro-active adaptation and the users from extreme risk events, for example, prohibiting measures result in lower fiscal costs and higher connectivity rates project construction in flood or landslide prone areas or defining as early as 2025. Examples of options, recommendations and best strict construction standards. More generally, climate change-relat- practices for adapting to climate change for infrastructure in the ed risks need to be identified specifically throughout the procure- PPP context are set out further in this section. ment process. This is described in greater detail in Section 3.2.1 - Assessing Project Feasibility and Economic Viability. Addressing natural disasters in PPP policy Finally, if mitigation is likely to require a costly and uncertain pro- Commercial insurance provides coverage for most natural disasters. cess of adaptation over time, such as evolving specifications or main- However, some risks cannot be quantified and therefore priced by tenance standards, then a PPP may not be the optimal solution. Box 1.9 The Uruguay Weather Derivative Uruguay’s state-owned public electric company, Administración On December 18, 2013, the World Bank executed a $450 Nacional de Usinas y Trasmisiones Eléctricas (UTE) relies on million weather and oil price insurance transaction for UTE. The hydropower to generate more than 80 percent of its energy transaction insured the energy company for 18 months against needs. When rainfall and/or accumulated water reserves is low, drought and high oil prices. To measure the extent of a drought UTE must purchase alternative fuels (mostly oil and natural gas) and potential insurance payouts to the company, the transaction as inputs. When the price of oil is high, generation costs become measured and collected daily rainfall data at 39 weather stations expensive, affecting UTE’s bottom line, and creating problems for spread throughout the two river systems on which Uruguay’s both consumers and the national budget. hydropower is dependent: the Rio Negro and Rio Uruguay. If precipitation fell below the level set up as trigger of the contract, In 2012, water shortages increased UTE production costs to a UTE would receive a payout of up to $450 million based on the record $1.4 billion, far exceeding the company’s original projections severity of the drought and oil price levels. of $953 million. To cover the gap, UTE borrowed funds from the market, drew from the country’s $150 million Energy Stabilization Source: (WB 2014) Fund, and increased consumer rates. The Government of Uruguay asked the World Bank for technical support to hedge UTE’s financial exposure to low rainfall and high oil prices. 36 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Key References: Infrastructure Challenges and How PPPs Can Help - Problems with Infrastructure Reference Description Foster, Vivien, and Cecilia Briceño-Garmendia, eds. 2010a. Africa’s Presents the results of the Africa Infrastructure Country Diagnostic (AICD) study, Infrastructure: A time for transformation. Washington, DC: World Bank. a comprehensive review of infrastructure sectors in Africa. Details the challenges facing infrastructure provision in Africa, with information on performance by sector. A French version is also available (Foster and Briceño-Garmendia 2010b). OECD. 2007a. Infrastructure to 2030: Volume 2: Mapping Policy for Presents the results of a global infrastructure needs study, reviewing trends Electricity, Water and Transport. Paris: Organisation for Economic Co- and challenges in the electricity, water, and transport sectors, and providing operation and Development. policy recommendations. Includes estimates of infrastructure needs in OECD economies, as well as considering the role of PPP in meeting those needs. A French version is also available (OECD 2007d). Flyvbjerg, Bent, Mette K. Skamris Holm, and Søren L. Buhl. 2002. This global study of 258 transport projects finds that, on average, actual costs “Underestimating Costs in Public Works Project: Error or Lie?.” Journal of were 28 percent higher than planned costs—65 percent higher for projects outside the American Planning Association 68(3) 279-295. Europe and North America. The paper describes technical, psychological, and political explanations for this result. Flyvbjerg, Bent, Mette K. Skamris Holm, and Søren L. Buhl. 2005. “How This study of 210 transport projects in 14 countries finds that traffic was over- (In)accurate Are Demand Forecasts in Public Works Projects? The Case of estimated for nine out of ten rail projects, by an average of 106 percent. The Transportation.” Journal of the American Planning Association 71(2) 131-146. accuracy of traffic forecasts also varies for roads, but on average road traffic was found to be under-estimated. Flyvbjerg, Bent. 2005. “Policy and Planning for Large Infrastructure Summarizes the results and lessons from the above studies, and other similar Projects: Problems, Causes, and Cures.” World Bank Policy Research work—why estimates of costs and benefits are inaccurate for large infrastructure Working Paper 3781. Washington, DC: World Bank. projects. Tanzi, Vito, and Hamid Davoodi. 1998. “Roads to Nowhere: How Drawing on cross-country analysis, argues that corruption reduces growth, corruption in public investment hurts growth.” Economic Issues 12. by increasing public investment while reducing its productivity—increasing Washington, DC: International Monetary Fund. investment expenditure, but with lower expenditure on operations and maintenance. WB. 2008. “Deterring Corruption and Improving Governance in the Urban Chapter 6 describes the problems of corruption in planning and implementing Water Supply & Sanitation Sector: A Sourcebook.” Water Working Notes, major capital projects. Note No. 18. Washington, DC: World Bank. ASCE. 2009. Report Card for America’s Infrastructure. Washington, DC: Assigns grades and describes the state of different types of infrastructure in the American Society of Civil Engineers. United States. Includes estimates of the cost to users and government of the poor standard of maintenance. PWC. 2005. Delivering the PPP Promise: A Review of PPP Issues and Activity. Section 2 succinctly describes the advantages and disadvantages of using PPPs. New York: PriceWaterhouseCoopers. Deloitte. 2006. Closing the Infrastructure Gap: The Role of Public-Private Examines the case for PPPs, describing the typical benefits of PPP over traditional Partnerships. New York: Deloitte. procurement. Also reviews how PPP markets typically develop, considering PPP experience in several sectors (with a focus on developed countries). Engel, Eduardo, Ronald Fischer, and Alexander Galetovic. 2009. Public- Describes the circumstances under which PPPs may provide better value than Private Partnerships: When and how. Santiago: Universidad de Chile. traditional public procurement, as well as examining some common but weak arguments for PPPs. Also describes institutional requirements for a successful PPP program. Fischer, Ronald. 2011. “The Promise and Peril of Public-Private Uses the experience of Chile and other developing countries to examine the Partnerships: Lessons from the Chilean Experience.” IGC Rwanda Policy benefits and pitfalls of PPPs, also offering recommendations to address common Note Series - No. 1. London: International Growth Centre. problems. Section 1.2 Infrastructure Challenges and How PPPs Can Help 37 Reference Description Irwin, Timothy C. 2007. Government Guarantees: Allocating and Valuing Chapter 2 describes lessons from history of government guarantees to private Risk in Privately Financed Infrastructure Projects. Directions in Development. infrastructure projects, with cautionary tales of governments thereby creating Washington, DC: World Bank. significant fiscal exposure. Chapter 3 describes why governments can make bad decisions on providing guarantees. Sousa, Mariana Abrantes de. 2011. “Managing PPPs for Budget Describes Portugal’s PPP experience, including the rapid adoption of PPP, Sustainability: The Case of PPPs in Portugal, from Problems to without strong fiscal control, and the associated fiscal risk. Also considers how Solutions.” PPP Lusofonia (blog). October 30. better management of PPPs could contribute to resolving Portugal’s external debt problems. UK. 2009. Government Response to Report on Private Finance Projects and Off- Sets out HM Treasury’s response to the Select Committee’s report, providing Balance Sheet Debt. London: House of Lords, Economic Affairs Committee. further detail and commentary on the practices and results of PFI in the United Kingdom. Gupta, Prashant, Rajat Gupta, and Thomas Netzer. 2009. Building India: Describes bottlenecks in infrastructure provision in India, and possible solutions, Accelerating Infrastructure Projects. Mumbai, India: McKinsey & Company. including highlighting some of the benefits of PPPs. NAO. 2003b. PFI: Construction Performance. Report by the Comptroller Compares PFI projects in the United Kingdom with an earlier survey of publicly- and Auditor General, HC 371. London: National Audit Office. procured construction projects, and found a higher proportion of PFI projects come in on time and on budget. NAO. 2009b. Performance of PFI Construction. London: National Audit Updates previous report, adding experience to 2008. Office. Duffield, Colin, and Peter Raisbeck. 2007. Performance of PPPs and Compares 21 PPP projects with 33 traditionally-procured infrastructure projects, Traditional Procurement in Australia: Final Report to Infrastructure Partnerships finding that on average, PPPs have lower cost overruns and delays. Australia. Melbourne: The Allen Consulting Group and University of Melbourne. Duffield, Colin. 2008. Report on the performance of PPP Projects in Compares 25 PPP projects with 42 traditionally-procured projects’ cost and time Australia when compared with a representative sample of traditionally procured performance over a series of project milestones. infrastructure projects: National PPP Forum – Benchmarking Study, Phase II. Melbourne: University of Melbourne, MERIT. Gassner, Katharina, Alexander Popov, and Nataliya Pushak. 2009. “Does A comprehensive econometric analysis of more than 1,200 utilities in 71 Private Sector Participation Improve Performance in Electricity and Water developing and transition countries. Found that private sector participation Distribution?.” Trends and Policy Options No. 6. Washington, DC: World improved efficiency and service levels. Bank. Funke, Katja, Tim Irwin, and Isabel Rial. 2013. “Budgeting and reporting Reviews the experience of 65 PPPs in the water sector in developing countries, for public-private partnerships.” OECD/ITF Joint Transport Research finding consistent improvements in efficiency and service quality. Centre Discussion Paper 2013 (07). Paris: Organisation for International Co-Operation and Development. Guasch, José Luis. 2004. Granting and Renegotiating Infrastructure Describes in detail how poor PPP design and weak implementation can lead Concessions: Doing it right. Washington, DC: World Bank. to renegotiations and increased costs. Based on a review of experience in Latin America and the Caribbean, where a high proportion of PPPs underwent renegotiation within a short time from contract close. Frauendorfer, Rudolf, and Roland Liemberger. 2010. The Issues The section on outsourcing of non-revenue water management activities (see and Challenges of Reducing Non-Revenue Water. Manila: Asian pages 34–37) describes how performance-based contracts can be used to help Development Bank. improve maintenance standards. 38 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Key References: Infrastructure Challenges and How PPPs Can Help - Private participation in infrastructure in Fragile and Conflict States Reference Description Nelson, Jane. 2014. How Can Multinationals Engage with Government to Describes three distinct levels (national, sector-specific and project levels) of Support Economic Development? Washington, DC: Brookings Institution. multinational corporate-FCS government engagement. OECD. 2007c. Principles for Good International Engagement in Fragile States. Explains how OECD countries can improve their engagement strategies with Paris: Organisation for Economic Co-operation and Development. FCS. Bettcher, Kim Eric, Benjamin Herzberg, and Anna Nadgrodkiewicz. 2015. Describes how the use of public-private dialogue can enhance governance and Public-Private Dialogue: The Key to Good Governance and Development. development outcomes. Washington, DC: Center for International Private Enterprise, Economic Reform Feature Service. Qiang, Christine. 2017. “Investment Climate Brief.” World Bank. Website Examines the use of private sector investment as a force for global economic growth and development. Key References: Infrastructure Challenges and How PPPs Can Help - Climate Changes and Natural Disasters Reference Description AfDB. 2011. Climate Screening and Adaptation Review and Evaluation Provides an overview of AfDB’s Climate Risk Management and Adaptation Procedures. Abidjan: African Development Bank Group. Strategy which includes climate screening at the project preparation level. ADB. 2011. Guidelines for Climate Proofing Investment in the Transport Sector: Presents a step-by-step methodological approach to help project teams incorporate Road Infrastructure Projects. Manila: Asian Development Bank. climate change adaptation measures into transport sector investment projects. ADB. 2013. Guidelines for Climate Proofing Investment in the Energy Sector. Provides a step-by-step methodological approach to help project teams Manila: Asian Development Bank. incorporate climate change adaptation measures into energy sector investment projects. UK. 2012b. Adapting to Climate Change: Helping Key Sectors to Adapt to Provides guidance about assessing current and projected impacts of climate Climate Change. London: UK Government, Department for Environment, change in relation to authorities’ functions and preparing proposals and policies Food and Rural Affairs. for adaptation. EBRD. 2015. Building resilience to climate change: Investing in Adaptation. Presents the methodology for climate resilience audits, which provide a basis to London: European Bank for Reconstruction and Development. identify, propose and discuss technical and investment solutions with the client. CLIMATE-ADAPT. 2012. “Guidelines for project managers.” European Assists project developers to incorporate resilience to current climate variability Climate Adaptation Platform (CLIMATE-ADAPT). Website. and future climate change within their projects. OECD. 2009. Integrating Climate Change Adaptation into Development Co- Policy guidance for policy makers and practitioners on approaches for climate operation: Policy Guidance. Paris: Organisation for Economic Co-operation integration at the national, sectoral, project and local level. and Development. WB. 2011a. Catastrophe Deferred Drawdown Option. Treasury Product Note. Product note regarding Development Policy Loan with a Catastrophe Deferred Washington, DC: World Bank. Drawdown Option (Cat DDO), a contingent credit line that provides immediate liquidity to IBRD member countries in the aftermath of a natural disaster Section 1.2 Infrastructure Challenges and How PPPs Can Help 39 Reference Description WB-Risk. Accessed March 15, 2017. “Climate, and Disaster Risk Screening Provides a resource for use by development practitioners at an early stage of Tools.” Washington, DC: World Bank. Website. national level planning processes or project design. There are national/policy level tools and project level tools which provide a user-friendly step-by-step approach to understanding potential risks to programs and investments. ESMAP. Accessed March 15, 2017. “Hands-on Energy Adaptation: Toolkit Online resource designed to assess climate vulnerabilities and adaptation options (HEAT).” Energy Sector Management Assistance Program Energy and in a country’s energy sector and raise awareness. Climate Adaptation Initiative. Website. WB. 2016e. “Climate and Disaster Resilience.” Pacific Possible. Washington, Highlights the costs of making Pacific coastlines more resilient to climate change, DC: World Bank. and provides evidence to policy makers on how incorporating climate adaptation activities into infrastructure development will reduce impacts in future years. WB. 2016d. “Toward Climate-Resilient Hydropower in South Asia.” Describes planning for climate-resiliency in hydropower projects in South Asia. LiveWire. Washington, DC: World Bank. WB. 2010. “The Costs of Adapting to Climate Change for Presents a methodology to estimate the costs of adapting to climate change. Infrastructure.” Discussion Paper No. 2. Washington, DC: World Bank. AfDB. 2013. Initiative for Risk Mitigation: Needs Assessment for Risk Assesses risk mitigation needs and possible solutions for African countries. Mitigation in Africa, Demands and Solutions. Final Report. Abidjan: African Development Bank Group. Pierris, Luigi de. 2012. “Risk Mitigation Instruments in PPP Projects.” Presents the IRMA and AfDB’s risk mitigation instruments. Presentation prepared for a PPP Conference, Dakar, June 5. Hallegatte, Stéphane, Ankur Shah, Robert Lempert, Casey Brown, and Explains decision-making methodologies to be applied to the uncertain scenarios Stuart Gill. 2012. “Investment Decision Making Under Deep Uncertainty: of climate change. Application to climate change.” Policy Research Working Paper 6193. Washington, DC: World Bank. Bonzanigo, Laura, and Nidhi Kalra. 2014. “Making Informed Investment Examines ten different case studies and the decision-making approaches applied Decisions in an Uncertain World: A Short Demonstration.” Policy Research to them; describes utilizing a different robust decision-making approach to Working Paper 6765. Washington, DC: World Bank. conduct economic analysis of a different case. Kalra, Nidhi, David G. Groves, Laura Bonzanigo, Edmundo Molina Perez, Describes using robust decision-making in the Master Plan for Lima’s water sector. Cayo Ramos, Carter Brandon, and Iván Rodriguez Cabanillas. 2015. “Robust Decision-Making in the Water Sector: A Strategy for Implementing Lima’s Long-Term Water Resources Master Plan.” Policy Research Working Paper 7439. Washington, DC: World Bank. UK. 2015a. Valuing Infrastructure Spend: Supplementary Guidance to The Presents the need for considering resilience in assessing and developing Green Book. London: UK Government, HM Treasury. infrastructure projects. 40 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS 1.3 How PPPs Are Financed Figure 1.3a - Typical PPP Project Structure shows a typical contract structure for a PPP project. The government’s primary contractu- Transferring responsibility to the private sector for mobilizing fi- al relationship is with the project company. This may be comple- nance for infrastructure investment is one of the major differences mented by a direct agreement between contracting authority and between PPPs and traditional procurement. Where this is the case, lenders; although often this relationship is limited to the provisions the private party to the PPP is responsible for identifying investors in favor of the lenders included in the PPP agreement, such as step- and developing the finance structure for the project. However, it in rights or senior debt repayment guarantees. is important for public sector practitioners to understand private financing structures for infrastructure and to consider the potential The initial equity investors, who develop the PPP proposal, are implications for government. This section typically called project shareholders. Typical equity investors may be project developers, engineering or construction companies, ŠŠIntroduces ways that private finance of PPP projects can be infrastructure management companies, and private equity funds. structured (Section 1.3.1 - Finance Structures for PPP); Lenders to PPP projects in developing countries may include com- mercial banks, multilateral and bilateral development banks and ŠŠHighlights points that governments need to bear in mind when finance institutions, and institutional investors such as pension procuring a privately-financed PPP—that is, ways in which the funds and insurance companies. government might need to enable or control how the private party raises finance to ensure the project is implemented suc- As shown in Figure 1.3a - Typical PPP Project Structure, the project cessfully (Section 1.3.2 - Considerations for Government); company contracts with firms to manage design and construction (usually known as an Engineering, Procurement and Construction, ŠŠDescribes different roles for public finance in PPPs—that is, or EPC contract), and operations and maintenance (O&M). These why and how governments may be directly involved in the fi- contractors may be affiliated with the equity investors. Yescombe’s nancing of PPPs (Section 1.3.3 - The Role of Public Finance in book on PPP finance includes examples of PPP structures for dif- PPPs). ferent types of PPP (Yescombe 2007, section 1.4). The chapter on PPP Financing in Farquharson et al’s book on As described in Farquharson et al’s chapter on PPP financing PPPs in emerging marketsprovides an overview of some of the (PPIAF 2001, 53), equity investment is ‘first in, last out’—that is, topics covered in this section (Farquharson et al. 2011, Chapter any project losses are borne first by the equity investors, and lenders 5). Yescombe’s (Yescombe 2007) and Delmon’s (Delmon 2015) suffer only if the equity investment is lost. This means that equity books on PPPs cover a wide range of topics on PPP financing. investors accept a higher risk than debt providers and therefore re- The relevant sections of these books, as well as links to additional quire a higher return on their investment. resources, are provided throughout the section for more informa- tion on specific points. The aim of the project shareholders and their advisors in develop- ing the finance structure is typically to minimize the cost of finance for the project. Because equity is more expensive than debt project 1.3.1 Finance Structures for PPP shareholders use a high proportion of debt to finance the project. In each country, this proportion may vary from project to project, The private party to most PPP contracts is a specific project com- depending on the risks assumed by the PPP operator. pany formed for that purpose—often called a Special Purpose Vehicle (SPV). This project company raises finance through a The financial modeling for the PPP project will tailor debt service combination of equity—provided by the project company’s share- and expected dividends according to the expected flow of funds, holders—and debt provided by banks, or through bonds or other including revenue from user fees and government payments, and financial instruments. The finance structure is the combination of construction and on-going expenditures, namely for maintenance equity and debt, and contractual relationships between the equity and operations. See Figure 1.3b - Flow of Funds for the typical flow holders and lenders. of funds in a PPP. Section 1.3 How PPPs Are Financed 41 Figure 1.3a Typical PPP Project Structure Government Contracting Authority Direct Agreement PPP Contract EPC Contractor Lenders Project Company (SPV) O&M Contractor Equity Investors Users Non-recourse project finance for PPPs often more expensive than borrowing by established companies. The transaction cost—setting up the contractual structure, and Under non-recourse project finance, lenders can be paid only from carrying out adequate due diligence—can make it unattractive for the project company’s revenues without demanding compensation smaller deals. For this reason, many smaller PPP projects do not from the equity investors. That is, the project company’s obliga- adopt non-recourse project finance structure to achieve greater tions are ring-fenced from those of the equity investors, and debt is contractual flexibility, or lower the financing cost. secured on the cash flows of the project. As described in Yescombe’s chapter on project finance for PPPs project finance structures One option is for project shareholders to back up the project com- typically involve a large proportion of debt (Yescombe 2007). In pany by providing a corporate guarantee to the lender for repay- many cases, it ranges from 70 to 95 percent of total finance. From ment for all or part of the project debt. Box 1.10 - Examples of Proj- the equity investors’ perspective, this helps manage risk by limiting ect Finance Structure with Corporate Guarantees provides examples. exposure to a project, and makes it possible to undertake much larger projects than would otherwise be the case. For lenders, it Large infrastructure companies can structure the financing of their means undertaking rigorous due diligence, focusing on the project projects either through traditional full recourse corporate finance cash flow and contractual structure. or through limited recourse project finance. If the corporate fi- nance route is followed, the lenders provide loans directly to the There is a large literature on project finance structures, including parent company, on the strength of its credit rating and balance several comprehensive textbooks listed in the key references for sheet. In case of default the lenders have full recourse to the balance readers interested in exploring the subject further. sheet of the company but their loan is generally unsecured, which means that it is not backed by a specific asset. In project finance, Alternatives to non-recourse project finance a special purpose company (SPV) is created to hold the assets of the project exclusively. The SPV is owned by the infrastructure While helpful for raising finance for large, highly leveraged invest- company and other equity investors. Lenders provide loans to the ments, project finance comes at a cost. Interest rates for project-fi- SPV. Their recourse in case of default is limited to the cash flows nance debt are more expensive than government borrowing, and generated by the assets of the SPV but not to the balance sheet of 42 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Figure 1.3b Flow of Funds Government Contracting Authority Subsidies & Availability Payments Service Payments Bonds, loans EPC Contractor Lenders Design & Construction Debt Service Project Company (SPV) Investment Service Payments O&M Contractor Equity Investors Ops & Maintenance Dividends User fees Services Users the equity investors. On the other hand, lenders will typically have is not too thinly capitalized, that is, the debt/equity ratio should security over the assets of the SPV. not be too high. Otherwise, the investors’ interests might not be aligned with those of the public sector, and financial close might In general, investors prefer limited recourse, because the risk of the be difficult to achieve. In addition, project finance induces lenders project is limited to the equity they put in the SPV company. The to focus on the PPP project assets and their ability to generate cash cost of debt is generally higher, but the risk is circumscribed. flows implying that lenders will implement better due diligence, and that they may later create an additional layer of protection to From the public sector standpoint, if the limited recourse project the public interest by exercising step-in rights in order to guarantee finance route is followed, it is important to ensure that the SPV service delivery according to standards. Box 1.10 Examples of Project Finance Structure with Corporate Guarantees In some cases, a project company may be unable to raise finance finance-basis, so Ayala provided a corporate guarantee to back on a non-recourse basis. One option is for a major project up the project company. shareholder to provide a partial or full guarantee on the project debt. For example: In 1992, an oil pipeline in Colombia was being developed as a joint-venture between the national oil company and international In 1997, a concession for the eastern section of metro Manila was oil companies with the IFC as the main lender. At the time, the awarded to the Manila Water Company, a consortium led by the IFC was concerned about possible guerilla attacks and the project Ayala Corporation of the Philippines, with interests from United stalled. To move forward, the shareholders provided a full loan Utilities, Bechtel, and the Mitsubishi Corporation. In the wake of guarantee on the project. the Asian Financial Crisis, the Manila Water Company was unable to raise debt to finance investments on a non-recourse project Sources: (Esguerra 2003); (IFC 1999) Section 1.3 How PPPs Are Financed 43 Figure 1.4 Non-Recourse and Full-Recourse Corporate Project Finance Structures Shareholder (Private Company) Equity Loan Loan Project Shareholder Company Lenders & Borrower Lenders SPV (Borrower) (Private Company) Principal + Interest Principal + Interest Cash flows Cash flows PPP Project PPP Other Project Assets From the lenders perspective, limited recourse project financing pleted and construction risk disappears, they issue project bonds to will often not be sufficient. They will typically require additional the financial markets. credit support from the PPP company shareholders and/or third parties. Monoline insurance companies were widely used for this Another alternative to lower the cost of finance for a PPP is for the purpose before the 2008 global financial crisis. Sometimes, lenders government to participate in the finance structure, as described in will ask for step-in rights in case of default. In full recourse schemes, The Role of Public Finance in PPPs under Section 1.3.2 - Consider- the only drawback is a potentially long and complex process for re- ations for Government. The government—or a government-owned dress, especially if the investors’ parent company is based overseas. financial institution—could provide finance as a lender to the proj- ect company, or could provide a guarantee to some, or all, of the Figure 1.4 - Non-Recourse and Full-Recourse Corporate Project Fi- project debt. nance Structures presents the structures for full-recourse corporate and non-recourse project finance. These two cases are not the only Islamic Finance financing structures available. PPP financing is actually quite di- versified. In some countries with less developed financial institu- Alongside the conventional system, the Islamic financial market tions, where project finance is not common, but where contracting has emerged as an increasingly relevant method for financing PPPs. authorities wish to design good PPP arrangements, investors are According to the Africa Islamic Economic Foundation (AIEF required to create a PPP company (the SPV), which then obtains 2014), Islamic financial institutions have accumulated significant loans with guarantees from the PPP company shareholders. A liquidity, and are looking for quality projects to invest in high World Bank report on PPP financing in Latin America (WB quality medium to long-term investment opportunities. As such, 2017b) describes some of these financing arrangements. In coun- Islamic finance presents a relatively untapped market for PPP fi- tries with more developed financial markets, large investors do fi- nancing. But there is a more fundamental reason for the growth in nance the PPP projects with their own resources (obtained through and appeal of Islamic finance—during the 2008 global financial full recourse corporate finance) and later, after construction is com- crisis, financial institutions and structures that were Sharia compli- 44 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS ant performed far better than their conventional counterparts. The As equity, by definition, is compliant with Islamic financial prin- two key features of Islamic finance that bring better stability are: ciples, it is invested either directly by sponsors or by Islamic in- transactions are asset-backed or asset-based (as trading of debt is frastructure funds (mutual funds or unit trusts) in PPP projects. prohibited); and they are based on risk-sharing principles. Equity could also come from sukuk as mudarabah (profit sharing trust financing—with no role in management decision-making) or Sukuk (bond-like structures) allows for co-ownership of productive musharakah (equity financing similar to a joint venture model). resources (underlying assets). As a result, the income to sukuk-hold- Takaful (Islamic insurance based on the concepts of cooperative ers is generated by the actual underlying business activity and hence risk sharing amongst the members) funds can also provide an alter- is considered profit rather than interest. The APMG PPP Certi- nate mode of financing PPP projects. fication Guide (APMG 2016, Annex B) presents a description of Islamic financing principles and products that may be used for The following additional references provide a starting point on this PPPs. Islamic project finance requires careful design of sukuk that is subject: well-adapted to each specific project and the financing instruments being used, such as istisna (construction financing during develop- ŠŠAn Introduction to Islamic Project Finance (2013) Clifford ment phase) and ijara (lease financing during operational phase). Chance Briefing Note (Latif 2013) Typically, an istisna agreement is signed between the Islamic finan- ŠŠIslamic Finance and Economic Development (2014) Salman Syed cier and the project’s SPV to procure the construction of a PPP Ali, IRTI (Syed Ali 2014) asset by entering into a direct agreement with its construction con- tractor. Once the asset has been constructed, the SPV delivers it to ŠŠAn Introduction to Islamic Finance (1999) Harvard Business the financier at a pre-agreed price. This is followed by ijara, where- School, Paper N9-200-002 (Esty et al. 1999) by a lease (with usufruct rights) of the same project asset is granted by the financier to the SPV. The ijara contract typically includes a ŠŠIslamic Banking and Finance (2011) Brian Kettell (Kettell 2011) promise by the Islamic financier as lessor to transfer ownership of the leased asset to the lessee either at the end of the lease period or ŠŠMastering Islamic Finance (2015) Faizal Karbani, Financial in stages during the term of the ijara. An example of this type of Times Publishing/Pearson (Karbani 2015) arraignment is the Queen Alia International Airport, a 25-year concession in Jordan (IsDB and WBG 2016). An Islamic struc- ŠŠIslamic Capital Markets, Products and Strategies (2011) Hassan ture co-financed the project with a $100 million istisna combined and Mahlknecht (Hassan and Mahlknecht 2011) with a forward lease under the ijara structure—it should be noted that in the co-financing, Islamic financing ranked pari passu (at the ŠŠPublic Private Partnerships: Lesson from Sukuk (2013), Abdul same level of seniority) with conventional senior lenders. Gahfar Ismail, IRTI (Ismail 2013) If the transfer of ownership of tangible assets is not allowed or pos- ŠŠFinancing PF2 Projects: Opportunities for Islamic Project Finance sible, the beneficial rights contained in the project agreement can (2014) Noor Zawawi et al (Zawawi et al. 2013) be assigned to the Islamic financier. For instance, in the Hajj Ter- minal Expansion Project (IFC 2013) in Jeddah, Saudi Arabia, the ŠŠThe Nitty Gritty of Supporting Islamic Finance (2011) Hoda Saudi Arabian Civil Aviation Authority, the Islamic Development Moustafa, MIGA (Moustafa 2011) Bank, and IFC used a Sharia-compliant Build, Transfer, and Oper- ate (BTO) concession model. The Islamic financiers purchased the beneficial rights under the BTO agreement, and then, as lessors, 1.3.2 Considerations for Government entered a forward lease agreement (ijara) with the project company under which the rights under the BTO agreement were assigned to When a PPP involves private finance, the investor typically has it in return for rental payments. primary responsibility for developing the finance structure of the project. Nonetheless, government may need to influence its design. Section 1.3 How PPPs Are Financed 45 At the most basic level, governments need to ensure that the project design is bankable—that is, the project company can raise debt. Box 1.11 Example of a Thinly- Although the ability to raise debt is a necessary feature, too much debt can undermine risk-transfer, so governments may want to lim- Capitalized PPP: Victoria Trams it the amount of debt finance (leverage) allowed. More arcane but and Trains still important details include: how to manage risks in going from contract award to financial close; how to deal with the possibility of The State Government of Victoria awarded five franchises refinancing project debt; and how to define step-in rights for lend- (similar to concessions) for operation of trams and ers and the government. These points are described in turn below. commuter rail in Melbourne, and regional trains in the State of Victoria. The financial equilibrium of the projects relied heavily on the expected growth in patronage and Governments may also participate in the finance structure. Gov- reduction in costs. The government expected total savings ernments can provide debt, equity, or guarantees—either directly, in subsidies to the projects of A$1.8 billion over the life of or through government-owned financial institutions such as devel- the contracts. However, the total private capital at stake, opment banks and pension funds. Section 1.3.3 - The Role of Public including equity and performance bonds, was only A$135 Finance in PPPs describes the role of this kind of public finance million, which is approximately three percent of total assets. When the growth and cost reductions were not realized, in PPPs. the franchisees experienced losses. Because the capital at stake was relatively low, the operators could walk away Bankability from the franchises, rather than endure the losses trying to improve it. This put the government in a position of having The ability of a project to raise finance is often called bankability. to renegotiate the contracts with the existing operators. Bankable really means that a project can attract not only equity Sources: (Ehrhardt and Irwin 2004); (VIC 2005) finance from its shareholders, but also the required amount of debt. Delmon’s chapter on bankability (Delmon 2015, Chapter 4) and Farquharson et al’s chapter on PPP financing (Farquharson et al. 2011, 54–57), both describe the factors banks will consider in of the project, and appropriate risk allocation. Section 3.2 - Apprais- deciding whether to lend to a project. ing Potential PPP Projects provides guidance on assessing financial viability of a potential PPP project. Section 3.3 - Structuring PPP For a project to be bankable, lenders need to be confident that Projects provides guidance and tools for practitioners on risk allo- the project company can service the debt. Under a project finance cation. structure, as described in Section 1.3.1 - Finance Structures for PPP, this means operating cash flows need to be high enough to cover Moreover, lenders and shareholders both have incentives to reduce debt service plus an acceptable margin. It also means that the risk their risks and maximize their return. This means that in struc- of variation to the cash flows must be highly likely to stay within turing the PPP, the government undertakes a difficult balancing the margin. Lenders therefore carefully assess project risks, and how act—ensuring the project is bankable, while resisting pressure for these risks have been allocated between the parties to the contract. the government to accept more risk than necessary. If too much risk has been allocated to the private party, lenders will Limiting the amount of debt allowed reduce the amount they are prepared to lend until the margin of cash flow over debt service is acceptable. When this happens, more Projects shareholders often have an incentive to finance a PPP with equity will be needed. At the same time, the project company needs a high ratio of debt to equity—that is, to achieve high leverage. to be expected to generate high enough returns to compensate its As Yescombe describes, higher leverage typically enables equity equity holders for their level of risk. investors to achieve higher returns, and makes it easier to man- age the financial structure, since it can be easier to raise debt than From the government’s perspective, the key considerations for en- equity (Yescombe 2007). Moreover, as described in Ehrhardt and suring bankability are therefore the technical and financial viability Irwin (Ehrhardt and Irwin 2004), governments often provide more 46 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS protection to debt investors than to equity investors, providing a harson et al. 2011, 125) the government may be under pressure further incentive for high leverage. For example, governments may to change the contract terms to meet lenders’ requirements, since provide guarantees on demand designed to ensure revenue can cov- re-opening the procurement process at this stage would cause de- er debt service, or agree to payments in case of early termination lays and additional transaction costs for the government. that are set equal to the level of debt, such that lenders are repaid even in case of default by the project sponsor on its obligations Governments have a few options available to mitigate this risk. As under the contract. Farquharson et al also explains, bidders can be required to provide a bond, which may be called if the preferred bidder fails to achieve To ensure a sustainable level of leverage, and large enough equity financial close within a certain period. This may encourage bidders stake in the project, governments can consider introducing a mini- to develop more concrete financing plans before submitting bids. mum equity ratio for PPPs. Box 1.11 - Example of a Thinly-Capital- Another option to avoid the risk altogether, as described by Del- ized PPP—Victoria Trams and Trains presents an interesting case in mon (Delmon 2015, 445–446), is for governments to require bids Australia where the minimum equity requirements were inadequate with financing commitments already in place (called an underwrit- to ensure a genuine commitment from operators. As Ehrhardt and ten bid). In this case, lenders must complete due diligence before Irwin (Ehrhardt and Irwin 2004, 49–50) note, equity ratios can the tender process is complete. However, both these options in- be particularly important if the government is also providing guar- crease the cost of bidding, which may deter bidders and undermine antees that are designed to protect lenders’ investment. However, competition. For projects with a small number of potential lenders, restricting an investor’s ability to choose its capital structure can requiring underwritten bids will immediately create an upper limit increase the cost of capital, as described in a World Bank Gridline on the number of bidders able to present a proposal, as discussed note on financing Indian infrastructure (Harris and Tadimalla in the PPP Certification Guide (APMG 2016, Chapter 1, Section 2008). The authors also note the importance of structuring any 7.2.2). guarantees or termination payment clauses to avoid creating incen- tives for high levels of debt and leverage. Another approach is to introduce stapled financing. Stapled financ- ing is a pre-arranged financing package for the project, developed Minimum requirements on equity levels and composition are also by the government and provided to bidders during the tender pro- relevant for having a core of strategic equity investors. Governments cess. The winning bidder has the option, but not the obligation, to should limit the ability of equity owners to sell-down until a cer- use the financial package for the project. Stapled financing is com- tain period after construction completion and commissioning, i.e. mon in Mergers and Acquisition deals, and has been used for infra- until the project is fully operational, ensuring that strategic inves- structure projects—for example, Russia used it for Pulkovo airport tors keep capital at risk long enough to ensure service performance (IFC 2017) with EBRD and IFC staple finance, and it is com- according to contractual standards. The length of that post-com- monly used in PPPs in Europe, with part of the SPV debt offered missioning period depends on the sector and the technology used. by EIB under conditions pre-announced to all bidders and subject to further due diligence on the winning bidder. Staple financing is Risks in going from award to financial close further discussed in EPEC’s 2009 report on the financial crisis and the PPP market (EPEC 2009). A PPP contract is sometimes awarded and signed before the project reaches financial close—that is, before the finance for the project The role of output based aid is fully secured. In the interim period, lenders complete their due diligence process, including detailed review of the PPP agreements. PPPs are output-based projects—users and procuring authorities Loan agreements set conditions precedent that must be in place be- will pay for service delivered and asset availability, not for inputs. fore the project company can access funds from the loan. When serving poor populations, PPPs can be combined with re- sults based financing (RBF) mechanisms that can effectively give This process creates a risk that the project could be delayed or even underserved populations access to electricity, water, sanitation, fall through, if the winning bidders are unable to raise finance on health care, education, and other basic services necessary for growth the expected terms. As described by Farquharson et al (Farqu- and opportunity. Output-Based Aid (OBA), an RBF mechanism, Section 1.3 How PPPs Are Financed 47 has been successfully used as a component of PPPs specifically to First, the project may have been unable to obtain a financing pack- ensure that the poor benefit from the PPP scheme—as presented in age with a long enough maturity to match the project’s length. This a World Bank report on OBA for water (GPOBA 2016). could occur because long-term debt was not available at the time when the project was awarded, or because lenders viewed the proj- Results-based financing (RBF) encompasses a range of mecha- ect as too risky to extend credit with a long maturity. In this case, nisms designed to enhance access to and delivery of infrastructure the project could proceed with a shorter-term loan, as described and social services using performance-based incentives, rewards, or in Yescombe’s chapter on financial structuring (Yescombe 2007, subsidies—see Box 1.7 - Performance Based Road Contracts—Im- Chapter 10). This creates a refinancing risk—that is, the risk that proving Maintenance of Infrastructure. RBF mechanisms typical- the shorter-term loan cannot be refinanced at the expected terms. ly have a funding entity (typically a government or government The PPP contract should specify who bears refinancing risk, as de- agency) that provides a financial incentive, conditional on the re- scribed in Section 3.3 - Structuring PPP Projects. cipient undertaking a set of pre-determined actions or achieving a pre-determined performance or outputs. Resources are disbursed One option to mitigate refinancing risk is take-out financing, in not solely against the completion of specific expenditures or con- which a second lender promises to take over a loan at some future tract effectiveness on the input side, but against demonstrated and point—thereby encouraging the original lender to provide lon- independently verified results that are largely within the control of ger-term debt than might otherwise be the case. For example, the the recipient such as the installation of solar home systems, or the Indian Infrastructure Finance Company Limited has established a connection of households to water supply systems. take-out financing scheme for infrastructure projects (IIFCL 2015). Payments that are based on independently verified results are the Refinancing can also provide an opportunity for the project com- principal characteristic of RBF approaches. Subsidies are used to pany and its shareholders if more favorable terms become available. incentivize service providers to offer access to services to under- Because infrastructure projects have long durations, capital markets served poor populations. The subsidies can be used to contribute to could change during the life of the project and offer better terms on the capital cost of the project so that it becomes affordable for the the existing project debt. Lenders also tend to offer better financing private operator, ensuring commercial returns from the operation. terms to projects with demonstrated track records and have already OBA is the RBF mechanism most frequently paired with PPPs. moved past initial risks, such as construction. Shareholders can use The focus is on access to basic infrastructure and social infrastruc- refinancing for increasing the debt/equity ratio, re-leveraging the ture (health, education) and on output-based reimbursement. project and freeing equity. Yescombe’s section on debt refinanc- ing (Yescombe 2007) further describes the potential gains to equity For example, consider a water network that reaches neighborhoods investors from refinancing. that can pay for household connections, yet the same mains line runs past poor neighborhoods that need and will pay for clean wa- Refinancing is also relevant for lenders, allowing banks to release ter, but cannot afford the household connection—OBA funds can capital to allocate to new projects. Capital markets (and pension help pay for the expansion of connection to poor households. Thus and insurance funds in particular) are well-placed to provide such poor households will gain access to water services and the utility refinancing, as they can generally provide longer tenor, and—as will have new paying customers that it would not have had other- risk is lower after the construction phase—they can often provide wise. For additional information, see the Global Partnership on cheaper debt. Output Based Aid (GPOBA) website. Refinancing with more favorable terms can lower overall costs for Refinancing of project debt users or government, improve returns to investors, or both. The government needs to consider upfront how benefits of refinancing Refinancing means taking on new debt to pay off existing loans. will be treated. Options include: The project company and its shareholders may have two main reasons to refinance debt that was initially used to finance the ŠŠDo nothing—allow equity holders to gain from refinancing project. through higher dividend payments; 48 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS ŠŠShare gains between project shareholders and users/clients, between the government and the project—so that, in case of proj- by including in the PPP contract or PPP regulation a clause ect misperformance, the lenders are allowed and incentivized to which states that benefits of refinancing must be reflected in the act, before the government is forced to intervene. price paid for the asset or service; It is important that both the government and lenders have a clear ŠŠBuilding into the PPP contract the right for the government framework and timeline for invoking their step-in rights so they to require or request refinancing of the project debt, if it be- are informed when problems start to occur and can take remedial lieves that more favorable terms are available in the market. actions. Section 3.4 - Designing PPP Contracts provides more detail on how step-in rights can be built into a PPP contract. Several governments have introduced rules for how PPP refinanc- ing benefits will be treated, as described by Yescombe (Yescombe The role of pension funds 2007). For example, in 2004 the United Kingdom’s Treasury introduced into its standard PFI contracts a 50:50 split of any Pension funds have long-term liabilities on their balance sheets in refinancing gain between the investors and the government (UK the form of future pension payments. To avoid a mismatch of ma- 2012c); this was subsequently revised in each version of contract turities between the two sides of their balance sheets, pension funds standards. South Korea has also introduced a similar provision in need to invest in long-term assets. Thus, the long-term nature of its legislation governing PPPs. Since 2008, the United Kingdom’s infrastructure investments suits the investment profile of pension government has also reserved the right to request for refinancing funds; and their returns, which tend to keep up with inflation, help of project debt to take advantage of more favorable capital market hedge pension funds’ liabilities that are also inflation-prone. Addi- conditions. A further discussion of refinancing and potential struc- tionally, pension funds are interested in diversifying their portfolios tural issues arising from it can be found in EPEC’s 2009 report on to lower the volatility of their returns. Infrastructure investments the financial crisis and the PPP market (EPEC 2009). can be attractive when the correlation between their anticipated returns and and those of traditional assets is low. Step-in rights In Australia and Canada, which benefit from a well-defined in- Step-in rights refer to a power under the contract or in the country’s vestment regulatory framework, funding to infrastructure projects legislation for the government or lender to take control of the proj- through pension funds has been successfully implemented on a ect in certain situations. Step-in rights for the government are nor- wide scale. In Latin America and the Caribbean—where domestic mally reserved for situations in which the project poses significant pension funds in Chile, Colombia, Peru, Mexico, Uruguay, and health and safety risks, threats to national security, or when legal Brazil hold assets ranging from 12 to 68 percent of GDP—only requirements call for the government to take over the project. The Chile’s and Peru’s domestic pension funds have invested substan- government may also terminate the PPP contract and take over tially into infrastructure (WB 2017b). Globally, pension funds’ in- the project if the project company fails to meet service obligations. vestments in infrastructure are estimated to be less than one percent of their assets (OECD 2011). Effective step-in rights by lenders require, besides contractual pro- visions, a direct agreement between government and lenders, reg- In general, pension fund financing to infrastructure is hindered ulating the process for requiring and implementing those rights. by rigid investment regulatory frameworks, slow progress in cap- ital market reforms, and the absence of a sound project financing Lenders generally require step-in rights that come into effect if framework for the banking sector. Pension funds’ poor ability to the project company fails to meet its debt service obligations, or if conduct effective due diligence and to understand infrastructure the PPP contract is under threat of termination for failure to meet risk may also reduce their appetite for investing in PPPs—they service obligations. In this situation, the lenders would typically are better placed to refinance projects, once construction risk is appoint new senior management or another firm to take over the out of the way and the project has a track record of good service project. Step-in rights do not only protect the interests of lenders, performance. Also, the lack of suitable PPP projects—i.e. lack of but also protect the public interest, by creating a third-party buffer well-structured projects submitted to market competition—tends Section 1.3 How PPPs Are Financed 49 to dissuade the involvement of pension funds in infrastructure ŠŠMitigating government risk—where project revenues depend schemes. Furthermore, in countries such as China and India, over- on regular payments from government, the risk of default by ly restrictive pension fund laws undermine their investment capa- the government will be assessed by the private party and will bilities (Inderst and Stewart 2014). be reflected in the project cost. Where reliability of government payments may be in doubt, providing subsidies or payments up- A World Bank report on LAC infrastructure financing (WB front in the form of loan or grant finance, rather than on-going 2017b) analyses what pension fund managers want from infrastruc- payments, could improve the bankability and lower the cost of ture—high returns, low risk, liquidity of the instrument, fair pric- the project. ing, and reliable partners. Infrastructure bonds can offer a return over government instruments that reflect credit risk plus some li- ŠŠImproving availability or reducing cost of finance—partic- quidity risk—but poorly prepared projects may not attract pension ularly when capital markets are under-developed, or disrupted, funds; and poorly designed PPP programs may create long-lasting the availability of long-term finance may be limited. Govern- distrust among institutional investors. Preference is given to liquid ments may choose to provide finance at terms that would oth- instruments such as standardized infrastructure bonds more easily erwise be unavailable. Some governments have access to finance valued in the market, and used for the whole concession program, on concessional terms, which they may pass on to lower the cost instead of for individual projects. To reduce risk, pension funds of infrastructure projects. This may also be part of a broader may require government guarantees, particularly during the con- policy of involving state financing institutions to provide long- struction phase, but governments need to carefully manage the term lending for developmental purposes. added contingent liabilities brought by contractual guarantees. Otherwise they require a two-stage financing mechanism, where There are different ways in which governments can contribute the long-term financing comes only after completion of construc- to the financing structure of a PPP. Governments may provide tion—therefore creating some refinancing risk. Fair pricing may loan or grant finance directly to the project company, or provide not exist where governments control or cap investor returns or a government guarantee on a commercial loan. The APMG PPP where the tax regime is not clear and appropriate. Certification Guide discusses de-risking approaches and credit en- hancement instruments (APMG 2016, Chapter 1, Section 7.4.2) Government-owned development banks or other finance institu- 1.3.3 The Role of Public Finance tions can also be involved—either providing finance to PPPs as part in PPPs of a broader portfolio, or being established specifically to support the PPP program. Finally, governments may simply not transfer the The exclusive use of private finance is not a defining characteris- financing function to the PPP project to the private sector, instead tic of a PPP—governments can also partially finance PPP projects. retaining on-going responsibility for capital expenditures. These Reducing the amount of capital investment needed from private options are described in more detail further in this section. entities reduces the extent of risk transfer—weakening private sec- tor incentives to create value for money, and making it easier for The rationale for government financial support to PPPs may be private entities to abandon the project if things go wrong. None- strengthened during periods of capital market disruption, and theless, there are several reasons why governments may choose to many governments introduce specific forms of financial support provide finance for PPP projects. These include: in response. ŠŠAvoiding excessive risk premiums—the government may Loan or grant finance directly from consider the risk premium charged by the private sector for the government to project company project to be excessive in relation to the actual project risks. This can be a difficult call to make, since financial markets are usually Governments may provide finance directly to a PPP in the form of better at assessing risk than governments, but can apply partic- loans or upfront grant subsidies. These can be critical for project ularly for new projects or markets, or during financial market viability, where revenue projections show that the project is not disruptions. likely to be financially viable without government funding. Capital 50 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS contributions can also reduce the project’s costs to the government by a few other governments, such as the Regional Government of by making finance available at better terms than would otherwise Flanders in Belgium. be possible. For example: However, public equity in a PPP can also generate conflicts of in- ŠŠIn the United States, the Transportation Infrastructure Finance terests within the public sector, and may enhance the perception and Innovation Act (TIFIA) established a flexible mechanism of risk for private investors. In particular, government ownership for the United States Department of Transport to provide loans can trigger conflict of interests with its regulatory function; and the (as well as loan guarantees) directly to private and state project private investors may be concerned that the government might be shareholders for eligible projects. The credit assistance is offered tempted to interfere in the management of the PPP contract within on flexible terms, and typically takes a subordinated position, the SPV, if some decisions need to be taken to maximize sharehold- which in turn makes it easier to attract more private debt (US ers value but are not necessarily in the public sector’s best interest. 2010, Chapter 4). Under the United Kingdom’s PF2 policy (UK 2012a), this po- tential conflict of interest is mitigated by separating the ownership ŠŠIndia’s Viability Gap Fund uses funds appropriated from the na- function from the contract management function. Hence, equity tional budget to provide upfront capital subsidies for PPP proj- shareholdings are managed by a unit located in the Treasury sep- ects, as described in Box 2.9 - The Viability Gap Fund Program arate from the procuring authority. France follows the same ap- in India. The Indian government’s guidelines on financial proach. support for PPP in infrastructure (IN 2013a) provide more details on this initiative. Government guarantee of commercial loan to project The willingness of the public sector to provide funds can also act as a signal to help build confidence of private investors. For ex- Rather than providing lending directly, governments may instead ample, after the 2008 financial crisis, the United Kingdom’s Trea- guarantee repayment of debt provided by commercial sources, in sury recognized several infrastructure projects could have difficulty case of default by the private party. Farquharson et al (Farquharson raising debt and were in danger of being scrapped. The Treasury et al. 2011, 63) notes that guaranteeing project debt undermines created the Treasury Infrastructure Finance Unit (TIFU) to lend at the risk transfer to the private sector. For this reason, governments commercial rates to PPP projects that were unable to raise enough often provide only partial credit guarantees—that is, a guarantee on commercial bank finance. The unit funded one major project in repayment of only a part of the total debt. April 2009: The Greater Manchester Water project. According to a United Kingdom National Audit Office report (NAO 2011, Partial credit guarantees have been used by both developed and de- 8), the Treasury’s willingness to lend improved market confidence, veloping country governments to help support their PPP programs. and as of July 2010, 35 further projects had been agreed without For example: public lending. ŠŠKorea’s Infrastructure Credit Guarantee Fund guarantees proj- Government provision of SPV equity ect debt through a counter-guarantee structure. That is, the Fund guarantees an on-demand term loan provided by a finan- Under the British Government’s revised PPP policy introduced cial institution that can be called by the project company to in 2012—termed Private Finance 2, or PF2—the Treasury may meet its senior debt service payments (Fitch 2006a, 6–7). provide a minority share of the equity in PF2 projects (UK 2012a). The rationale was to give government better access to project infor- ŠŠKazakhstan has provided guarantees on infrastructure bonds mation, including in relation to the financial performance of the issued for its transport PPPs. The guarantees on the bonds by project company; allow government to be more involved in stra- the government gave security for the pension funds to invest in tegic decision making; and improve value for money by sharing in the projects (USAID 2008). the ongoing investment returns. A similar structure has been used Section 1.3 How PPPs Are Financed 51 ŠŠIndonesia has established IIGF, as described in Section 2.4.3 - government payments are unconditional and can be used to cover Budgeting for Government Commitments to PPPs. some or all of the debt service of the PPP project company. The use of guarantees should be carefully considered, and cover the The Government of Peru has also introduced a financing structure risks which the government is best placed to manage. Inappropriate for PPPs that is a variant on the forfaiting model. In the Peru- use of guarantees can increase government’s fiscal exposure, and vian model, irrevocable payment commitments are issued during reduce value for money as the transfer of risk to the private sector is construction on completion of defined milestones. The CRPAO mitigated. A more detailed discussion on this topic can be found in structure is described in Box 1.12 - CRPAOs in Peru. These for- Section 1.3.2 - Considerations for Government which focuses on the faiting-type models allow for the private partner to gradually fi- dangers of over-leverage, and in Section 1.2.1 - Insufficient Funds nance its investment by securitizing the guaranteed future flow of which discuses the risks associated with the lack of fiscal clarity payments related to each phase of construction. However, it also from PPPs. For more information on government guarantees and means the government is committed to paying a proportion of the public financial management for PPPs, see Section 2.4 - Public Fi- contracted amount irrespective of whether the asset is completed. nancial Management Frameworks for PPPs. The relevance of this approach may depend on the nature of the asset—in particular, whether it is readily divisible. Forfaiting structures A finance structure sometimes used to reduce the cost of finance for PPPs is the forfaiting model, which can be used for govern- ment-pays PPP projects. Under this model, once construction is completed satisfactorily, the government issues an irrevocable Box 1.12 CRPAOs in Peru commitment to pay the project company a portion of the contract costs—typically sufficient to cover debt service. This can lower the In Peru, an innovative financing structure has been developed to finance construction of its road concessions. project’s financing costs. The Government of Peru issues PAOs (Pago Annual de Obras or annual payments for work) to the private However, it means the government retains more risk under the contractor for completing construction milestones. PAOs PPPs. The lender has less interest in ensuring project performance are obligation of the Government of Peru to make dollar- since government payments are no longer conditional on the pri- denominated payments on an annual basis (similar to vate operator meeting performance objectives. Since there is cer- bonds). After they are issued, the payments are not linked to the performance or operation of the roads and are tainty in government payments, this is effectively a government irrevocable and unconditional. Debt for the project is raised debt obligation—and government should account for this liability through bonds that are backed by the securitization of the accordingly. Besides, the fact that payment is not conditional re- PAOs, known as CRPAOs (Certificado de Reconocimiento duces revenue risk. It should therefore be reflected in the pricing of de Pago Annual de Obras). SPV debt. The forfaiting model has been widely used in Germany for small projects—typically municipal projects—where over half Peru first used this financing structure in 2006 to finance the first 960km piece of the IIRSA Interoceania Sur. The of the PPPs implemented between 2002 and 2006 used this struc- project raised $226 million in debt for the project with ture. For more detail on the forfaiting model, see Daube’s article a $60 million partial credit guarantee from the Inter- (Daube et al. 2008) comparing project finance to the forfaiting American Development Bank. Two subsequent pieces of model. the Interoceania Sur have also used the CRPAO financing structure. A variant of the forfaiting model is the cession de créance (assign- Sources: (Fitch 2006b); (USAID 2009) ment of receivables) used in France. In this case, upon verification of availability, the project company assigns its receivables payable by the government to the commercial bank financing the proj- ect. Therefore, once the infrastructure is built and operational the 52 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS Development bank or other state finance has been a major lender to private infrastructure projects in Bra- institution involvement in PPPs zil—appraising risk and providing finance. Many governments have established publicly-owned development Alternatively, governments may establish finance institutions spe- banks or other finance institutions, which may provide a range of cifically to serve PPPs, and sometimes other infrastructure invest- financial products to PPP projects. These financial institutions ments. For example, the India Infrastructure Finance Company may be capitalized by the government, and can often also access Limited (IIFCL) was established in 2006 to provide long-term debt concessional financing. Where these entities operate as commercial to viable infrastructure projects undertaken by public or private finance institutions, they may be better placed to assess the viability companies. The Indonesia Infrastructure Guarantee Fund (IIGF) of a proposed PPP project than the government itself—although was established in 2009 as a state-owned company to provide guar- they are sometimes also exposed to political pressure that may un- antees for infrastructure projects under PPP schemes. However, as dermine the quality of due diligence or project structuring. described by Klingebiel and Ruster in their paper on infrastruc- ture facilities (Klingebiel and Ruster 1999), unless policy and in- In some cases, established development banks may expand their stitutional frameworks are developed to provide a pipeline of bank- activities into the PPP sector. For example, the Banco Nacional de able projects, government-backed financing facilities are unlikely Desenvolvimento Econômico e Social (BNDES, Annual Report) to provide the desired results. Table 1.4 Example of Third-Party Risk Mitigation or Credit Enhancement Instruments Instrument Description Example Provider(s) Full or comprehensive Cover the full value of a project’s senior debt for all Historically such guarantees were provided by “monoline” insurers. Providers credit guarantees risks. Such cover is typically available for projects that of such guarantees are relatively few, and include some Development Finance are already relatively low-risk, with the objective of Institutions (e.g. EIB), Export Credit Agencies, and MIGA’s guarantees raising the rating of those projects to investment grade, regarding ‘non honoring of financial obligation’. enabling more risk-averse investors such as pension funds to participate in the project financing. Partial credit guarantees Tailored to the project, they cover loss in case of default Most development finance institutions can provide partial credit guarantees, for (PCGs) up to a certain proportion of a project’s senior debt. example the World Bank, or the EIB’s Project Bond Initiative, which can offer This cover may be on a first loss or pari passu basis. both subordinated debt or partial credit guarantees. GuarantCo specializes in First loss guarantees absorb the first percentage of loss providing partial credit guarantees in local currency, to enable local financial given default: that is, they reduce the risk of loss from institutions to participate in project financing (also reducing currency-related a lender’s perspective in a similar way to subordinated risks). debt. Pari passu guarantees absorb a defined percentage of any loss—that is, reduce the size of loss, but not the risk. Political risk insurance Protect the project sponsor and/or lender from loss Offered by several development finance institutions, including MIGA. A report due to political risks. These may include the risk of by the Initiative for Risk Mitigation in Africa (IRMA) (Pierris 2012), which is expropriation, political violence such as war or civil a program in partnership with the AfDB, it illustrates that the range of IRMA’s disturbance, or transfer or convertibility risk, and PRI instruments that can be used for PPP projects. breach-of-contract risks. Currency swaps or Swaps or forward contracts to hedge against Commercial banks and the Currency Exchange (TCX), a donor-funded forward contracts fluctuations in currency or commodity prices. Currency initiative that provides currency swaps for a wide range of currencies. swaps in particular are often available only for a limited range of widely-traded currencies. Insurance or contingent Protect from loss due to natural disaster, or alternatively, Provided by several development finance institutions or in some cases, private credit lines against natural provide a contingent credit line to finance needed providers. Examples include index-based weather derivatives (see Box 1.9 The disasters investments. Uruguay Weather Derivative), or the World Bank’s Catastrophic Risk Deferred Drawdown Option (WB 2011a). Section 1.3 How PPPs Are Financed 53 Government-owned finance institutions can also be used to pro- ries—the contracting agency and private parties—following the vide PPP policy coordination and enforcement, by establishing principles discussed in Section 3.3 - Structuring PPP Projects. The clear rules and requirements for when financing will be available. overarching goal is to align the profit incentives of the private par- This can particularly apply when a financial institution is set up ties with the government’s objectives for the project. specifically to serve the needs of a PPP program. For example, in Mexico most PPPs have been implemented with the support of However, a well-structured PPP agreement, based on sound risk FONADIN, an infrastructure investment fund under the national allocation, may not necessarily result in a bankable project. As development bank BANOBRAS. The operating rules for FONA- described in Section 1.3.2 - Considerations for Government, if the DIN de facto established the rules and procedures by which PPP level of risk allocated to the private party is too high, lenders may projects will be implemented, as described in Box 1.13 - Mexi- increase their lending rates or reduce their willingness to lend to co’s FONADIN. the project to the point where the project becomes unviable or not bankable. For example, projects with particularly high exposure to geotechnical or natural disaster risks—particularly in the context 1.3.4 Third Party Risk Mitigation and of climate change, as described in Section 1.2.6 - Climate Change Credit Enhancement and Natural Disasters—could be difficult to finance. Projects in countries with a high perceived risk of doing business with the gov- The PPP Agreement is at the center of a PPP, as shown in Figure ernment in general, such as in fragile or conflict-affected states, as 1.3 - Typical PPP Project Structure. This agreement allocates proj- described in Section 1.2.5 - Infrastructure in Fragile and Conflict-Af- ects risks, responsibilities, and rewards between the two signato- fected States, often face similar challenges. In these circumstances, governments can secure the bankability of the project by accepting more risk (through adjusting the agree- Box 1.13 Mexico’s FONADIN ment or providing additional guarantees), or providing government grants or loans to reduce the extent to which the private party needs Prior to 2012, Mexico had no PPP Law. However, most to raise finance, as described in Section 1.3.1 - Finance Structures for government agencies that implement projects through PPP PPP. However, these levers have limitations: they may reduce the schemes did so with the support of the Fondo Nacional risk transfer to the point where the alignment of incentives is sim- de Infraestructura (FONADIN). Exceptions are typically ply too weak to be effective; they may present fiscal costs or risks projects that are self-financing—that is, projects that generate revenues that are sufficient to cover the costs; that the government is not willing to bear; or they may simply not the two government entities that generally follow this path be effective, particularly in the case of significant political risk or are CFE (the national electric company) and PEMEX (the risk of adverse government behavior, which is borne by the private national oil company). party by definition. In addition to providing subsidized lending and, in some An alternative option is to assign some part of the project risk to cases grants, FONADIN can help agencies in providing grants for the preliminary studies for the project, preparing a third party through a credit enhancement or risk transfer instru- the project documentation and implementing the tender ment. These instruments include guarantees, insurance policies, process. In practice, this has meant that the Presidential or hedging mechanisms under which, for a fee, the provider will Decree that established FONADIN in 2008 has effectively agree to compensate the concessionaire (or its lenders) in case of governed most PPP projects. Under that decree, the Rules default and/or loss due to some specified circumstance. Some of of Operation of FONADIN set out the scope, and the these instruments are offered by commercial providers, such as in- processes and procedures to identify, assess, and approve PPP projects. surance companies or swap providers, which specialize in pricing and managing risks. Others are offered by development finance in- Source: (FONADIN 2011) stitutions, such as MIGA, that have access to concessional capital, explicit mandates, different risk appetites, and/or are better placed than private sector lenders to assess and manage the specific risks 54 PPP REFERENCE GUIDE : MODULE 1 – PPP BASICS involved in investing in emerging markets—see (WB 2016h) as an (AfDB) on the Initiative for Risk Mitigation (Pierris 2012, 68– example. 72) present several examples. The World Economic Forum (WEF 2016) has undertaken a recent assessment of the availability and Risk mitigation or credit enhancement instruments fall into three use of risk mitigation instruments for infrastructure in develop- broad types: full, or comprehensive credit guarantees, which cover ing countries. the totality of a project’s senior debt against all risks; partial credit guarantees, which cover a certain proportion of a project’s debt for Accessing these risk mitigation or credit enhancement instruments all risks; and a range of partial risk instruments which provide full is mostly the responsibility of the concessionaire during arranging or partial cover of loss due to specific risks. financing for the project. Governments may also consider the op- tion of credit enhancement when structuring a project, and engage The APMG PPP Certification Guide discusses credit enhancement with potential providers prior to bringing it to market—particular- instruments. (APMG 2016, Chapter 1, Section 7.4.2). ly for credit enhancements designed to back up the government’s own commitment to the project. This can help attract bidders who For a general discussion of risk mitigation instruments, the OECD’s may otherwise not participate, and ensure bids are based on com- report mapping instruments and incentives for infrastructure parable assumptions, resulting in a more competitive procurement financing (OECD 2015c) provides a comprehensive description for the project. of different instrument types, and the African Development Bank Key References: How PPPs Are Financed Reference Description Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and Chapter 5 provides an overview of private finance for PPPs, focusing on Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private challenges faced in developing countries. Partnerships in Emerging Markets. Washington, DC: World Bank. Yescombe, E.R. 2007. Public-Private Partnerships: Principles of Policy and Provides comprehensive coverage of PPP financing: putting PPPs in context; Finance. Oxford: Butterworth-Heinemann. describing financial analysis of PPPs and how this informs investment decisions by both public and private parties; debt financing structures and sources; how PPP financing plans are constructed; and how financing requirements are reflected in contractual terms. Delmon, Jeffrey. 2015. Private Sector Investment in Infrastructure: Project Also covers a wide range of topics on PPP financing. These include an Finance, PPP Projects and PPP Frameworks. 3rd edition. Alphen aan den introduction to project finance structures and typical terms (Chapter 2); typical Rijn, Netherlands: Wolters Kluwer. contractual arrangements for a PPP (Chapter 3); and bankability (Chapter 4). Daube, Dirk, Susann Vollrath, and Hans Wilhelm Alfen. 2008. “A Describes the forfaiting model used in Germany as an alternative to project Comparison of Project Finance and the Forfeiting Model as Financing finance, to lower financing costs for PPP projects. Forms for PPP Projects in Germany.” International Journal of Project Management 26 (4) 376-387. Ehrhardt, David, and Timothy C. Irwin. 2004. “Avoiding Customer and Describes how high leverage combined with high-risk projects and a reluctance to Taxpayer Bailouts in Private Infrastructure Projects: Policy toward Leverage, allow a PPP company to go bankrupt can create problems for PPPs, and suggests Risk allocation, and Bankruptcy.” World Bank Policy Research Working options to address the problem. Includes PPP case studies in Australia, the United Paper 3274. Washington, DC: World Bank. Kingdom, Brazil, and Mexico. Harris, Clive, and Sri Kumar Tadimalla. 2008. “Financing the Boom in Describes how financing structures for PPPs in India have evolved as the use Public-Private Partnerships in Indian Infrastructure: Trends and policy of PPPs has increased since the mid-1990s—in particular, noting an increasing implications.” Gridlines Note No. 45. Washington, DC: World Bank. proportion of debt financing—and provides some policy lessons. Section 1.3 How PPPs Are Financed 55 Reference Description US. 2010. Project Finance Primer. Washington, DC: United States Outlines the United States financing mechanisms for highway infrastructure. Government, Department of Transportation, Federal Highway Chapter 4 describes three mechanisms by which the United States government Administration. provides credit assistance to private investors in roads. IN. 2013b. Guidelines for Formulation, Appraisal and Approval of Central Describes India’s Viability Gap Financing scheme for providing capital subsidies Sector Public Private Partnership Projects. New Delhi: Government of India, to private infrastructure projects. Ministry of Finance. UK. 2010b. Financing PFI Projects in the Credit Crisis and the Treasury’s The Treasury of the United Kingdom outlines its response to the financial crisis, Response, Ninth Report of Session 2010-11. London: House of Commons. which included establishing an Infrastructure Finance Unit to provide lending at commercial terms to projects unable to raise debt from commercial banks. Farquharson, Edward, and Javier Encinas. 2010. “The U.K. Treasury Summarizes the United Kingdom’s experience with PFI during the financial crisis, Infrastructure Finance Unit: Supporting PPP financing during the global and describes the Treasury Infrastructure Finance Unit. liquidity crisis.” Public-Private Partnerships Solutions. Washington, DC: World Bank. Burger, Philippe, Justin Tyson, Izabela Karpowicz, and Maria Delgado Investigates the impact of the global financial crisis on PPPs, and the Coelho. 2009. “The Effects of the Financial Crisis on Public-Private circumstances under which providing support to new and existing projects is Partnerships.” IMF Working Paper WP/09/144. Washington, DC: justified. International Monetary Fund. Foster, Richard. 2010. “Preserving the Integrity of the PPP Model in Describes how the Government of the State of Victoria, Australia, adapted its PPP Victoria, Australia, during the Global Financial Crisis.” Public-Private program to the global financial crisis, by making changes on a project-by-project Partnerships Solutions. Washington, DC: World Bank. basis to allocating certain financial risks. EPEC. 2009. The Financial Crisis and the PPP Market: Potential Remedial Provides ideas for governments on ways to support PPPs during the Global Actions. Luxembourg: European Investment Bank, European PPP Financial Crisis. These include changes to procurement approaches, providing Expertise Centre. state guarantees or co-lending, particularly as a short-term measure, and adapting PPP structures to attract different types of investor. Latif, Qudeer. 2013. “An Introduction to Islamic Project Finance.” Client This reference provides an overview of the Sharia compliant project finance Briefing. April 29. Dubai: Clifford Chance. market, summary of a few recent deals and how these deals were structured and procured. Esty, Benjamin C., Fuaad A. Qureshi, and Mathew Mateo Millett. 1999. Provides a basic introduction to the principles of Islamic finance, including the “Introduction to Islamic Finance.” Harvard Business Review Case Study. religious background and its legal foundations. Also discusses the development of August 6. Watertown, Massachusetts. Islamic financial institutions and the financial instruments they use. Concludes with a discussion of recent developments and future challenges for this growing segment of the global financial system. Karbani, Faizal. 2015. Mastering Islamic Finance: A Practical Guide to Sharia- Guides readers from the basic principles underpinning Islamic finance, including Compliant Banking, Investment and Insurance. Upper Saddle River, New its market applications and prevalent practices. Jersey: FT Press. Esty, Benjamin C. 2014. Modern Project Finance: A Casebook. Hoboken, Provides a detailed description and analysis of project-financed transactions. New Jersey: John Wiley and Sons. Hoffman, Scott. 2007. The Law and Business of International Project Finance: Covers the complete project finance structure, from conception to negotiation to A Resource for Governments, Sponsors, Lawyers, and Project Participants. 3rd debt closing, and from project difficulties to successful restructuring. ed. Cambridge, England: Cambridge University Press. Finnery, John D. 2013. Project Financing: Asset-Based Financial Engineering. Reviews the project finance process step by step to assist readers in familiarizing 3rd ed. Hoboken, New Jersey: John Wiley and Sons. themselves with the topic. Module 2 Establishing the PPP Framework PPPs can be implemented on a one-off basis without any specif- excessive fiscal risks. It also guarantees that consultation with stake- ic supporting legal and institutional framework. However, most holders will be systematically undertaken and fair compensation countries with successful PPP programs rely on a sound PPP awarded to those that are entitled to receive it. This generates great- framework. Countries pioneering PPPs have built their PPP pro- er private sector interest and public acceptance of PPP programs. grams and frameworks together, learning by doing, and adjusting These core principles are described in Box 2.1 - Good Governance their frameworks to their needs. Governments now beginning or for PPPs. expanding their PPP programs can benefit from this global experi- ence. By addressing efficiency and good-governance requirements, Defining the PPP framework they can design and implement PPP frameworks that promote sound project selection, fair and competitive procurement, effec- There is no single, model PPP framework. A government’s PPP tive delivery of public services, and the ultimate success and sus- framework typically evolves over time, often in response to specific tainability of PPP programs. challenges facing its PPP program. In the early stages of a program the emphasis may be on enabling PPPs, and creating and promot- The “PPP framework” consists of the policies, procedures, institu- ing PPP opportunities. Once several PPPs have been implemented tions, and rules that together define how PPPs will be identified, on an ad hoc basis, concern about the level of fiscal risk in the PPP assessed, selected, prioritized, budgeted for, procured, monitored, program may be the impetus for strengthening the PPP framework. and accounted for; and who will be responsible for these tasks. In this case, the focus may be on strengthening control over how Establishing a PPP framework communicates government’s com- PPPs are developed, or improving public financial management for mitment to PPPs and it fosters efficiency in the governance of the PPPs, as for example in South Africa (Burger 2006). PPP program—that is, it promotes accountability, transparency, and integrity. It ensures that selected projects are aligned with the Often the initial phase of this iterative process involves introducing government’s development strategy, generate the greatest economic PPP-specific institutions, rules, and procedures to ensure PPP proj- returns for society as a whole, and do not expose the government to ects are subject to similar discipline as public investment projects. 58 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK ty. Box 2.2 - The PPP Framework of Chile and Box 2.3 - The PPP Framework of South Africa provide brief overviews of the PPP Box 2.1 Good Governance frameworks in South Africa and Chile—both countries recognized for PPPs as having best-practice PPP frameworks. The components of a comprehensive PPP framework typically in- The United Nations Economic Commission for Europe (UNECE) Guidebook on Promoting Good Governance in clude the following: PPPs defines governance as the processes in government ŠŠPolicy—articulation of the rationale behind the government’s actions and how things are done, not just what is done. All elements of the PPP Framework described in Module 2 intent to use PPPs to deliver public services, and the objectives, of the Reference Guide contribute to the governance of scope, and implementing principles of the PPP program. the PPP program. UNECE describes good governance as ŠŠLegal framework—the laws and regulations that underpin the encompassing the following six core principles: PPP program—enabling the government to enter into PPPs, Efficiency—use of resources without waste, delay, and setting the rules and boundaries for how PPPs are imple- corruption, or undue burden on future generations mented. This can include PPP-specific legislation, other public financial management laws and regulations, or sector-specific Accountability—the extent to which political actors are laws and regulations. responsible to society for their actions ŠŠProcesses and institutional responsibilities—the steps by Transparency—clarity and openness in decision-making which PPP projects are identified, developed, appraised, im- plemented, and managed, ideally within the Public Investment Decency—development and implementation of rules without harming people Management system; and the roles of different entities in that process. A sound PPP process is efficient, transparent, and is Fairness—equal application of rules to all members of followed consistently to effectively control the quality of PPP society projects. Participation—involvement of all stakeholders ŠŠPublic financial management approach—how fiscal commit- ments under PPPs are controlled, reported, and budgeted for, One of the aims of establishing a sound PPP framework is to ensure PPPs provide value for money, without placing undue to ensure these principles of good governance are followed burden on future generations, and to manage the associated fis- in the implementation of PPP projects. cal risk. Source: (UNECE 2008, Section 2.1: Principles of Good ŠŠOther arrangements—how other entities such as auditing Governance in PPPs) entities, the legislature, and the public participate in the PPP program, and hold those responsible for implementing PPPs accountable for their decisions and actions. The sections of this Gradually, as experience with PPP grows, these PPP frameworks module describe each of these elements of a PPP framework, may re-integrate with normal public investment and infrastructure providing examples and guidance for practitioners. planning, procurement, and fiscal management processes, with In practice, these elements are closely interrelated. For example, a PPPs as one option facing the same standards as others for imple- well-controlled process for developing PPPs requires assessing their menting public investment projects. Maintaining the same stan- fiscal consequences, which implies some Finance Ministry control dards will prevent PPPs from being used to circumvent standard at different stages of the project cycle. This is essential for sound project checks and balances or fiscal constraints. public financial management of the PPP program. Comprehensive The best solutions to any given challenge will likely vary between public reporting of fiscal commitments to PPPs in turn enables countries—depending on the country’s existing legal framework, effective oversight of the PPP program. These linkages are high- investment environment, government institutions, and capaci- lighted throughout this module.  59 Box 2.2 The PPP Framework of Chile Chile is a country with substantial PPP experience and a well- The Ministry of Finance approves PPP tender documents, as well as defined PPP framework. As of 2015, Chile had 59 active projects any changes made during the tender process, and any significant in roads, airports, jails, reservoirs, urban transport, hospitals, and changes made through the lifetime of the contract. The Minister other sectors, with a total investment value of $10.8 billion. of Finance also signs the decree awarding the PPP contract to the winning bidder. To manage these responsibilities, the Ministry has The use of PPPs in Chile was enabled in 1991 by Decree 164, which established a Contingent Liabilities Unit, which reviews all projects set out much of the framework still in use today. This framework prior to approval, and calculates the value of the government’s was updated in 2010 by the Concessions Law. liabilities initially and throughout the contract on an annual basis. Chile publicly discloses its commitments to PPP projects in a The Concessions Law sets out the institutional responsibilities and detailed annual contingent liabilities report. Information on the processes for developing and implementing PPPs. The Concessions PPP program is also included in budget documentation. Unit of the Ministry of Public Works (MOP) acts as implementing agency for all PPPs in Chile. The MOP may receive proposals from The Chilean Treasury makes the payments set out in the PPP government agencies or private investors. It follows a clearly- contract in accordance with appropriation procedures and the defined process to appraise a project. If the project is deemed to milestones stipulated in the contract. These payments were be a good PPP candidate, the MOP Concessions Unit prepares the previously approved by the Ministry of Finance during the project tender documents, manages the tender process, and selects and approval phase. Disbursements are structured where possible announces the winning bidder by decree. The Unit then manages to minimize their impact on fiscal risk—for example, demand the PPP contract over the project lifetime, receiving regular reports guarantee payments are typically due the year after a demand from the concessionaire—with the ability to request additional shortfall, once the amount is known. audits to check the information received—and managing any changes needed to the contract. Either party can bring a dispute that emerges during the implementation of a project to a Technical Panel. If the solution The National Planning Authority reviews and approves the technical proposed by the technical panel does not resolve the problem, the and economic analysis of the project. The Concessions Council— parties may bring the matter before the Arbitration Commission led by the Minister of Public Works, with an advisor selected by the or the Appeals Court of Santiago. MOP, and four other advisers representing the Civil Engineering, Economics and Management, Law, and Architecture departments Sources: (CL 2010a); (CL 2010b); (CL 2016) of the University of Chile—approves the initial decision to carry out the project as a PPP. For more on the typical components of a PPP framework, see Far- Detailed assessments of PPP frameworks in a range of countries are quharson et al (Farquharson et al. 2011, 15–16), and Yong (Yong available in the following: 2010, 30), which both provide brief overviews. The OECD’s rec- ommendation on public governance of PPPs (OECD 2012) also ŠŠThe Economist Intelligence Unit (EIU)’s Infrascope index sets out guiding principles for governments on managing PPPs. publications assess the PPP environment in a set of countries The recommendations cover three areas: (1) establishing a clear, to determine whether they are ready to undertake sustainable predictable, and legitimate institutional framework supported by PPPs. The variables used to assess the countries include many competent and well-resourced authorities; (2) grounding the selec- of the PPP framework elements described above, as well as the tion of PPPs in value for money; and (3) using the budget process country’s operational experience with PPPs, the availability of transparently to minimize fiscal risks and ensure the integrity of the finance and financing support mechanisms, and the overall in- procurement process. These built on earlier OECD principles for vestment climate. The series includes the EIU Infrascope index private sector participation in infrastructure (OECD 2007b). for Latin America and the Caribbean (EIU 2014b), commis- 60 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Box 2.3 The PPP Framework of South Africa South Africa is another country with substantial PPP experience. responsible for managing PPPs through the contract lifetime, From 2000 to April 2014, South Africa implemented 24 national which includes ensuring the project meets performance standards, and provincial level PPP projects totaling over $8.35 billion of resolving disputes, and reporting on the PPP in the institution’s/ investment. municipality’s annual reports. The legislation governing national and provincial PPPs is the Treasury PPP approvals are made by the Treasury at the national and Regulation 16, issued under the Public Finance Management Act provincial levels. Municipal PPPs will be subject to Treasury’s views of 1999. Regulation 16 sets out the PPP process, requirements and recommendations. Projects are submitted for approval at four and approvals, and institutional responsibilities. Municipal PPPs points, after: (1) the feasibility study has been completed; (2) the are governed by the Municipal Finance Management Act and the bid documents have been prepared; (3) bids have been received Municipal Systems Act. There are also municipal PPP regulations and evaluated; and (4) negotiations have concluded and the PPP that roughly mirror the requirements of Treasury Regulation 16. contract is in its final form. The Treasury established a PPP Unit in 2004 to review all PPP submissions and recommend the PPP PPP processes and institutional responsibilities are established in for approval. The Treasury’s evaluation focuses particularly on the a detailed PPP Manual. This manual describes how the Treasury value for money and affordability of the PPP project. regulations should be interpreted, and provides detailed guidance at every step in the PPP process, each in a separate module. Each Payments for PPP commitments are made through the annual module of the manual is issued as a practice note of the National appropriations process. The Accounting Standards Board of South Treasury, and can be updated separately. A similar manual, Africa has published guidelines for public sector accounting for the Municipal Service Delivery and PPP Guidelines, provides PPPs. The PPP Manual also sets out the auditing requirements for instructions for municipal PPPs. PPP. The Auditor General’s annual audits of contracting authorities should check that the requirements of the PPP regulations have Responsibility for implementing PPP projects rests with the been met, and the financial implications are reflected in the contracting authority. Contracting authorities must identify institution or municipality’s accounts. The Auditor General may and appraise PPP projects, and manage the tender process to also conduct forensic audits if any irregularity is suspected. select the winning bidder, following the detailed guidance and requirements (including checklists for each stage and standard Sources: (ZA 2004a); (Burger 2006); (Irwin and Mokdad 2010) forms) set out in the manuals. The contracting authority is sioned by the Inter-American Development Bank’s Multilater- ŠŠThe PPP Knowledge Lab contains links to a set of tools designed al Investment Fund (MIF); the EIU Infrascope index for the by multilateral organizations to assess and improve PPP frameworks. Asia-Pacific region (EIU 2014a), commissioned by the Asian ŠŠThe OECD Principles for Public Governance of Public- Development Bank (ADB); the EIU Infrascope indexfor East- Private Partnerships (OECD 2012)—provides recommenda- ern Europe and the Commonwealth of Independent States tions on how to ensure value for money through institutional (EIU 2012), commissioned by the European Bank for Recon- design, regulation, competition, budgetary transparency, fiscal struction and Development (EBRD); and the EIU Infrascope policy, and integrity at all levels of government. report evaluating the environment for PPPs in Africa (EIU 2015), commissioned by the World Bank. ŠŠThe Country Readiness Diagnostic for Public-Private Part- nerships (WB 2016a) is a World Bank tool to help determine the ŠŠIrwin and Mokdad’s paper on managing contingent liabili- status quo and compare it with best practices to determine gaps. ties in PPPs (Irwin and Mokdad 2010) describes the PPP ap- proval, analysis and management approach in Australia, Chile, ŠŠThe World Bank Benchmarking PPP Procurement 2017 and South Africa, with a focus on fiscal management. (WB 2016b)—benchmarks the regulatory frameworks govern- Section 2.1 PPP Policy 61 ing the PPP procurement processes in 82 economies, and evalu- government’s statement of intent to use PPPs as a course of action ates these data against internationally recognized good practices. to deliver public services and the guiding principles for that course of action. A PPP policy would typically include: ŠŠThe Framework for Disclosure in PPP Projects (WB 2015a)—is a World Bank review of PPP disclosure frameworks ŠŠPPP rationale/program objectives—why the government is and practices together with a set of recommendations for a sys- pursuing a PPP program tematic structure for proactively disclosing project information. ŠŠPPP program scope—what types of projects will be pursued A PPP framework can be instituted in different ways. The options under the PPP policy available typically depend on the legal system of the country, and ŠŠImplementing principles and governance arrangements— on the norm for establishing government policies, procedures, in- how PPP projects will be implemented, to ensure the PPP pro- stitutions, and rules. They can include: gram meets its objectives ŠŠPolicy statement—in developed countries with a common-law The following sections provide examples of how different coun- tradition, PPP policy statements typically set out the rationale tries define their PPP program objectives, scope, and implementing for, objectives, scope, and implementing principles of the PPP principles. program, as described further in Section 2.1 - PPP Policy. Policy statements may also outline procedures, institutions, and rules Many governments issue a PPP policy statement or document to by which the objectives and principles will be put into practice. communicate their intention to use PPPs to civil servants, the pub- lic, and potential investors and the rationale behind this decision. ŠŠLaws and regulations—as described further in Section 2.2 The policy statement also describes how PPPs will be implemented. - PPP Legal Framework, civil law countries typically require The OECD’s report on fostering investment in infrastructure legislation to enable PPPs to be pursued, and set out the rules (OECD 2015b, 16–17) highlights the importance of a stable gov- for how PPPs will be implemented; many common law coun- ernment position on private participation. The following sections tries also introduce PPP legislation as a more binding form of reference some examples of PPP policy documents. Other coun- commitment to a PPP framework. This can be a dedicated PPP tries incorporate these elements of PPP policy within PPP laws and law, a component of broader public financial management law, regulations, or guidance material. PPP policies benefit from being subordinate legislation such as executive orders, presidential de- more comprehensive public investment or infrastructure policy crees, regulations, or a combination. framework, as described further in Section 2.3 - PPP Processes and ŠŠGuidance materials, such as manuals, handbooks, and other Institutional Responsibilities. tools. These may be used to establish PPP procedures upfront, or developed over time to supplement policy statements or leg- 2.1.1 PPP Program Objectives islation, as a codification of good practice. Module 3 - PPP Cycle provides examples and draws from many examples of good qual- Governments pursue PPP programs for different reasons. Some ity guidance material from national PPP programs. countries begin using PPPs to resolve a crisis or remove bottlenecks in a particular sector. For example, PPPs were first used in South In addition to cross-sector PPP frameworks, policies or laws at the Africa in the roads sector to build more highways. In the Philip- sector level can enable the use of PPPs and create a framework for pines, many of the first PPPs were in the power sector, where the PPPs within the sector. Many PPP programs use a combination of state-owned power company contracted with independent power these approaches. producers to solve a power crisis. In both cases, the use of PPPs subsequently extended into other sectors. 2.1 PPP Policy Most governments define broad PPP program objectives when The first step for government in establishing a PPP framework is to formulating and documenting their PPP policies. The choice and articulate its PPP policy. PPP policy is used in different ways in dif- relative priority of these objectives cascade from the government’s ferent countries. This Reference Guide uses PPP policy to mean the other policies and priorities. They can include: 62 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK ŠŠEnabling more investment in infrastructure, by accessing pri- and provide value for money. Governments may define the PPP vate finance program scope by one or more of the following: ŠŠEncouraging a whole-life-cost approach to infrastructure ŠŠPPP contract types—there is no consistent, international defi- nition of PPP. The term describes a wide range of contract types ŠŠPutting a greater focus on the quality of service to the end-user as presented in Section 1.1 - What is a PPP: Defining Public-Pri- ŠŠAccessing additional management capacity through private op- vate Partnership. Some countries filter the types of contract that eration of infrastructure are included under their PPP policies. The rationale behind this approach can be to prioritize the contract types that are most ŠŠAchieving value for money in the provision of infrastructure and consistent with the government’s policy objectives. It is also im- public services portant to clarify when the requirements and processes of the ŠŠImproving accountability in the provision of infrastructure and PPP framework apply. For example, India’s draft National PPP public services Policy specifies the types of contracts that can be used for PPPs (Engineering-Procurement-Construction (EPC) contracts, and ŠŠHarnessing private sector innovation and efficiency divestiture of assets). Brazil’s Law 11079, Federal PPP Law, (BR ŠŠStimulating growth and development in the country 2004a) and Chile’s Ley y Reglamento de Concesiones de Obras Públicas (CL 2010b) both define limits on the contract dura- Table 2.1 - Example PPP Program Objectives provides examples of tion. PPP program objectives in countries’ PPP policy statement or law. ŠŠSectors—the PPP program may be limited to sectors most in need of investment or improvements in service performance, 2.1.2 PPP Program Scope or those where PPPs are expected to be most successful. For Many governments choose to limit the scope of their PPP program example, Singapore’s PPP policy limits the use of PPPs to those to particular types of projects (or contracts). The aim can be to sectors in which other similar countries have had proven success focus on those most likely to achieve the government’s objectives with PPPs. Some countries exclude sectors considered too sen- Table 2.1 Example PPP Program Objectives Country Reference PPP Objectives Australia National PPP Policy Framework (AU Describes the aim of PPPs as being “to deliver improved services and better value for money, primarily 2016b, 3) through appropriate risk transfer, encouraging innovation, greater asset utilization and an integrated whole-of-life management, underpinned by private financing.” Indonesia Regulation of Government Cooperation The purpose of cooperation of government and the private sector (through PPPs) is set out as follows: with Business Entity in the Supply of • To fulfill sustainable funding requirements in the supply of infrastructure through mobilization of Infrastructure (ID 2005, Chapter II private sector funds Article 3) • To improve the quantity, quality and efficiency of services through healthy competition • To improve the quality of management and maintenance in the supply of infrastructure • To encourage the use of the principle where users pay for services received; or in certain cases the paying ability of the users shall be taken into consideration São Paulo Law 11688 (SP 2004a, Article 1) States that the objective of the PPP program is to “promote, coordinate, regulate, and audit the activities (Brazil) of the private sector agents who, as collaborators, participate in the implementation of public policies aimed at the development of the state and the collective wellbeing.” Mexico PPP Law (MX 2012, Ley de Asociaciones States that the objective of the PPP program is to increase social wellbeing, and investment levels in the Publico Privadas, Art.1) country. Section 2.1 PPP Policy 63 sitive, such as water, education or health. The EPEC report on Table 2.2 - Example Definitions of PPP Policy Scope provides more European lessons with PPPs (EPEC 2015) discusses the use of detail on how various countries have defined the scope of their PPPs for specific sectors in countries such as Belgium, France, PPP programs. Greece, the Netherlands, and Ireland. Additionally, certain countries have special programs specifically ŠŠProject size—many governments define a minimum size for for small projects, such as Kenya, Tanzania and India. These are PPP projects implemented under the PPP framework. Small described in greater detail in the review of trends in small-scale PPP projects may not make sense because of the relatively high PPPs (Ahmad and Shukla 2014). transaction costs—although there is evidence of a few cases in which small PPPs have been successful. In Singapore, PPPs are only pursued for projects with an estimated capital value of over 2.1.3 Implementing Principles $50 million. When Brazil passed its PPP law (BR 2004a) set a PPP policies often include a set of implementing principles—the minimum size of 20 million reais ($6.9 million at that time) for guiding rules, or code of conduct under which PPP projects will be individual projects launched under the PPP Law. Table 2.2 Example Definitions of PPP Policy Scope Country Reference PPP Policy Scope Australia National PPP Guidelines-PPP Policy Project size—value for money considerations mean PPPs will likely only be applicable for projects over Framework (AU 2016b, Section 3.1.3, 6) $50 million. Brazil National PPP Law (BR 2004a, Law 11079, Contract Types—only two types of contracts will be considered PPPs in Brazil: sponsored concession— Article 2, paragraph 4) returns for the private party come from user fees and government transfers; and administrative concessions—all returns to the private party come from government transfers. Concessions not requiring government transfers are not considered PPPs in Brazil. The law also states that the concession must be at least five years long to be considered a PPP. Project Size—PPPs will only be used for project over 20 million reais. Chile Concessions Law (CL 2010b, Law 20.410) Contract types—the law specifies a maximum duration for concession contracts of 50 years. Sector—the law does not specify the sectors. Colombia National PPP Law (CO 2012a, Law 1508, Contract types—PPP contracts must always make the private investor responsible for operations and Articles 3 and 6) maintenance, and must be for less than 30 years (if the project is longer, it will require approval from the National Council on Economic and Social Policy). Project size—Total investment in the project must be above 6000 smmlv (i.e. minimum legal monthly wage) or approximately $1,460,000. Indonesia Presidential Regulation No. 67 (ID 2005, Sectors – specifies eight eligible infrastructure sectors: transportation (ports and railways); roads; water Peraturan Presiden No. 67) (channels for fresh water flows); potable water distribution; waste water; telecommunications; electric power; oil and natural gas. Mexico PPP Law (MX 2012, Ley de Asociaciones Contract types—defines PPPs as long-term contractual relationships between public and private entities Publico Privadas) to provide services to the public sector or the general public, and where infrastructure is provided to increase social wellbeing and investment levels in the country. Contracts must not exceed 40 years in duration (including extensions)—contracts that are longer than 40 years must be approved by law. Senegal PPP Contracts Law and Order of Sectors—PPP provisions apply to all sectors except those subject to special regulations, particularly Application (SN 2015, Loi Relative mining, telecommunications, and energy. aux Contrats de Partenariat et Decret d’Application) 64 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK implemented. These principles set out the standards against which ŠŠThe PPP Law of the State of São Paulo, Brazil (SP 2004a, those responsible for implementing PPPs should be held account- Law 11688, Article 1) sets out eight principles to guide PPP able. Regulations and processes detailing how the principles will design and implementation, including efficiency, respect for the be put into practice often support the PPP policy framework. For interests of the end users, universal access to essential goods and example, Box 2.4 - PPP Implementing Principles in Peru lists the services, transparency, fiscal, social, and environmental respon- implementing principles established in Peru’s national PPP law. sibility. For other examples of strong guiding principles, see: ŠŠIndonesia’s Presidential Regulation No. 67 (ID 2005, Article 6) presents PPP principles promoting transparency, fair consid- ŠŠThe State Government of Karnataka Infrastructure Policy eration, and competition in the PPP program, as well as “win- (KAR 2015, 9–20) explains its Touchstone Principles. win” structures for the public and private parties. ŠŠAustralia’s National PPP Policy Framework (AU 2016b, 11– ŠŠColombia’s National PPP Law (CO 2012a, Law 1508, Arti- 12) sets out nine principles: value for money, public interest, cles 4 and 5) lays out the key principles of the PPP policy in risk allocation, output-orientation, transparency, accountability, the country: efficiency, necessity, and efficient risk allocation. modified funding and financing, sustainable long-term con- The law also states that all payments to private investor must be tracting, and engaging the market. conditional on the availability of the infrastructure to contrac- ŠŠBrazil’s Federal PPP Law (BR 2004a, Law 11079, Article 4), tually-set levels. identifies seven principles for the use of PPPs—efficiency, re- ŠŠJamaica’s PPP Policy (JM 2012) sets out four guiding prin- spect for the interests of users and the private actors involved, ciples: optimal risk transfer; achieving value for money for the non-transferability of regulatory, jurisdictional and law enforce- public; being fiscally responsible; and maintaining probity and ment responsibilities, transparency, objective risk allocation, transparency. and financial sustainability. Box 2.4 PPP Implementing Principles in Peru Peru’s PPP policy is set out in legislative Decree 1012. Article 5 services. The government must avoid any anti-competitive or defines the following guiding principles for PPP programs: collusive behavior. Value for Money: the public service provided by the private Adequate Risk Allocation: there must be adequate risk allocation actor must offer better quality for a given cost or lower costs for between the public and private parties. This means that the risks a given quality outputs. This is how the policy seeks to maximize must be assigned to the party that has the greatest capacity to user satisfaction and optimize the use of public resources. manage the risks at a lower cost, considering both the public interest and the project’s characteristics. Transparency: all quantitative and qualitative information used to make decisions during the evaluation, development, Budgetary Responsibility: this is defined as government capacity implementation and monitoring stages of a PPP must be made to assume the firm and contingent financial commitments related public in accordance with Article 3 of the Transparency and to the implementation of PPP contracts without compromising Public Information Access Law. the sustainability of public finances or the regular provision of the public service. Competition: competition must be sought to ensure efficiency and lower costs in the provision of public infrastructure and Source: (PE 2014) Section 2.1 PPP Policy 65 Key References: PPP Policy Examples Reference Description AU. 2016b. National Public Private Partnership – Policy Framework. Canberra: Sets out the policy objectives, scope, assessment of projects as PPPs, and Commonwealth of Australia. principles guiding the application of PPPs. ID. 2005. Peraturan Presiden Republik Indonesia Nomor 67 Tahun 2005. Jakarta: Sets out the purpose, scope, and principles of the PPP program in Indonesia, as President of the Republic of Indonesia. well as defines the PPP process and responsibilities. SP. 2004a. Lei No. 11.688 de 19 de maio de 2004. São Paulo: Governo do Sets out the objectives of the PPP Program, creates the PPP Management Estado de São Paulo. Council, the São Paulo Partnerships Corporation, and the PPP Unit within the Planning Secretariat. Also establishes the private partner’s responsibilities, and establishes the rule for PPP contracts. MX. 2012. Ley de Asociaciones Público Privadas. Mexico City: Gobierno de Sets out the scope, principles, and processes for the PPP program in Mexico. México, Cámara de Diputados. BR. 2004. Lei No. 11.079 de 30 de dezembro de 2004. Brasília: Presidência da Defines PPPs and the PPP process, including requirements for the tendering República, Casa Civil. process and contract design. Also establishes the institutional framework for the PPP program. CL. 2010b. Ley y Reglamento de Concesiones de Obras Públicas: Decreto Supremo This law creates the Concessions Council, defines all the preparatory activities MOP Nº 900. Santiago: Gobierno de Chile, Ministerio de Obras Públicas. that must be carried out by the contracting agency, establishes the procurement process, sets rights and responsibilities, and establishes processes for dealing with change. CO. 2012a. Ley 1508 de 10 de enero de 2012. Bogotá: Congreso de Colombia. Sets out the scope, principles, and processes for the PPP program in Colombia, as well as institutional responsibilities for developing projects. SG. 2012. Public Private Partnership Handbook. Version 2. Singapore: Introduces PPPs, their structures, and the process for procuring and managing Government of Singapore, Ministry of Finance. PPPs in Singapore. It also defines the scope of Singapore’s PPP program. PE. 2014. Ley No. 30167: Ley que Modifica el Decreto Legislativo 1012. Lima: This decree is the national law and it sets out the PPP policy in the country. Presidente de la Republica del Peru. Defines and classifies PPPs, sets out the principles that should guide the implementation of the policy, define the institutional framework, and sets out the financial rules for PPPs in Peru. KAR. 2015. Proceedings of the Government of Karnakata: Amendments to Sets out the State of Karnataka’s policy relating to PPPs, including procurement the Karnataka Infrastructure Policy, 2007. Bengaluru, India: Government of principles and the composition and organization of PPP cells. Karnataka. SN. 2015. Loi Relative aux Contrats de Partenariat (PPP) et Decret d’Application. Defines Senegal’s PPP policies and sets out how contracts are structured Loi 2014-09 du 20/02/2014 et Décret 2015-386 du 20/03/2015. Dakar: and implemented. Gouvernement du Sénégal. 66 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK 2.2 PPP Legal Framework ŠŠFarquharson et al (Farquharson et al. 2011, 16–21) sets out key questions that investors and lenders are likely to ask about the legal and regulatory framework, and some principles on de- The PPP legal framework refers to all laws and regulations that veloping effective frameworks. govern the PPP project cycle. Governments embarking on PPPs may need to adapt the existing legal framework to ensure—at mini- ŠŠThe PPIAF’s online PPP Toolkit for Roads and Highways mum—that contracts for the delivery of public services by a private (WB 2009a, Module 4) includes a section on legislative frame- entity can be entered into. In some cases, changes may be necessary work that describes the types of enabling law for PPPs. It in- to introduce PPP-specific processes and responsibilities. Some gov- cludes other laws that typically impact PPP projects in highway ernments do so by adapting existing laws; others introduce specific infrastructure. legislation. The legal framework for PPP depends on the legal tradition in 2.2.1 Scope of the PPP Legal the country—common law and civil law are the two main types. In civil law systems, the operations of government are codified Framework through administrative law. This code, combined with other legis- lation, such as the civil code and the commercial and public con- The PPP legal framework includes not only PPP-specific legislation tract codes, establishes legal rights and processes that apply to PPP and regulations, but also all legislation that affects PPP contracts, contracts. Common law systems are less prescriptive, with fewer decision processes, and implementation procedures. provisions governing contracts in general. As a result, contracts in As described in Section 2.2 - PPP Legal Framework, in civil law common law countries tend to be longer than in civil law coun- countries PPP contracts are framed by administrative law, which tries; the terms governing the relationship between the parties tend governs the functions and decision-making processes of govern- be specified in greater detail to avoid ambiguities that may not be ment agencies. This body of law can create legal rights and ob- easily resolved by reference to specific jurisprudence. ligations for both the contracting authority and private party in This section briefly describes and provides examples of PPP le- addition to those specified in the contract. For example, the public gal frameworks: Section 2.2.1 - Scope of the PPP Legal Framework contract code may establish the right of the contracting authority describes the broad scope of legislation that may affect PPPs and to modify or cancel a contract (often linked to a legal requirement Section 2.2.2 - PPP Laws focuses on PPP-specific legislation. The for continuity of service provision). Some protections of the op- following resources provide overview guidance on assessing and de- erator may also be implied by law—such as the right to maintain veloping the legal and regulatory framework for PPPs: the financial equilibrium of the contract in case of certain types of unexpected change in circumstances (as described further under ŠŠJeff Delmon and Victoria Delmon’s Legal Guide (Delmon Section 3.4 - Designing PPP Contracts). Administrative law may also and Delmon 2012) reviews key legal issues in 17 countries. define processes and institutional roles relevant to PPPs; such as those for procurement, or resolution of contractual disputes—in- ŠŠThe World Bank’s PPP Infrastructure Resource Center cluding the ultimate jurisdiction of administrative courts, unless (PPPIRC) presents the key features of common and civil law otherwise specified. In both civil and common-law jurisdictions, systems and their impacts on PPP arrangements. It has useful there may also be specific laws that apply to aspects of the PPP online tools for assessing the legal environment for PPPs in var- process. These can include: ious countries (PPPIRC, Legislative Frameworks). ŠŠAnnex 2 of the EPEC Guide to Guidance (EPEC 2011b) has ŠŠPublic contract and procurement laws—PPP contracts and an overview of legal and regulatory requirements for PPPs in transactions must typically comply with public procurement countries with different legal traditions. law and regulations, unless PPPs are specifically exempt. ŠŠThe World Bank Benchmarking PPP Procurement 2017 ŠŠPublic financial management laws—institutional responsibili- (WB 2016b) presents the procurement framework in 82 econ- ties, processes, and rules established in public financial manage- omies and evaluates them against international good practices. ment laws and regulations can contribute to the PPP framework. Section 2.2 PPP Legal Framework 67 For each of the topics mentioned above, the PPP in Infrastructure For example, this could include project approval requirements, Resource Center (PPPIRC) identifies important issues and pres- fiscal limits, budgeting processes, and reporting requirements. ents guidance as well as references. ŠŠSector laws and regulatory frameworks—PPPs are often im- These laws taken together may comprise the legal framework for plemented in sectors that are already governed by sector-level implementing PPP—that is, there may be no need for PPP-specific law and regulatory frameworks. These may constrain the gov- legislation. For an example, see Box 2.5 - PPP Legal Framework ernment’s ability to contract with the private sector, or provide in Germany. rules for doing so. ŠŠOther laws affecting contracts and the operation of private 2.2.2 PPP Laws firms, which also apply to PPP companies, and should be taken Some countries enact specific PPP laws. As described in into consideration when defining PPP projects and processes OECD’s report on fostering investment in infrastructure (OECD can include: 2015b, 16–17), these may be used to adapt the existing legal frame- work if it is not clear or comprehensive, or if the general framework yyEnvironmental law and regulations constrains the government’s ability to structure and manage PPPs yyLaws and regulations governing land acquisition, ownership well. Instead of creating a PPP Law, the government may change and expropriation existing laws to accommodate PPPs. A PPP-specific law can help raise the profile and demonstrate political commitment to the PPP yyLicensing requirements, particularly for international firms program—although care is needed to avoid conflict with any other yyTax rules existing laws. PPP laws may establish guiding principles for a PPP program, processes and institutional responsibilities (such as for se- yyInsolvency law lecting PPP projects, procurement, and dealing with disputes) and yyCurrency exchange controls policies such as public financial management rules governing PPPs. A well-designed PPP law typically sets out principles, which may be yyEmployment law supported by more detailed regulations—with a view to avoiding yyInsurance rigidity and enabling the PPP programs to adapt over time. Box 2.5 PPP Legal Framework in Germany The development and implementation of PPPs in Germany is conducted during various stages of the project development regulated primarily by the Budget law, particularly sections process before any decision with financial impact; it includes 7 and 55 of the Federal >me< Budget Code (DE >me$< 2013), which set analysis of alternative procurement approaches. out requirements for project preparation and appraisal, and procurement, respectively. General provisions for procurement >gnorts< processes>gnorts$< are set out in>gnorts< Section >gnorts$< 55 of the Federal >me< Budget Code . >me$< Federal procurement The Budget law establishes guiding >gnorts< principles and appraisal procedures vary according to certain thresholds (€5 million for requirements>gnorts$< for all public procurements, including PPP projects. construction contracts). For procedures exceeding stipulated Under section 7 subsection (1) of the Federal Budget Code, thresholds, the rules established under EU Directives apply, as well the principles of efficiency and economy must be observed as the Act >me< Against Restraints of Competition>me$< (DE 1998, part 4) and when preparing and executing the budget—which includes the the Ordinance >me< on the Award of Public Contracts>me$< (DE 2016). preparation of PPP projects. Economic feasibility analysis is the main instrument for implementing the efficiency principle—it must be conducted for all initiatives having a financial impact, which includes PPPs (section 7 subsection (2) of the Federal Budget Code). This analysis— see (NRW 2007) or (DE 2014)—must be 68 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Table 2.3 Example PPP Laws Jurisdiction PPP-Specific Laws and Regulations Brazil The federal-level legal framework for PPPs in Brazil is different for Concessions (self-financing projects requiring no government subsidy support), and PPPs: • Law 8987 is the Federal Concessions Law (BR 1995). Establishes which government bodies can grant concessions and defines concession types. Also sets out criteria for selecting bidders during tender, the required content of concession contracts, rights and responsibilities of the contracting government agency, the concessionaire and users, the tariff policy, and acceptable reasons for step in and contract termination. Law 9648 made some updates to this law. • Law 11079 is the Federal PPP Law (BR 2004a). Defines PPPs in the Brazilian context, establishes the scope of the PPP program, defines the contents of PPP contracts, sets rules for providing guarantees, and defines the rights and responsibilities of the contracting authority. Each state that uses PPPs also has its own legal framework. Chile Law 20410 is the current Concessions Law (CL 2010b). Updated the previous legal instrument for concessions—Decree 900 (1996)—which had modified the original legal instrument for PPPs in Chile: The Ministry of Public Work’s Regulation 164 (1991). The law sets out the institutional framework for PPPs, tender rules, concessionaire’s rights and obligations, inspection and oversight requirements, and procedures for resolving conflicts. Colombia Law 1508 is the National PPP Law (CO 2012a). Sets out the scope of the PPP program in the country and the principles that should guide it; also establishes the procedures and institutional framework for PPPs. Sets out specific approaches on PPP procurement, PPP contract design, and on the budgetary approach for PPPs. The following laws also contribute to the legal framework for PPP: Law 80 (CO 1993): establishes norms and principles for government contracting. It also sets norms that regulate the legal relationship between the public and private partners. Law 1150 (CO 2007): modifies some parts of Law 80. Specifically, it incorporates certain elements that make the tendering processes more efficient and transparent. Presidential Decree 4165 (CO 2011), in article 4, establishes the National Infrastructure Agency (ANI Agencia Nacional de Infraestructura), which is in charge of identifying, assessing the viability, and proposing concessions and other forms of PPPs in transport and other related services, and of developing and implementing the resulting PPP projects. Presidential Decree 1467 (CO 2012c): defines the structures of PPPs under Law 1508. Presidential Decree 100 (CO 2013): modifies certain articles in Presidential Decree 1467, specifically the treatment of prequalified bidders and private initiatives. France Law 2004-559 (FR 2004) on Partnership Contracts sets out the legal and institutional framework for PPPs in France. Law 2008-735 (FR 2008) incorporates adjustments to Law 2004-559, as well as the codes for subnational governments, urbanisms, general tax, monetary policy and finance, to improve the PPP framework in France. In addition, the Parliament has passed sector-specific laws to enable PPPs in the justice and penitentiary systems (Law 2002-1094, and Law 2002-1138), and the Public Hospital System (Law 2003-850). Indonesia Presidential Regulation No. 67 (ID 2005, Peraturan Presiden Republik Indonesia Nomor 67) lays out the purposes, principles, requisites and framework for implementing PPPs in Indonesia. Mexico The PPP Law (MX 2012) sets out the principles, scope, institutional framework, contracting mechanisms, required studies, approval procedures, PPP registry, fiscal management, and other matters that make up the Federal PPP Policy in Mexico. Peru Legislative Decree No. 410-2015-EF (PE 2015) establishes the principles, processes, and role of the Public Sector in the evaluation, implementation, and operation of public infrastructure and public service involving private sector participation. Philippines The BOT Law (PH 2006, Republic Act 7718) enables the use of PPPs to develop infrastructure in the Philippines. The law establishes rules concerning the bidding process, financing, government support, and regulatory authorities. Executive Order No. 8 (PH 2010) modifies the BOT law, reorganizing the BOT Office of the National Economic Development Authority (NEDA) into a PPP Center, and outlining its duties and responsibilities. South Africa The Public Finance Management Act (ZA 1999b) is the enabling legislation for PPPs. In accordance with this Act, the National Treasury issued Treasury Regulation 16 (ZA 2003) to the Act, which establishes the rules for the nation’s PPP program. Tanzania The PPP Act (TZ 2010) sets out the responsibilities of the private and public sectors, the functions and powers of the PPP Unit, and the approval process for PPPs. Section 2.3 PPP Processes and Institutional Responsibilities 69 PPP laws are most common in civil law countries—for example, all consistently and efficiently. Section 2.3.1 - PPP Process describes Latin American countries implementing PPPs do so under a specif- a typical PPP process, and gives examples from various coun- ic PPP or concession law (or both). Some common-law countries tries’ PPP programs. also adopt PPP laws to establish a more binding commitment by ŠŠDefining institutional responsibilities for PPPs—that is, government than a PPP policy. which entity will play which role at each step. Institutional ar- Table 2.3 - Example PPP Laws provides examples of PPP laws and rangements and the allocation of functions differ from place to regulations from several countries. Yong summarizes the suggested place—depending on the specific needs of the PPP program and content of a dedicated PPP law (Yong 2010, 33), while the Unit- the existing institutional responsibilities and capacities. Section ed Nations Commission on International Trade Law has pub- 2.3.2 - Institutional Responsibilities: Implementation and Section lished general recommendations (UNCITRAL 2001) and model 2.3.3 - Institutional Responsibilities: Review and Approval de- legislative provisions (UNCITRAL 2004) for enabling privately scribe and provide examples of institutional responsibilities for: financed infrastructure projects. The World Bank PPPIRC web- yyImplementing PPPs—that is, doing the day-to-day work site (PPPIRC, “Legislation and Laws”) provides more information, to drive forward the PPP process through the steps defined including summaries of different legislation types (such as general below: from identifying potential projects, appraising, struc- PPP laws, concession laws), example provisions, and PPP legisla- turing, drafting the contract, bidding it out, and managing tion from over 30 countries. the contract after it is signed. Resources on these and other country-specific PPP laws and regu- yyReviewing and approving PPPs—that is, overseeing the lations can be found on the PPP Knowledge Lab country pages. PPP process, typically through review and approvals at key stages, to ensure that the project represents a good invest- ment decision for the government. 2.3 PPP Processes and Establishing PPP units. Some governments establish teams Institutional Responsibilities ŠŠ aggregating staff with specific knowledge on PPPs. The func- Governments need commitment, skill, capacity, and coordination tions of these PPP Units vary widely, as do their location within to implement PPPs successfully. Under a PPP contract, the private government and structure—reflecting the variation in priorities party will design, finance, build, and maintain the infrastructure, and constraints facing PPP programs both between govern- and provide services. However, the government remains respon- ments, and over time as the PPP program evolves. Section 2.3.4 sible for ensuring the public service is provided to the expected - Dedicated PPP Units briefly describes the various roles played quality and quantity specified in the PPP contract, in a way that by these units, with examples from different countries. achieves good value for money. The government must choose the This section focuses on the process and responsibilities within the right project, select a competent partner, and set and enforce the executive branch of government for implementing PPPs. Section parameters within which that partner operates. It is always import- 2.5 - Broader PPP Program Governance provides further guidance ant to keep in mind that PPPs are fundamentally a procurement on how other entities can input into the PPP process, and hold mechanism for the delivery of a public service. those responsible for developing PPPs accountable for their deci- To this end, many governments define processes and institutional sions and actions. responsibilities for PPPs—that is, the steps that must be followed when developing and implementing a PPP project, and the entities responsible for each step. This section provides examples and re- 2.3.1 PPP Process sources for practitioners on: Many governments set out a process that must be followed to de- ŠŠEstablishing the PPP process—there are several steps that velop and implement every PPP project. Standardizing the PPP a government must usually take to implement a PPP project process helps ensure that all PPPs are developed in a way that is successfully. Defining a standard PPP process, with approvals consistent with the government’s objectives. It also helps achieve required at key points, helps to ensure that these steps are taken coordination between the various entities involved. 70 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Figure 2.1 - Typical PPP Process shows an example of a well-defined signing PPP Contracts presents specific guidance on designing PPP process. The process is broken down into several stages, in the PPP contract. which the PPP is iteratively developed and appraised. At each key ŠŠImplementing the PPP transaction—in the transaction stage, stage, approval is required to proceed. There are two reasons to use the government selects the private party that will implement an iterative approach to developing a PPP project. First, it enables the PPP. This usually involves preparing for and conducting a timely involvement of oversight agencies in approving projects, competitive procurement process. Bidders submit information as described further in Section 2.3.3 - Institutional Responsibilities: detailing their qualifications and detailed technical and financial Review and Approval—poor projects, and poorly-defined projects, proposals, which are evaluated according to defined criteria—of- risk undermining a whole PPP program. Second, it avoids wasting ten in a multi-stage process—to select a preferred bidder. Since resources developing weak projects. Developing a PPP project is the bidding process also results in the establishment some key pa- costly—early checks that the project is promising can help ensure rameters of the contract—in particular its cost—most processes development budgets are well-spent. involve a final approval before contract close. The PPP contract As shown in Figure 2.1 - Typical PPP Process, the process of develop- signed at contract close between the contracting authority and ing and implementing a PPP is typically preceded by identifying the SPV (the special-purpose firm created by the winning bid- a priority public investment project. A PPP is one way to deliver ders for implementing the project) may include as attachments public investment—moreover, one that “locks in” the specifica- the main sub-contracts signed between the SPV and third-par- tions of the project over a long-term period. Potential PPP projects ty contractors (i.e. the construction contract and the operation/ therefore typically emerge from a broader public investment plan- maintenance contract). The transaction stage is complete when ning and project selection process. At some point in this process the project reaches financial close, i.e. when the financing con- some or all proposed public investment projects may be screened, tracts have been signed so that implementation may begin. Once to determine whether they may provide more value for money if the PPP has reached financial close, the government must man- implemented as a PPP. age the PPP contract over its lifetime. This involves monitoring and enforcing the PPP contract requirements, and managing the Developing and implementing the PPP then involves several relationship between the public and private partners. stages: An alternative to the government carrying out all these steps is ŠŠStructuring and appraising the PPP—once a priority public to allow private companies to identify and propose PPP projects. investment project has been identified and tentatively approved Some governments have introduced specific requirements and pro- for development as a PPP, the next step is to select the PPP cesses to ensure that these unsolicited proposals are subject to the structure, or key commercial terms—including the proposed same assessment, and developed following the same principles, as contract type, risk allocation, and payment mechanisms. This government-originated PPPs. Section 3.7 - Dealing with Unsolicited proposed PPP structure can then be appraised. The proposed Proposals provides details and examples. PPP structure and appraisal analysis is often pulled together in a business case to demonstrate why the PPP project is a good Module 3 - PPP Cycle describes the PPP process in detail, setting investment decision. Approval is typically needed at this stage, out options and providing information and guidance for practi- based on the analysis in the business case, before going on to tioners on each stage. The following provide examples of how the prepare for and implement the PPP transaction. PPP process is defined in a range of countries: ŠŠDesigning the PPP contract—the final step to prepare the ŠŠIn Chile, the Concessions law (CL 2010b, Chapters II and III, PPP for procurement is to draft the PPP contract and other Articles 2-14) presents a thorough description of the PPP pro- agreements. This involves developing the commercial principles cess including the preliminary proposal by the contracting agen- into contractual terms, as well as setting out the provisions for cy, the tender process and implementation. change and how the contract will be managed, such as dispute resolution mechanisms. Often the design of the draft contract ŠŠIn Egypt, the Ministry of Finance has published a step-by-step is completed in the early stages of the procurement process, to guide to developing PPPs (EG 2007). The guide assists the rel- allow for consultation with potential bidders. Section 3.4 - De- evant Ministries through the PPP process, from identifying a Section 2.3 PPP Processes and Institutional Responsibilities 71 Figure 2.1 Typical PPP Process Identify priority project SELECT EXIT PROCESS PROJECT INITIAL CONCEPT Screen as PPP Screen priority projects for PPP potential PREPARE OTHER AS PPP OPTIONS Identify and allocate risks and responsibilities KEY COMMERCIAL TERMS Structure PPP Appraise PPP Appraise project feasibility, commercial viability, value-for-money, fiscal responsibiity PROCEED OTHER AS PPP OPTIONS Define performance requirements Define payment mechanisms DRAFT PPP CONTRACT Draft PPP contract Create adjustment mechanisms Establish dispute resolution mechanisms Provide for termination Decide the procurement strategy Market PPP Manage PPP transaction Qualify bidders Manage bid process Reach financial closure SIGN CONTRACT EXIT PROCESS PPP CONTRACT Set up contract management structures Manage PPP contract Monitor and manage PPP delivery and risk Deal with change 72 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK project through developing a business case and the procurement individuals responsible for implementing projects need a sound un- process. derstanding of the needs of the particular sector, skill in economic and financial appraisal of projects and PPPs, expertise in structur- ŠŠAn ADB publication on PPP projects in Korea (Kim et al. ing privately-financed infrastructure project contracts, expertise in 2011, 61–72) includes a detailed description of the PPP imple- procurement and contract management, and experience in dealing mentation process for different types of PPP, including unsolic- with the private sector. The main challenge in designing the insti- ited projects. tutional arrangements for PPPs is to ensure that all these skills are ŠŠThe PPP Guidelines of the Government of Malaysia (Dobbs available to implement PPP projects successfully. et al. 2013, 11) provides an overview of its PPP process. By default, responsibility for implementing a PPP typically falls to ŠŠIn Mexico, the PPP Law describes all the studies that must be the ministry, department, or agency responsible for ensuring the carried out to assess the viability of a PPP project; sets out the relevant asset or service is provided. However, particularly at the PPP approval process; sets out the activities and institutional early stages of a PPP program, such entities usually to have the responsibilities in running a PPP tender process; and describes full range of skills and experienced needed: hence, other govern- the bid evaluation process and the selection of the winning bid ment entities are sometimes involved, namely the central PPP unit. (MX 2012, Articles 14, 21–25, 38–51, and 52-59). Both in developed (UK, Canada, Australia) and developing coun- tries (Philippines, Colombia, South Africa) a strong central unit ŠŠPeru’s Legislative Decree No.30167 lays out the process for has been shown to be critical to a successful program. This section carrying out a PPP, establishes the criteria for selecting projects briefly describes the range of institutional arrangements for iden- and the PPP modality, and defines the steps and responsibilities tifying PPP projects; developing and implementing those projects; in project design and approval (PE 2014). and managing the PPP contracts. ŠŠThe Implementing Rules and Regulations of the Philippines BOT Law (PH 2010, 11–51 and Annexes) set the PPP process Identifying PPP projects in the Philippines. As described in Section 2.3.1 - PPP Process above, PPP projects ŠŠIn Puerto Rico, the PPP Act (PR 2009, sections 7–10), presents usually emerge from the public investment planning and project a detailed description of the PPP process including conducting identification process. Responsibility for identifying potential PPPs initial desirability and convenience analysis, setting up a Partner- from among priority public investment projects therefore often ship Committee to implement the tender process and the PPP rests with the relevant sector agency or entity under the oversight of contract, and selecting proponents and awarding partnerships. entities responsible for public financial management and planning. ŠŠThe South Africa PPP Manual (ZA 2004a) has an introduc- For more on PPP review and approval responsibilities see Section tion that provides a brief overview of the PPP process. The pro- 2.3.3 - Institutional Responsibilities: Review and Approval. cess is explained in detail in the manual, with a module dedicat- Sometimes a specialized PPP team may be involved in the PPP ed to each step. identification process, as described in Section 2.3.4 - Dedicated ŠŠSpain’s Public Procurement Law (ES 2011) has a detailed de- PPP Units. For example, a PPP Unit may provide support to sector scription of the PPP process, including the project appraisal re- agencies in screening projects for PPP potential—particularly at quirements, disclosure requirements at each stage, the approval the early stage of a PPP program when sector agencies may have process, and tendering options. limited understanding of how PPPs work. Sometimes PPP Units are mandated to promote the use of PPPs. This can help overcome initial anti-PPP bias at the early stage of new PPP programs. How- 2.3.2 Institutional Responsibilities: ever, it can also risk distorting the public investment planning pro- Implementation cess—pushing forward projects because they appear to be doable Implementing a PPP project successfully requires commitment as PPPs, rather than because they are public investment priorities. and a range of skills and expertise. Government agencies and Instituting a clear PPP process with appropriate approvals, as de- Section 2.3 PPP Processes and Institutional Responsibilities 73 scribed in Section 2.3.1 - PPP Process and Section 2.3.3 - Institution- Controlled Corporations (GOCCs), Government Financial In- al Responsibilities: Review and Approval, helps overcome this risk. stitutions (GFIs), State Universities and Colleges (SUCs), and Local Government Units. These agencies are required to create Level playing field vs. perverse incentives a Pre-qualification, Bids and Awards Committee (PBAC) that will oversee the PPP process for each PPP project. The need for a level playing field, when assessing PPP versus non- PPP options, is critical for success in the procurement of infrastruc- ŠŠUnder Tanzania’s PPP Law (TZ 2010), the contracting author- ture and services—even more at the subnational level, where tech- ity is responsible for facilitating project development, including nical capacity and the ability to reach the financial markets may be project identification, a feasibility study, environmental impact limited, and free-riding on upper levels of government is often an assessment, and design and implementation of the PPP con- attractive alternative. The traditional procurement practices some- tract. times induce governments to avoid using the PPP route, even when ŠŠIn Colombia, the Manual for PPP procedures (CO 2014, it provides greater value to users and taxpayers. Conversely, fiscally Chapter 4.2, 34) allows contracting authorities to be ministries stressed governments may look for PPPs even for projects where the or other sector-specific institutions, and local and regional insti- PPP option is not the most efficient solution. tutions. The contracting authorities are in charge of conducting Some governments have created PPP incentives in an attempt eligibility and value for money analyses, and submitting the re- to modify the behavior of civil servants. These approaches have sults to the PPP Unit, which develops and implements PPP-re- not always yielded positive outcomes. While public procurement lated policies and steers procurement processes in coordination practices favored the procurement modes traditionally used, PPP with contracting authorities. incentives created bias in decision-making in the other direction. However, sector agencies may lack some of the skills needed to “PFI credits” in the United Kingdom are now recognized as having identify and develop PPP projects successfully. Particularly at the induced significant bias. Other governments have resorted to lines early stages of a PPP program, sector agencies may have little or no of funding available only for PPP projects, or for non-PPP projects. experience with engaging with the private sector on privately-fi- These types of discrimination may distort decision-making in fa- nanced projects. For this reason, other government entities are of- vor of non-optimal solutions—and, even when not distorting the ten also involved, to provide additional skills or perspectives. This decision process, they create reasonable suspicions of bias, affecting can be achieved in different ways, including: public perceptions. ŠŠInvolving dedicated PPP units, as described in Section 2.3.4 - Developing and implementing PPP projects Dedicated PPP Units. These units are a repository of skill and Responsibility for developing and implementing the PPP proj- experience in developing PPPs. They often support contracting ect—that is, for structuring the PPP, designing the PPP contract, authorities in implementing PPP projects. In a few cases the bidding out the transaction, and managing the contract—typically PPP unit may take over primary responsibility as implement- falls to the government entity responsible for the delivery of the rel- ing agency. For example, the PPP Law in Chile authorizes the evant asset or service. This entity is often termed, for PPP purposes, Ministry of Public Works as the implementing agency for PPPs, the contracting authority or contracting agency, since it will usually through its dedicated concessions unit (CL 2010b, Article 1–3, be the public party to the PPP contract. The PPP law or policy may 6–9, 15–21, 25, 27–30, 35–36, 39–41). Section 2.3.4 - Dedicat- define the types of government entity that can be contracting au- ed PPP Units provides several more examples of PPP units and thorities, and specify that these authorities are responsible for PPP the extent of their roles in implementing PPPs. implementation. For example: ŠŠForming interdepartmental committees to oversee each PPP ŠŠIn the Philippines, the BOT Law (PH 2006, Implementation transaction—often including representatives from the sector Rules and Regulations) delegates responsibility for develop- ministry as well as ministries of finance and planning, and legal ing and implementing PPPs to eligible government agencies, representatives. units, or authorities. These include Government-Owned or 74 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK ŠŠInvolving specialist entities in different implementing roles. The EPEC report on the role and use of external advisors (EPEC This is the case in Peru, for example, where the procurement 2014d) outlines how governments may best utilize the support of agency is responsible for implementing the PPP transaction, external advisors. The extent and nature of external advisory sup- and sector regulatory agencies are responsible for monitoring port needed may change as the government and the country gains the private parties’ compliance with the PPP contract. PPP experience. Initially, governments may rely heavily on advi- sors, and contract full-service transaction advisors providing the Even governments with extensive PPP experience may not have all full range of technical skills needed as well as strategic support. the expertise and skills in-house needed to develop PPP projects. Over time, responsible government teams may be better able to PPIAF’s guide for hiring and managing advisors (PPIAF 2001) play an integrating role, and use advisors to provide specific techni- describes how they will benefit from using external advisors who cal or legal inputs. Even when working with experienced advisors, will provide support in the appraisal, preparation and transaction however, it is important for the contracting authority to develop phases of a proposed PPP. These external advisors may engage in the internal capacity to manage the process effectively—to oversee detailed, technical tasks such as conducting feasibility studies and the work of the advisors, and retain ownership of the structuring drafting PPP contracts. Developing countries governments are too decisions. Over-relying on external consultants to drive the pro- often unaware of the significant disadvantage of not having com- curement process can put the contracting authority in a weak posi- petent external advisors by their side when negotiating with private tion for managing the contract over its lifetime. parties. While they may be expensive, experienced advisors equip governments to take informed decisions and safeguard the pub- lic interest. Private parties seldom make the mistake of not hiring Managing PPP Contracts them. The best advisors in the market usually advise them. With this asymmetry in negotiating ability, PPP contracts will often be Monitoring the project performance and managing the contract biased in favor of the private parties. usually falls to the contracting authority. From roads and bridges to water provision and hospital services, line ministries and agencies typically have the required technical knowledge and the policy fo- cus for monitoring delivery. Some countries reduce conflict in con- Box 2.6 External advisors tract management by outsourcing to credible external entities, such as engineering firms, or research institutions, certain specialized Governments can use the advisory services provided monitoring activities. For example, in Brazil, the state Government by commercial firms or multilateral organizations. The of Minas Gerais hires Independent Verifiers for monitoring PPP IFC paper on independent advisors outlines several key performance; in France, engineering firms are hired for monitoring characteristics that external advisors should possess: PPP hospital infrastructure performance. • The ability to balance private and public sector interests However, managing PPP contracts can be complex—particularly by designing projects that guarantee long-lasting when it comes to dealing with change that inevitably occurs over benefits for the population the lifetime of the contract (as described in Section 3.6.3 - Dealing • Reputation as an honest broker to demonstrate with Change). Some countries therefore involve other, specialized transparency and inspire investor confidence entities in the contract management function; for example, by: • Multi-skilled team with extensive, direct experience in ŠŠCreating a centralized contract management support func- infrastructure project structuring and financing tion. For example, in 2006, the British Treasury invited the • Direct experience in the relevant sector and market then-PPP Unit, Partnerships UK, to create a PFI Operational Taskforce, operating on behalf of the Treasury (UK 2006a, 3). • Ties with the global investment community This taskforce provided support to hundreds of contract man- Source: (Jagun and Marques de Sá 2006) agers and published guidance. The central PPP unit for British local governments, 4Ps (now called Local Partnerships—a com- pany jointly owned by HM Treasury and the Local Government Section 2.3 PPP Processes and Institutional Responsibilities 75 Association) also has a role in supporting local governments in al may be needed before the contract is signed. Figure 2.2 - The carrying out their contract management role. In 2007, it pub- South African Gateway Process for PPPs describes this gateway pro- lished a Guide to Contract Management for PFI and PPP cess in South Africa (ZA 2004a, Module 1). Projects (4ps 2007). Finance ministries typically have a leading role in this process, giv- ŠŠIncluding responsibility for some aspects of contract man- en their responsibilities for managing government resources, and agement among the responsibilities of a dedicated PPP Unit. (often) economic and fiscal policy. The IMF emphasizes the im- For instance, the Concessions Unit of the Ministry of Public portance of the role of the finance ministry in its book on Pub- Works in Chile monitors performance and manages PPP con- lic Investment and PPPs (Schwartz et al. 2008, 10). In France tracts on behalf of several ministries. Often this involvement and many Francophone countries this role is split between the may be limited to non-routine events, or particularly challeng- Ministries of Finance, Development and Planning. In a few other ing contract management tasks. In Korea, the PPP Unit PIMAC countries, another entity altogether has overall responsibility for manages PPP contracts during the sensitive construction phase. overseeing the public investment program, and hence may play the same role for PPPs—such as the National Economic Development ŠŠAllocating contract management responsibility to an inde- Agency (NEDA) in the Philippines. Many finance ministries have pendent regulator—a solution when relevant variables, such established special PPP units through which to carry out their fil- as the mechanism determining the fees to collect over time, are tering and monitoring functions, as described further below. not clearly prescribed in the contract. However, the functions of regulator and contract manager may collide—the contract man- Other oversight agencies can also have a role in reviewing and feed- ager is supposed to protect the public interest and the public ing into PPP project approvals, mirroring their roles in any major purse, while the regulator may have a distinct and legally-man- capital investment project. These can include: dated set of interests to preserve. ŠŠPlanning agencies: Some governments separate responsibility for planning and project appraisal from fiscal oversight, with the former housed in a dedicated planning agency. For example, 2.3.3 Institutional Responsibilities: in Chile, the National Planning Authority must review and ap- Review and Approval prove the economic analysis of proposed PPPs, as is the case for all public investment projects. A PPP project is a specific type of public investment. Most gov- ŠŠAttorney generals may be required to approve major govern- ernments have systems and standard procedures for reviewing and ment contracts, including PPPs, as part of their role as the gov- approving capital investment projects: to ensure all projects are ef- ernment’s legal advisor. For example, The PPP law of Tanzania fective at meeting strategic objectives; provide value for money; and (TZ 2010, 15–16) requires that the implementing agency sub- in line with fiscal priorities. Because PPPs do not necessarily require mit the final draft PPP contract for approval by the Attorney capital investment by the government, they may not automatically General before the contract is executed. be subject to these approval rules. Many governments therefore de- fine similar review and approval requirements for PPPs. See Table ŠŠSupreme audit entities: Many Latin American countries also 2.4 - Example PPP Approval Requirements for some examples. require approvals from audit entities that are independent of the executive branch of government, as described further in Section Often, several decision points are created, allowing weak projects to 2.5 - Broader PPP Program Governance. For example, in Brazil, be stopped before they consume too many resources, or develop a the Court of Audits (Tribunal de Contas da União, or TCU, momentum of their own. This is illustrated in Figure 2.1 - Typical at the federal level, and state Courts at the subnational level) PPP Process. These iterative reviews are sometimes called gateway is required to review each PPP project and its legal documents processes. Monteiro’s article in IMF’s book on PPPs (Schwartz et before it can go to market. al. 2008) describes a typical gateway process, and how this pro- cess works in Portugal. At a minimum, formal approval is typically These additional reviews can be important checks on the quali- needed to enter into a PPP transaction. Because the final cost of a ty and legality of the project appraisal and development process. project is not known until procurement is concluded, final approv- However, they can also introduce delays at crucial points. Mech- 76 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK anisms for coordination can help. Capacity building may also be Figure 2.2 needed to ensure these institutions are able to fulfill their roles as The South African Gateway Process for PPPs they relate to PPPs. Ultimately approval may be by Cabinet and/or Parliament. Juris- INCEPTION dictions vary as to which entity can approve a PPP. A few countries • Register project with the relevant treasury require legislative approval of large projects. More often, approval I • Appoint project officer may come from Cabinet or a Cabinet-level committee, the finance • Appoint transaction advisor ministry, or a combination. As described in Irwin’s paper on con- trolling spending commitments in PPPs (Irwin 2007, 113–114), FEASIBILITY STUDY approval power may depend on the size of the project, as is typically Prepare a feasibility study comprising: • Needs analysis the case for other capital investments. • Options analysis II • Project due diligence • Value assessment Coordination • Economic valuation • Procurement plan Decision-making for public investment projects is typically artic- Treasury approval: I ulated around the annual budget process. However, because PPPs PROCUREMENT often do not have immediate budget implications, specific coordi- • Design a fair, equitable, transparent, competitive, cost- nation mechanisms are needed to ensure the projects are integrated effective procurement process • Prepare bid documents, including draft PPP agreement into the Mid-Term Expenditure Framework (MTEF) and reviews and approvals proceed smoothly and do not hold up the project Treasury approval: IIA development process. In some cases, PPP units are assigned with a • Pre-qualify parties coordinating role, as described further in Section 2.3.4 - Dedicated • Issue request for proposals with draft PPP agreement PPP Units. Some governments also form interdepartmental com- III • Receive bids • Compare bids with feasibility study and each other mittees to oversee each PPP transaction, to ensure the perspectives • Select preferred bidder of oversight agencies are taken into consideration throughout the • Prepare value for money report project development process rather than just at review points. Treasury approval: IIB • • Negotiate with preferred bidder Finalize PPP agreement management plan 2.3.4 Dedicated PPP Units Government teams concentrating skills in PPPs with the public ad- Treasury approval: III ministration are often called PPP Units. The functions of these PPP PPP AGREEMENT SIGNED Units vary widely, as do their location within government and team structure. This variety reflects the range of priorities and constraints IV DEVELOPMENT facing PPP programs both between governments, and within a gov- Measure outputs, monitor and regulate performance, liaise ernment over time as the PPP program evolves. Countries with effectively, and settle disputes established PPP programs experienced a gradual broadening of the V DELIVERY Report progress in the scope of the original PPP Unit, tending to address infrastructure in Annual Report general, including non-PPP solutions. Scrutiny by the Auditor General Functions allocated to such PPP Units can include: VI EXIT ŠŠPolicy guidance and capacity building—defining PPP poli- cies and processes, and building the capacity of implementing agencies to follow those processes. This often includes preparing guidance materials and standard documentation for PPPs. Table 2.1 - Example PPP Program Objectives and the “Key Referenc- Section 2.3 PPP Processes and Institutional Responsibilities 77 Table 2.4 Example PPP Approval Requirements Country Reference Approval Requirements State of Victoria, National PPP Guidelines- All high-value or high-risk projects—including PPPs—go through a gateway approval process, established by the Australia Partnership Victoria Department of Treasury and Finance. A panel of experts that are not directly involved in the project carries out Requirements (VIC reviews at key stages in developing and implementing the project, called gates. For PPPs, there are five gates: strategic 2016, 5) assessment, business case (before issuing the requests for expressions of interest), readiness for market (before issuing project briefs and contract), readiness for service (before the contract is executed), and benefits evaluation. Chile Concessions Law (CL Final approval of a PPP—through signing the decree that formalizes the concession—rests with the President and the 2010b, Law 20410, Ministry of Finance together. Contracts cannot be bid out unless the Ministry of Finance has approved the bidding Articles 7, 20, and 28) documents. The Ministry of Finance must also approve any changes to economic aspects of the bidding documents, as well as certain changes during implementation. Colombia PPP implementation rules PPPs must be approved by: (CO 2014, Section 3.2.3) • CONFIS—the National Fiscal Council, which leads the national fiscal policy and coordinates the budgetary Also set out in the system, approves the future appropriations (vigencias futuras) for PPP projects. CONFIS is made up of the National PPP Law (CO Ministry of Finance, the Director of the Administrative Department of the National Planning Agency, the Chief 2012c, Law 1508, Article Economic Advisors of the Presidency, the Vice-minister of Finance, and the directors of the National Treasury, 26) Public Credit, and Tax and Customs Authority. Before reaching the CONFIS the project must have the approval of the sector ministry, and the National Planning Department. • CONPES—the National Council for Economic and Social Policy, which is the highest planning authority in Colombia and advises the government in all aspects related to the economic and social development of the country, certifies the strategic importance of the project. Such certification is required for the project to be eligible to receive future appropriations. In addition, this sets the limits on how many future appropriations can be approved by CONFIS in any given year. CONPES comprises the President, Vice President, the Cabinet, the director of the administrative department of the presidency, the director of the national planning department, and the director of Colciencias. Philippines The Philippines BOT Law All national projects and projects over PHP200 million ($4.6 million) require approval from the Investment (PH 2006, Rule 2, 16–19) Coordination Committee (ICC) under the National Economic and Development Authority (NEDA) Board. The members of the NEDA Board are cabinet members responsible for the major infrastructure, economic and finance departments. PPP projects also require approval from both the NEDA Board and the President, upon recommendation by the ICC. The ICC’s recommendation is in turn informed by a review by NEDA’s technical staff, to check the project submission is complete, and adequately demonstrates the project complies with requirements for financial, economic, social, and environmental impacts. South Africa Public Finance PPP approvals are made by the Treasury, through its PPP Unit. Projects are submitted for approval at four points, after: Management Act and (1) the feasibility study has been completed, (2) the bid documents have been prepared, (3) bids have been received and Treasury Regulation 16 evaluated, and (4) negotiations have concluded and the PPP contract is in its final form. (ZA 2004a, 8–10) es” in Module 3 - PPP Cycle provide examples of such guidance above, this may involve providing hand-holding support to re- material. sponsible implementation teams in ministries or agencies; or being directly responsible for some aspects of PPP implemen- ŠŠPPP promotion both within and beyond government—that is, tation. Some PPP Units act as a Project Development Facility, encouraging sector agencies to consider using PPPs, or promot- identifying, assessing, and structuring projects, and building a ing the opportunities presented by the PPP program to poten- project pipeline. tial suppliers and investors. ŠŠTechnical support in implementing PPP projects. As described ŠŠGatekeeping or reviewing and overseeing the management of in Section 2.3.2 - Institutional Responsibilities: Implementation PPP projects for efficiency and affordability; and either approv- 78 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Box 2.7 PPP Training As part of their capacity-building functions, PPP Units in countries Several Massive Open Online Courses (MOOCs) have been with significant PPP programs promoted the creation of PPP developed for PPPs. The World Bank created the PPP MOOC (WB training programs—e.g. the Philippines (PH 2017) and South Africa 2015d) in English followed by a French version (WB 2016g). The (ZA 2017). In South Korea (KDI Training), the Public and Private Inter-American Development Bank also developed several MOOCs Infrastructure Investment Management Center (PIMAC) provides on PPPs and infrastructure in Spanish and Portuguese (IDB 2017)— several PPP training programs every year. This training for public for instance, a MOOC on PPPs and another on sustainable cities. officials are done at two levels, basic and advanced training. The The APMG PPP Certification Program (APMG-PPP) is another latter addresses feasibility studies, evaluation, financial modeling, useful tool in building knowledge about PPPs. Practitioners can and negotiation. PIMAC also provides PPP training for private become certified in PPP by APMG, a reputable online assessment companies. portal—certification requires taking online examinations that demonstrate a solid understanding of the APMG PPP Guide Multilateral organizations have also partnered with PPP teams in (APMG 2016), a comprehensive encyclopedia developed by over organizing PPP training activities and practitioner networks. The 80 PPP practitioners. Students can also become accredited to train World Bank and PPIAF promoted Tanzania’s City Creditworthiness PPP practitioners to pass the certification examination. Academy (TZ 2014). The Korean Development Institute (KDIS 2017), ADB, and the World Bank have supported the annual conferences promoted by the Asian PPP Network (APN) (KDI 2017). ing PPP projects, or advising on the approval process. As de- Gatekeeping units are most often located within ministries of fi- scribed in Section 2.3.3 - Institutional Responsibilities: Review and nance, or other oversight agencies; while technical support units Approval, such reviews can take place at several stages during may be housed centrally, sometimes alongside other relevant func- project development; while the oversight role of such PPP teams tions such as procurement, or be established at the subnational or can extend into PPP implementation and portfolio manage- sector level where a sector has a significant PPP program. Units ment. with a PPP promotion focus may be part of broader investment promotion entities. PPP units may perform more than one of these functions, while a The functions of PPP units, and hence their structure, may also single PPP program may involve more than one PPP unit perform- change over time as the PPP program evolves. For example, in the ing different roles. United Kingdom, the original Treasury Task Force (its first PPP The institutional design of PPP Units, particularly the gatekeeping Unit) was partially converted into a joint public-private venture ones, requires a well-pondered balance of mandatory requirements (Partnerships UK, or PUK, 51 percent owned by private entities), (e.g. project scrutiny, draft contract review, involvement in the ten- with more of a focus on PPP promotion and technical support. der process) and resource provision (not only money for project However, as the PPP program developed and ministries and agen- preparation and procurement, but mainly knowledge and experts cies gained more experience, the focus shifted towards oversight able to supplement line ministries staff and resources)—in practice, and integration of PPP with the broader public investment func- a “sticks and carrots” approach. Adequate leverage of the PPP Unit tion. Eventually PUK was reabsorbed into the government as Infra- is also required. structure UK, which later merged into the UK’s Infrastructure and Projects Authority. The structure and location within government of PPP units typi- cally depends on their specific functions, as well as existing insti- Many countries do establish their central PPP Unit in the Ministry tutions, skills, and experience within government. PPP units may of Finance, to better fulfil its role of gatekeeper—that is the case be departments within ministries or agencies, units with special of the United Kingdom, France, Portugal, South Africa, India, and status but reporting to ministries, autonomous government enti- Indonesia. A number of countries that have established their cen- ties, or even government-owned or public-private corporations. tral PPP Unit outside the Ministry of Finance felt the need to create Section 2.3 PPP Processes and Institutional Responsibilities 79 its own Ministry of Finance PPP Unit, in charge of monitoring and provides detailed case studies of PPP Units in Germany, Korea, managing fiscal liabilities and fiscal risks arising from PPPs—that is South Africa, the State of Victoria in Australia, and the United the case, for instance, of the Division of Contingent Liabilities and Kingdom. Concessions of the Ministry of Finance of Chile (where the main ŠŠA report by the Brookings Institution (Irwin and Mokdad PPP Unit is part of the Ministry of Public Works) and of the Sub- 2010) provides a similar breakdown of the functions of PPP direction of PPPs of the Ministry of Finance of Colombia (where units into three categories: review bodies or gatekeepers; full ser- the PPP Unit is an agency under the Ministry of Transportation). vice agencies providing technical assistance to review agencies, The following studies provide more information on the functions and centers of excellence acting as repositories of best practice. and structure of PPP Units, detailed case studies, and assessments ŠŠA set of reports published by the European PPP Expertise of the effectiveness of these units in achieving their objectives: Centre analyzes European PPP Units and institutional frame- ŠŠAn OECD study on PPP units (OECD 2010) describes the works (EPEC 2014a) and discuss individual cases, such as range of PPP unit functions along the lines of the list above, and France (EPEC 2012) and Portugal (EPEC 2014c). Did you know....? The Dakar toll road is the first successful road PPP in West Africa The Dakar toll road was inaugurated in August 2013 by SENAC, the Senegalese concession company set up by Eiffage, a French construction company, and is considered the first greenfield toll road PPP in West Africa. Traffic congestion had been an issue for decades as the previous two-lane road could only handle a fraction of the greater capital’s traffic. Built as a concession, the new 24 kilometer, six-lane road project enhanced access to the city center and improved commute times between central Dakar and outlying neighborhoods. The city center as well as the outskirts experienced stimulated economic growth as access to markets for businesses improved significantly. Some of the challenges of this project included the resettlement of more than 30,000 people, the largest resettlement program undertaken by the government and project sponsor, in concordance with IFC’s Equator Principles and Performance Standards. A contract for the expansion of the road to connect central Dakar with the new international airport was signed in 2014. Source: Partnering for Water in Cote d’Ivoire: Lessons from 50 Years of Successful Private Operation. Gridlines; No. 50. World Bank, August 2009 80 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Key References: PPP Processes and Institutional Responsibilities Reference Description CL. 2010b. Ley y Reglamento de Concesiones de Obras Públicas: Decreto Supremo Sets out the processes for handling proposals, tendering, monitoring, and MOP Nº 900. Santiago: Gobierno de Chile, Ministerio de Obras Públicas. dispute resolution. EG. 2007. National Program for Public-Private Partnerships. 2nd edition. Cairo: Egypt’s comprehensive guidelines and policies for PPPs, including Government of Egypt, Public-Private Partnerships Central Unit. regulations for the PPP procurement process. It also outlines the institutional responsibilities within the government and the approval process. MY. 2009. Garis Panduan: Kerjasama Awam-Swasta Public-Private Partnership- The Government of Malaysia’s policy framework and procurement process for PPP. Putrajaya, Malaysia: Prime Minister’s Office, Public-Private Partnership PPPs are outlined in this document. Unit. MX. 2012. Ley de Asociaciones Público Privadas. Mexico City: Gobierno de Sets out in detail the process and institutional responsibilities for developing México, Cámara de Diputados. and implementing PPP projects in Mexico. PE. 2014. Ley No. 30167: Ley que Modifica el Decreto Legislativo 1012. Lima: Sets out the entire PPP process (from appraisal to tendering and implementing Presidente de la Republica del Peru. the contract), and it also defines the institutional framework for PPPs in infrastructure—this includes defining the role of the Ministry of Finance and the PPP promotion Agency PROINVERSION). PH. 2006. The Philippine BOT Law R.A. 7718 and its Implementing Rules and The set of laws for PPPs in the Philippines, including implementing rules and Regulations. Revised 2006. Manila: Public-Private Partnership Center. regulations of the PPP process. PR. 2009. Act No. 29. San Juan: Commonwealth of Puerto Rico.​​​​​​ Outlines the processes for assessing the desirability and convenience of the PPP project, tendering the project, designing the contract, and monitoring its implementation. It also establishes the PPP Authority, and assigns responsibilities to the Authority and other government agencies. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African The comprehensive PPP manual outlining the PPP procurement process for Government, National Treasury. South Africa, including the approval process. ES. 2011. “Real Decreto Legislativo 3/20111, de 14 de noviembre, por Describes the different stages and studies that must be carried out when using el que se aprueba el texto refundido de la Ley de Contratos del Sector a PPP as a procurement option. PPP that use private public-private legal Público.” Boletín Oficial del Estado, 276 (1) 117729-117913. Madrid: framework will consider the principles of transparency, openness, and non- Gobierno de España, Ministerio de la Presidencia. discrimination of public legal framework. EPEC. 2011b. The Guide to Guidance: How to Prepare, Procure, and Deliver A guide and sourcebook for PPP policies and project implementation. Chapter PPP Projects. Luxembourg: European Investment Bank, European PPP 1 presents a short guide on project identification. Expertise Centre. PPPIRC. Accessed March 9, 2017. “Public-Private Partnerships The section on legislation includes information and questions for assessing legal in Infrastructure Resource Center website.” Website. environments for PPPs, information on types of legislation, and example PPP legislation from over 30 countries. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and This guide for public sector practitioners describes how to develop and Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private implement a PPP successfully, by developing a marketable project and Partnerships in Emerging Markets. Washington, DC: World Bank. attracting the right private partners. Chapter 4 describes guidelines for PPP project selection. WB. 2009a. “Toolkit for Public-Private Partnerships in Roads and Highways.” An online product. Module 4 in the Laws and Contracts section of the online World Bank. Website. toolkit on Legislative Framework describes the various types of laws that comprise the framework for PPPs in roads. Section 2.3 PPP Processes and Institutional Responsibilities 81 Reference Description EPEC. 2014d. Role and Use of Advisers in Preparing and Implementing PPP Highlights what practitioners should expect when working with external Projects. Luxembourg: European Investment Bank, European PPP Expertise advisors and best practices for engagement. Centre. UNCITRAL. 2004. Model Legislative Provisions on Privately Financed This report by the UN offers legislative recommendations and model provisions Infrastructure Projects. Vienna: United Nations Commission on International for PPP legislation that are favorable to privately financed infrastructure Trade Law. projects. Yong, H.K., ed. 2010. Public-Private Partnerships Policy and Practice: A Reference This report provides a comprehensive review of PPP policies worldwide, Guide. London: Commonwealth Secretariat. including guidance to practitioners about key aspects of designing and implementing PPP policy and projects. Chapter 4.1 outlines key issues for a PPP legal framework, and principles for PPP legislation. KR. 2011. Basic Plan for Public Private Partnerships. Seoul: Korea Development Establishes the PPP process and institutional responsibilities of various parties Institute, PIMAC. involved in the PPP process. US. 2009. Public Policy Considerations in Public-Private Partnership. This report reviews how different states within the United States have Washington, DC: United States Government, Department of Transportation, responded to the issues most frequently raised 14 PPP issues. Both legislative Federal Highway Administration. and contract provisions are examined to identify how states vary in addressing the public policy concerns in PPP arrangements. UK. 2015a. Valuing Infrastructure Spend: Supplementary Guidance to The Green Based on interviews across 10 departments in the United Kingdom, the Book. London: UK Government, HM Treasury. report develops a benchmarking model which can be used to compare the management performance of PFI and PPP programs. EPEC. 2012a. France: PPP Units and related institutional framework. The report surveys the developments in PPP legislations and institutions in Luxembourg: European Investment Bank, European PPP Expertise Centre. France. It describes the role of the central PPP unit (MAPPP) in relation with other PPP units in respective line ministries. TZ. 2010. Bill Supplement No. 0: The Public-Private Partnership Act, 2010. Dar Tanzania’s PPP law, which creates and outlines responsibility for a new PPP es Salaam: Government of Tanzania.​​​​​ unit. The law also describes the requirements for PPP projects in the country and the responsibility of each actor and stakeholder. CO. 2014. Manual de Procesos y Procedimientos para la Ejecución de Proyectos Manual that provides, in detail, the PPP procurement process in Colombia. de Asociación Público-Privada. Bogotá: Gobierno de Colombia, Ministerio de Hacienda y Crédito Público. Akitoby, Bernardin, Richard Hemming, and Gerd Schwartz. 2007. “Public A short booklet describing the implications of PPPs for public investment, investment and public-private partnerships.” Economic Issues 40, Washington, including how PPP commitments should be managed and controlled. DC: International Monetary Fund. VIC. 2016. Partnership Victoria Requirements. Melbourne, Australia: State of These guidelines outline the objective, scope, and principles of the PPP Victoria, Department of Treasury and Finance. program in the State of Victoria, Australia. The guidelines also include a revised PPP procurement process to adhere to changes in the national guidelines. NEDA. 2005b. ICC Project Evaluation Procedures and Guidelines. Manila: The guidelines by which projects are evaluated by the Investment Coordination National Economic and Development Authority. Committee (ICC) in the Philippines, including reporting requirements of the implementing agency. CO. 2012c. Decreto Ley 1467 de 2012. Bogotá: Congreso de Colombia. Sets out the institutional responsibilities and processes for PPPs in Colombia. It sets out the roles of the Ministry of Finance and the National Planning Department, the Committee on Economic and Social Policy (CONPES), and the Committee on Fiscal Policy (CONFIS). 82 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Reference Description NAO. 2006. A Framework for Evaluating the Implementation of Private Finance The report describes the evaluation framework which considers the entire Initiative Projects: Volume 1. London: National Audit Office. lifecycle of a project from the initial strategic analysis to the mature operational phase. The matrix covers six key business management themes across six stages in the lifecycle of the project. WB. 2013b. “Implementing a Framework for Managing Fiscal Commitments Presents practical guidance on how to implement that framework. from Public Private Partnerships.” Operational Note. World Bank, Washington, DC. Key References: PPP Units Reference Description WB. 2007b. Public-Private Partnership Units: Lessons for their Design and Use in This report provides a comprehensive assessment of the effectiveness of PPP Infrastructure. Washington, DC: World Bank. units in developed and developing countries. The report offers lessons of the context in which PPP units have been most effective. Dutz, Mark, Clive Harris, Inderbir Dhingra, and Chris Shugart. 2006. “Public A short note reviewing several country experiences with PPP units, and Private Partnership Units: What Are They, and What Do They Do?.” Public provides high-level recommendations to improve governance and their Policy for the Private Sector Note No. 311. Washington, DC: World Bank. effectiveness. Kim, Jay-Hyung, Jungwook Kim, Sunghwan Shin, and Seung-yeon Lee. This report reviews the PPP program in Korea, including case studies of BTO 2011. Public-Private Partnership Infrastructure Projects: Case Studies from the and BTL PPP projects. Republic of Korea. Volume 1, Institutional Arrangements and Performance. Manila: Asian Development Bank. WB. 2006a. India: Building Capacities for Public-Private Partnerships. More details on case studies, including their applicability to India. Washington, DC: World Bank. Farrugia, Christine, Tim Reynolds, and Ryan J. Orr. 2008. “Public-Private A review of PPP units with a focus of experience of developed countries. Partnership Agencies: A global perspective.” Working Paper #39. Stanford, The report includes case studies and reviews the key aspects of eight California: Collaboratory for Research on Global Projects at Stanford difference agencies. University. OECD. 2010. Dedicated Public-Private Partnership Units: A Survey of Provides an overview of dedicated PPP units in OECD countries, including Institutional and Governance Structures. Paris: Organisation for Economic Co- case studies of the experience of five jurisdictions (State of Victoria, Australia, operation and Development. Germany, Korea, the United Kingdom, and South Africa). Burger, Philippe. 2006. “The Dedicated PPP Unit of the South African This paper provides a review of the PPP program in South Africa and its Treasury.” Paper presented at the Symposium on Agencies and Public-Private dedicated PPP unit. Partnerships.  Madrid, July 5-7. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African The comprehensive PPP manual outlining the PPP procurement process for Government, National Treasury. South Africa, including the approval process. EPEC. 2012a. France: PPP Units and related institutional framework. The report surveys the developments in PPP legislations and institutions in Luxembourg: European Investment Bank, European PPP Expertise Centre. France. It describes the role of the central PPP unit (MAPPP) in relation with other PPP units in respective line ministries. Istrate, Emilia, and Robert Puentes. 2011. “Moving Forward on Public Private This report surveys international PPP units and U.S. domestic PPP units. It Partnerships: U.S. and International Experience with PPP Units.” Project On addresses whether a U.S. federal PPP unit is desirable. State and Metropolitan Innovation. Washington, DC: Brookings-Rockefeller. Section 2.3 PPP Processes and Institutional Responsibilities 83 Reference Description Farrugia, Christine, Tim Reynolds, and Ryan J. Orr. 2008. “Public-Private A review of PPP units with a focus of experience of developed countries. The Partnership Agencies: A global perspective.” Working Paper #39. Stanford, report includes case studies and reviews the key aspects of eight difference California: Collaboratory for Research on Global Projects at Stanford agencies. University OECD. 2010. Dedicated Public-Private Partnership Units: A Survey of Provides an overview of dedicated PPP units in OECD countries, including Institutional and Governance Structures. Paris: Organisation for Economic Co- case studies of the experience of five jurisdictions (State of Victoria, Australia, operation and Development. Germany, Korea, the United Kingdom, and South Africa). Burger, Philippe. 2006. “The Dedicated PPP Unit of the South African This paper provides a review of the PPP program in South Africa and its Treasury.” Paper presented at the Symposium on Agencies and Public-Private dedicated PPP unit. Partnerships.  Madrid, July 5-7 ZA. 2004a. Public Private Partnership Manual. Pretoria: South African The comprehensive PPP manual outlining the PPP procurement process for Government, National Treasury. South Africa, including the approval process. EPEC. 2012a. France: PPP Units and related institutional framework. The report surveys the developments in PPP legislations and institutions in Luxembourg: European Investment Bank, European PPP Expertise Centre. France. It describes the role of the central PPP unit (MAPPP) in relation with other PPP units in respective line ministries. Istrate, Emilia, and Robert Puentes. 2011. “Moving Forward on Public Private This report surveys international PPP units and U.S. domestic PPP units. It Partnerships: U.S. and International Experience with PPP Units.” Project On addresses whether a U.S. federal PPP unit is desirable. State and Metropolitan Innovation. Washington, DC: Brookings-Rockefeller. Did you know....? Most bridges in Paris were built as PPPs Historically, Paris’ bridges were built as PPPs by entrepreneurs under 20 to 50-year concessions. The contracts allowed them to collect tolls, for example, from pedestrians and horse riders. Sometimes the contracts included building houses on the bridge, with on average 30 to 50 houses per bridge. An example for a bridge concession is Pont Marie, the still existing bridge linking Île Saint-Louis to the Right Bank. The concession contract was established in 1614, after the entrepreneur Jean-Christophe Marie submitted an unsolicited proposal in 1610 (he was the same person reconverting the island into a wealthy residential area). The concession authorized Marie to collect tolls for 20 years. King Louis XIII laid the inauguration stone in 1614, and the bridge opened for circulation in 1630. Source: Xavier Bezançon, 2000 Ans d’Histoire du Partenariat Public-Privé (Paris: Presses de l’École Nationale des Ponts et Chaussées, 2004 84 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK 2.4 Public Financial Management Government commitment is a key element of success of PPP pro- grams, together with effective reforms to foster collaboration and Frameworks for PPPs coordination between various government institutions and over- Typically, PPP contracts have financial implications for govern- come governance challenges. ments. Payment commitments under PPP contracts are often The World Development Report 2017 (WB 2017c) describes the long-term, and can be contingent on risk. Box 2.8 - Types of Fiscal critical path to maximize the efficiency of policy reforms. The Commitments to PPPs sets out the different categories of risk inher- “policy effectiveness cycle” begins by defining the objective to be ent to PPPs. Managing these risks can create challenges for public achieved; it then follows a series of six critical steps as follows: diag- financial management, which is generally geared to annual appro- nosis; assessment; targeting; designing; implementation; and evalu- priations for expenditure. For this reason, PPP-specific approaches ation and adaptation. The process through which the various actors to public financial management have been developed. bargain about the design and implementation of policies within a Section 1.2 - Infrastructure Challenges and How PPPs Can Help de- specific institutional setting, must also be taken into account. The scribes some of the problems that commonly arise when the fiscal consistency and continuity of policies over time (commitment), the implications of PPPs are not carefully thought through. Without alignment of beliefs and preferences (coordination), and the volun- specific rules to address and manage fiscal risk, PPPs can be used tary compliance and absence of free-riding (cooperation) are key to bypass budget constraints or borrowing limits and create hidden institutional functions that influence how effective policies will be. deficits for the Government, as illustrated by Kharas and Mishra’s The Ministry of Finance plays a critical role in all three functions. paper (Kharas and Mishra 2001). Governments also often under- The assessment of fiscal implications of a PPP project/portfolio estimate the cost of bearing risk under PPPs. This can result in sig- demonstrates the commitment of the government to the private nificant levels of exposure to PPP-related risks that can jeopardize sector and helps reduce uncertainty regarding project development. fiscal sustainability if not monitored and managed proactively. This in turn helps reduce the cost of private finance. It also helps This section provides guidance for practitioners on public financial attract the ablest and efficient PPP operators, instead of firms more management for PPPs, to help avoid these pitfalls. The following interested in benefiting from uncertainty and contract changes by sections describe how governments can: gaming government. The Ministry of Finance also coordinates and collaborates with sector ministries and other government agencies ŠŠAssess the fiscal implications of a proposed PPP project such as PPP units. ŠŠControl aggregate exposure to PPPs Having Ministry of Finance officials understand infrastructure ŠŠBudget for fiscal commitments to PPPs risks and PPP fiscal risks is therefore critical for full government commitment. Most governments have established their central PPP ŠŠReflect fiscal commitments to PPPs in government accounts units in the Ministry of Finance. Even those that have anchored it and reports elsewhere, have felt the need to have a PPP team in the Ministry of Finance and therefore have fiscal management staff trained in PPP contracting. Those PPP teams help review PPP projects and 2.4.1 Assessing Fiscal Implications of a assess PPP fiscal costs and risks, checking the fiscal sustainability of PPP Project PPP programs, managing fiscal PPP risks, and reporting on PPP liabilities. Good practice consists of subjecting public investment projects to appraisal and approval processes to determine whether it is a good Commitment, collaboration, and coordination are also essential to project. Close integration with the budget process is essential to formulate and implement policies on a broad set of issues including elucidate whether and when the project is affordable. The finance cross-sectoral issues, public finance management, and regulations ministry typically plays a central role in this endeavor. Because PPPs concerning internal control and reporting mechanisms. Sustained often involve neither capital investment nor other expenditure in efforts are also needed to develop a system to manage threats to the short term, they may slip through the standard control mecha- the integrity of practitioners. Finally, because the electoral cycle is nisms designed for public investment financed by the public purse. typically much shorter than the project cycle, politicians are most Section 2.4 Public Financial Management Frameworks for PPPs 85 Box 2.8 Types of Fiscal Commitments to PPPs Fiscal commitments to PPPs can be regular payments constituting government and the private party. For example, this could all or part of the remuneration of the private party, a means to share include guarantees on demand remaining above a specified risk, or a combination of the two. Common types of government level; or on exchange rates remaining within a certain range; fiscal commitments to PPPs include the following: or commitments to buy land needed for the project, or to pay Direct liabilities compensation for relocation of people and activities. • Compensation clauses—for example, a commitment to Direct liabilities are payment commitments that are not dependent compensate the private party for damage or loss due to on the occurrence of an uncertain future event (although there may be some uncertainty regarding their value). Direct liabilities certain, specified, uninsurable force majeure events. arising from PPP contracts can include: • Termination payment commitments—a commitment to pay an agreed amount, should the contract be terminated due • ”Viability gap” payments—a capital subsidy, which may be to default by the public or private party—the amount may phased over construction based on achievement of milestones, depend on the circumstances of default. or against equity investments. Alternatively, subsidies can be used to lower tariffs for targeted end-users so that they • Debt guarantees or other credit enhancements—a become affordable to them. commitment to repay part or all of the debt used to finance a project. The guarantee could cover a specific risk or event. • Availability payments—a regular payment or subsidy over the Guarantees are used to provide more security to a lender that lifetime of the project, usually conditional on the availability their loan will be repaid. of the service or asset at a contractually specified quality. The payment may be adjusted with bonuses or penalties related to • Litigation—potential litigation costs to government relating to performance. PPP. • Shadow tolls, or output-based payments—a payment or Every PPP contract also creates implicit contingent liabilities— moral obligations of governments reflecting public interest or subsidy per unit or user of a service—for example, per political pressures. These include: cost of retendering or operating kilometer driven on a toll road. if operators go bankrupt; cost of expanding or redesigning service Contingent liabilities when PPP contract is overly rigid; and change in government policy. Contingent liabilities are payment commitments whose occurrence, timing, and magnitude depend on some uncertain future event. Polackova and Schick’s edited volume on Government Contingent Explicit contingent liabilities under PPP contracts can include: Liabilities (Polackova 1998) defines direct and contingent liabilities, and describes the fiscal risks posed by contingent liabilities in • Guarantees on particular risk variables—an agreement to general. compensate the private party for loss in revenue should a particular risk variable deviate from a contractually specified level. The associated risk is thereby shared between the likely to inaugurate projects that were planned by the previous ad- Section 2.3 - PPP Processes and Institutional Responsibilities describes ministration, and to select and plan those that will be inaugurated how governments often create an approval process for PPPs that by the next administration. This requires a considerable degree of mirrors that used for their large investment projects. Such processes commitment and collaboration, particularly since politicians usu- generally provide a central role for the finance ministry. This sec- ally want to leave their mark. tion offers guidance on how the finance ministry can decide wheth- 86 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Table 2.5 Options for Assessing the Affordability of Fiscal Commitments to PPPs Option References and Examples Forecast budget limits—that is, make An OECD survey described in (OECD 2008a, 42–43) found that: conservative assumptions for how overall budget • In Brazil, project studies must include a fiscal analysis for the next ten years. limits will evolve, and consider whether the • In the UK, procuring authorities must demonstrate the affordability of a PPP project based on agreed estimated annual payments for a PPP (under departmental spending figures for the years available, and on cautious assumptions of departmental spending a reasonable range of scenarios) could be envelopes thereafter. accommodated within those limits • In France, affordability of a PPP is demonstrated by reference to a ministerial program—a multi-year indicative budgeting exercise. • The PPP Manual of South Africa section on affordability (ZA 2004a, Module 2) also describes a similar approach. Introduce budget rules—that is, the affordability For example: of PPP commitments is considered in the annual • In the State of Victoria, Australia, a department considering a PPP must first seek approval for the capital budget process spending that would be required if the project received public funds—as required in the national PPP Guidelines (AU 2017) and described in Irwin’s review of PPP contingent liability management (Irwin and Mokdad 2010, 10-11). • Colombia’s law on contingent liabilities (CO 1998, Article 6) requires implementing agencies to make a cash transfer to a contingency fund when a PPP project is signed. The cash transfer is set equal to the expected cost of programs including any guarantees provided. The payments may be spaced out over several years. This means the decision to accept a contingent liability has an immediate budget impact that must be considered. er to approve the fiscal commitments to a proposed PPP project. In payments are made in foreign currency). Moreover, many fiscal doing so, a finance ministry typically considers two questions: will commitments to PPPs are contingent liabilities, whose occurrence, the project provide value for money; and is the project affordable. timing, and value all depend on some uncertain future events. Sec- tion 3.2 - Appraising Potential PPP Projects provides guidance and Assessing whether a PPP will provide value examples on how the cost of fiscal commitments to a proposed for money PPP can be calculated. Mostly this involves considering the modal or best estimate value, hopefully correcting for optimism bias, and For most projects, assessing value for money means assessing scenarios for how that value might vary. whether the project is cost-benefit justified, and the least-cost way of achieving the benefits. When assessing a PPP, some addition- Second, because costs are long-term, and may be contingent, it is al analysis is needed—to check whether the PPP has been struc- not easy to decide whether they are affordable. An OECD publi- tured well, and will provide better value for money than alterna- cation on PPPs (OECD 2012, 21) defines affordability to mean tive public procurement modes. Section 3.2 - Appraising Potential the “ability to be accommodated within the inter-temporal budget PPP Projects describes this analysis, and provides links to examples constraint of the government.” For most government expenditures, and guidance. affordability is assessed by considering the annual budget con- straint, and in some cases the medium-term (typically three-year) expenditure/fiscal framework. Table 2.5 - Options for Assessing the Assessing whether a PPP is affordable Affordability of Fiscal Commitments to PPPs describes two alterna- The second question is even harder to answer: Is the PPP project tives for PPPs. The approach may be different for different types affordable? There are two main challenges in answering this ques- of fiscal commitments. Limits on the total stock of fiscal commit- tion for a PPP project. ments to PPPs may also affect decision-making for particular proj- ects. First, it is not always clear how much the PPP will cost. Direct fiscal commitments are long-term, and may depend on variables such The complexity of financial arrangements that are often entered as demand (in the case of shadow tolls) or exchange rates (where into in a PPP project, especially in infrastructure investments, war- Section 2.4 Public Financial Management Frameworks for PPPs 87 rants that the government is able to identify up-front what its li- PPPs would provide better value for money (or vice versa). None- abilities are over the life of the project. These could be explicit or theless, given the difficulties in deciding whether a particular PPP implicit direct or indirect. Constructing a Fiscal Risk Matrix (for commitment is affordable, limits on aggregate exposure can be a liabilities) and a Fiscal Hedge Matrix (for the asset side) to catalogue helpful way to ensure the government’s total exposure to PPP costs the potential sources of fiscal risks to the government, and factors and risk remains within manageable limits (Irwin 2007). that influence their size, is an important analytical exercise to be Monitoring and managing the fiscal impacts and risks associated undertaken prior to signing a PPP agreement. These two matrices with PPP projects undertaken by quasi-fiscal entities at the sub- are displayed in Table 2.6 - Fiscal Risk Matrix: For Liabilities and national levels is important as well. This is more so in countries Table 2.7 - Fiscal Hedge Matrix: Assets and Contingent Financing. where the subnational governments have undertaken, or have plans This function is typically carried out in the Ministry of Finance and to undertake large PPP portfolios of infrastructure projects—see must be divorced from the sector ministry or entity promoting and Gooptu and Kahkonen lessons of international experience on negotiating the project. subnational debt management (Kahkonen and Gooptu 2015). An alternative is to incorporate limits on PPP commitments within 2.4.2 Controlling Aggregate Exposure other fiscal targets. For example, some governments introduce tar- to PPPs gets or limits on public debt or government liabilities. Some types of PPP commitment may be included within measurements of gov- As well as considering fiscal exposure project-by-project, some gov- ernment liabilities, following international norms or national rules. ernments introduce targets or rules limiting aggregate exposure. A However, this usually only applies in limited cases and is restricted challenge is defining which types of fiscal commitments should be to the national level as highlighted by Liu and Pradelli. Their pa- included—for example, does the rule apply to direct liabilities only, per (Liu and Pradelli 2012) proposes a more rigorous monitoring or are contingent liabilities included? framework of fiscal risks imposed by PPP liabilities by using a min- imum set of five sub-national debt indicators which also considers The introduction of specific limits on PPP exposure is described in the SPV’s debt. Irwin also describes an alternative of establishing a Irwin’s article on controlling spending commitments in PPPs limit on debt plus PPP commitments (Irwin 2007). (Irwin 2007, p.114–115). For example: ŠŠPeru’s Legislative Decree No. 410-2015-EF (PE 2015) states that the present value of the total fiscal commitments to PPPs, 2.4.3 Budgeting for Government excluding governmental finance entities, shall not exceed 12 Commitments to PPPs percent of GDP. However, every three years, the President may, with the endorsement of the Ministry of the Economy and Fi- Budgeting for PPPs involves making sure money is appropriated nance, issue a decree to revise this limit, depending on the infra- and available to pay for whatever cost the government has agreed to structure needs of the country. bear under its PPP projects. Because such cost may be contingent or occur in the future, PPP budgeting can be hard to manage in ŠŠIn Hungary, Act 38 of 1992 (Article 12) limited the total nom- traditional annual budget cycles. Nevertheless, credible and prac- inal value of multi-year commitments in PPPs to three percent tical budgeting approaches are needed for good public financial of government revenue, as quoted in Irwin’s paper (Irwin 2007). management, and to assure private partners that they will be paid. ŠŠBrazil’s Federal PPP Law (BR 2004a, Law 11079) initially lim- This section describes how some countries have introduced systems ited total financial commitments pertaining to all PPP contracts specifically to enable better budgeting for PPP payments, both di- to a maximum of one percent of annual net current revenue—in rect and contingent. 2009 Law 12024 raised this limit to three percent, and in 2012 Law 12766 raised it again to five percent. Budgeting for Direct Commitments to PPPs Irwin describes how creating PPP-specific limits—distinct from Direct commitments to PPP may include ongoing payments such other limits on public expenditure—can create incentives for agen- as availability payments and shadow tolls, as well as capital subsi- cies to choose traditional public procurement over PPPs even when dies during project construction. 88 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Table 2.6 Fiscal Risk Matrix: Liabilities Direct Contingent Explicit Foreign and domestic sovereign debt Guarantees for borrowing and obligations of sub-national (legal obligation, no Budget expenditures—both in the current fiscal year and those governments and SOEs choice) legally binding over the long term (civil servant salaries and Guarantees for trade and exchange rate risks pensions) Guarantees for private investments (PPPs) State insurance schemes (deposit insurance, private pension funds, crop insurance, flood insurance, war-risk insurance) Unexpected compensation in legal cases related to disparate claims Implicit Future public pensions if not required by law Defaults of subnational governments and SOEs on nonguaranteed (expectations – political Social security schemes if not required by law debt and other obligations decision) Future health care financing if not required by law Liability clean-up in entities being privatized Future recurrent cost of public investments Bank failures (support beyond state insurance) Failures of nonguaranteed pension funds, or other social security funds Environmental recovery, natural disaster relief Source: (Polackova 1998) Table 2.7 Fiscal Hedge Matrix: Assets and Contingent Financing Direct Contingent (based on the stock (dependent on future events, such as of existing assets) value generated in the future) Explicit Asset recovery (workouts, sales of non-performing loans, state Government revenues from natural resource extraction and sales (based on government equity sales, etc.) Government customs revenues legal powers such as Proceeds from privatization of state-owned enterprises (SOEs) and Tax Revenues less: ownership, right to other public resources • Tax Expenditures raise taxes and other Recovery of government loan assets (e.g. resulting from earlier • Revenues from forward sales (e.g. commodity forward sales) revenues) direct government lending) • Hedging instruments and re-insurance purchased by government Implicit Stabilization and contingency funds (Note: These liabilities refer to Profits of state-owned enterprises (based on Government fiscal authorities, not the central bank) Contingent credit lines and financing commitments from IFIs indirect control) Positive net worth of Central Bank Current account surpluses across currencies When governments provide capital subsidies to PPPs, the payments Budgeting for long-term direct commitments, such as availability required are similar to those for traditionally-procured government payments, is more challenging. The mismatch between the annual projects. Because these payments are typically made within the first budget appropriation cycle and the multi-year payment commit- few years of a project, they can be relatively easily built into annual ments exposes the private party to the risk that payments may not budgets and medium-term expenditure frameworks. Nonetheless, be appropriated when due. This problem is not unique to PPPs— some governments have introduced particular funds, called Via- many other types of contractual payment commitments extend be- bility Gap Funds, from which such payments will be made. One yond the budget year. In many jurisdictions, governments do not example of such a fund is in India, as described in Box 2.9 - The introduce any particular budgeting approach for direct, long-term Viability Gap Fund Program in India. PPP commitments on the assumption that a responsible legislature Section 2.4 Public Financial Management Frameworks for PPPs 89 Box 2.9 The Viability Gap Fund Program in India In July 2005, the Cabinet Committee on Economic Affairs Knowing that the funding is available encourages firms to bid established India’s Viability Gap Fund (VGF) program through on India’s PPP projects. The resulting competition has meant its approval of the Scheme for Financial Support to Public Private that many projects that the government thought might need a Partnerships in Infrastructure. During its first eleven years, 58 subsidy have, in fact, been fully privately financed, without a VFG projects with a total project cost of approximately $4.9 billion and contribution being called on or in some cases with negative grants, VGF allocation of $872 million received final approval thanks to or upfront payments by the private sector. the scheme. The scheme is funded by the Government through budgetary The primary objective of India’s VGF program is to attract private resources. Budget provisions are made on an annual basis based investment in infrastructure by making PPP projects financially on the likely demand for disbursements during the year. In the viable, with three underlying objectives: first year, a budgetary provision of $40 million was made. The scheme also provides for a revolving fund under the authority of • Mobilizing additional finance to meet India’s infrastructure the Empowered Committee to ensure liquidity of the VGF facility. The fund is replenished as needed. needs more rapidly • Prioritizing PPP projects to improve the efficiency of service In any given year, the value of projects approved is capped by a delivery, control timing and cost, and attract private sector ceiling equivalent to ten times the budget provisions for VGF—to ensure continuing liquidity and prevent bunching of disbursement expertise requests as far as possible. This cap can be modified at the • Developing projects through an inclusive approach that does discretion of the Ministry of Finance. In practice, the cap has not not neglect geographically or economically disadvantaged been binding. regions Sources: (IN 2013a); (IN 2017) will always approve appropriations to meet the government’s legally The long-term nature of most governments’ commitments to pay, binding payment commitments. under PPP contracts, suggest the need for incorporating them in the Medium-Term Fiscal Framework (MTFF). More countries Where appropriations risk is high—typically in systems with a have legislation requiring periodic analysis of a MTFF, such as strict separation of powers between the legislature and executive— Brazil, China, Colombia, India, Peru, and Poland—good practice mechanisms to reduce this risk may be warranted. In Brazil, at consists of including PPPs in the MTFF. the federal level, Law No.101 of 2000 (BR 2005) requires subsidy payments to PPPs to be treated in the same way as debt service pay- Governments with prudent fiscal governance have felt the need to ments—that is, they are automatically appropriated. This means establish and continuously update a centralized register for all PPP that once the subsidy is approved, the appropriations needed are commitments in the Ministry of Finance. This is good practice. All not subject to further legislative approval. Although no federal sub- PPP commitments should be centrally recorded and monitored. sidies have been disbursed yet, this policy should help reduce the This is relevant for unitary countries, but also for federal republics likelihood that committed funds are retracted and provides inves- that have a history of subnational fiscal discipline issues. Monitor- tors with more certainty. ing currency exposures may be also relevant—PPP commitments may have foreign exchange implications. For more on budgeting for direct commitments to PPPs, see the World Bank report on fiscal subsidies for PPPs (WB 2012a). Availability payments depend on effective availability of infrastruc- The study presents the appropriations mechanisms for Brazil at the ture. Although contingent upon availability, these payments should Federal and State levels (see pages 15–16), Colombia (page 31), be considered as direct liabilities as their probability of occurring is Mexico (page 46), and India (page 59). almost certain in a well-designed PPP. Governments may commit 90 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK to pay according to the volume of production or the amount and returns generated with its resources. The government entities quality of services delivered, for instance healthcare services in a carry out the contingent liabilities valuation which is then ap- PPP hospital or electricity generated at a PPP power plant. Since proved by the Public Credit Division of the Ministry of Finance. these costs are variable, governments must budget for expected lev- Once the PPP is approved and implemented, the division car- els of delivery. ries out ongoing assessments of the value of the associated con- tingent liabilities (CO 1998, Articles 3–8). Budgeting for PPP Contingent Liabilities ŠŠSão Paulo, Brazil—in the State of São Paulo, the São Paulo Budgeting for contingent liabilities can be particularly challenging, Partnerships Corporation (Companhia Paulista de Parcerias— because payments may become due unexpectedly. If savings cannot CPP) was established in 2004 using resources from the sale of be found within the existing appropriations, government may need the government’s stake in State-Owned Enterprises (SP 2004a, to go back to the legislature to request a supplementary appropria- Articles 12–23). Section 5 of State Governor’s Decree (SP 2004b, tion—often a difficult and contentious affair. Articles 11–12) describes the duties of CPP. The CPP manag- es its resources as a fiduciary fund that provides guarantees to To overcome these difficulties, some governments introduce par- PPP projects (SP 2004b, Article 15). The CPP is governed by ticular mechanisms for budgeting for contingent liabilities under a directorate made up of up to three members selected by the PPP projects. As described in Cebotari’s paper on managing governor of the state, a management council made up of up to contingent liabilities (Cebotari 2008, 26–28), the first option is five members selected by the state governor, and a fiscal council. to create additional budget flexibility. This can include creating a The CPP is an independent legal entity. The government of the contingency line in the budget from which unexpected payments state can add capital to the fund using funds from the sale of can be made. A contingency line could be specific to a particular li- shares in state-owned companies or government-owned build- ability—for example, to one considered relatively riskier—or cover ings, public debt titles, other goods or rights that are directly or a range of contingent liabilities. In Chile, the Ministry of Finance indirectly owned by the government. The World Bank review of assesses the cost of guarantees (e.g. demand guarantees) provided Subsidy Funds for PPPs in LAC (WB 2012a, 16) provides more to PPP operators and creates a budget line for those guarantees. background about the CPP. Cebotari also notes that some countries allow spending in excess of the budget without need for additional approval in certain, defined ŠŠIndonesia—the Indonesia Infrastructure Guarantee Fund, or circumstances. IIGF, is a state-owned enterprise established by government reg- ulation and a 2009 Ministry of Finance decree. As one of the fis- A second option, also described in detail by Cebotari (Cebotari cal tools of the government, IIGF is under direct supervision of 2008, 27–29), is to create a contingent liability fund. A contin- the Ministry of Finance and has mandate to provide guarantees gent liability fund (or guarantee fund) is an account (which may be for infrastructure projects under of PPP schemes. IIGF is part within or external to the government’s accounts) to which transfers of the government’s efforts to accelerate infrastructure develop- are made in advance, and from which payments for realized contin- ment in Indonesia, by providing contingency support/guarantee gent liabilities will be made when due. for the risks caused by the government’s action or inaction. The The following are examples of contingent liability funds for PPPs: Fund operates as a single window for appraising, structuring, and providing guarantees for PPP infrastructure projects. The ŠŠColombia—has developed a set of procedures for managing single window ensures a consistent policy for appraising guaran- contingent liabilities arising from guarantees offered to toll tees and a single process for claims. It introduces transparency road concessionaires. This includes assessing the fiscal impact and consistency in the process which is critical for market con- of guarantees before these are granted and setting aside funds to fidence. IIGF provides guarantees against specific risks based on cover the expected payments from the guarantees (WB 2012a, private sector demand in a variety of sectors—including power, 32–33). A Government Entities Contingent Liabilities Fund, water, toll roads, railways, bridges, ports, and others (IIGF). established in 1998, is managed by La Previsora, a Trust Com- pany. The fund is funded by contributions by various govern- ŠŠSouth Korea—The Infrastructure Credit Guarantee Fund ment entities, contributions from the national Budget, and the (ICGF) was established in 1994. It is being managed by a pub- Section 2.4 Public Financial Management Frameworks for PPPs 91 lic financial institution. ICGF guarantees each project up to 300 recognized—that is, formally recorded in the financial statements billion won, for an annual guarantee fee capped at 1.5 percent and statistics, or disclosed—and reported in notes or narratives. of the total guarantee amount (KR 2011). Typically, the annual This section briefly describes how these standards apply to PPPs, guarantee fees range between 0.3 and 1.3 percent. The guaran- with some examples of how different countries have interpreted tee operates as a subrogation—that is, ICGF pays back loans them in practice. taken by the project company to financial institutions if it de- The 2016 Eurostat Guide to the Statistical Treatment of PPPs faults on its debt obligations. If funds become insufficient, the (EPEC 2016) explains how government-pays PPP contract pro- government can provide additional contributions (Kim et al. visions are relevant to the Eurostat statistical classification of 2011). PPPs (see Box 2.10 - Types of Government Financial Reporting). The As well as providing a clear budgeting mechanism and thereby im- definition, for statistical purposes, of general government sector may proving credibility, creating a fund can also help control the gov- differ from the one used for financial management of government ernment’s fiscal commitments to PPPs—depending on how the affairs. Eurostat, a statistical office, uses the risks and rewards crite- fund is designed. For example, Colombia’s approach encourages rion for classification purposes, while the international standard for discipline when deciding what liabilities to accept, as described in public accounts, IPSAS, uses the control criterion, as described in Section 2.4.1 - Assessing Fiscal Implications of a PPP Project. Requir- Section 2.4.4 - Fiscal Accounting and Reporting for PPPs. ing a cash transfer from the implementing agency’s budget when a contingent liability is incurred means the decision to accept a Recognizing PPP Liabilities in contingent liability has an immediate budget impact that must be Government Accounts considered. In Indonesia, the government policy requires IIGF to Governments need to decide whether and when PPP commitments accept contingent liabilities based on a careful assessment of the should be recognized—that is, formally recorded in financial state- risk by the fund’s management. The EPEC note on State Guar- ments as creating public assets, liabilities or expenses. This is im- antees in PPPs (EPEC 2011a, Section 2) provides further detail portant because limits or targets are often set on the government’s on the different types of guarantees that governments may offer to liabilities and expenditures. Whether or not PPP commitments are PPP projects. recognized as expenses or liabilities can therefore influence a gov- ernment’s decision to pursue PPPs, or how to structure them, in a 2.4.4 Fiscal Accounting and Reporting way that is not driven by the fundamental objective of achieving for PPPs value for money. Section 1.2.1 - Insufficient Funds describes how some governments have used PPPs to circumvent limits on liabil- Governments need to account for and report on their financial ities. The 2016 Eurostat Guide to the Statistical Treatment of commitments, including those under PPP contracts—an addition- PPPs (EPEC 2016) notes that an excessive focus on off govern- al reason for the Ministry of Finance to keep a centralized register ment balance sheet recording can be at the expense of sound proj- of financial commitments under PPP contracts, both direct and ect preparation and value for money and may push public authori- contingent. When reporting is done well, it encourages the govern- ties to use PPPs where not appropriate. ment to scrutinize its own fiscal position. Making financial reports publicly available enables other interested parties—such as lenders, The financial standards mentioned in Box 2.10 - Types of Gov- rating agencies, and the public—to reach an informed opinion on ernment Financial Reporting vary in their treatment of PPP fiscal the government’s public financial management performance. commitments. A few standards specifically address when and how direct liabilities and assets of PPP projects should be recognized by Box 2.10 - Types of Government Financial Reporting briefly describes the contracting governments: the three types of government financial accounting and reporting— government financial statistics, government financial statements, ŠŠInternational Public Sector Accounting Standards—intro- and budget documentation and reporting—and the internationally duced in 2011, IPSAS-32 defines when PPP assets and liabil- relevant—recognized standards and guidelines that apply in each ities should be recognized, assuming a government is following case. In general, these standards set rules or guidelines for whether IPSAS accrual accounting standards, that is it records revenues and how different kinds of liabilities and expenditures should be and expenses when they are incurred, regardless of when cash is 92 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Box 2.10 Types of Government Financial Reporting Most governments capture and report financial information in those standards. The International Public Sector Accounting three related frameworks: Standards (IFAC) is a modified version of the International Financial Reporting Standards (IFRS). IPSAS is designed for use • Government finance statistics—these are summary statistics in the public sector, while IFRS applies to companies. Some on the state of a government’s finances, which are intended governments adopt local accounting standards that are a to be internationally comparable. These statistics may simplified version of the IPSAS standards. follow regional or international standards, such as those Budget documentation and reporting—most governments prepare set by Eurostat for European Union countries, or the IMF’s reports on financial performance as part of budget preparation Government Finance Statistics Manual (GFSM) (IMF 2014b) and reporting. These are not subject to any international published in 2001 but with regular updates since that date. standards, although there are international guidance materials that promote transparency—for example, the IMF’s Update on • Government financial statements—most governments also the Fiscal Transparency Initiative (IMF 2014a) and the OECD’s publish audited financial statements. There are internationally- Recommendation of the Council on Budgetary Governance recognized standards on what should be in those financial (OECD 2015a). statements, although in practice few governments meet exchanged. Under IPSAS-32, PPP assets and liabilities appear the allocation of demand risk, residual value and obsolescence on the government’s balance sheet, provided the government risk, and availability risk. controls or regulates the services the operator must provide with ŠŠEurostat guidelines—Eurostat requires European governments the PPP asset, to whom, and at what price; and the government to recognize PPP liabilities in debt statistics where the govern- controls any significant residual interest in the asset at the end ment retains construction risk or demand or availability risk. of the contract. Under this definition, government-pays PPPs Rougemont’s article on Accounting for PPPs (Schwartz et al. would appear on the government’s balance sheet; the treatment 2008, 256–268) provides more detail, and the European Man- of user-pays PPPs depends on the details of the contract (IFAC ual on Government Deficit and Debt (Eurostat 2016) and 2011). Additional IFAC guidance on IPSAS-32 is provided in the European System of Accounts ESA2010 (Eurostat 2010) (IFAC 2016). IPSAS-32 assumes full accrual accounting (for define the rules. Since PPPs transfer those risks to the private example, such that the government prepares a full balance sheet party, under this rule most PPPs tend to remain off the govern- capturing both assets and liabilities)—PFRAM (IMF and WB ment’s balance sheet—realizing that an excessive focus on off 2016) adapts IPSAS-32 to cash accounting, allowing for users to government balance sheet recording can be at the expense of see how a PPP is reflected in both accrual and cash accounting. sound project preparation and value for money and may push Also relevant in the standard on contingent liabilities, IPSAS-19 public authorities to use PPPs where not appropriate, Eurostat (IFAC 2002). prepared with EPEC the 2016 Eurostat Guide to the Statisti- ŠŠThe IMF’s Government Finance Statistics Manual (IMF cal Treatment of PPPs (EPEC 2016). 2014b) sets out criteria for classifying PPP assets and liabili- ties for statistical reporting purposes. Under these criteria, PPP Most accounting and reporting standards do not require govern- assets and liabilities are accounted for in the government’s bal- ments to recognize contingent liabilities, including those arising ance sheet if the government bears most of the project’s risks from accepting risk under PPP contracts. Cebotari’s report on and rewards—for example, taking into consideration the degree contingent liabilities (Cebotari 2008, Annex I) describes one lim- to which the government controls the design, quality, size, and ited exception: IPSAS standards for governments implementing maintenance of the asset, and bears construction risk; as well as accrual accounting (IFAC 2002) require contingent liabilities to Section 2.4 Public Financial Management Frameworks for PPPs 93 be recognized, only if it is more likely than not that the underlying national guidelines for how contingent liability exposure should event will occur, and the amount of the obligation can be measured be disclosed—including those under PPP programs—and provides with sufficient reliability. In this case, the net present value of the examples from several countries. expected cost of the contingent liability should be recognized as a Cebotari’s paper also describes how some countries have inter- liability when the contract is signed. preted these standards in practice. For example, New Zealand and Australia disclose contingent liabilities—including to PPPs—in Disclosing PPP Liabilities notes to financial statements, available online. Since 2007, Chile’s Most international reporting and statistical standards agree that Budget Directorate of the Ministry of Finance has published an even when PPP commitments are not recognized as liabilities, they annual contingent liabilities report (CL 2016), which initially should be disclosed in notes to the accounts and reports. For exam- presented information on contingent liabilities from revenue and ple, an IMF booklet on Public Investment and PPPs (Schwartz exchange rate guarantees to PPPs. This report has since been ex- et al. 2008, 14–17) describes what information should be disclosed panded to cover other types of government contingent liability. for PPPs in general, and specific disclosure requirements for guar- IMF’s Fiscal Transparency Code (IMF 2014c) is the international antees. A World Bank report on Disclosure of Project and Con- standard for disclosure of information about public finances—it tract Information in PPPs (WB 2013c) reviews practices in sever- comprises a set of principles built around four pillars: fiscal re- al jurisdictions and present best practices in the field. porting, fiscal forecasting and budgeting, fiscal risk analysis and Disclosing contingent liabilities can be challenging since it can be management, and resource revenue management. Fiscal transpar- difficult to estimate their value. Section 3.2 - Appraising Potential ency evaluations (FTE) now include PPPs as a main object. FTE PPP Projects provides guidance on how the value of contingent reports from all continents—e.g. Peru (IMF 2015b), Kenya (IMF liabilities can be estimated. Cebotari’s paper on Government 2016), Portugal (IMF 2014d), and the Philippines (IMF 2015c)— Contingent Liabilities (Cebotari 2008, 32–41) describes inter- demonstrate the relevance of fiscal transparency on PPPs. Did you know....? Italy implemented a modern irrigation PPP in 1870 The Villoresi irrigation canal was designed, financed, and built entirely with private capital between 1877 and 1890. The King of Italy granted a 90-year concession only 15 days after receiving the investment proposal from the original investors. Whereas the Villoresi family provided seed capital, capital for the main infrastructure was raised on the financial markets. The water was sold to farmers for irrigation. The original structure of the concession contract included the option for the water off-takers to buy out the concession. This option was called in 1918 when the farmers formed a consortium of water users and took over the concession and the infrastructure. Operated for many years by private investors, the Villoresi irrigation canal is now successfully owned and operated by a consortium of public entities. Source: Handshake Issue #1. IFC, March 2011, page 45. 94 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Key References: Public Financial Management for PPPs Reference Description Polackova, Hana. 1998. “Contingent Government Liabilities: A Hidden Risk Provides the conceptual structure used by many subsequent articles to describe for Fiscal Stability.” Policy Research Working Paper 1989. Washington, DC: different types of government liabilities—distinguishing between contingent World Bank. and direct liabilities, and explicit and implicit liabilities. Schwartz, Gerd, Ana Corbacho, and Katja Funke, eds. 2008. Public Investment A collection of papers on managing the fiscal impact of PPPs, drawing form an and Public-Private Partnerships: Addressing infrastructure challenges and managing IMF conference held in Budapest in 2007. Part Two: “Fiscal Risks from PPPs,” fiscal risks. Washington, DC: International Monetary Fund. and Part Four: “PPP Accounting, Reporting, and Auditing” are particularly relevant to public financial management for PPPs. OECD. 2008a. Public-Private Partnerships: In Pursuit of Risk Sharing and Value Identifies best practices for maximizing value-for-money for PPP projects, for Money. Paris: Organisation for Economic Co-operation and Development. including accounting for fiscal impacts and affordability. The book also covers issues with regulatory reform, governance, and developing institutional capacity. IMF. 2007. Manual on Fiscal Transparency. Washington, DC: International Manual for public sector disclosure of fiscal reporting. The manual provides Monetary Fund. a framework for responsibilities for transparency, the transparency of the budget process, and openness and integrity of information. The 2014 Fiscal Transparency Code elaborates on this further (IMF 2014c). Irwin, Timothy C., and Tanya Mokdad. 2010. Managing Contingent Liabilities Describes the approach in the State of Victoria, Australia, Chile, and South in Public-Private Partnerships: Practice in Australia, Chile, and South Africa. Africa, to approvals analysis, and reporting of contingent liabilities (and other Washington, DC: World Bank. fiscal obligations) under PPP projects, and draws lessons for other countries. Irwin, Timothy C. 2007. Government Guarantees: Allocating and Valuing Covers topics relating to fiscal impacts of PPP projects and provides Risk in Privately Financed Infrastructure Projects. Directions in Development. frameworks to guide policymakers. Offers lessons learned in managing Washington, DC: World Bank. liabilities, direct or contingent, and case studies. Liu, Lili, and Juan Pradelli. 2012. “Financing Infrastructure and Monitoring Proposes a more rigorous monitoring framework of fiscal risks imposed by PPP Fiscal Risks at the Subnational Level.” Policy Research Working Paper 6069. debt by using a minimum set of five subnational debt indicators which also Washington, DC: World Bank. considers the SPV’s debt. Posner, Paul L., Shin Kue Ryu, and Ann Tkachenko. 2009. “Public-Private Examines the budgetary treatment and issues raised by PPPs. Reviews the Partnerships: The relevance of budgeting.” OECD Journal on Budgeting 2009 unique budgetary and accounting issues posed by privately financed capital (1). services. WB. 2012a. Best Practices in Public-Private Partnerships Financing in Latin Provides a framework for why subsidies are sometimes needed for PPPs. The America: The Role of Subsidy Mechanisms. Washington, DC: World Bank. report includes case studies of PPP subsidy programs in Brazil, Colombia, Mexico, and India. Cebotari, Aliona. 2008. “Contingent Liabilities: Issues and Practice.” IMF A seminal paper on managing contingent liabilities, including to PPP projects. Working Paper WP/08/245. Washington, DC: International Monetary Fund. Includes case studies to illustrate management challenges and practices from different countries and issues. Case studies also highlight best practices. Kim, Jay-Hyung, Jungwook Kim, Sunghwan Shin, and Seung-yeon Lee. Reviews the PPP program in Korea, including case studies of BTO and BTL 2011. Public-Private Partnership Infrastructure Projects: Case Studies from the PPP projects. Republic of Korea. Volume 1, Institutional Arrangements and Performance. Manila: Asian Development Bank. IMF. 2014b. Government Finance Statistics Manual 2014. Washington, DC: IMF guidelines on how to report government fiscal statistics. International Monetary Fund. OECD. 2015a. Recommendation of the Council for Budgetary Governance. Paris: A tool designed to help countrie increase transparency in their budget process, Organisation for Economic Co-operation and Development. based on best practices. Section 2.4 Public Financial Management Frameworks for PPPs 95 Reference Description Akitoby, Bernardin, Richard Hemming, and Gerd Schwartz. 2007. “Public A short booklet describing the implications of PPPs for public investment, investment and public-private partnerships.” Economic Issues 40, Washington, including how PPP commitments should be managed and controlled. DC: International Monetary Fund. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African Module 4, Part 6: “Demonstrate Affordability” describes the methodology and Government, National Treasury. requirements to demonstrate affordability of a PPP project. VIC. 2016. Partnership Victoria Requirements. Melbourne, Australia: State of These PPP guidelines set out the objectives, principles, and processes for the Victoria, Department of Treasury and Finance. PPP program in the State of Victoria. The guidelines highlight the need for a comprehensive test of affordability for the project before project is considered. CO. 1998. Ley 448 de 1998. Bogotá: Congreso de Colombia. Establishes the Contingent Liabilities Fund, defines where the resources will come from, states how its operative costs will be covered, and describes how it will monitor the contingent liabilities throughout the duration of the project. PE. 2014. Ley No. 30167: Ley que Modifica el Decreto Legislativo 1012. Lima: Sets out the entire PPP process (from appraisal to tendering and the Presidente de la Republica del Peru. implementing the contract), and it also defines the institutional framework for PPPs in infrastructure—this includes defining the role of the Ministry of Finance and the PPP promotion Agency Proinversion). BR. 2004. Lei No. 11.079 de 30 de dezembro de 2004. Brasília: Presidência da Sets out the tendering process and assigns roles for the Ministry of Finance, the República, Casa Civil. Ministry of Planning, and establishes the Federal PPP Management Council. The law also sets the limits of the government´s financial commitments. SP. 2004a. Lei No. 11.688 de 19 de maio de 2004. São Paulo: Governo do Establishes how the CPP is funded, its composition, organizational structure, Estado de São Paulo. and its role. SP. 2004b. Decreto No. 48.867 de 10 de agosto de 2004. São Paulo: Governo do Defines in detail the specific duties of the CPP, including the management of Estado de São Paulo. the CPP fund. KR. 2011. Basic Plan for Public Private Partnerships. Seoul: Korea Development Sets the PPP policy, identifies the areas of PPP project development, and Institute, PIMAC. specifies the legal framework governing the PPP procurement process. IFAC. 2011. “IPSAS 32 - Service Concession Arrangements: Grantor.” Sets out the accounting requirements for the government party to a PPP Including amendments issued up to January 15, 2013. New York: International contract. Specifies when and how PPP assets and liabilities should be Federation of Accountants. recognized as assets and liabilities of the government. IFAC. Accessed March 7, 2017. “International Federation of Accountants Provides an overview of the IPSAS Standard 32 described above. website.” Website. CL 2016. Informe de Pasivos Contingentes 2016. Santiago: Gobierno de Chile, Describes the conceptual framework for assessing contingent liabilities and Ministerio de Hacienda, Dirección de Presupuestos. the government’s contingent liability exposure in the given year. This includes quantitative information (maximum value and expected cost) on government guarantees to PPPs. EPEC. 2010. Eurostat Treatment of Public-Private Partnerships: Purposes, Clarifies the process for determining the impact of PPPs on government debt Methodology and Recent Trends. Luxembourg: European Investment Bank, and deficit, for EU countries. European PPP Expertise Centre. IMF and WB. 2016. PPP Fiscal Risk Assessment Model (PFRAM). Washington, Evaluates the fiscal impact of PPPs and allows users to identify and assess their DC: International Monetary Fund and World Bank. fiscal risks, and corresponding mitigation strategy. 96 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK 2.5 Broader PPP interference as described in Section 2.5.5 - Role of Independent Regulators. Program Governance Creating mechanisms through which the legislature, audit bodies, The executive branch of government is largely responsible for im- and the public can engage in the PPP process strengthens account- plementing PPP projects. The processes and institutional respon- ability and helps make the PPP program more participatory, trans- sibilities described in Section 2.3 - PPP Processes and Institutional parent, and legitimate. An example of a well-established positive Responsibilities aim to create checks and balances within the execu- feedback mechanism which involves all three oversight bodies can tive branch on how those decisions are made. This section describes be seen in the United Kingdom—PPP audit reports are often used the broader governance of the PPP program—how other entities in legislative hearings where all their written recordings are avail- and the general public participate in the PPP process, and hold the able to the public on the National Audit Office’s website (NAO). executive accountable for its decisions and actions. A cornerstone of these accountability mechanisms is the timely and comprehensive disclosure of information about PPP programs. 2.5.1 Stakeholder Communication The entities and groups outside the executive with a role to play in and Engagement ensuring good governance of the PPP program include: Stakeholder engagement is an inexpensive and efficient way of cre- ŠŠThe public—the public can directly participate in PPP proj- ating a better operational environment for a project. The consulta- ect design through consultation processes (discussed in Section tion process reduces risks and increases its chance of success. Most 2.5.1 - Stakeholder Communication and Engagement), and in large infrastructure projects will have a wide range of stakeholders, providing feedback on service quality. Contract disclosure and including those that support the project, and those that oppose it. transparency of the PPP process as a whole, as discussed in Sec- Stakeholder engagement plays two important roles throughout the tion 2.5.2 - Disclosure of PPP Project and Program Information, project cycle: can help ensure improve project design and service performance. ŠŠThe information gained by consulting stakeholders confirms or ŠŠSupreme auditing institutions—many jurisdictions have inde- reassesses whether a project will deliver value to society—con- pendent audit entities, which can play a role in ensuring good sultation often improves the initial project concept. governance of PPP programs. Their usefulness is more effective when they are truly independent. They may consider PPP com- ŠŠGovernments can mitigate risk by disseminating project infor- mitments as part of their regular audit responsibilities as detailed mation, thereby learning of potential project issues, and estab- in Section 2.5.3 - Role of Supreme Auditing Institutions—for ex- lishing a dialogue with a range of stakeholders. ample in auditing government financial statements. They may The capacity of the procurement agency to conduct stakeholder also review PPP project performance or investigate particular engagement is an important factor. Broad constituencies of stake- points of concern, or review the value for money of the program holders often need to be consulted, and agents do not always con- as a whole. These reviews, in turn, enable the legislature and the vey the opinions of beneficiaries effectively. This is a challenge in public to check on PPP program performance. advanced economies and developing countries alike. Direct consul- ŠŠThe legislature—the legislative branch of government often tation is always beneficial. The timeframe during which the consul- defines the PPP framework, bypassing PPP legislation. In some tation is conducted is particularly critical. cases, the legislature may be directly involved in the PPP pro- cess, approving PPP projects. More commonly, it exercises ex- Benefits of engaging stakeholders post oversight by scrutinizing reports on the government’s PPP Stakeholder engagement helps governments identify critical is- commitments. The role of legislative bodies is outlined in Sec- sues and prepare effective strategies. In particular, it can frame tion 2.5.4 - Role of Legislative Bodies. discussions with beneficiaries, clarify project impacts and objec- ŠŠIndependent regulators—used in several countries to transfer tives, and ultimately increase public support for a given project. regulatory responsibilities to entities protected from political In certain circumstances, creating space for dialogue and allowing Section 2.5 Broader PPP Program Governance 97 stakeholder participation in project decision-making can increase The same IFC handbook (IFC 2007, 14-16) recommends two its endorsement in the national political arena and strengthen its parallel approaches to identify stakeholders based on the project’s sustainability. The process can enhance the social capital between geospatial sphere of influence. First, identify those stakeholders the government and the public, generating long-term benefits for that are likely to be impacted by the primary project facilities and the effectiveness of policy reforms. Moreover, stakeholder engage- the related facilities, such as transportation routes and areas. The ment is one of the ten Equator Principles (EP 2017); a thorough analysis should focus on socio-economic and environmental conse- consultation is a requisite to receive funds from Equator Principle quences for those directly affected by the project, such as end-users, Financial Institutions. homeowners or specific professional categories, as well as groups that appear peripheral but perceive that they may be impacted by The engagement process can also give governments the opportu- the project. nity to explain how a PPP differs from privatization. In modern PPPs, the government retains control over the use of the asset; it The second component of IFC’s parallel approach for identifying defines minimum service quality and maximum user costs. This is stakeholders applies to those that have interests in the project but fundamentally different from older concessions wherein the oper- are not affected by it geospatially. These include institutions such ator acted as a local monopolist with limited accountability to the as political parties, trade unions, chambers of commerce, think contracting agency.These factors underline the critical importance tanks, community leaders, professional associations, or local and of identifying an accountable public spokesperson for any project. international civil society organizations. Analysis and mapping of Before any consultations, it is good practice to appoint a project motivations and influence patterns can help identify these stake- spokesperson, preferably a senior figure within government. This is holders. Cost effective solutions, such as websites or newsletters, critical for establishing and maintaining a regular flow of informa- may provide an efficient method of establishing and maintaining tion about a project, addressing and being perceived as addressing communication. public questions and concerns, and correcting any misinformation It is important to note that over the PPP life-cycle, stakeholder in the media. This spokesperson lends his or her credibility to the communication and engagement will address different catego- project throughout the project cycle. ries of stakeholders—and, as the goals will not be the same, the consultation mechanism will vary. Consider the main phases of the Identifying stakeholders PPP cycle: Identifying stakeholders requires thinking carefully about those ŠŠPPP program definition—engaging citizens (as taxpayers and who may be affected by, have a legitimate interest in, or the abil- as potential users) during the identification phase of the gov- ity to influence the project. Identifying stakeholders too broadly ernment’s infrastructure program. Infrastructure programs are may be cumbersome and open a project to risks. However, defin- designed, developed, publicly presented, and tested through ing stakeholders too narrowly may result in potentially influential formal and informal feedback-collection mechanisms. The em- stakeholders being overlooked, and undermine local ownership phasis is on demonstrating the program’s ability to serve user and support. needs—instead of simply listing projects and amounts—The process ensures that investment programs serve the public inter- The IFC stakeholder engagement handbook (IFC 2007, 10) est and reward politicians that promote them. defines stakeholders as “persons or groups who are directly or in- directly affected by a project, as well as those who may have inter- ŠŠProject assessment and preparation—engaging potential users ests in a project and/or the ability to influence its outcome, either and populations likely to be affected by the project. This en- positively or negatively.” This definition is broad. It demonstrates gagement tests the quality of the project and provides elements the inclusiveness needed when mapping stakeholders—but not the for its optimization. The process is critical—the intensity of en- range of stakeholders that should be consulted in each phase of the gagement with users and genuinely affected persons should be PPP cycle. In some phases, it is crucial to include a broader set of high. Extensive communication with relocated persons should stakeholders; in others, it should only be the core stakeholders— be organized and publicized; and efforts to mitigate the impact the users and the affected persons—that should be consulted. on the environment should be communicated exhaustively. 98 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK ŠŠContract tendering—no stakeholder consultation should take to stop it, even when the overwhelming majority of people would place during the tender process to avoid introducing undue benefit. Disregarding such considerations, and not building stake- pressure on the selection of the PPP operator. An initial market holder consensus for a project, has led to many PPPs being aban- consultation, before the Call for Tender, will be highly relevant doned or failing to achieve expected results. for assessing market interest and for receiving feedback that can Even if a project can be demonstrated to be economically advan- help optimize the project, the draft contract, and the tender tageous and welfare-enhancing for society as a whole, some stake- regulations. A competitive tender should avoid creating oppor- holders may be negatively affected by it—environment and social tunities for collusion and force the procuring authority to deal assessments, discussed in Section 3.2.5 - Assessing Fiscal Implications, independently with each bidder, and only with bidders. should identify these stakeholders and propose whether they should ŠŠProject implementation and evaluation—requires full proac- be compensated. Legitimate claims for compensation, for example, tive disclosure of the contract, followed by periodic dissemi- due to expropriation, need to be recognized and publicized in the nation of information on project performance, and continuous consultation process—claims that do not lead to compensation collection of feedback from users using contractually-prescribed also need to be identified and explained. (or regulator-defined) communication channels. For example, a project to develop infrastructure and local capac- ity and institutions at the village level in Lao PDR (IEG 2015) Careful mapping to determine who is genuinely affected by the did not achieve optimal results because it focused on provision project is important to ensure the right stakeholders are consult- of infrastructure instead of engaging stakeholders in participato- ed and to avoid legitimizing vested interests. The consultation ry processes. Such suboptimal results could have been avoided by process may attract groups of individuals to the discussion arena preparing and implementing a well thought-through strategy for who are not directly or significantly affected by the project. The stakeholder engagement. government’s efforts to give voice to genuine stakeholders may be perceived by these individuals as an opportunity to obtain undue The World Bank working paper on strategic communications benefits if they are able to become actors in a process that does not (Calabrese 2008, 25) also provides examples of how some stake- concern them. In an improperly conducted engagement process, holder opposition can arise when the project is structured as a PPP. vested interests may garner too much power and derail a project. For instance, unions representing employees of State-Owned En- Formulating a stakeholder terprises who see services transferred to PPP concessionaires may engagement strategy try to block projects that reduce their power. Engaging with them Upon completing the identification of stakeholders and the analy- will be critical, However, it is equally important to engage directly sis of their interests, concerns, information needs, communication with employees. Safeguarding the interests of workers is an essential channels, and likely impact of the project, governments should part of project sustainability, but it should not be given priority then map key influencers to identify important entry points for over the public interest and the needs of users. their engagement and formulate context-specific strategies. These strategies need to be approached systematically; they should cover Risks of disregarding stakeholders all consultation activities. The IFC stakeholder handbook (IFC Technocrats are often tempted to focus on technical issues and rush 2007, 8) emphasizes that they require clear objectives, budget, and to finish projects. However, this approach can be dangerous—some allocation of responsibilities. influential stakeholders may have deeply-rooted ideological oppo- Calabrese’s paper on strategic communications (Calabrese 2008, sition to private provision of public services, and fears and suspi- 11) recommends that governments begin the formulation of their cions of government capture and/or abuse of a local monopoly may project engagement strategy by highlighting the government’s na- be easily spread and difficult to diffuse. tional economic development and poverty reduction objectives Moreover, people may have strong apprehensions that a project and other relevant strategic priorities. The engagement strategy will degrade their quality of life. Constituencies—including small can then demonstrate how the specific objectives of the project are ones—that feel threatened by a project may be powerful enough aligned with the overarching national policy. Section 2.5 Broader PPP Program Governance 99 Governments should customize their level of engagement with ŠŠPublicize broadly and effectively—Adequate awareness-rais- each category of stakeholders according to their relative ability to ing publicity is essential; the specific consultation’s communica- impact the project and availability of government resources to en- tion channels should be adapted to meet the needs of all target gage. Attempting to engage all identified stakeholders at the same audiences. level may lead to project delays. ŠŠTime limits for participation in the consultation period— The following resources provide two more in-depth methodologies Sufficient time should be provided for planning and responses for formulating stakeholder engagement strategies: to invitations and written contributions. ŠŠThe European Commission guidelines on stakeholder con- ŠŠFeedback—Receipt of contributions should be acknowledged sultation (EC 2015, Section 6.1) and contributions published. ŠŠThe IFC stakeholder engagement handbook (IFC 2007, 34-46) These principles provide a solid framework for conducting engage- ment. However, there are times when governments will need to The preliminary consultation process moderate their usage. For example, in the United Kingdom (UK 2015b), after the authority in charge of a runway expansion at In the preliminary consultation period, governments should be- Heathrow Airport committed to responding to all comments re- gin by disclosing all relevant information, including identified so- ceived from the public, more than 70,000 comments were received. cio-economic and environmental risks. This leads to transparency An article in the Engineers Journal (Morrissey 2015) suggests that and gives an informed view of the project to stakeholders. Opin- following the preliminary consultation, it remains important to ions and points of contentions can then be collected. Calabrese’s communicate regularly around the critical milestones of the proj- paper on strategic communications (Calabrese 2008, 2) explains ect, as well as when relevant information becomes available. This that this consultation process fleshes out the understanding of will feed the continuous feedback loop, identify concerns from the perceptions that stakeholders hold about the project, enables stakeholders throughout the project cycle, and enhance stakeholder governments to improve their communication efforts by directly participation in the process. This reinforces the need for a project addressing stakeholder concerns, and may provide solutions for spokesperson to be appointed who can provide regular and timely critical project issues. It also functions as a feedback mechanism to information to stakeholders and have regular interaction with the continually improve the overall strategy. Integrating feedback into media at key project milestones. the project design has the additional benefit of demonstrating that stakeholders’ input is being considered. There is a broad consensus among policy makers and practitioners Stakeholder engagement post- that the consultation should be as inclusive as possible. This does contract award not necessarily mean that the level of engagement will be the same, as discussed previously, but it will ensure that all stakeholders are Once the project contract has been awarded the nature of stake- able to contribute their voice and thus avoid negative sentiment holder engagement will shift largely to managing stakeholders’ ex- toward the project through feelings of exclusion. pectations, maintaining relationships, and obtaining user feedback. The IFC stakeholder engagement handbook (IFC 2007, 135– The European Commission guidelines on stakeholder consulta- 147) presents a series of recommendations for the construction and tion (EC 2015) provide the following five minimum standards for operation phases. conducting effective consultations: For the construction phase of infrastructure projects, engagement ŠŠClarity—All communication and the consultation documents will involve notifying those local stakeholders that will be affect- should be clear, concise and include all necessary information to ed by the construction. The nature of the construction, its dura- facilitate responses. tion, potential impacts such as noise or traffic, and information on ŠŠTargeting—All relevant groups should have an opportunity to whom they may consult regarding grievances should be provided express their opinions regarding the project. at this stage. 100 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Upon transitioning to the operations phase, stakeholder engage- ŠŠSharing an online project database with key pieces of contract ment will focus upon management of established stakeholder rela- information tionships as well as continued user feedback. This may be accom- ŠŠCreating a library of PPP contracts, often with accompanying plished through retaining community liaison officers or by having project summaries an overlapping period with old and new staff, in which liaison offi- cers with established rapports may introduce newer officers. ŠŠPublishing press releases As operations progress, it is important to continue to review and Proactive disclosure of project and program information is often update stakeholder information at regular intervals. Disclosure of the responsibility of a PPP unit—for instance, Chile’s PPP unit pertinent information as well as stakeholder consultations should located in the Ministry of Public Works provides information on continue as well. This will ensure that the any new issues or changes contracts, contract variations, and monthly performance reports. in the perception of the project may be integrated into the overall In many countries, disclosure of PPP project contracts is manda- strategy. Stakeholders during this phase may shift, and, as such, the tory to comply with legislation. Disclosure practices—for example, strategy may need to be adapted to include them as well. what information should be disclosed and when—are not uniform across countries. For example, Chile and Peru disclose the full con- Role of the public tract, as does the state of Minas Gerais in Brazil. Other countries, such as the United Kingdom, redact PPP contracts before they are PPPs are meant to provide value to the public. Getting the right made available to the public, with a view to protecting commer- level of public involvement in the PPP process and program can cially sensitive information—although the definition of ‘sensitive enhance the legitimacy of PPP as a procurement tool, and contrib- information’ is not well defined. The Center for Global Devel- ute to good governance as defined in Box 2.1 - Good Governance for opment report on public procurement (CGDev 2014) discusses PPPs. As described above, direct public participation—by service the meaning and implications of commercial secrecy, noting how users or other stakeholders—at various points in the PPP process it has been used to avoid scrutiny. A British Parliament’s Public Ac- can improve project design and performance. Equally important, counts Committee report (UK 2014b) concluded that government making PPP projects and processes transparent enables PPP perfor- departments should not “routinely use commercial confidential- mance to enable informed policy debate. ity as a reason for withholding information about contracts with User feedback mechanisms can be structured in various ways, as private providers.” Even in countries without mandatory proactive described further in Section 3.6 - Managing PPP Contracts—some disclosure, responsible sector ministries or agencies may proactively projects provide a web portal for continuous user-based input, oth- disclose information about PPPs—for instance, India discloses in- ers conduct regular user surveys. A specific mechanism may also formation about road contracts. be needed for user grievances. In Chile, the Ministry of Public Certain countries, such as South Africa, provide reactive disclo- Works collects and measures user feedback statistics on their web- sure—that is, make information available only in response to a site (CL-Proyectos). specific request by a member of the public. Procedures for mak- ing requests are outlined in legislation. The terms of such reactive disclosure vary by country—including the cost (which may range 2.5.2 Disclosure of PPP Project and from nominal to substantial) and the required timeframe, which Program Information may be as much as a month or more in many cases. Transparency and timely access to information are important to the Disclosing PPP contracts may not be enough for the public to un- principles of accountability and governance. Many governments, derstand them—some additional information on the projects, and therefore, proactively disclose information about PPP projects or a plain-language description of the main contract provisions, is use- contractual information to the public, without receiving a specific ful. For example, the Victorian Freedom of Information Act of request, making it freely accessible to anyone interested. This pro- 1982 requires that, besides publishing all PPP contracts on Victo- active disclosure can be achieved in various ways, for example, by: rian Government Purchasing Board website (VIC-GPB), a project Section 2.5 Broader PPP Program Governance 101 Box 2.11 The Delhi Water Project In 2004, the Government of Delhi decided to reform its water It made several claims about the project, including that it would sector with support from the World Bank. Delhi had access to a lead to even higher tariffs, create inaccessibility to water for sufficient supply of water for its population but lacked adequate the poor, and gradually privatize the water sector. Additionally, transmission and distribution systems. These deficiencies largely Parivartan suggested that the World Bank was manipulating the stemmed from political, institutional and governance issues that Delhi Water Board, the entity in charge of water and sanitation resulted in sub-optimal performance for the system. The project services. It spread these claims widely through media and by sought to increase accountability in the sector by separating the seeking to influence important players in civil society, government, responsibilities for ownership and policy-making and provision of and academia. services while establishing a transparent mechanism between the two. Parivartan’s claims against the project were unfounded. However, no one in either the Delhi Water Board or the Government of Delhi The Government of Delhi engaged stakeholders at various levels to stepped forward to refute them. Additionally, there was already a learn their concerns and formulate an implementation mechanism. public outcry over power privatization, adding to antipathy toward A willingness to pay survey was also conducted, which found that the project. Because of this unaddressed popular sentiment consumers were willing to pay more for improved service quality. against the project, it was eventually suspended in November This led to an increase in water tariffs for the first time in six years. 2005 and fell into a perpetual hiatus. A pilot project was proposed in two of Delhi’s 21 zones to be Source: (Odugbemi and Jacobson 2008) conducted under a management contract. In July 2005, before the consultation on the pilot project could be completed, a local NGO, Parivartan, made public its opposition to the project. summary is published, providing information on the key project public expenditure decisions. They provide independent reviews of features and commercial terms of the project. government finances and performance to parliaments and the pub- lic. The International Organization of Supreme Audit Institutions The World Bank’s 2013 report on Disclosure in PPPs (WB (INTOSAI) provides an online list of its member audit entities. 2013c) presents the above-mentioned diversity of disclosure prac- tices. The report identifies a gradual trend towards broader dis- The mandate of supreme audit entities varies by jurisdiction, but closure, with several countries supplementing contract disclosure often includes two types of audit: with project summaries presenting the main contract provisions, ŠŠRegularity audits, which can include auditing the financial state- its origination, its procurement, and other relevant information on ments of government entities and of government as a whole, and the project. auditing decision-making processes for compliance and probity Additionally, a completely transparent competitive procurement ŠŠPerformance, or value for money audits—reviewing the govern- process should include disclosure of the reasons behind procure- ment’s effectiveness and efficiency ment decisions. This means disclosure of which bidders present- ed expressions of interest, proposals for each project, which were Other entities may play a similar role—for example, government awarded the contract and why they received it. procurement agencies may be responsible for checking that pro- curement processes have been followed, as does the Contractor General in Jamaica. 2.5.3 Role of Supreme Auditing Institutions Supreme audit entities can also play a role in PPP programs. In some jurisdictions, audit entities must sign off on PPP contracts Supreme audit entities, such as courts of accounts and top audit before they can be implemented. Audit entities may then need to offices, are an important link in the chain of accountability for consider PPP commitments and processes as part of regular audits 102 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK of contracting authorities and of the government as a whole. Audit entities may also conduct performance audits of PPP projects, or review the value for money of the program as a whole. Box 2.12 Audit Entity Access to This section describes each of these elements of auditing PPP pro- PPP Company Information grams. Audit institutions performing these roles can help improve While the authority of supreme audit entities vary, it typically PPP program governance. However, to be effective in doing so— extends only to government agencies and entities wholly rather than simply introducing delays, or saddling PPP programs or majority-owned by government. Some supreme audit with requirements that are not appropriate for the specific needs of entities therefore do not have the right or responsibility to PPP—audit entities often need training and support. INTOSAI, audit PPP companies. Nonetheless, the private company supported by the World Bank and by several Courts of Audits, de- often holds a lot of relevant information. Lack of clarity on the access of the audit entity to information held by the livers training activities for auditors, and produced a series of man- private party, and needed for effective auditing, has the uals on PPPs, e.g. (INTOSAI 2007). potential to create conflict. For further examples of how PPP supreme auditing works in prac- The Public Auditing Guidelines for PPPs issued by the tice, see the articles on PPP Audits in Portugal, and Hungary’s audit Comptroller and Auditor General of India (CAG 2009) experience with PPPs, in the IMF publication on Public Invest- discuss this issue in Section III: Scope and Objectives of ment and PPPs (Schwartz et al. 2008, Chapters 17 and 18). PPP Audit. The guidelines suggest that access rights for the CAG in carrying out PPP projects may need to be defined in the public audit statute. In the meantime, the guidelines Regularity auditing for PPPs note that the audit entity is likely only to have access to information held by the contracting authority given its When carrying out regularity audits of contracting authorities, au- contract monitoring role (CAG 2009, Section 3, 29–38). In dit entities may need to check that PPP commitments are appro- the United Kingdom, this type of access is provided through priately reflected in accounts, and that PPP processes have been mechanisms in the PPP contract itself. followed. INTOSAI has published guidelines for audit PPP projects, For example, the National Treasury of South Africa’s PPP Man- which note that the audit entity must be clear about its ual (ZA 2004a, Module 7) describes how the scope of the Auditor access rights to the private company associated with the General’s annual regularity audits applies to PPPs. This includes: PPP (INTOSAI 2007, Section 1, Guideline 1). ŠŠChecking compliance—the Auditor General is required to check that the requirements of PPP Regulations have been met, for example, that the appropriate treasury approvals were sought Performance auditing of PPP projects and granted. Auditing agencies may also carry out performance, or value for ŠŠChecking financial reporting—the Auditor General must also money audits, of particular PPP projects. INTOSAI published check the financial implication of the PPP for the institution. guidelines for auditing PPP projects in 2007 (INTOSAI 2007) This includes checking that information on PPPs in notes to with the aim to help audit entities carry out thorough performance the financial accounts is correct, and that commitments to PPPs audits of PPP projects, leading to recommendations for improved have been accounted for appropriately. For more on accounting performance, and the spread of good practice. requirements for PPPs, see Section 2.4.4 - Fiscal Accounting and Reporting for PPPs. INTOSAI guidelines recommend that the audit office review a PPP project soon after procurement and carry out further reviews According to the guidelines, the Auditor General in South Africa over the project life cycle. The guidelines recommend that the re- may also carry out forensic audits (should the regular audits raise view cover all major aspects of the deal that have a bearing on value any suspicion of fraud or corruption), or performance audits, as for money. They provide guidance for reviewing how the PPP was described further in the following section. identified, how the transaction process was managed, the tender Section 2.5 Broader PPP Program Governance 103 process adopted, how the contract was finalized, and ongoing man- 2.5.4 Role of Legislative Bodies agement of the PPP contract. The legislative branch of government—that is, the elected, Auditors and other similar bodies may review particular projects law-making parliament or assembly—may engage in the PPP pro- where there is concern over whether processes have been appropri- cess in several ways. These include: ately followed, or whether the project is providing value for money. ŠŠDefining the PPP framework—the PPP Framework is often The following are examples of PPP project performance audits: established in specific PPP legislation. As described in Section 2.2 - PPP Legal Framework, one rationale for introducing a ŠŠIn the State of New South Wales, Australia, the Auditor-Gen- PPP law is to enable the legislative branch of government to set eral audited the Cross City Tunnel through Sydney (NSW rules for how PPPs will be developed and implemented, against 2006). The 2006 report included an analysis of the process which those responsible can be held accountable. in which the PPP contract was awarded, how the contracted was amended, and whether the costs of the project to citizens ŠŠDefining limits on PPP commitments—as described in Sec- were justified. The project was criticized for its high tolls, low- tion 2.4.2 - Controlling Aggregate Exposure to PPPs, the legisla- er-than-expected levels of traffic, and the lack of transparency ture may limit total PPP commitments, or the amount taken in the amendment of the initial contract. The Auditor-General on in a year, or otherwise govern the risk and inter-generational provided opinions on each of these issues based on the analysis. equity issues that PPPs can create. ŠŠThe franchises awarded for the tram and train system in the ŠŠApproving PPP projects—PPP projects may require parlia- city of Melbourne ran into financial difficulties, as described in mentary approval, as described in Section 2.3.3 - Institutional Box 1.11 - Example of a Thinly-Capitalized PPP. Because of the Responsibilities: Review and Approval. This requirement can concerns this raised for the resulting value for money, the gov- be limited to PPP projects above a certain size. For example, ernment committed to carrying out an ex-post value for money the Hungarian PPP Act (1992) stated the government must audit of the concessions and renegotiations. The report, pub- seek Parliament’s approval before signing a contract creating lished in 2005, focused on the effectiveness of the responsible multi-year payment obligations with a present value of more agency, transparency of the process, proper risk allocation of the than $230 million. In Guatemala, on the other hand, all PPP project, the development of public sector benchmarks, and ade- contracts require approval from Congress. In the United States quate monitoring systems. as of 2010, nine states require some individual projects to be approved by the state legislature. Auditing the PPP program ŠŠReceiving and reviewing reports on the PPP program—as described in Section 2.4 - Public Financial Management Frame- In some countries with well-developed PPP programs, audit enti- works for PPPs, many governments include information on the ties have undertaken value for money reviews of the PPP program PPP program in budget documents and other financial reports. as a whole. For example, in the UK, audit entities have compared This gives Parliament the opportunity to scrutinize the govern- PPPs and traditionally-procured public projects to assess whether ment’s commitments to PPPs, and hold the decision-makers and how PPPs provide value for money, and feed back into PPP responsible after the event. Parliaments may also commission decision-making. and receive auditors’ reports on the PPP program and processes, In 2011, the National Audit Office published a review of the PFI as described further in Section 2.5.3 - Role of Supreme Auditing program and other large procurement projects and provided key Institutions. lessons from the UK’s experience (NAO 2011). The NAO assessed An example of a legislative review of PPP programs is described various aspects of the program, including value for money, project below: preparation and implementation, and accountability. Based on this analysis, the NAO offered recommendations for future improve- ŠŠThe Public Accounts and Estimate Committee in the Parlia- ments to the PFI program. The findings were discussed in Section ment of Victoria, Australia reviewed Partnerships Victoria, the 1.3.4 - Third Party Risk Mitigation and Credit Enhancement. PPP program, in the context of governance, risk allocation, ac- 104 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK countability, protecting the public interest, economic benefits 2.3.2 - Institutional Responsibilities: Implementation provides and value for money, and international accounting standards more examples of the roles of sector regulators in developing, for PPPs. Recommendations were then made to improve PPP implementing, and managing PPPs. policies and strengthen governance of the projects (VIC 2006). The Body of Knowledge on Infrastructure Regulation (PURC 2012) is an online resource that provides detailed guidance and 2.5.5 Role of Independent Regulators further reading on a wide range of regulation topics. The following references also discuss regulation, including how it relates to PPPs: PPPs and sector regulation ŠŠYong discusses regulatory frameworks for PPPs—box 4.4 in sec- PPPs often supply essential services in monopoly (or near-monop- tion 4.1.3 provides an overview of the different approaches to oly) conditions, for example, in the water, electricity, gas, telecom- regulation of infrastructure (Yong 2010). munications, airports or highways sectors. Private providers of such ŠŠThe note on regulation of water and sanitation (Groom et al. public services are typically overseen by government to control tar- 2006) cover a wide range of topics in water sector regulation, iffs and service standards—often by assigning responsibilities to an including guidance on assigning regulatory functions, and the independent regulatory agency—to protect customers from possi- options of regulation by contract or by an independent agency. ble abuse of market power. Sector regulation may also govern the terms under which providers in a sector deal with each other; entry ŠŠEberhard’s paper on hybrid and transitional models of reg- to the sector through licensing; and control over sector investment ulation in developing countries (Eberhard 2007) provides an decisions. Governments looking at options to improve perfor- overview of different regulatory models and the advantages and mance of existing public assets and services in natural monopoly potential pitfalls of each model. The paper also provides recom- sectors may consider a PPP as an alternative sector reform option mendations on how to improve the performance of regulatory to privatizing and establishing a regulatory regime. While there are models. similarities in the processes of establishing a PPP and privatizing, Regulation is not limited to sectors involving the provision of es- and some of the guidance in this book may be applicable in both sential services in monopoly or near-monopoly conditions. Regu- cases, the nature of the resulting relationship is distinct: latory frameworks can also be used to overcome other market fail- ŠŠRegulation by contract through a PPP. The PPP contract itself ures, such as ensuring responsible management of limited natural can define tariffs, tariff adjustments, and service standards to resources. In some cases, the processes and structures can resemble protect customers’ interests as an alternative to establishing a a PPP—for example, a concession for mining or petroleum explo- regulatory regime. Some of the implications for PPP contract ration or exploitation, or for management of a tourism site. There design are described further in Section 3.3 - Structuring PPP can also be some muddy ground between these types of regula- Projects. tion, where some aspect of provision of essential services through a competitive market requires access to limited resources—such as ŠŠPPP alongside sector regulation. Some countries establish sector allocation of radio spectrums for mobile telecommunications, or regulatory regimes when introducing a PPP for service provision access to hydropower or other resources for electricity generation in a sector; including, in some cases, acting as government party in the context of a competitive market. to the contract. In other cases, sector regulation may already be in place. In either case, the PPP agreement and sector law and While there are some similarities between such concessions or li- regulations need to be carefully harmonized to ensure there is censing procedures and PPPs, for the most part the contractual no conflict between the PPP contract and regulatory require- structures involved in such cases are distinct. The material in this ments, and to establish clear roles and responsibilities. Section Reference Guide is of limited relevance in such cases. Section 2.5 Broader PPP Program Governance 105 Key References: Broader PPP Program Governance Reference Description IFC. 2007. Stakeholder Engagement: A Good Practice Handbook for Companies Provides an eight-component description of conducting and implementing Doing Business in Emerging Markets. Washington, DC: International Finance stakeholder engagement throughout the project cycle. Corporation. Morrissey, Billy. 2015. “The Importance of Stakeholder and Community Discusses the benefits that stakeholder engagement will bring to the planning Engagement in Engineering Projects.” Engineers Journal (blog). April 21. and implementation of infrastructure projects. Website. Calabrese, Daniele. 2008. “Strategic Communication for Privatization, Public- Explains the design and implementation of a strategic communications Private Partnerships, and Private Participation in Infrastructure Projects.” program for consultation with stakeholders. World Bank Working Paper No. 139. Washington, DC: World Bank. EC. 2015. Better Regulation: Guidelines on Stakeholder Consultation. Strasbourg: Provides a thorough description of how to conduct a stakeholder consultation. European Commission. WB. 2013c. Disclosure of Project and Contract Information in Public-Private Reviews disclosure practices for PPP projects and contracts from 11 Partnerships. Washington, DC: World Bank. jurisdictions at the national and sub-national level, representing eight countries, and presents recommendations on proactive disclosure. UK. 2015b. Consideration of Consultation Responses. Report addressing Outlines the 70,000 responses received regarding the consultation for the the expansion options for Heathrow and Gatwick airports. London: UK Heathrow airport expansion. Government, Airports Commission. IEG. 2015. Lao People’s Democratic Republic: Poverty Reduction Fund. Project Describes the implementation and ultimate performance of the Poverty Performance Assessment Report. Washington, DC: World Bank Group, Reduction Fund project in Lao PDR. Independent Evaluation Group. Yong, H.K., ed. 2010. Public-Private Partnerships Policy and Practice: A Reference This report provides a comprehensive review of PPP policies worldwide, Guide. London: Commonwealth Secretariat. including guidance to practitioners about key aspects of designing and implementing PPP policy and projects. Chapter 4.1 outlines key issues for a PPP legal framework, and principles for PPP legislation. Groom, Eric, Jonathan Halpern, and David Ehrhardt. 2006. “Explanatory A series of notes covering topics related to governance of infrastructure with Notes on Key Topics in the Regulation of Water and Sanitation focus on water and sanitation. Topics include a conceptual framework for Services.” Water Supply and Sanitation Sector Board Discussion Paper 6. regulation, design of regulation, institutional arrangements, regulation by Washington, DC: World Bank. contract, regulating government-owned utilities, and regulation of wastewater in developing countries. Eberhard, Anton. 2007. “Infrastructure Regulation in Developing Countries: Provides an overview of different regulatory models and the advantages and An Exploration of Hybrid and Transitional Models.” Working Paper No. 4. potential pitfalls of each model. The paper also provides recommendations on Washington, DC: Public-Private Infrastructure Advisory Facility. how to improve the performance of regulatory models. Bakovic, Tonci, Bernard Tenenbaum, and Fiona Woolf. 2003. “Regulation Describes the key features of “regulation by contract”; how different countries by Contract: A New Way to Privatize Electricity Distribution?”  World Bank have handled key regulatory issues through this mechanism; describes the Working Paper No.14. Washington, DC: World Bank. strengths and weaknesses of different approaches, drawing on international experience. Akitoby, Bernardin, Richard Hemming, and Gerd Schwartz. 2007. “Public A collection of papers on managing the fiscal impact of PPPs, drawing from investment and public-private partnerships.” Economic Issues 40, Washington, an IMF conference held in Budapest in 2007. Part Four: PPP Accounting, DC: International Monetary Fund. Reporting, and Auditing examines the role of different institutions to ensure accountability. 106 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Reference Description CAG. 2009. Public Private Partnerships (PPP) in Infrastructure Projects: Public These draft guidelines outline the regulatory framework in which the Auditing Guidelines. New Delhi: Comptroller and Auditor General of India. Comptroller and Auditor General of India audit PPP projects. Provides a justification for audits under the PPP law and  an overview of the methodology and evaluation criteria for the audit. INTOSAI.  2007. ISSAI 5220 - Guidelines on Best Practice for the Audit of Provides guidelines on best practices for evaluating PPP projects throughout Public/Private Finance and Concessions. Vienna: International Organization of the entire life cycle. Supreme Audit Institutions. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African A comprehensive PPP manual outlining the PPP procurement process for Government, National Treasury. South Africa. Provides technical guidance for value for money and affordability analysis. Module 7 provides guidelines for auditing PPP projects. NAO. 2010b. From Private Finance Units to Commercial Champions: Managing A best practice model for departments engaged in PPP/PFI programs by the Complex Capital Investment Programmes Utilizing Private Finance - A Current National Audit Office in partnership with Infrastructure UK. Best Practice Model for Departments. London: National Audit Office and HM Treasury. NAO. 2011. Lessons from PFI and other projects. Report by the Comptroller and An extensive review of the PFI program and other large infrastructure projects Auditor General, HC 920. London: National Audit Office. by the National Audit Office to evaluate value-for-money of the program and the performance of government units. The content of this report is discussed in HC 1201 (UK 2011c). NAO. 2010a. The Performance and Management of Hospital PFI Contracts. National Audit Office’s report on the performance and management of hospital Report by the Comptroller and Auditor General, HC 68. London: National PFI contracts. Audit Office. NAO. 2006. A Framework for Evaluating the Implementation of Private Finance This report provides a more specialized project performance matrix for PFI Initiative Projects: Volume 1. London: National Audit Office. projects. 2.6 Municipal and other outcomes. However, there are examples of municipalities that succeeded in building such capacity. There are other cases where subnational PPPs central government worked with subnational governments to Subnational governments including states, provinces, and munic- build capacity and provide knowledge and technical support. ipalities provide many essential and basic infrastructure services, ŠŠMost municipal governments do not benefit from the same especially in water and sanitation and urban transport. Some sub- credit ratings as central governments. They need to build their national governments, for instance, Australian and Brazilian states credit ratings gradually over time. However, in the short term, and Canadian provinces, have put solid PPP programs together— most will need central government support in the form of pay- their fiscal self-sufficiency, credit ratings, and execution capabilities ment guarantees or public finance—but moral hazard concerns are not far from those of central governments. The same cannot be are leading central governments to move away from guarantee- said about municipalities. Municipal governments are closer to the ing subnational governments fiscal decisions, as described by populations they serve, and therefore better able to identify projects Canuto and Liu in the World Bank book on subnational debt that satisfy local needs. However, they face additional challenges (Canuto and Liu 2013). Moral hazard arises from subnational and raise particular issues: borrowers having an incentive not to repay their creditors, or ŠŠMunicipal governments often have limited project development to engage in too risky or poorly-structured projects, if they per- and procurement capacity. This lack of capacity may be exac- ceive that defaulting debtors could be bailed out by the central erbated by frequent changes of personnel triggered by electoral government. Charbil and Gamper’s article on coordination Section 2.6 Municipal and other subnational PPPs 107 of infrastructure investment (Frank and Martinez-Vazquez projects are only bid upon by local contractors, as identified by 2015) notes that in a sample of OECD countries hardly any the Charbonneau Commission in Québec (Charbonneau and subnational infrastructure investment is carried out in isolation Lachance 2015), creates additional challenges in setting up an of central government—partial funding often flows from na- effective competitive framework. It also makes it more difficult tional or supra-national authorities as in many developing coun- to maintain integrity in PPP procurement at the local level. tries. In other developing countries, state governments can fund ŠŠMany cities and subnational governments have fragmented and infrastructure on their own, but municipalities often need state overlapping jurisdictions. For example, some public services government support. may be managed by the regional government whereas others are ŠŠMunicipal governments often do not have an efficient legal administered by the municipality. This can generate problems framework for procuring PPPs, reducing investors’ appetite for of coordination in policy formulation and implementation. their projects. In addition, PPPs are sometimes selected without an efficient fiscal responsibility framework in place. Clear fiscal rules allow ŠŠDecentralization, when not accompanied by increased sub- decentralization of decision-making without jeopardizing local national accountability and transparency, may sometimes and national fiscal sustainability. Lack of clarity on these rules bolster corrupt practices, as noted by Shah (Frank and Mar- either discourages subnational governments from using PPPs or tinez-Vazquez 2015). However, by bringing the decision-mak- encourages free-riding with no regard to fiscal sustainability. ing process closer to the people directly affected by the project, decentralization may instead combat corruption. Often the nat- This section addresses these five issues one-by-one with references ural geographical segmentation of construction in which local and examples. Box 2.13 Municipal Water PPPs in Benin In 1999, Benin went through a reorganization of its public an output/result-based subsidy payable to private operators upon administration leading to the introduction of decentralized, verification of delivery. The subsidy ensures the profitability of the financially autonomous municipalities or communes. The country’s operations and creates an incentive for delivery. The output-based 77 municipalities own the water supply facilities and pipe networks subsidy also permitted private operators to raise financing from and are responsible for the provision of water and sanitation local commercial banks. services to their populations. From 2007 to 2014, the number of piped water systems managed To support the Government’s decentralization program and by private operators in Beninese municipalities increased from one strengthen the quality of water services in small towns and to 269, providing water services to 28 percent of the population. rural areas, IFC, in close cooperation with the Water Sanitation As of February 2015, approximately 77 private operations were Program (WSP), a multi-donor partnership administered by the functioning all over Benin. Initially, the municipalities demonstrated World Bank, provided advisory services and technical assistance. a dearth of technical capabilities to prepare and financially close The contribution of the WBG included advice on the structuring such PPP transactions. However, their effectiveness improved and implementation of a PPP pilot scheme for the delivery of gradually through a combination of institutional reforms and improved and expanded water services to the households of three provision of technical assistance by the World Bank. The piped municipalities, through the participation of small domestic private water systems performance has improved significantly, leading operators. to approximately 32 kilometers of additional network pipes and 1,071 new household water connection pipes installed. Given the The project required the private operators to design, engineer, success of the pilot projects, the Government of Benin decided to rehabilitate, operate, and maintain systems, without increasing the scale up this approach countrywide through a World Bank lending price of water. This included rehabilitating equipment, extending project involving more than 180 piped water systems. the network, installing private water connections, and partially financing these activities. The concessions were structured with Source: (Adokpo Migan and Tremolet 2015) 108 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK Despite the challenges, PPPs are now fairly common at the state vestment—institutional capacities, whether in financial manage- level in advanced and developing economies in countries such as ment, human resources or procurement, can benefit from shared Brazil, Mexico, and Australia; and at the provincial and municipal approaches which go beyond individual levels of government, level in South Africa and Canada. Large municipalities in Brazil particularly in the design of procurement systems, monitoring ar- and China have increasingly been using PPPs. Small municipal- rangements, and ex-post reviews. Training provided by commer- ities have also experimented with PPPs for the procurement of cial and academic entities may be complemented by the APMG their infrastructure projects; in India, PPPs have been used by lo- Certification Program sponsored by MDBs (APMG 2016). Box cal executive bodies like the Gram Panchayats for the provision 2.7 - PPP Training describes several Massive Open Online Courses of urban amenities in rural areas. The World Economic Forum (MOOCs) developed by the World Bank and the Inter-American report on Accelerating Infrastructure Delivery (Maier and Jor- Development Bank, which may also be helpful. dan-Tank 2014) refers to a portfolio of €6.1 billion with more Knowledge interchange inside a national or multi-national practi- than 300 municipal projects financed by EBRD between 1994 and tioners’ network has been used, not only by national governments, 2014—of this amount, 20 percent was debt or equity in private- but also by subnational governments. Rede PPP (Rede PPP 2017), ly-financed infrastructure. a network created to promote PPP collaboration in Brazil, has fos- tered cooperation between states and municipalities. EPEC, the Capacity challenges at subnational level European PPP Expertise Centre (EPEC)—based in Luxembourg While decentralization is theoretically a sound principle of good and funded by the European Investment Bank and EBRD’s In- governance, it cannot function efficiently unless central and sub- frastructure Project Preparation Facility (IPPF)—has many sub- national governments develop new institutional arrangements and national governments among its members and beneficiaries, and regulations, and build capacity. Subnational governments usually several of them participated in secondment programs at EPEC, al- face capacity constraints of scale and governance. Traditionally, lowing staff members to spend time at EPEC, working with other subnational governments, particularly municipalities, have been European governments. In line with the National PPP Capacity less involved in infrastructure policy and procurement than central Building program for civil servants organized by the Government governments. Exceptions are seen in federal countries where state/ of India, PPP cells have been created within various state govern- provincial governments have been responsible for infrastructure, ments—those PPP cells offer assistance to line departments in the such as Brazil, Canada, and Australia—examples are the Minas development of projects through PPP arrangements. Gerais PPP Unit, Sao Paulo’s Companhia Paulista de Parcerias, For complex projects, capacity constraints may induce subnational British Columbia’s Partnerships BC, and Partnerships Victoria. governments to hire private companies to manage complex project These state/provincial units developed significant PPP knowledge preparation and implementation—they can provide expert advice and experience, even before the national PPP teams of their respec- in the elaboration of PPP contracts, joint ventures, management tive countries were established. contracts, or operations and maintenance (O&M) contracts. How- However, decentralization, in terms of devolution of responsibili- ever, procuring private investment will still require capacity build- ties, seems to be spreading globally. Some countries, such as Ken- ing within the subnational government for managing external con- ya, Turkey, and Kazakhstan are shifting their legal regime toward sultants and advisors during project preparation and tendering, and decentralization; even without legislative changes, the responsibil- for contract management. ity for infrastructure procurement is increasingly transferred from central to subnational governments. Thus, a growing number of Subnational creditworthiness and access subnational governments are actively procuring PPPs. This trend to finance increases the need for capacity building in procurement and project The financial challenges of subnational governments are discussed management. in an Inter-American Development Bank concept note on fi- Frank and Martinez-Vazquez, in their book on decentralization nancing sustainable urban infrastructure (UN-Habitat/IDB and infrastructure (Frank and Martinez-Vazquez 2015), insist 2016). The note highlights the link between municipal PPP op- on the need to create intergovernmental capacities for public in- portunities and cities’ creditworthiness. Creditworthy local govern- Section 2.6 Municipal and other subnational PPPs 109 ments can generally attract private sector investment; those that tions and a separate manual for municipalities. This is also true in are not creditworthy will require central government guarantees for almost all EBRD countries. their financial commitments. Sound financial management is often Brazil introduced hard-budget constraint legislation—the Fiscal critical to the creditworthiness of subnational entities. Failure on Responsibility Law—in 2000. This law applies to all levels of gov- the side of central governments to honor commitments towards ernment, and is reinforced by the PPP Law, which puts a cap on the subnational entities jeopardizes chances of attracting quality inves- volume of PPPs that each level (federal, state, municipal) can pro- tors for subnational PPP projects. cure based on its expected revenue. Frank and Martinez-Vazquez’s Multilateral organizations provide technical assistance programs to book on decentralization and infrastructure (Frank and Marti- strengthen the capacity of local governments to design and plan nez-Vazquez 2015) highlights that national governments often pay infrastructure projects, including PPPs. For example, PPIAF’s sub- insufficient attention to developing appropriate local authority national technical assistance (SNTA) program (PPIAF-Work) procurement systems and capacity. Standard legal provisions and helps subnational entities improve their investment planning and guidelines often reproduce the central procurement standards at project preparation skills, strengthen their financial management the local level. For example, thresholds for project approval at the practices and processes, ensure fiscal responsibility, and ultimately national level will apply at the local level. improve their creditworthiness. Transparency and governance Creditworthiness depends on a credible, capital investment pro- gram. Investment programs provide a framework for PPPs to be Maintaining transparency and good governance may be challeng- identified, prioritized, and eventually approved and budgeted. A ing in subnational PPPs, particularly when the stricter oversight World Bank toolkit on city creditworthiness (WB 2017a) can of central governments is removed. As the responsibility of sub- be used to assess cities’ preparedness for commercial-based transac- national governments for resource allocation and service provision tions, allowing users to: (1) get a quick sense of their city’s overall increases, so does the importance of commitment, coordination, financial performance without burdening them with complicated transparency, and accountability. This is highlighted by the Inter- studies; (2) verify their city’s commitment to various financing national Budget Partnership (Lawson and Alvarez 2013)—its schemes; (3) get a quick sense of its portfolio and pipeline of proj- pilot studies report a wide range of fiscal transparency levels, with ects, including financing needs; (4) agree on action-plans that can many subnational governments exhibiting significant weaknesses. help identify and prepare projects. A World Bank book on subna- Where subnational governments are subject to strict balanced-bud- tional finances (Canuto and Liu 2013) discusses fiscal incentives get rules, borrowing constraints, or restrictions on their power to and insolvency risk in municipal and state governments, analyzing increase spending or taxes, lack of fiscal transparency rules may cases and experiences in many subnational governments. invite decision-makers to opt for PPPs as a way to bypass fiscal rules. A report by the Canadian Council for PPPs (CCPPP 2011) Legislative and regulatory framework provides guidelines for municipalities in this regard, including a critical path and a discussion on the specific challenges that may The absence of a clear and efficient legislative and regulatory arise when implementing PPPs, depending on whether the munic- framework, including a procurement code and fiscal management ipality is large or small. guidelines, may restrict the ability of subnational governments to implement PPPs and create uncertainty for private investors. Sev- National central support to eral countries have taken some initiatives to share information on subnational governments good practices across subnational entities. Other countries have en- dowed each state with their own PPP legislation—such as Brazil, The IADB report on Financing the New Urban Agenda India, Australia, and Mexico. In other instances, procurement at (UN-Habitat/IDB 2016) describes the experience of a Guatema- the municipal level is governed by national legislation. And in some lan municipality requiring central government support to upgrade countries, the central government provides uniform regulations for its waste management facilities. In some countries with established all government institutions—hence, in South Africa, the govern- PPP frameworks (e.g. South Africa and France), a major part of ment provides one PPP manual for national and provincial institu- the activity of the central PPP Unit relates to supporting PPPs pro- 110 PPP REFERENCE GUIDE : MODULE 2 – ESTABLISHING THE PPP FRAMEWORK cured by subnational governments. In others (e.g. Brazil and Aus- and municipalities assess PPPs; Peru’s Proinversion is mandate tralia), several state governments already have more PPP experience to assist structure projects at the subnational level; and Canada’s than the central government. Often, the central PPP Unit acts as a central government provides funding support to provincial and knowledge center, leading the PPP processes at the central govern- municipal PPP projects. Central public sector institutions provide ment level and helping subnational governments. South Africa’s other forms of support: The Indonesia Infrastructure Guarantee National Treasury provides guidance and training for municipal- Fund (IIGF) supports subnational PPPs and Brazil’s BNDES and ities; Croatia and Tanzania conducted municipal-level PPP train- Mexico’s Fonadin help subnational government structure and fi- ing; Colombia’s Planning Department (DNP) helps provinces nance projects. Key References: Municipal and other subnational PPPs Reference Description FCM. 2008. Innovative Mechanisms for Fiscal Transfers to Municipalities: Highlights some of the innovative mechanisms used to transfer funds from The Canadian Experience in Municipal Financing. Federation of Canadian the Canadian federal and provincial/territorial governments to Canadian Municipalities, Ottawa, Canada. municipalities. UN-Habitat/IDB. 2016. Financing the New Urban Agenda: The Challenges of Concept note was prepared with UN Habitat on the challenges of financing Financing Sustainable Urban Infrastructure Concept Note. Draft for Discussion infrastructure projects in Latin America and the Caribbean. Purposes. Washington, DC: United Nations Human Settlements Programme and Inter-American Development Bank. PPPIRC. 2016. “India: State Sub-National PPP Policies.” Public-Private Presents subnational PPP policies for select Indian states. Partnership in Infrastructure Resource Center. Website. PIAPPEM. Accessed March 6, 2017. “Leyes y Reglamentos.” Programa para el Highlights some of the subnational PPP policies for Mexico. Impulso de Asociaciones Público-Privadas en Estados Mexicanos. Website. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African Provides PPP policies for South Africa at the national and subnational levels. Government, National Treasury. Rede PPP. Accessed March 6, 2017. “Rede Intergovernamental PPP.” Provides an overview of Rede PPP, the Brazilian network of PPP practitioners. Brazil: Rede Parceria Público-Privada. Website. CCPPP. 2011. Public-Private Partnerships: A Guide for Municipalities. Presents some of the issues important or unique to municipal governments. Toronto: Canadian Council for Public-Private Partnerships PPIAF-Work. Accessed March 9, 2017. “Our Work.” Public-Private Highlights the objectives of the SNTA program, as well as the type of activities Infrastructure Advisory Facility. Website. supported by PPIAF. WB. 2017a. “City Creditworthiness Self-Assessment & Planning Toolkit.” This toolkit helps municipal-level units/ cities identify where they stand vis-à- World Bank. Website. vis investment grade, and undertake a self-assessment to help develop an action plan. Canuto, Otaviano, and Lili Liu, eds. 2013. Until debt do us part: Subnational Addresses guidance on fiscal solidarity. debt, insolvency, and markets. Washington, DC: World Bank. Section 2.6 Municipal and other subnational PPPs 111 Key References: PPP Framework Reference Description UNECE. 2008. Guidebook on Promoting Good Governance in Public-Private This guide for policymakers provides detailed instructions on how to improve Partnerships. Geneva: United Nations Economic Commission for Europe. governance for PPP programs. The guide also gives insight into what the key challenges are and possible frameworks for solutions. Irwin, Timothy C., and Tanya Mokdad. 2010. Managing Contingent Liabilities Describes the approach in the State of Victoria, Australia, Chile, and South in Public-Private Partnerships: Practice in Australia, Chile, and South Africa. Africa, to approvals analysis, and reporting of contingent liabilities (and other Washington, DC: World Bank. fiscal obligations) under PPP projects, and draws lessons for other countries. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and This guide for public sector practitioners describes how to develop and Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private implement a PPP successfully by developing a marketable project and attracting Partnerships in Emerging Markets. Washington, DC: World Bank. the right private partners. Section 3 focuses on setting the PPP framework. Yong, H.K., ed. 2010. Public-Private Partnerships Policy and Practice: A Reference This report provides a comprehensive review of PPP policies worldwide, Guide. London: Commonwealth Secretariat. including guidance to practitioners about key aspects of designing and implementing PPP policy and projects. Chapter 4 provides guidelines for public sector appraisal of PPP projects. EIU. 2014b. Evaluating the Environment for Public-Private Partnerships in This publication, Infrascope, sets out an index for assessing countries’ Latin America and the Caribbean: The 2014 Infrascope. London: Economist readiness to carry out sustainable PPPs, and uses the index to evaluate the PPP Intelligence Unit. environment in 19 countries in the region. See also the versions for Asia-Pacific, for Africa, and for Eastern Europe and CIS, based on similar methodologies. Did you know....? The first lines of the Paris Metro were PPPs In 1898, Paris’ city government appointed a Belgian entrepreneur, Édouard Empain, as concessionaire for the metropolitan railway concession. He established the Compagnie du Métropolitain Parisien (CMP), which built a power station and the rail superstructure within the tunnels (the tunnels had been built by the city), purchased electrical trains, and operated them from 1900 to 1947. In addition to defining performance requirements and level of user fees, the PPP contract provided social protection for CMP workers— including a pension plan, annual leave, paid sick days, and free medical care. In 1904, a second concession was established with Berlier, a company that constructed and operated a North-South metro line for 30 years. Source: Xavier Bezançon, 2000 Ans d’Histoire du Partenariat Public-Privé (Paris: Presses de l’École Nationale des Ponts et Chaussées, 2004 Module 3 PPP Cycle This module provides guidance on each stage of developing and of preparation is broken into successively more intensive and ex- implementing a PPP project—from identifying PPP candidates to pensive phases. Before each new phase, the project must be checked managing contracts through the project life cycle. Section 2.3.1 - to provide assurance that it is likely to meet the criteria for success- PPP Process introduced the overall PPP development and imple- ful PPPs as it develops. mentation process, also shown in Figure 3.1 - PPP Development This module describes the iterative process for developing a PPP, and Implementation Process. This module describes each stage of the as follows: PPP process in more detail, providing links to resources, tools, and further guidance for PPP practitioners. ŠŠProject identification and screening—the process of develop- Governments should only develop PPP projects that are cost-bene- ing and implementing a PPP is typically preceded by identi- fit justified, provide better value for money than traditional public fying a priority public investment project, typically through procurement, and are fiscally responsible. However, it is difficult a public investment planning and project selection process. to assess whether a project meets all these criteria until the project During this process, some or all proposed public investment is fully designed, and the decision cannot be confirmed until bids projects are screened for their potential as a PPP. are received. This creates a dilemma—government does not want ŠŠCandidate projects that survive this screening process are then to incur the considerable costs of developing a PPP unless it knows developed and appraised. Again, this is a multi-stage process— the project meets the criteria, but cannot tell if it meets the criteria hence appraisal and structuring are shown in parallel in Figure until the project has been developed. 3.1 - PPP Development and Implementation Process. Because ap- Successful PPP programs tackle this problem through an approach praisal and structuring are conceptually different, the Reference where projects are screened more rigorously at successive stage of Guide discusses appraisal first (Section 3.2 - Appraising Potential development. A project must be a good candidate for development PPP Projects) and then structuring (Section 3.3 - Structuring PPP as a PPP before any public money is spent on it. Then, the process Projects). Projects will typically be partially structured, then par- 114 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Figure 3.1 PPP Development and Implementation Process Identify priority project SELECT EXIT PROCESS PROJECT INITIAL CONCEPT Screen as PPP Screen priority projects for PPP potential PREPARE OTHER AS PPP OPTIONS Identify and allocate risks and responsibilities KEY COMMERCIAL TERMS Structure PPP Appraise PPP Appraise project feasibility, commercial viability, value-for-money, fiscal responsibiity PROCEED OTHER AS PPP OPTIONS Define performance requirements Define payment mechanisms DRAFT PPP CONTRACT Draft PPP contract Create adjustment mechanisms Establish dispute resolution mechanisms Provide for termination Decide the procurement strategy Market PPP Manage PPP transaction Qualify bidders Manage bid process Reach financial closure SIGN CONTRACT EXIT PROCESS PPP CONTRACT Set up contract management structures Manage PPP contract Monitor and manage PPP delivery and risk Deal with change Section 3.1 Identifying PPP Projects 115 tially appraised, then more fully structured, and more fully ap- ences table on PPP on ‘Other Guidance Material and Toolkits’ list praised. Different countries break up these steps differently. The some of the best PPP guidance documents. Relevant sections are result, or the business case for the project, is typically the basis for included as further resources for each PPP stage described in this approval to proceed with the PPP transaction. Reference Guide. ŠŠBefore the PPP transaction can be implemented, the draft PPP contract needs to be prepared—further refining the PPP struc- ture by setting out its details in appropriate legal language. Sec- 3.1 Identifying PPP Projects tion 3.4 - Designing PPP Contracts sets out some key elements of The first step towards a successful PPP is identifying a potential PPP contract design. PPP project. Since a PPP is a public investment, most successful PPP projects originate from the broader public investment plan- ŠŠManaging a PPP transaction is a complex process. A well-de- ning process as described in Section 2.3.1 - PPP Process. During signed and well-implemented transaction process is central to this process, priority public investment projects can be screened for achieving value for money from the PPP. As described in Section their potential to achieve better value for money if implemented as 3.5 - Managing PPP Transactions, this includes marketing the PPPs. Several governments have established tools and checklists to PPP, checking the qualifications of bidders, inviting and evalu- support this screening. The online toolkit for PPPs in India (IN) ating proposals, interacting with bidders during the process, and provides a good overview of the PPP project screening process. identifying and finalizing the contract with the selected bidder. At the end of the transaction, after bids are received and the As shown in Figure 3.2 - Identifying PPP Projects, the output of the contract agreed, government will finally know the cost and risks project identification stage is typically an initial concept and the in the PPP project. At this point it may be checked once more strategic or outline business case for pursuing the project as a PPP. to ensure it still meets the PPP criteria. In many countries, the concept must be formally approved before developing the PPP further. ŠŠHaving executed the contract, the PPP enters the final and lon- gest stage—managing the contract throughout its lifetime, as described in Section 3.6 - Managing PPP Contracts. 3.1.1 Identifying Priority Public ŠŠAs an alternative approach to originating and developing PPP Investment Projects project ideas, some governments accept unsolicited proposals for PPP projects from private companies, as described in Section The starting point—or precursor—to identifying a potential PPP 3.7 - Dealing with Unsolicited Proposals. is identifying a priority public investment project. Many govern- ments have well-defined processes and methodologies for public This guidance module is not an exhaustive resource—developing a investment planning. These may extend from setting out sector or PPP is a complex process and every project has its own peculiarities. infrastructure strategies, assessing project options to meet objec- Public officials should hire experienced advisors when implement- tives, conducting detailed feasibility and cost-benefit analyses, and ing a PPP project. The World Bank toolkit for hiring advisors prioritizing projects within an overall public investment plan or for PPP in infrastructure (PPIAF 2001) provides extensive guid- fiscal envelope. ance on engaging and managing advisors. Sound public investment planning and management are crucial components of the success of PPP projects. Like all public invest- Overall guidance on implementing ment projects, a PPP needs to address clearly-identified socio-eco- PPP Projects nomic objectives that are central to sector needs—particularly since As described in Module 2 - Establishing the PPP Framework, some the long-term nature of PPP contracts effectively locks in asset and governments and multilateral institutions, including the World service specifications over a long-term period. Procurement skills Bank, have developed detailed guidance materials, manuals, and are essential to deliver a well-structured PPP that meets public in- toolkits to help PPP practitioners develop and implement PPP vestment management standards. The World Bank webpages on projects. These include sector-specific materials. The Key Refer- Public Investment Management (PIM) (WB-PIM) provides a 116 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Figure 3.2 Identifying PPP projects Identify priority project SELECT EXIT PROCESS PROJECT INITIAL CONCEPT Screen as PPP Screen priority projects for PPP potential PREPARE OTHER AS PPP OPTIONS Identify and allocate risks and responsibilities KEY COMMERCIAL TERMS Structure PPP Appraise PPP Appraise project feasibility, commercial viability, value-for-money, fiscal responsibiity wealth of resources and examples on this topic. Rajaram et al’s among a range of options for introducing private participation book on PIM (Rajaram et al. 2014) presents a step-by-step ap- to improve service delivery in that sector, as described in Sec- proach and specifically addresses PPPs. tion 1.1.2 - What PPP is Not: Other Types of Private Involvement. The ADB’s PPP Handbook chapter on sector diagnostic anal- An IMF report on infrastructure efficiency (IMF 2015a) con- ysis (ADB 2008, Chapter 3) describes how potential PPPs may cluded that countries with stronger PIM institutions have more emerge in this context. predictable, credible, efficient, and productive investments. This IMF research, by focusing on the quality of investment results (out- ŠŠUnsolicited proposals from businesses. Most governments put)—instead of its volume (input)—suggests that better public provide a legal framework to encourage businesses and other investment decisions lead to higher economic growth, implying non-government entities to originate PPP project ideas that that strengthening PIM institutions could be as effective, in terms may be considered by government—as described in Section 3.7 of output, as increasing investment by two-thirds of the estimated - Dealing with Unsolicited Proposals. This approach can be a way additional needs. to harness on the ideas of the private sector on how to solve infrastructure challenges. In some cases, PPP project ideas may also emerge from other sourc- es than the standard public investment planning process. These However, wherever a PPP is developed outside the typical pub- could include: lic investment planning process, this raises the risk that such ideas may not be well-integrated with broader sector and infrastructure ŠŠSector reform processes. Governments undertaking reform of plans and priorities. Such project ideas must be subject to the same an under-performing infrastructure sector may consider PPPs analysis and screening as any proposed public investment and PPP. Section 3.1 Identifying PPP Projects 117 3.1.2 Screening for PPP Potential detailed appraisal, as described in Section 3.2.4 - Assessing Value for Money of the PPP—at the screening stage, the idea is to check if the At some point in the process of identifying priority public invest- criteria are likely to be met for the project to proceed to the next ments, or sector reform options, projects may be screened for level of development. their potential to be implemented as a PPP. The objective of this screening is to identify—based on the available information— The following resources provide further suggestions and guidance whether the project may provide better value if implemented as a on the factors to consider when screening potential PPP projects: PPP. ŠŠIndia’s online PPP toolkit (IN) includes a suitability filter that In practice, different governments do this PPP screening at dif- guides the user to consider the same issues described in Box 3.2 ferent stages, as described in Box 3.1 - PPP Selection in the Public - PPP Potential Screening Factors in South Africa, as well as the Investment Planning Process. Some may screen all projects, as part support of the public sector for the project (including an assess- of a comprehensive procurement options analysis, as described in ment of the public sector capacities to implement the project as (Burger and Hawkesworth 2011, 47–50). Others may consider a PPP). It also considers potential barriers to project implemen- PPP only for certain project types—as may be established in the tation (based on information from the pre-feasibility study) and PPP Policy (see Section 2.1.2 - PPP Program Scope). In many coun- other factors, such as the expected effort and resources needed tries, the initial impetus to develop a project as a PPP is left to the to develop the PPP. For example, the availability of standard discretion of the implementing agency. contracts should be assessed. To support this screening process, many governments introduce ŠŠIn Colombia, the implementing agency must present an Exec- criteria or checklists for PPP potential against which projects can be utive Report to the PPP Unit, ANI, requesting authorization to compared. Box 3.2 - PPP Potential Screening Factors in South Africa implement the project as a PPP. The analysis in this report— provides an example of such a checklist from the South Africa PPP such as pre-feasibility analysis—is described in the PPP Manual Manual (ZA 2004a). Similar criteria may be also used for more (CO 2014, 34–38). Box 3.1 PPP Selection in the Public Investment Planning Process The PPP process can be seen as a branch of the broader public • After pre-feasibility or strategic options analysis. In the investment management process—that is, at some point a project Republic of Korea, a potential PPP is identified after a pre- is selected as a potential PPP, and thereafter follows a PPP-specific feasibility analysis and a detailed project appraisal (such as process. However, this branching can occur at different points in technical feasibility studies or a cost-benefit analysis). These the public investment process. For example, this could be: are part of the PPP appraisal process. A similar approach is • After budgeting as a public investment project, as is the case followed in South Africa, where PPP implementation is part of in Australia and the Netherlands, where procurement options an initial needs analysis and options assessment of a potential (including PPPs) are assessed only after a project has been public investment project. approved and budgeted for as a public investment project. If Well-defined PPP processes typically mirror public investment the project is subsequently implemented as a PPP, then budget management processes—for example, requiring approvals by the allocations are adjusted accordingly. same bodies, as described further in Section 2.3.3 - Institutional Responsibilities: Review and Approval. • After project appraisal and approval as a public investment. In Chile, all public investment projects undergo a cost-benefit Sources: Irwin & Moktad paper on managing Contingent Liabilities analysis by the National Planning Commission and must also (for Chile and Australia) (Irwin and Mokdad 2010); PPP projects from the Republic of Korea (Kim et al. 2011, 63); South Africa PPP meet a specified social return rate for public investments. PPP manual (ZA 2004a, Module 4, 1–13) projects are also taken from this list. 118 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Box 3.2 PPP Potential Screening Factors in South Africa The South Africa PPP Manual lists the following, as factors to for money compared to the alternative of traditional public consider when deciding whether a project could achieve value for procurement? That is: appropriate risk allocation should assign money as a PPP: risks to the party best able to control or bear them—and capitalize on the PPP value drivers set out in Box 1.2 - PPP • Scale of the project—are transaction costs likely to be justified? Value Drivers. Section 2.1 - PPP Policy describes how some governments set a minimum size for their PPP projects. • Market capability and appetite—is there a potentially viable commercial project and a level of market interest in the • Outputs capable of clear specification—is there reason project? Assessing market appetite may require initial market to believe we can write a contract that will hold provider sounding with potential investors. accountable? Source: South Africa PPP Manual (ZA 2004a, Module 4, 13) • Opportunities for risk transfer (and other PPP value drivers)—is there good reason to believe that a PPP will provide value ŠŠThe Government of Hong Kong’s Guide to PPPs (HK 2007, Farquharson et al describes the advantages of defining the invest- 31–32) describes a list of criteria that a PPP should meet at the ment framework for a PPP program—including the PPP pipeline initial screening stage (or stage one business case) to be considered and other planned infrastructure investments that complement it as a PPP candidate. (Farquharson et al. 2011, 21–22). ŠŠThe Caribbean PPP Toolkit (Caribbean 2017, Module 3) pro- vides guidance using Caribbean examples with global relevancy. 3.1.3 Building an Initial PPP Pipeline The UNESCAP Qualitative Value-for-Money Toolkit (UNES- In countries with relatively new PPP programs, project selection of- CAP 2017) contains a set of criteria that governments may use ten means sifting through the project concepts generated by sector for prioritization and helps identify project weaknesses. Ministries, agencies and screening them for PPP potential using the approach departments, or sector agencies often need support to overcome described in Section 3.1.2 - Screening for PPP Potential. In this initial unfamiliarity or reluctance to adopt PPPs. A central PPP context, governments may consider additional criteria in deciding unit can play this role, as described in Section 2.3.4 - Dedicated PPP which potential PPP projects to develop first. Often, at this stage, Units. Developing and implementing a PPP transaction is typically the priority is to build experience and momentum in the PPP pro- more expensive than the equivalent process for a traditional pub- gram by achieving project successes in a relatively short timeframe. lic investment project, which may deter agencies from identifying PPPs. Additional funding for PPP development can help level this Several factors may feed into this process. For example, the Philip- playing ground. For example, the India Infrastructure Project De- pines PPP Center notes that projects in its PPP program pipeline velopment Fund (IN 2013a) was established as a revolving fund, (on its PPP List) were selected based on the following criteria: and can fund up to 75 percent of PPP project development ex- penses. ŠŠProject readiness and stage of preparation—some projects were more developed than others before being proposed as The outcome of this screening process is a pipeline of PPP projects PPPs, reducing the remaining project development costs. set in the context of a national infrastructure program and sector strategic plans. Making this PPP pipeline public can be a good way ŠŠResponsiveness to the sector’s needs—the order of imple- to build private sector interest in investing in PPPs. The Chilean mentation of PPP projects needs to be aligned with overall sec- PPP unit, Coordinación de Concesiones de Obra Pública, shares tor priorities within the strategic plan—in other words, PPPs all relevant information on their project pipeline on their website. should be central to the development of the sector, not peripher- Section 3.1 Identifying PPP Projects 119 al projects whose benefits may turn out to be marginal, or which zation. The Caribbean PPP Toolkit (Caribbean 2017, Module may distract from strategic priorities. 3, Section 4) presents guidance on pipeline identification and its common challenges. ŠŠHigh implementability—prioritizing PPP projects with a high likelihood of success, that are considered most likely to attract In an interview with the Reason Foundation (Gilroy 2011), the private sector interest, and for which there is a precedent in the Director of the Puerto Rico PPP Authority also describes how the local or regional market. Authority initially prioritized PPP projects that were most ready to go to market, as well as ensuring that these corresponded with PPIAF (PPIAF 2017), in its Rapid Support Framework, includes overall policy priorities (such as brownfield school PPPs). consultancy services for pipeline diagnostic and project prioriti- Key References: Identifying Candidate Projects Reference Description IN. Accessed March 15, 2017. “PPP Toolkit for Improving PPP Decision- Module 2: “Work through the PPP Process, Phase 1: Identification” provides Making Processes.” Public-Private Partnerships in India. New Delhi: extensive guidance on identifying PPP projects. Government of India, Ministry of Finance. CO. 2014. Manual de Procesos y Procedimientos para la Ejecución de Proyectos The Process and Procedures Manual for PPP Projects describes (on pages de Asociación Público-Privada. Bogotá: Gobierno de Colombia, Ministerio de 34–38) the information that an implementing agency must include in its initial Hacienda y Crédito Público. report to the PPP Unit requesting that a project be implemented as a PPP. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African Module 4: “PPP Feasibility Study” describes needs analysis and options analysis Government, National Treasury. as the first two stages of carrying out a feasibility study to “decide whether traditional public procurement of a PPP is the best choice for the proposed project.” IN. 2013a. Scheme and Guidelines for Financial Support to Public Private Describes the rationale for establishing the IIPDF to overcome barriers to PPP Partnerships in Infrastructure. New Delhi: Government of India, Ministry of project identification, and the structure and operational arrangements for the Finance.  fund. PE. 2010. Pautas para la Identificación, formulación y evaluación social de Module 2: “Identification” within the Guidelines for the Identification, proyectos de inversión pública a nivel de perfil. Lima: Ministerio de Economia y Formulation, and Social Evaluation of Public Investment Projects outlines the Finanzas. gap analysis approach to identifying investment needs and projects. ADB. 2008. Public-Private Partnership Handbook. Manila: Asian Development Chapter 3: “Structuring a PPP: Sector Diagnostic and Sector Road Map” sets Bank. out how identifying possible PPPs can be part of an overall strategic review of a sector. HK. 2008. An Introductory Guide to Public Private Partnerships. Hong Kong, The first section of Chapter 4: “Making the Business Case” sets out the criteria China: Efficiency Unit. for a project should meet to have a prima facie case to be implemented as PPP. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and The section on developing a PPP Investment Framework on pages 21–23 Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private describes the importance of building a PPP project pipeline, together with clear Partnerships in Emerging Markets. Washington, DC: World Bank. public sector investment plans. Caribbean. 2017. Caribbean PPP Toolkit. Washington, DC: World Bank, Inter- Discusses methodology for PPP project pipeline identification as well as typical American Development Bank and Caribbean Development Bank. issues that arise during this process. 120 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE 3.2 Appraising Potential issues (E&S), addressed in Section 3.2.2 - Environmental and Social Studies and Standards. PPP Projects ŠŠCommercial viability (Section 3.2.3 - Assessing Commercial Vi- Potential PPP projects must undergo an appraisal process to en- ability)—whether the project is likely to attract good-quality sure that developing and implementing them makes sense. For any sponsors and lenders by providing robust and reasonable finan- proposed PPP project, there are five key criteria that governments cial returns. This is subsequently confirmed through the tender should consider when deciding whether or not to pursue a project process. as a PPP: ŠŠValue for money of the PPP (Section 3.2.4 - Assessing Value for Money of the PPP)—whether developing the proposed project ŠŠFeasibility and economic viability of the project (Section as a PPP can be expected to best achieve value for money com- 3.2.1 - Assessing Project Feasibility and Economic Viability)— pared to other options. This includes comparing against public whether the underlying project makes sense, irrespective of procurement (where that would be an option) and other pos- the procurement model. First, this means confirming that the sible PPP structures. Some countries, like Australia and India, project fits in with national development and sector strategies, mandate the development of a public sector comparator during policy priorities, and sector and infrastructure plans. It then in- the appraisal process. This is an estimate of the hypothetical, volves feasibility studies to ensure that the project is technically whole-of-life cost of the project if financed by government un- feasible, and the technology is easily available in the market and der traditional procurement. This ensures that the proposed unlikely to become obsolete in the medium term; and econom- structure provides the best value for money. ic appraisal to check that the project is cost-benefit justified, and represents the least-cost approach to delivering the expected ŠŠFiscal responsibility (Section 3.2.5 - Assessing Fiscal Implica- benefits. Attention should be paid to environmental and social tions)—whether the project’s overall revenue requirements are Figure 3.3 Appraising PPP Projects INITIAL CONCEPT Screen as PPP Screen priority projects for PPP potential PREPARE OTHER AS PPP OPTIONS Identify and allocate risks and responsibilities KEY COMMERCIAL TERMS Structure PPP Appraise PPP Appraise project feasibility, commercial viability, value-for-money, fiscal responsibiity PROCEED OTHER AS PPP OPTIONS Define performance requirements Define payment mechanisms DRAFT PPP CONTRACT Draft PPP contract Create adjustment mechanisms Establish dispute resolution mechanisms Provide for termination Section 3.2 Appraising Potential PPP Projects 121 Box 3.3 The Five Case Model The United Kingdom has developed a methodology for project • The Commercial Case—demonstrates that the project is assessment called the Five Case Model. The methodology can be commercially viable and bankable; that the supplier market has applied to every type of project, whether PPP or not. It provides been tested; and that the contract is well developed with an a comprehensive framework for assessing projects. It consists appropriate risk allocation. of looking at a project through five different lenses, or cases, as follows: • The Financial Case—demonstrates that the project is affordable and explains what amount is to be funded by the • The Strategic Case—covers the rationale for the project, contracting authority, what amount will be funded by the outlining its scope and objectives, and places it within an central government funding, and what user of the facility will overall strategic and policy context; in short it should make the pay. case for change. • The Management Case—this should demonstrate that all • The Economic Case—this demonstrates that a wide range arrangements are in place to ensure the successful delivery of options has been considered taking into account relevant of the project, namely, that the project is properly staffed political, economic, social, technical, legal and environmental and resourced, with appropriate governance arrangements, factors. A cost-benefit analysis should be conducted on a advisers and timetable, so that it can be procured on time and short list of options to determine which one offers best value. on budget. For a PPP, it should demonstrate that using private finance Guidance on this can be found in the United Kingdom Green Book offers best value for money for the public sector. In the United (UK 2011a) and Five Case Model methodology (Flanagan and Kingdom, a qualitative evaluation and a numerical quantitative Nicholls 2007). evaluation are used to test this. within the capacity of users and the public authority to pay screening stage, as described in Section 3.1 - Identifying PPP Proj- for the infrastructure service. This involves checking the fiscal ects. Detailed appraisal is usually first conducted as part of a de- cost of the project—both in terms of regular payments and fis- tailed business case alongside developing the PPP project structure, cal risk—and establishing whether this can be accommodated as described in Section 3.3 - Structuring PPP Projects. For example, within prudent budget and other fiscal constraints. assessing the value for money of the PPP depends on risk alloca- tion, an important part of PPP structuring. ŠŠProject management (Section 3.2.6 - Assessing the Ability to Manage the Project)—whether the contracting agency has the PPP appraisal is typically re-visited at later stages. The final cost, authority, capacity, and fiscal resources to prepare and tender affordability and value for money is not known until after pro- the project, and to manage the contract during its term. curement is complete, when the government must make the final decision to sign the contract. Many governments require further These criteria (with some variations) are described in more detail appraisal and approval at this stage. in Chapter 5: “Public-Sector Investment Decision” in Yescombe’s book on PPPs (Yescombe 2007); Chapter 4: “Selecting PPP Proj- ects” in Farquharson et al’s book on PPPs (Farquharson et al. 3.2.1 Assessing Project Feasibility and 2011), Module 3 of the Caribbean PPP Toolkit (Caribbean 2017), Economic Viability and Chapter 1: “Project Identification” in the EPEC Guide to Implementing a project as a PPP only makes sense if the project Guidance (EPEC 2011b). itself is sound. Most governments therefore subject proposed PPP Figure 3.3 - Appraising PPP Projects shows how project appraisal projects to the same technical and economic appraisal as any other fits in to the overall PPP process. Initial assessment against each major public investment project. There are typically two broad ele- criterion is typically done at the project identification and initial ments to this assessment: 122 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE ŠŠDeveloping and assessing the feasibility of the project concept detail at (Engel et al. 2009). This is discussed in greater detail in Section 3.2.2 - Environmental and Social Studies and Standards. ŠŠAppraising whether the project is a good public investment de- cision based on an economic viability analysis Answering these questions involves engaging experts to undertake several detailed studies—for example, technical feasibility studies, This assessment may take place prior to consideration of a project legal due diligence, environmental, and social impact assessments. as a PPP as described in Section 3.1 - Identifying PPP Projects. In For further guidance, see for example the detailed manuals pub- other cases, it may be undertaken as part of the PPP appraisal pro- lished by the governments of Chile (CL 2010b), Germany (DE cess. The project feasibility and economic viability analysis of a PPP 1998), Peru (PE Pasivos), Philippines (PH 2010), and the United should be as thorough as that of any other major public investment Kingdom (UK 2011a) for carrying out feasibility studies for public project. sector investment projects. The Caribbean PPP Toolkit (Caribbe- This section describes such analyses as applied to potential PPP an 2017, Modules 3 & 4) also provides guidance on carrying out projects, highlighting key issues that would typically be addressed feasibility studies, including checklists on legal and technical topics. and providing a selection of sources that may supplement govern- ments’ existing guidance materials. Creating and appraising options Developing value for money in a project requires identifying deliv- Defining a project and checking feasibility ery options and appraising them. Noting that establishing a range A project must be clearly defined before it can be appraised. Proj- of options can be challenging, the United Kingdom Green Book ect definition includes the description of the physical facilities that (UK 2011a) suggests the following actions: will be constructed, the technology to be used, the outputs to be ŠŠResearch existing reports, and consult widely with practitioners provided, and the identification of the end-users. Capital, operat- and experts, to gather the set of data and information relevant ing, and maintenance costs should be estimated over the life of the to the objectives and scope of the project. project, as well as any revenue expected to be generated. This defi- nition should be sufficiently broad to apply to a project delivered ŠŠAnalyze the data to understand significant dependencies, prior- as either a PPP or a traditional publicly financed project. The PPP ities, incentives and other drivers. contract should focus on output and refrain from specifying the ŠŠFrom the research, identify best practice solutions, including technologies, inputs, and processes to be used. This should be the international examples if appropriate. responsibility of the private operator. However, some technological definition is still needed for initial cost assessment. ŠŠConsider the full range of issues likely to affect the objective. The project can then be tested for feasibility across several dimen- ŠŠIdentify the full range of policy instruments or projects that may sions: be used to meet the objectives. This may span different sorts or scales of intervention; regulatory (or deregulatory) solutions may ŠŠTechnical feasibility—can the project be implemented as be compared with self-regulation; different financing and fund- planned, using proven technologies, and without unreasonable ing solutions may be considered as well as various tax options. technical risks? ŠŠDevelop and consider radical options. These options may not ŠŠLegal feasibility—are there any legal barriers to the project? For become part of the formal appraisal but can be helpful to test a PPP, this includes due diligence to identify any legal constraint the parameters of feasible solutions. Well-run brainstorming preventing the government to enter into a PPP contract. sessions can help to generate such a range of ideas. ŠŠEnvironmental and social sustainability—at a minimum, The same Green Book (UK 2011a) provides examples of strategic does the project comply with national environmental and plan- and operational options. They include, among others: ning standards? In some cases, a higher bar may be set, such as compliance with the Equator Principles—a set of standards on ŠŠVarying time and scale managing environmental and social risk from project finance transactions, based on World Bank Group standards, set out in ŠŠOptions to rent, build, or purchase Section 3.2 Appraising Potential PPP Projects 123 ŠŠRefurbishing existing facilities or leasing and buying new ones Application to PPP ŠŠChanging locations or sites Many countries require PPP projects to meet feasibility and eco- nomic viability criteria. For example: ŠŠCo-locating, or sharing facilities with other agencies ŠŠChanging the combination of capital and recurrent expenditure ŠŠIn the Philippines, all major infrastructure projects are required to undergo a feasibility and viability assessment process, as de- ŠŠVarying the balance between outsourcing and providing services scribed in details in a reference manual (NEDA 2005a). The ŠŠVarying quality targets same process is required for PPP projects. ŠŠIn Chile, the 2010 Concessions Law states that the social im- Appraising project economic viability pact evaluation of a potential PPP project must be approved Many governments undertake some form of economic viability by the Ministry of Planning. The Concessions Council must analysis (also known as socio-economic viability) to decide wheth- also review this document before allowing a project to be im- er a proposed project is a good use of public resources. A project is plemented as a PPP. economically viable if the economic benefits of the project exceed ŠŠIn Indonesia, guidelines issued by the state-owned Indonesia its economic costs, when analyzed for society as a whole. Infrastructure Guarantee Fund specify the criteria to assess the The economic costs of the project are not the same as its financial opportunity cost of issuing guarantees to PPP investors. The costs—externalities and environmental impacts should be consid- criteria include technical feasibility, economic viability, and en- ered. Externalities (positive or negative) are economic impacts that vironmental and social desirability. affect persons who are not necessarily part of the project scope. The Optimism bias is a systemic issue relevant to all infrastructure proj- economic benefits are a measure of the value the project will deliver ects including PPPs (see Section 1.2.2 - Poor Planning and Project to society as a whole. The revenue a project will generate is usually Selection). It needs to be addressed at the time of appraisal as it is a lower-bound estimate of its economic benefits; however, benefits often the cause of project renegotiation. In addition, overly opti- can be much higher than revenues. For example, the benefits from mistic demand studies may induce governments to approve proj- improved transportation, for drivers, can far exceed the tolls paid ects that ultimately generate more cost than benefit. The United on a highway—faster connections, reduced vehicle maintenance, Kingdom Treasury has published guidance material (UK 2013) lower accident rates, may be significant factors. In addition, the on overcoming optimism bias. project may enhance regional economic activity and quality of life for the people living in the vicinity of the project. Similarly, the Implementing agencies should bear in mind that the work under- value of education at a high school should be measured by the en- taken in assessing project viability also lays the foundation for the hancement in the lives and prospects of the children who attend rest of the PPP appraisal. The project definition provides the basis that school, even if no school fees are charged. Economic viability for developing the PPP financial model and commercial and fiscal analysis can also include a cost-effectiveness analysis to determine viability analysis, as well as any quantitative value for money anal- whether the project is the lowest-cost alternative to achieve the ysis. Assessment of technical feasibility, and environmental and so- identified benefits. cial sustainability will provide a basis for the risk analysis. Cost and demand estimates developed for the economic viability assessment There is a wide range of literature and guidance material available will also provide initial inputs to the financial modeling, and PPP on project appraisal and economic cost-benefit analysis. The Key value for money analysis. References for this section provide a selection, with examples of gov- ernment guidance material, as well as resources from international Stakeholder engagement should be initiated as early as possible in institutions, and textbooks. The United Kingdom Green Book on the project cycle. The IFC stakeholder handbook (IFC 2007, 4) appraisal (UK 2011a) states as the main purpose of appraisal guar- states that many private operators begin their consultation process anteeing that no project, program, or policy is adopted without around the pre-feasibility stage of the project. IFC’s handbook also answering two major questions: Are there better ways to achieve recommends beginning the consultation at the time of the project this objective? Are there better uses for these resources? concept stage. 124 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Early engagement has both its positive and negative aspects. It al- scope of the project with only major projects necessitating the full lows government to introduce the project in a positive light, lay out 12-week consultation period. its development rationale publicly, and strike a balance between promoting the project and managing expectations. All projects Stakeholder engagement to assess have potential benefits but also uncertainties. Early engagement project viability also signals to stakeholders that their needs and views are being Stakeholder engagement is a valuable tool for assessing the viability taken into consideration (IFC 2007, 4–5). Establishing a positive of a project and identifying risks. Section 2.5.1 - Stakeholder Com- relationship early generates social capital and creates a foundation munication and Engagement describes the process in detail. of credibility with stakeholders if an issue were to arise. The negative aspects of early engagement are connected to the dan- Evaluating climate change-related and ger of spreading of misinformation. As soon as disclosure on the natural disaster risks project begins, the window for misinformation and rumors opens. As policy makers and project developers gradually enhance their As described in the IFC stakeholder engagement handbook (IFC understanding of the risks posed by climate change, practitioners 2007, 111–113), the ability to counteract these rumors is limited should be able to design the contractual obligations of private in- in the early stages of the project cycle, since many details will only vestors and adequate contract management mechanisms. The life become clear toward the end of the appraisal phase. It may there- cycle approach opens avenues for creating incentives for all stake- fore be difficult to reassure stakeholders or respond to questions holders engaged in the PPP process and minimizing risks to invest- in the absence of concrete details. This lack of information may ments. A European Commission study: Guidelines for Project cause stakeholders to speculate and prematurely condemn a project Managers (CLIMATE-ADAPT 2012, 17–53) presents guidelines based on unconfirmed facts or false assumptions. Therefore, stake- for integrating climate resilience into the asset lifecycle. holders for the initial consultation should be chosen strategically. Limited consultation with targeted stakeholders can be conducted Downscaled models use macro information to predict climate out- during the project concept stage to receive important stakeholder comes at the local level. Although the data on climate and disaster input; but care is needed to avoid the spreading of unnecessary and risks for downscaled models is becoming more robust, the range potentially harmful misinformation that will raise alarms before a of uncertainty regarding these risks and resulting impacts remains project is even given the go-ahead. After this initial consultation, a challenge. Good practice consists of incorporating the concept stakeholders may then be more broadly identified and consulted of resilience in the risk allocation matrix and whole-asset-life-cost when more project specifics are known. Box 2.11 - The Delhi Water optimization approaches, instead of focusing only on the project Project provides an example of the consequences of misinformation implementation phase. remaining unchecked. Procurement specialists need to develop incentive structures in PPP Having a solid project narrative in place may help countering procurement to foster innovation in climate mitigation and adap- such misinformation. Several useful steps in formulating a nar- tation while still operating within a competitive environment. For rative are: example, evaluation criteria for resilience could be introduced in tender documents, using the asset life costing approach—bidders ŠŠIdentify the current problem faced by the populations could be invited to demonstrate how their proposals address resil- ŠŠExplain the problem’s impact on the lives of those affected ience to risk, highlighting the costs as well as the benefits, and how they will manage the project when facing changes in the risk itself. ŠŠExplain how the government is addressing the problem Two key resources enable non-specialists to consider the impacts of ŠŠExplain why the government is choosing to address the problem disasters on new development projects. These are: with a PPP ŠŠThe Climate Change Knowledge Portal (WB-Climate) The European Commission guidelines on stakeholder consulta- tion (EC 2015) suggest a maximum of 12 weeks for this consulta- ŠŠThink Hazard (GFDRR), a web-based tool, developed by the tion process to occur. This period will vary based off the scale and World Bank and other partners Section 3.2 Appraising Potential PPP Projects 125 Other innovative technical assistance available to procuring author- how to compensate those affected by them. For example, if people ities are: living on or near a proposed construction site of a PPP project will be displaced, E&S studies should consider ways to minimize dis- ŠŠThe Society for Decision Making under Deep Uncertainty placement and propose specific measures to compensate relocated (DMDU) (Deep Uncertainty), an interactive platform that persons fairly. supports learning and dialogue about key aspects of long-term investment under uncertainty. There are cases where the need for compensation is not as obvious as in the case of displaced people. For example, building a new ŠŠMaking Informed Investment Decisions in an Uncertain bridge may benefit passengers, but could also prevent a ferry oper- World: A Short Demonstration (Bonzanigo and Kalra 2014) ator from collecting monopoly fees. Loss of a monopoly position seeks to motivate and equip analysts to better manage uncer- does not necessarily require compensation. If the livelihood of ferry tainty in investment decisions. employees is greatly affected, solutions such as skills training and ŠŠA World Bank study: Robust decision-making in the water job search support could be provided to reduce social impacts, or sector (Kalra et al. 2015) helped SEDAPAL, the water utility ensure that they do not fall disproportionately on the most vulner- serving Lima, Peru, make smart investments to ensure long- able. term water reliability by drawing on state-of-the-art methods The E&S studies should address the whole life cycle of the project, for decision-making under deep uncertainty. including design, construction, operation, and decommissioning. ŠŠA World Bank publication (WB 2016d) outlines the decision The assessment should consider sectoral and national policies, leg- tree used in South Asia to procure climate resilient hydropower. islation and regulations, governance frameworks, and environmen- tal capacity. These studies should be conducted early in the project preparation phase so that the findings can be considered in the 3.2.2 Environmental and Social Studies decision-making process. In the PPP context, this translates into and Standards assessing E&S risks and developing mitigations during PPP prepa- Potential damage to the environment and the impact on popula- ration and procurement. tions are key issues when planning infrastructure projects. Besides Introducing E&S risk management steps when structuring a PPP the cost-benefit analysis that determines whether the expected ben- project can improve the quality of the project, help it achieve polit- efits of a project outweigh potential detrimental environmental and ical, social and environmental sustainability, prevent conflicts, and social (E&S) impacts, there is increasing recognition that the suc- avoid delays. Impacts to PPP timeline and related cost implication cess of a project depends on managing E&S risks and impacts ef- could be avoided when stakeholders impacted by the project (or fectively in addition to managing its technical and financial aspects. perceived to be impacted) are adequately engaged and risks and im- Investment decisions increasingly include an assessment of the pacts are recognized at a stage that allows integration of mitigation management of E&S risks and impacts—not only when MDBs strategies in the project design. Examples of this include: and international financial institutions are involved but also when commercial banks and private equity funds are the source of fi- ŠŠManila Light Rail, Philippines, 2014. The design, construction nancing. Furthermore, in many developing countries international and operation of a 12-kilometer extension of railway transit and players require compliance with both national laws and interna- ancillary facilities in the densest part of Manila, and the opera- tional E&S standards developed by MDBs, which are sometimes tion of the existing line, implied the displacement of over 1,000 more stringent than those imbedded in national legislation. households with no land title and a significant number of small firms. IFC commissioned an analysis to identify gaps between rel- A key element in E&S risk management is the mitigation hierar- evant national legislation and IFC E&S Performance Standard 5 chy, whereby priority is given to avoidance and minimization of (PS5), estimate the costs of closing these gaps, and make recom- impacts. Where residual risks or impacts remain, a compensation mendations on allocating associated risks (WB 2015b). or offset is provided to support relocated persons and affected com- munities, or to mitigate risks to the environment. E&S studies are ŠŠNew port in Tibar Bay, Timor Leste, 2016. A greenfield con- necessary to determine how to mitigate these risks and impacts and tainer port in a region with significant biodiversity, including 126 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE mangrove and coral habitats of protected species). The early ŠŠProvide a preliminary indication of possible mitigation mea- E&S studies led to a change in site location within the selected sures and associated high level costs harbor. A biodiversity offset program is being formulated by the ŠŠEvaluate for each measure which party will be best placed for its concessionaire and the public authority to compensate for the implementation impacts on mangroves and corals. The operator will apply IFC E&S Performance Standards (PS) to its construction and opera- ŠŠMap key stakeholder groups and design an engagement plan tion activities with third party monitoring (TL 2016). ŠŠDevelop Terms of Reference (ToRs) for further, detailed E&S studies, such as Environmental and Social Impact Assessment or Environmental and social assessments a Resettlement Action Plan to be undertaken by the responsible party (usually included in bidding documents to ensure the re- Countries have found advantages in creating their own framework sponsible party adequately covers the identified risks and impacts) for E&S assessment in several stages of the PPP project cycle. These frameworks include provisions for: E&S due diligence enables government officials, bidders, and other stakeholders to understand key E&S issues affecting PPP projects. ŠŠAssessing E&S impacts when selecting PPP projects to mitigate It also supports development of projects in line with national legis- negative project impacts and optimize social welfare lation and international E&S standards. ŠŠEngaging with stakeholders during project preparation to com- The outcomes of the E&S due diligence also feed into specific municate government concerns and solutions regarding envi- steps of the PPP project appraisal stage such as the assessment of ronmental and social impact, and to receive useful feedback and technical feasibility and the assessment of commercial viability suggestions—Section 2.5.1 - Stakeholder Communication and which needs to include the cost estimate of identified mitigation Engagement discusses stakeholder engagement measures. They also inform risk allocation during PPP structuring ŠŠDefining the specific E&S standards to be included in the PPP (see Section 3.3 - Structuring PPP Projects) and the E&S specific contract provisions of the draft contract. ŠŠMonitoring E&S issues during the contract term (design, con- E&S studies should distinguish between mitigation measures to be struction, and operation) implemented by the PPP operator and by the contracting authority before contract award. For example, stakeholder engagement (see Several countries have found it effective to define E&S mitigation Section 2.5.1 - Stakeholder Communication and Engagement) should requirements prior to tendering projects. This approach allows often be started by the contracting authority in the PPP prepara- bidders to factor the cost of these measures into their bid. Good tion stage, and then taken over by the private partner. practice consists of including the E&S constraints in the Call for Tender documents, thereby allowing bidders and concessionaires A good example of this approach is found in the guidance notes to design and implement projects at their own risk, subject to the on screening (EC 2001c), scoping (EC 2001b) and review (EC satisfaction of those constraints. 2001a) of the European Environmental Impact Assessment (EIA) scheme. This requires governments to submit the EIA to the This approach is followed by IFC when providing advice to gov- environmental authority before the project is implemented. Based ernments on structuring PPP projects. During the appraisal stage on the assessment, the authority will issue an environmental license an E&S due diligence is undertaken to: identifying the constraints affecting the project. In a second phase, a more detailed project design that explains how the constraints ŠŠAssess major E&S risks and impacts of the project will be mitigated is submitted for approval. This process allows for ŠŠIdentify gaps between the relevant national legislation and inter- the government to establish limits prior to tendering, and for the national E&S standards potential concessionaire to present the detailed project. Section 3.2 Appraising Potential PPP Projects 127 Effective use of environmental and social ŠŠDonors and commercial banks who are members of the Equa- standards tor Principles Association (EP 2017) will discard projects that do not comply with international E&S standards. Project sus- It is good practice to include E&S standards in the draft PPP proj- tainability will be strengthened from this methodology, thereby ect agreement. Certain standards may be required by national leg- improving the bankability of a project. islation, or by international finance institutions and major com- mercial banks (for example, signatories of the Equator Principles) ŠŠBidders concerned about the reputational risk posed by E&S as a financing condition. The contracting authority will need to issues, particularly international bidders, can be reassured by detail how the service provider will be monitored to ensure com- preliminary E&S assessment and will have less uncertainties to pliance with these standards. The consequences for failure to meet factor in their offer. these standards also need to be established. The E&S-related pro- ŠŠGovernments can protect the public interest by requiring bid- visions of the draft project agreement should reflect the allocation ders to adopt best practices for managing E&S issues. This ap- of responsibilities for the design and implementation of E&S mit- proach allows for a leveling up of competition for both local and igation. Depending on the level of E&S risks of the project, and international bidders and guarantees that E&S standards rise for complexity associated with the design and implementation of the all stakeholders. mitigation measures, the (pre) qualification criteria might benefit from the introduction of E&S-related criteria. 3.2.3 Assessing Commercial Viability For large projects, the contracting authority may also supplement the national environment-protection framework with contractual Once a project is established as viable, the next step is to determine provisions in the PPP contract discouraging the service provider whether it would be attractive to the market if structured as a PPP. from damaging the environment. Generally speaking, private parties will find a project commercially IFC has developed a risk management methodology (IFC 2012) attractive if it offers good financial returns and requires the private consisting of eight Performance Standards (PS). Compliance with party to bear reasonable levels of risk. these standards is required for projects financed by IFC. Since Assessing returns typically involves financial analysis—that is, 2012, all PPP projects where the IFC had an advisory mandate building a project financial model and checking project cash flows, are screened against the Performance Standards and, where gaps returns, and financial robustness. The ADB’s PPP Handbook are identified, recommendations are made to align them with the (ADB 2008, 17–18) gives a brief overview of typical financial anal- standards. IFC’s Performance Standards are a global benchmark ysis of a PPP. Yescombe’s chapter on financial structuring (Yes- to determine, assess, and manage E&S risks in project financing. combe 2007) provides a more comprehensive description. Eighty-four private financial institutions in 35 countries have ad- opted the ten Equator Principles (EP 2017), which are based on Where revenue from user charges exceeds costs and yield sufficient IFC’s Performance Standards. The Equator Principles have been returns to remunerate capital, the project will generally be commer- accepted as a move towards establishing an industry norm for man- cially attractive provided risks are reasonable. Where user charges aging environmental issues. are not at this level, government can use the financial model to assess what government contributions will be needed. Such con- In summary, a proper assessment and mitigation of E&S risks will tributions need to be integrated in financial analysis to assess what likely have a significant impact on the perceived value of a project, government contributions that will be needed—which in turn increasing its probability of success. The value for several categories needs to be assessed as part of the fiscal analysis discussed in Section of stakeholders is highlighted below: 2.4.1 - Assessing Fiscal Implications of a PPP Project. ŠŠDirectly impacted communities will perceive the project more Governments often assess the appetite of potential partners positively following the analysis of the E&S risks of a project for a proposed PPP before taking it to market. This can be de- and the presentation of proposed mitigation measures. termined by investigating whether similar projects have previous- 128 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE ly been implemented with private partners, in the country or the ŠŠSingapore’s PPP Handbook (SG 2012, 56–57), which re- region. It can also include testing market interest through market quires implementing agencies to conduct market sounding sounding—that is, presenting the main parameters of the project before pre-qualification, and describes the type of information to selected potential investors for questions and comments—typ- that should be shared at this stage ically the project concept and initial structure developed during ŠŠThe Caribbean PPP Toolkit (Caribbean 2017, Module 5, Sec- the structuring phase described in Section 3.3 - Structuring PPP tion 5), which offers guidance on marketing PPP projects Projects. The following resources provide more guidance on market sounding: Market sounding may be done by government agencies directly or may be delegated to transaction advisors. Experienced transaction ŠŠFarquharson et al’s chapter on managing the interface with advisors tend to know the most likely bidders for many kinds of the private sector (Farquharson et al. 2011, Chapter 8), which PPP projects—using them to assess market interest allows govern- includes top 10 tips for a successful market-sounding exercise ment to take advantage of these relationships. Market feedback can ŠŠ4ps paper on soft market testing (4ps 2007), which includes be more honest and specific when the consultation is conducted by tips, practical guidance, and a case study of a market sounding transaction advisors. A government agency may not have the same exercise for a PPP in the United Kingdom industry expertise nor the same capacity to engage in a candid dia- logue with market participants. ŠŠGrimsey and Lewis’ chapter on procurements options analy- sis (Grimsey and Lewis 2009, 409–411), which describes a mar- Where local experienced transaction advisors are not available, gov- ket sounding exercise for a hypothetical hospital PPP project ernments may hire international advisors that have a track record Box 3.4 World Bank Environmental and Social Framework MDBs and other international development institutions are Management of Living Natural Resources attentive to E&S issues when they co-finance an infrastructure project. The World Bank’s Environmental and Social Framework • Standard 7: Indigenous Peoples/Sub-Saharan African rules (WB 2016c) are often more stringent than the host country’s Historically Underserved Traditional Local Communities national legislation. The World Bank may accept the country’s • Standard 8: Cultural Heritage E&S standards or require that the utilization of the Bank’s own E&S safeguards standards. Then they must apply over the entire • Standard 9: Financial Intermediaries project, even if they are only financing a portion of it. There are ten World Bank E&S standards: • Standard 10: Stakeholder Engagement and Information Disclosure • Standard 1: Assessment and Management of Environmental These standards were approved by the Board in August 2016, to and Social Risks and Impacts be implemented after a preparation and training period. According to the World Bank (WB-Safeguards), the new E&S framework • Standard 2: Labor and Working Conditions introduces comprehensive labor and working condition protection; • Standard 3: Resource Efficiency and Pollution Prevention and an over-arching non-discrimination principle; community health Management and safety measures that address road safety, emergency response and disaster mitigation; and a responsibility to include stakeholder • Standard 4: Community Health and Safety engagement throughout the project cycle. Other MDBs have their own corresponding standards. For example, the Asian • Standard 5: Land Acquisition, Restrictions on Land Use and Development Bank (ADB-Safeguards) and Asian Infrastructure Involuntary Resettlement Investment Bank (AIIB 2016) use three safeguard categories: (1) Environment; (2) Involuntary Resettlement; and (3) Indigenous • Standard 6: Biodiversity Conservation and Sustainable Peoples. Section 3.2 Appraising Potential PPP Projects 129 of closing transactions in the specific sector, or perhaps multilateral options—comparing the risk-adjusted cost to government of pro- financial organizations, such as IFC PPP advisory services. Trans- curing the same project through traditional procurement, to the action costs may be financed by the various preparation facilities, expected cost to government of the PPP (pre-procurement) or the such as the Multilateral Investment Fund PPP advisory facility actual PPP bids (post-procurement). An alternative is to compare of the Inter-American Development Bank (MIF) or the Global the two options with an economic cost-benefit basis—that is, to Infrastructure Facility (GIF 2017). These facilities offer advisory quantitatively weigh the expected benefits of a PPP over traditional services in preparing and structuring PPPs to both attract private procurement against its additional costs. sector investment in emerging markets and uphold government Value for money analysis—particularly using quantitative public project objectives. sector comparator methodologies—has been widely debated. Some question the value and relevance of a PSC approach, which can 3.2.4 Assessing Value for Money of appear to be more scientific than is the case, potentially misleading the PPP decision-makers; or conversely, may simply come too late in the process to be a genuine input to decision-making. A World Bank A key objective of governments in implementing PPPs in infra- report on Value for Money (WB 2013a) analysis presents evidence structure is to achieve value for money (VFM). Value for money on practices from several countries, and on trends regarding the means achieving the optimal combination of benefits and costs in scope of value for money analysis and the relative advantages of delivering services users want. Many PPP programs require an as- quantitative and qualitative approaches. sessment of whether a PPP is likely to offer better value for the public than traditional public procurement—often called value for For more discussion on approaches to assessing value for money, money analysis. and their relative advantages and disadvantages, see also: A VFM analysis can be done for a specific PPP project, and at a ŠŠFarquharson et al’s section on selecting projects (Farquharson program level, for projects with common characteristics. For exam- et al. 2011, 41–43), which briefly describes value for money ple, the United Kingdom Treasury’s manual on assessing value and cost benefit analysis, and considers the value of qualitative for money (UK 2011b) described how value for money should be versus quantitative approaches. assessed at both the program and project levels (that methodology was later considered biased and recalled by government). ŠŠGrimsey and Lewis’s article on PPPs and Value for Money (Grimsey and Lewis 2005, 347–351) includes a section on ap- VFM analysis typically involves a combination of qualitative and proaches to value for money describing examples of different quantitative approaches. Qualitative VFM analysis consists of countries’ approaches. sense-checking the rationale for using a PPP. This involves asking whether a proposed project is of a type likely to be suitable for pri- ŠŠThe OECD’s publication on PPPs (OECD 2008a, 71–72), vate financing, and whether the conditions are in place for the PPP which also describes the range of methods used by different to achieve value for money—for example, that the PPP has been countries, on a spectrum of complexity, from simply relying on structured well, and that competitive tension is expected during the competition, to full cost-benefit analysis of different procure- bidding process. This often takes place at a relatively early stage of ment options. PPP development—as such, qualitative VFM analysis may consti- ŠŠThe PPIAF Toolkit for PPP in Roads and Highways has a tute part of the PPP screening described in Section 3.1.2 - Screening section on value for money and the PSC (WB 2009a), which for PPP Potential. describes the logic behind value for money analysis, and how Some PPP programs also require quantitative assessment of val- the PSC is used. ue for money. This typically involves comparing the chosen PPP ŠŠThe European PPP Expertise Centre (EPEC) value for money option against a Public Sector Comparator (or PSC)—that is, what assessment report (EPEC 2015) outlines and compares value for the project costs would look like if delivered through tradition- money assessment methodologies in several European countries. al procurement. This comparison can be made in different ways. The most common is to compare the fiscal cost under the two 130 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE The remainder of this section briefly describes and provides further private sector innovation; whether a PPP can achieve appropri- resources for readers on qualitative and quantitative value for mon- ate risk transfer; and the degree of stakeholder support. The ex- ey assessment methodologies. tent to which a project can generate revenues from tolls is also taken into consideration when assessing possible PPP structures Qualitative Value-for-Money assessment (WB 2013a). Qualitative VFM analysis involves sense-checking the rationale for ŠŠThe Caribbean PPP Toolkit (Caribbean 2017, Module 4, Sec- using PPP as a delivery mechanism—that is, asking whether a pro- tion 8) presents Jamaica’s methodology for assessing value for posed project is of a type likely to be suitable for private financing; money, and other globally-relevant guidance. as well as whether the conditions that are necessary to achieve value The EPEC Guide to Guidance also includes a list of key condi- for money are in place, as described in Farquharson et al, (Farqu- tions that should be met to have a higher probability of achieving harson et al. 2011, 42–43). This often takes place at a relatively value for money (EPEC 2011b, Chapter 1.2.4). early stage of PPP development—as such, qualitative VFM analysis may overlap with the PPP Screening process described in Section Public Sector Comparator: Comparing 3.1.2 - Screening for PPP Potential above—but may be repeated Fiscal Cost throughout the project development process. The most common quantitative tool for value for money assess- Some jurisdictions have clearly-defined criteria for this analysis. For ment of a PPP project is derived from the approach originally used example: in the United Kingdom’s PFI program in the early 1990s as de- scribed in Leigland and Shugart’s Gridlines article on the PSC ŠŠThe UK Treasury has defined criteria for assessing suitability, (Leigland and Shugart 2006). It involves comparing the fiscal cost and unsuitability, for a Private Finance Initiative (PFI)—the of a PPP delivery option with that of a conventional public de- UK’s availability payment PPP model. Suitability criteria in- livery option—not a single conventional option, but a range of clude the long-term, predictable need for the service; the ability infrastructure options as noted in the 2011 Treasury Guidance to allocate risk effectively—including through performance-re- on Valuing Infrastructure Spend (UK 2015a). NAO evidence lated payments and ensuring sufficient private capital at risk; the presented in the House of Commons 2014 report (UK 2014a) likely ability of the private sector party to manage risk and take discusses several shortcomings in the identification of PSCs. responsibility for delivery; presence of stable and adequate pol- icy and institutions; and a competitive bidding market. Unsuit- The focus of the Fiscal Cost approach to value for money analysis ability criteria include projects that are either too small or too is the construction of a PSC—the cost to government of imple- complicated; sectors where needs are likely to change or there is menting the project through traditional public procurement. Cal- a risk of obsolescence (for example, PFI projects are no longer culating the PSC can be complicated, as several adjustments are used in the ICT sector in the UK); or where the contracting needed to ensure a fair comparison. Box 3.5 - How the Public Sector authority is inadequately skilled to manage PPP (WB 2013a). Comparator is calculated, highlights some methodological debates. ŠŠIn France, preliminary analysis of a PPP includes checking This type of PSC can be used at two stages of the procurement pro- against several criteria under three categories: PPP relevance— cess, as described in the OECD book’s chapter on the economics for example, appropriateness of an integrated, whole-of-life ap- of PPPs (OECD 2008a, 71–72). These are: proach to managing a project; commercial attractiveness; and ŠŠBefore the bidding process—the PSC can be compared with the potential for optimal risk allocation (WB 2013a). a shadow or reference PPP, or market comparator—a model of ŠŠIn the Commonwealth of Virginia, United States, assessment the expected cost of the project under the PPP option. This can of a potential PPP at high level and detailed screening stages help identify whether the PPP can be expected to provide value also considers proposed road projects against specific criteria to for money, before deciding to go ahead with detailed prepara- determine if the project is delivered under the Public-Private tion and procurement. The reference PPP model would be the Transportation Act (PPTA)—that is, as a PPP. These criteria in- same as the financial model described in Section 3.2.3 - Assessing clude whether a project is sufficiently complex to benefit from Commercial Viability. Section 3.2 Appraising Potential PPP Projects 131 Box 3.5 How the Public Sector Comparator is calculated Calculating a PSC can be complex. The starting point is typically The Treasury of the United Kingdom’s detailed guidance for the best estimate of the capital cost and lifetime operations quantitative PSC assessment was recalled in 2013, and guidance and maintenance cost of implementing the project under public on qualitative assessment was developed. procurement. This is typically adjusted, to enable a fair comparison between the PSC and the PPP. The Infrastructure Australia South Africa’s PPP Manual’s module on the PPP Feasibility Study guidance note on PSC (AU 2011b, Section 2.3) describes two includes a detailed description of how to calculate and use the types of adjustment: PSC (ZA 2004a, Module 4, 17–49). Risk adjustments—one of the main differences between traditional Methodological differences and challenges procurement and the PPP approach is that the PPP transfers more risks to the private party. The return on investment expected by Although the PSC has been widely used, the methodology differs the private party will consider these transferred risks. This means between countries, and there is ongoing debate on several that to make a fair comparison, the PSC should also consider the methodological points. For example, Shugart’s article on the cost of these risks. PSC (Shugart 2006) highlights two related issues: which is the appropriate discount rate to use when calculating present values, ‘Competitive neutrality’ adjustments—a public sector project or and how the cost of risk should be considered. Grimsey and Lewis enterprise may have cost advantages or disadvantages compared (Grimsey and Lewis 2004) and Gray, Hall and Pollard (Gray et al. to a private company, which creates costs or benefits to the 2010) both focus on the choice of discount rate, and its relationship government that are not normally considered when considering with risk allocation under PPP and traditional procurement. In the cost of a traditionally procured project. For example, the IFC’s report on lessons learned (IFC 2010, 7-13), José Luis Flores tax liabilities under the two options may be different. These presents a concrete case of “value for money” assessment. differences should be corrected for in calculating the PSC. Some countries in Latin America, such as Colombia and Peru, have There are also differences in the timing of payments between developed guidelines for implementing the PSC methodology. the PPP option—where payments are often spread over time— However, due to lack of capacity and or trustworthy information to and traditional procurement, where the government must meet implement such a complex methodology, none of these countries construction costs upfront. The streams of payments are usually have implemented the full methodology in practice. converted into net present values, to give a single value for comparison. This requires defining the appropriate discount rate The World Bank report on Value for Money assessment practices to apply to future cash flows in both the PPP and PSC models. (WB 2013a, 23–28) reviews methodological evolution and practices in several governments with significant PPP experience, including The following provide further descriptions and examples of how the United Kingdom, France, India, Chile, the U.S. state of Virginia, the PSC is used and calculated in different countries: and British Columbia, Canada. ŠŠDuring the bidding process—the PSC can also be compared limit the value of the PSC. The government’s response to the review with actual PPP bids received, to assess whether the bids provide agrees that the PSC provides only a partial picture, and highlights value for money. This approach is used in Australia, and is de- that its use is balanced with qualitative analysis, as described above. scribed in a PSC Technical Note (AU 2016a). Leigland’s Gridlines article on the PSC (Leigland 2006, 2–3) Despite the appealing logic of the concept, there have been many summarizes these criticisms, which include the inevitable inaccu- criticisms of the usefulness of the PSC and fiscal cost comparison racy of estimates over a long-term project, lack of consensus on approach in countries where it has been used frequently, such as methodology, and so the possibility of manipulation to reach the the United Kingdom and Australia. A United Kingdom House desired conclusion. Grimsey and Lewis (Grimsey and Lewis 2005, of Lords’ review of the PPP program (NAO 2013a), for exam- 362–371) describe some of these criticisms in more detail. Giv- ple, argued that shortage of relevant data and methodological issues en these challenges, Leigland’s Gridlines article (Leigland 2006, 132 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE 3–4) also discusses whether and how the PSC approach could make Many governments have entered into PPPs not fully understand- sense in a developing country context. ing their potential costs. This can create significant fiscal risk for governments (see Section 1.2.1 - Insufficient Funds). To avoid this Economic cost-benefit comparison of PPP pitfall, governments need to assess fiscal affordability when they ap- and public procurement praise a PPP project so that they do not go to market with projects they cannot afford. One of the criticisms sometimes leveled at the PSC is that it fo- cuses solely on the financial cost to government of PPP or tradi- Fiscal commitments can be either direct or contingent. tional procurement. A more comprehensive approach would also ŠŠDirect commitments are those the government knows it will consider the differences in expected benefits, and compare the net have to make if the PPP project goes ahead—for example, the economic benefit under PPP or under public procurement. On the availability payments for a school PPP. other hand, as Grimsey and Lewis note (Grimsey and Lewis 2004, 353), this adds further complexity to the value for money analysis ŠŠContingent payments are ones that will only be made if certain over the PSC approach, and could risk making the results even events occur—for example, payments that may have to be made more subjective. under a minimum traffic guarantee if traffic levels are below projections on a PPP highway, or compensation in the event of For example, the EPEC’s note on non-financial benefits of PPP early termination. (EPEC 2011c) suggests how some of the benefits of PPP—as de- scribed in Section 1.2 - Infrastructure Challenges and How PPPs Can For more on these concepts, see Box 2.8 - Types of Fiscal Commit- Help—could be quantified, and added to a more typical PSC anal- ments to PPPs. ysis. Governments need to assess the likely costs of both types of com- Few countries have introduced this kind of analysis in practice. mitments. Once likely fiscal costs are identified, governments need New Zealand’s new PPP program is an exception. Cost-benefit to assess whether they are affordable. Section 2.4.2 - Controlling analysis is the main tool for assessing procurement options. New Aggregate Exposure to PPPs describes how governments can assess Zealand’s PPP guidance material (NZ 2016, 6–12) asks prac- the affordability of those commitments. For example, by compar- titioners to identify the possible benefits of PPP over traditional ing annual cost estimates against the budget of the contracting au- public procurement and where possible to assign dollar values to thority, considering the impact on debt sustainability under various each benefit. scenarios, or introducing specific limits on different types of PPP commitment. A World Bank note on managing fiscal commit- In many developing countries’ PPP programs, the aim is not just ments from PPPs (WB 2013b) provides an overview of typical to reduce cost, but to transform service delivery. For example, gov- types of fiscal commitments to PPP projects, and how these can ernments hope that roads will be better maintained, thus delivering be assessed. additional trade and economic benefits. These changes in service levels and quality cannot be captured by comparing fiscal costs of Assessing cost of direct fiscal commitments PPP and public procurement. Where these expected benefits are deemed important, and quantitative value for money analysis is Direct fiscal commitments may include up-front capital contribu- desired, economic cost-benefit analysis may be the better approach. tions or regular payments by government such as availability pay- ments or shadow tolls, as described in Box 3.6 - Types of Direct Payment Commitments to PPP Projects. 3.2.5 Assessing Fiscal Implications The nature of the government’s direct commitments will be defined A proposed PPP project may be feasible and economically viable, during the structuring process described in Section 3.3 - Structur- and value for money analysis may show that the PPP is the best ing PPP Projects. This highlights the importance of a back-and- option to procure it. Nonetheless, the government also needs to de- forth process between appraisal and structuring. The government cide whether the PPP project is affordable and fiscally responsible, should have an idea of the level and type of support that will be given its fiscal constraints. needed to make a project bankable to assess fiscal affordability be- Section 3.2 Appraising Potential PPP Projects 133 fore investing large amounts in project preparation. Fiscal limits ments consider the affordability of direct payment commitments set in appraisal can then inform further structuring efforts until under PPPs—for example, this can include projecting current the project converges on a structure that is both fiscally responsible spending levels forward, or introducing specific limits on govern- and attractive to the market. In fact, the value of the direct fiscal ment payment commitments to PPPs. An OECD publication on commitments is often a key bid variable, as described in Section PPPs (OECD 2008a, 36–46) provides a helpful overview. 3.5 - Managing PPP Transactions. This means the fiscal cost cannot finally be known until after the tender process is complete. Assessing the cost of contingent liabilities During the appraisal stage, the value of the direct fiscal commit- Contingent liabilities arise in well-designed PPP projects because ments required can be estimated from the project financial model, there are some risks that government is best placed to bear. These described in Section 3.2.3 - Assessing Commercial Viability. The val- risks should be defined throughout project structuring—see Section ue of these direct payment commitments is driven by the project 3.3 - Structuring PPP Projects. costs and any non-government revenues. The value of the direct Assessing the cost of contingent liabilities is more difficult than for fiscal contribution required is the difference between the cost of direct liabilities, since the need for, timing, and value of payments the project (including a commercial return on capital invested) and are uncertain. Broadly speaking, there are two possible approach- the revenue the project can expect to earn from non-government es, as described in the Infrastructure Australia guidance note for sources such as user fees. calculating the PSC (AU 2016b, 84–109): The fiscal cost can be measured in different ways: ŠŠScenario analysis—scenario analysis involves making assump- tions for the outcome of any events or variables that affect the ŠŠEstimated payments in each year—that is, the amount that the value of the contingent liability and calculating the cost to the government expects to have to pay in each year of the contract, government given those assumptions. For example, this could given the most likely project outcomes. This is the most useful include working out the cost to government in a worst-case sce- measure when considering the budget impact of the project. nario, such as default by the private party on its debt obligations ŠŠNet present value of payments—if the government is commit- at various points in the contract. It could also include calculat- ted to a stream of payments over the lifetime of the contract— ing the cost of a guarantee on a specific variable—for example, such as availability payments—it is often also helpful to calcu- demand—for different levels of demand outturns. late the net present value of that payment stream. This measure ŠŠProbabilistic analysis—an alternative approach is to use a for- captures the government’s total financial commitment to the mula to define how the variables that affect the value of the project, and is often used if incorporating the PPP in finan- contingent liability will behave and use a combination of math- cial reporting and analysis (such as debt sustainability analysis). ematics and computer modeling to calculate the resultant costs. Calculating the net present value of future payments requires This enables analysts to estimate the distribution of possible choosing an appropriate discount rate—the choice of discount costs, and calculate measures such as the median (most likely) rate to apply when assessing PPP projects has been a subject of cost, the mean (average) cost, and different percentiles (for ex- much debate. ample, the value within which the cost is likely to lie 90 percent In both cases, it is also helpful to estimate how the payments might of the time). However, producing useful results requires a lot of vary—for example, they may be linked to demand, or be denom- information on the underlying risk variables. inated in a foreign currency and so be subject to exchange rate Scenario analysis is the simpler form of risk analysis, and gives a changes. Irwin’s paper on fiscal support to PPPs (Irwin 2003, sense of the range of possible outcomes, but not their likelihood. 16–17 and Annex) provides more detail on measuring the cost of In practice, most governments use scenario analysis, if anything, different kinds of fiscal support. to assess the possible cost of contingent liabilities. A probabilistic Having estimated the cost of direct payment commitments, the approach requires more input data, and complex statistical analysis. government needs to decide if they are affordable. Section 2.4.2 - In practice, only a few governments have used probabilistic analysis Controlling Aggregate Exposure to PPPs describes how some govern- to assess a few types of contingent liabilities. 134 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Irwin’s book on government guarantees (Irwin 2007) provides a comprehensive discussion of why and how governments accept contingent liabilities under PPP projects by providing guarantees, Box 3.6 Types of Direct Payment and how the value of these guarantees can be calculated. The fol- Commitments to PPP Projects lowing resources provide more guidance and example of how par- ticular countries approach this problem: Direct liabilities are payment commitments that are not dependent on the occurrence of an uncertain future event ŠŠColombia’s Ministry of Finance has defined its approach to (although there may be some uncertainty regarding the assessing the financial and economic implications of contingent value). Direct liabilities arising from PPP contracts can liabilities; accounting, budgeting and assessing the fiscal im- include: plications of contingent liabilities; and identifying, classifying, Upfront viability gap payments—an up-front capital subsidy quantifying and managing contingent liabilities. This approach (which may be phased over construction, or against equity is set out in a presentation on management of contingent liabil- investments). ities (CO 2012b). Availability payments—a regular payment or subsidy ŠŠIn Chile, the Ministry of Finance has developed a sophisticated over the lifetime of the project, usually conditional on the model for valuing minimum revenue and exchange rate guaran- availability of the service or asset at a contractually specified tees to PPPs. This valuation is updated on an ongoing basis for quality. The payment may be adjusted with bonuses or all PPP projects, and reported in an annual report on contingent penalties related to performance. liabilities (CL 2016). The report includes a brief description of the techniques used in Chile to analyze and value guarantees ex- Shadow tolls, or output-based payments—a payment or subsidy per unit or user of a service—for example, per tended to PPP projects. Irwin and Mokdad’s paper on manag- kilometer driven on a toll road. ing contingent liabilities from PPP projects (Irwin and Mok- dad 2010, Appendix 1) also describes the Chilean methodology For more on types of payment commitments, see Section in more detail. 2.4 - Public Financial Management Frameworks for PPPs. ŠŠPeru’s Finance Ministry has also published a methodology for valuing contingent liabilities under PPPs—available on the Ministry’s website section on managing contingent liabilities (PE Pasivos). overview of different approaches to managing the fiscal implica- tions of PPP contingent liabilities. Defining and publishing a methodology for valuing contingent lia- bilities from PPPs is only part of the solution—implementing such methodologies in practice can be demanding. Governments may 3.2.6 Assessing the Ability to Manage need to strike a balance between building capacity in risk analysis, and adopting sufficiently straightforward and simple approaches to the Project this assessment that can be implemented in practice. A less common but still highly relevant component of project as- sessment focuses on the ability of the procuring authority to man- Having estimated the cost of contingent liabilities, the government age the delivery of the project, i.e. project preparation, tendering, can assess whether they are affordable given fiscal constraints. For and contract management over the term of the PPP contract. example, as described in Section 2.4.2 - Controlling Aggregate Expo- sure to PPPs, this could include considering the implications of PPP This requires an appraisal of the current capacity of the procuring contingent liabilities in the context of overall debt sustainability authority including its leadership, and the identification of future analysis, or specific limits on PPP liabilities. A few countries, such needs. The exercise should lead to the formulation of a credible as Indonesia, have introduced contingent liability funds to ring- plan drawing upon the resources of other government agencies, fence and budget for these liabilities. The EPEC publication on and including the costs of hiring external experts and transaction State Guarantees in PPPs (EPEC 2011a) also provides a helpful advisors, and of strengthening the leadership of the project team. Section 3.2 Appraising Potential PPP Projects 135 This assessment of the procuring authority should demonstrate ŠŠProgram and Project Management Methodology and Structure that the project is appropriately resourced and that appropriate ŠŠProgram and Project Management Plans governance arrangements are in place. The project should have gone through a detailed planning exercise with a realistic timetable; ŠŠUse of Specialist Advisers advisers should have been hired; and a risk register should have ŠŠChange and Contract Management Arrangements been prepared showing the primary risks faced by the procurement and how they will be mitigated. There should also be a benefits ŠŠBenefits Realization realization plan. This plan should explain how the project will be ŠŠRisk Management evaluated, and how project outcomes will be captured and moni- tored during the operational phase of the project. ŠŠMonitoring during Implementation In the United Kingdom, the Five Case Model methodology (Fla- ŠŠPost Implementation Evaluation Arrangements nagan and Nicholls 2007) includes in this assessment (the manage- ŠŠContingency Arrangements ment case) the following components: Key References: PPP Project Appraisal Reference Description Yescombe, E.R. 2007. Public-Private Partnerships: Principles of Policy and Chapter 5: The Public-Sector Investment Decisions describes the factors that Finance. Oxford: Butterworth-Heinemann. a public authority should consider when deciding to invest in new public infrastructure via a PPP, and how these can be assessed. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and Chapter 4: Selecting PPP Projects describes how governments can assess Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private whether a project can and should be developed as a PPP, including considering Partnerships in Emerging Markets. Washington, DC: World Bank. affordability, risk allocation, value for money, and market assessments. EPEC. 2011b. The Guide to Guidance: How to Prepare, Procure, and Deliver Chapter 1: “Project Identification, Section 1.2: Assessment of the PPP Option” PPP Projects. Luxembourg: European Investment Bank, European PPP describes and provides links to further references on how governments assess Expertise Centre. whether a proposed PPP is affordable, whether risks have been allocated appropriately, whether it is bankable, and will provide value for money. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African Module 4: “PPP Feasibility Study” describes in detail the analysis required Government, National Treasury to support a business case for a PPP project. This includes needs and options analysis, project due diligence, value for money analysis, and economic valuation. Key References: Commercial Viability Analysis Reference Description ADB. 2008. Public-Private Partnership Handbook. Manila: Asian Development Chapter 3.5 on assessing commercial, financial and economic issues, includes Bank. an overview of a typical financial model of a PPP project, and how it is used to assess commercial viability. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and Chapter 8: “Managing the Initial Interface with the Private Sector” describes Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private how to prepare and carry out a market sounding exercise. Partnerships in Emerging Markets. Washington, DC: World Bank. 4ps. Accessed March 16, 2017. “Public Private Partnerships Programme (4Ps) Provides tips and guidance on implementing market sounding, and a case study website.” Website. on the experience of market sounding for a hospital in the United Kingdom. 136 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Reference Description Grimsey, Darrin, and Mervyn K. Lewis. 2009. “Developing a Framework for Describes the advantages of market sounding and sets out a market sounding Procurement Options Analysis.” In Policy, Finance and Management for Public- exercise for a hypothetical example hospital PPP project. Private Partnerships, edited by Akintola Akintoye and Matthias Beck. Oxford, England: Wiley-Blackwell. SG. 2012. Public Private Partnership Handbook. Version 2. Singapore: Requires implementing agencies to conduct market sounding before pre- Government of Singapore, Ministry of Finance. qualification, and describes the type of information that should be shared at this stage. Key References: Value for Money Analysis Reference Description UK. 2011b. Quantitative assessment: User Guide. London: UK Government, Provides detailed guidance and a worked example on the quantitative approach HM Treasury. to value for money assessment—calculating the Public Sector Comparator, and comparing it to the PPP reference model, as well as an excel spreadsheet tool for carrying out the analysis. Grimsey, Darrin, and Mervyn K. Lewis. 2005. “Are Public Private Partnerships Describes approaches to assessing value for money in PPPs, and sets out in value for money?: Evaluating alternative approaches and comparing academic detail the PSC approach and its pros and cons. and practitioner views.”  Accounting Forum 29(4) 345-378. OECD. 2008a. Public-Private Partnerships: In Pursuit of Risk Sharing and Value Chapter 3: “The Economics of Public-Private Partnership: is PPP the Best for Money. Paris: Organisation for Economic Co-operation and Development. Alternative” describes the determinants of value for money in a PPP, and how it is typically assessed. WB. 2009a. “Toolkit for Public-Private Partnerships in Roads and Highways.” Section on value for money and the PSC describes the logic behind value for World Bank. Website. money analysis, how the PSC is used, and some of its shortcomings. Leigland, James, and Chris Shugart. 2006. “Is the public sector comparator Summarizes common criticisms of PSC analysis, and describes whether and right for developing countries? Appraising public-private projects in how using PSC analysis may make sense in developing country contexts. infrastructure.” Gridlines Note No. 4. Washington, DC: Public-Private Infrastructure Advisory Facility. AU. 2016a. National Public Private Partnership Guidelines - Volume 4: Public Provides detailed guidance on calculating the public sector comparator, and a Sector Comparator Guidance. Canberra: Commonwealth of Australia. worked example, including extracts from the excel model used. CO. 2010. Nota Técnica: Comparador público-privado para la selección de Introduces the PSC methodology, explains all the analytic steps, and provides a proyectos APP (Borrador para Discusion). Bogotá: Gobierno de Colombia, worked example. Ministerio de Hacienda y Crédito Público. Shugart, Chris. 2006. Quantitative Methods for the Preparation, Appraisal, and Describes some methodological inconsistencies and challenges with the PSC— Management of PPI projects in Sub-Saharan Africa. Midrand, South Africa: focusing on two related issues: which is the appropriate discount rate to use NEPAD. when calculating present values, and how the cost of risk should be considered. Grimsey, Darrin, and Mervyn K. Lewis. 2004. “Discount debates: Rates, risk, Describes the implications of the choice of discount rate in comparing PPP uncertainty and value for money in PPPs.” Public Infrastructure Bulletin 1(3). and public procurement, and the relationship between discount rates and risk allocation. Gray, Stephen, Jason Hall, and Grant Pollard. 2010. The public private Provides a more theoretically-driven discussion of the choice of discount rate partnership paradox. Brisbane, Australia: University of Queensland. for evaluating PPPs, compared with public procurement projects—emphasizing the difference between discounting future cash outflows and inflows. Section 3.2 Appraising Potential PPP Projects 137 Reference Description EPEC. 2011c. The Non-Financial Benefits of PPPs: A Review of Concepts Describes the shortcomings of standard PSC analysis, which assesses fiscal costs and Methodology. Luxembourg: European Investment Bank, European PPP but does not consider non-financial costs and benefits. Suggests an alternative Expertise Centre. approach incorporating non-financial benefits in the PSC. NZ. 2016. “Public Private Partnership (PPP) Guidance.” The Treasury. Chapter 5: “Procurement Options” sets out the logic and analysis for assessing Website. whether procuring a project as a PPP is likely to provide value for money. This includes a simple, quantitative cost-benefit comparison of PPP and public procurement. Key References: Fiscal Analysis Reference Description Irwin, Timothy C. 2003. “Public Money for Private Infrastructure: Deciding Section 6: “Comparing the Cost of Different Instruments” describes how When to Offer Guarantees, Output-Based Subsidies, and Other Fiscal governments can assess the cost of various types of fiscal support to PPPs— Support.” Working Paper No. 10. Washington, DC: World Bank. including output-based grants, in-kind grants, tax breaks, capital contributions, and guarantees. OECD. 2008a. Public-Private Partnerships: In Pursuit of Risk Sharing and Value Chapter 3: “The Economics of Public-Private Partnership: is PPP the Best for Money. Paris: Organisation for Economic Co-operation and Development. Alternative” describes how the affordability of a PPP can be assessed. EPEC. 2011a. State Guarantees in PPPs: A guide to better evaluation, design, Sets out the range of state guarantees used in PPPs—encompassing finance implementation, and management. Luxembourg: European Investment Bank, guarantees, and contract provisions such as revenue guarantees, or termination European PPP Expertise Centre. payments. Describes why and how they are used, how their value can be assessed, and how they can be best managed. AU. 2016a. National Public Private Partnership Guidelines - Volume 4: Public Section 16: “Identifying, allocating, and evaluating risk” describes in detail Sector Comparator Guidance. Canberra: Commonwealth of Australia. different methodologies for valuing risk (and contingent liabilities) in PPPs. Irwin, Timothy C. 2007. Government Guarantees: Allocating and Valuing Comprehensively describes why and how governments accept contingent Risk in Privately Financed Infrastructure Projects. Directions in Development. liabilities under PPP projects by providing guarantees. Describes in detail how Washington, DC: World Bank. the value of these guarantees can be calculated, with examples. CO. 2012b. Obligaciones Contingentes: Metodologías del caso colombiano. Presentation by the Ministry of Finance of Colombia on the conceptual Bogotá: Gobierno de Colombia, Ministerio de Hacienda y Crédito Público. and legal frameworks, and methodologies used in Colombia for managing contingent liabilities. CL 2015. Informe de Pasivos Contingentes 2015. Santiago: Gobierno de Chile, Describes the conceptual framework for assessing contingent liabilities and Dirección de Presupuestos. the government’s contingent liability exposure. This includes quantitative information (maximum value and expected cost) on government guarantees to PPP projects (concessions). Irwin, Timothy C., and Tanya Mokdad. 2010. Managing Contingent Liabilities Describes the approach in the State of Victoria, Australia, Chile, and South in Public-Private Partnerships: Practice in Australia, Chile, and South Africa. Africa, to approvals analysis, and reporting of contingent liabilities under PPPs. Washington, DC: World Bank. Appendix 1 describes in detail the methodology used in Chile to value revenue and exchange rate guarantees. PE Pasivos. Accessed March 8, 2017. “Pasivos Contingentes.” Peru, Ministerio Presents a methodology, results, and background reports on the value of de Economía y Finanzas. Website. contingent liabilities under PPP projects in Peru. 138 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Key References: Environmental and Social Studies and Standards Reference Description WB. 2016c. Environmental and Social Framework: Setting Environmental and Highlights the World Bank E&S safeguards for investment project finance. Social Standards for Investment Project Financing. Washington, DC: World Bank. EP. Accessed March 6, 2017. “Equator Principles.” Essex, England: The Risk management framework adopted by financial institutions for determining, Equator Principles Association. Website. assessing and managing environmental and social risk in projects. ADB-Safeguards. Accessed March 2, 2017. “Safeguards.” Asian Development Presents an overview of ADB’s E&S safeguards, including frameworks and Bank. Website. relevant publications. AIIB. 2016. Environmental and Social Framework. Beijing: Asian Infrastructure Presents an overview of AIIB’s E&S policies and safeguards. Investment Bank. IFC. 2012. Performance Standards on Environmental and Social Sustainability. Presents the IFC’s sustainability framework which applies to all investment and Washington, DC: International Finance Corporation. advisory clients. EC. 2001c. Guidance on Environmental Impact Assessment: Screening. Presents EU guidance on EIA screening. Luxembourg: European Commission. EC. 2001b. Guidance on Environmental Impact Assessment: Scoping. Presents EU guidance on EIA scoping. Luxembourg: European Commission. EC. 2001a. Guidance on Environmental Impact Assessment: EIS Review. Presents EU guidance on EIA, and is designed principally for use by Luxembourg: European Commission. authorities, developers and EIA practitioners. Key References: Project Feasibility and Economic Viability Analysis Reference Description EP. Accessed March 6, 2017. “Equator Principles.” Essex, England: The Describes the Equator Principles framework for managing the social and Equator Principles Association. Website. environmental impact of project finance investments, and provides guidance material on best practices. CO. 2006. Metodología general ajustada para la identificación, preparación Pages 79–84 in the General Adjusted Methodology for the Identification, y evaluación de proyectos de inversión. Bogotá: Gobierno de Colombia, Preparation, and Evaluation of Projects provide guidelines for the Technical Departamento Nacional de Planeación, Dirección de Inversiones y Finanzas Feasibility Studies that should be carried out at this stage to estimate the Públicas. capital, machinery, labor, materials, and other inputs required to implement the PPP project. CL. n.d. Metodología General de  Preparación y Evaluación de Proyectos. Santiago: The General Methodology for Preparing and Evaluating Public Investment Gobierno de Chile, Ministerio de Planificación. Projects provide guidance for preparing projects—identifying the problem, producing a diagnosis of the current situation, identifying possible alternatives—and evaluating projects—including cost-benefit analysis, cost- efficiency analysis. PE. 2010. Pautas para la Identificación, formulación y evaluación social de The Guidelines for the Identification, Formulation, and Social Evaluation proyectos de inversión pública a nivel de perfil. Lima: Ministerio de Economia y of Public Investment Projects provides guidelines for identifying public Finanzas. investment projects, and for carrying out detailed feasibility studies and economic viability analysis. NEDA. 2005a. Reference Manual on Project Development and Evaluation. Provides detailed guidance on feasibility and economic evaluation analysis Manila: National Economic Development Authority. required for all public investment projects. Section 3.2 Appraising Potential PPP Projects 139 Reference Description UK. 2011a. The Green Book: Appraisal and Evaluation in Central Government. Provides guidance on appraisal of projects, programs and policies, by London: UK Government, HM Treasury. combining economic, financial, social and environmental assessments to guide analysis of the options available, along with detailed technical annexes. The Green Book is used as a guide by many other governments. EC. 2013. Evalsed Sourcebook: Method and Techniques. Brussels: European Online sourcebook covering all aspects of socio-economic evaluation as part of Commission. their Resource for the Evaluation of Socio-Economic Development. Includes sections on cost-benefit analysis and cost effectiveness analysis; in each case describing the approach, when it is used, its strengths and weaknesses, and provides a bibliography with further reading. WB. 1998. Handbook on Economic Analysis of Investment Operations. A detailed handbook, starting with an introduction to economic analysis, and Washington, DC: World Bank. going on to describe in detail how to assess economic costs and benefits. The handbook includes chapters on estimating economic benefits specific to the health, education, and transport sectors. Boardman, Anthony, David Greenberg, Aidan Vining, and David Weimer. Comprehensive reference textbook on cost-benefit analysis issues. 2010. Cost Benefit Analysis: Concepts and Practice. 4th ed. Cranbury, New Jersey: Pearson. ADB. 1999. Handbook for Economic Analysis of Water Supply Projects. Manila: Provides detailed guidance on appraising water supply projects—including Asian Development Bank. demand analysis and forecasting, least cost analysis, financial and economic cost-benefit analysis, and sensitivity and risk analysis. Hine, John. 2008. The Economics of Road Investment. Washington, DC: World This presentation provides an overview of specific issues in cost-benefit analysis Bank. for road sector projects. Khatib, Hisham. 2014. Economic Evaluation of Projects in the Electricity Supply Chapter 7: “Economic Evaluation of Projects” focuses on economic cost- Industry. 3rd ed. Stevenage, England: The Institution of Engineering and benefit analysis. Other chapters cover financial analysis, describe how to build Technology. environmental considerations into project appraisal, and describe risk analysis. EIB and EC. 2005. RAILPAG: Railway Project Appraisal Guidelines. Chapter 4: “Financial and Economic Analyses” includes guidance for the Luxembourg: European Investment Bank and European Commission. development of the financial and cost-benefit analyses and sector relevant aspects. Did you know....? The Roman Empire used PPPs At its peak, the Roman Empire financed some of its large infrastructure projects through concessions and private finance. In those projects, the public sector was mainly responsible for building roads, ports, lighthouses, and upstream water mains, while the private sector, through concessions and private finance, built thermal facilities, theaters and circus, canals, and even roads (including sewage pipes and water mains). The projects were paid by users and municipalities, but also rich donors. The latter had the right to put their names on the works, and have a better chance of being elected for public functions. Source: Xavier Bezançon, 2000 Ans d’Histoire du Partenariat Public-Privé (Paris: Presses de l’École Nationale des Ponts et Chaussées, 2004 140 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE 3.3 Structuring PPP Projects This section follows the literature, starting with identifying and prioritizing project risks (Section 3.3.1 - Identifying Risks) then de- “Structuring a PPP project” means allocating responsibilities, scribing how risks are allocated (Section 3.3.2 - Allocating Risks) rights, and risks to each party to the PPP contract. This allocation then explaining how the risk allocation relates to the other aspects is defined in detail in the contract. Project structuring is typically of project structure (Section 3.3.3 - Translating Risk Allocation into developed through an extended process, rather than by drafting a Contract Structure). detailed contract straight away. The first step is to develop the ini- tial project concept into key commercial terms—that is, an outline of the required outputs, the responsibilities and risks borne by each 3.3.1 Identifying Risks party, and how the private party will be paid. The key commercial The first step toward structuring the PPP is often to put togeth- terms are typically detailed enough to enable practitioners to ap- er a comprehensive list of all the risks associated with the project. praise the proposed PPP, as described in Section 3.1 - Identifying Such a list is known as a risk register. In this context, a risk is an PPP Projects, before committing the resources needed to develop unpredictable variation in the project’s value—from the point of the draft PPP contract in detail. view of some or all stakeholders—arising from a given underlying Figure 3.4 - Structuring PPP Projects shows how PPP structuring— risk factor. For example, demand risk is the risk that the project to the level of key commercial terms—fits into the overall develop- value, and project revenues, will be lower (or higher) than expected ment process. Information from the feasibility study and economic because demand for the output is lower (or higher) than expected. viability analysis is a key input to PPP structuring—for example, Irwin’s book on PPP guarantees and risk defines risk in more identifying the key technical risks, and providing estimates for de- detail (Irwin 2007). mand and users’ willingness to pay for services. The PPP structure PPP risks vary depending on the country where the project is im- then feeds into commercial viability, affordability and value for plemented, the nature of the project, and the assets and services money analysis—which may find that changes are needed to the involved. Nonetheless, certain risks are common to many types of proposed risk allocation. The aim is typically to structure a PPP PPP project. These are usually grouped into risk categories that are that will be technically feasible, economically and commercially vi- often associated with a particular function (such as construction, able, fiscally responsible, and provide value for money. operations, or financing), or with a particular project phase (such as The starting point for PPP structuring is the project concept: that termination), as discussed in Box 3.7 - PPP Risk Categories. is, the project’s physical outline, the technology it is expected to use, Many resources provide standard risk lists and preferred risk allo- the outputs it will provide, and the people it will serve. These are cations, in some cases for specific project types. Several examples often developed before deciding whether to implement the project are provided in Section 3.3.2 - Allocating Risks. These standard lists as a PPP, as described in Section 3.1 - Identifying PPP Projects. can be useful resources when identifying project risks for a partic- The specification of output requirements in the PPP contracts is ular PPP. However, PPP projects often have unique features or cir- described in Section 3.4 - Designing PPP Contracts. PPP project cumstances—for example, the specific geological conditions on the structuring focuses on identifying and allocating risks. This makes route of a proposed road. This means that implementing agencies sense since appropriate risk allocation is behind many of the PPP should make use of experienced advisors to help identify a compre- Value Drivers described in Box 1.2 - PPP Value Drivers. Following hensive list of project risks. this approach, the other elements of the PPP structure—such as the allocation of responsibilities and the payment mechanism—stem Assessing and prioritizing risks from the risk allocation. For example, construction risk may be To focus efforts when allocating risks, it is often helpful to consider allocated to the private party, on the basis that it is best qualified their importance. Some risks will be more significant than others to manage construction. This means that the private party should in terms of likelihood and severity of impact on project outcomes, also be allocated the responsibility and right to make all construc- or both. Risk can be assessed either quantitatively or qualitatively. tion-related decisions. The mechanism for allocating commercial risk to the private party may take the form of a user-pays payment The Infrastructure Australia guidance note on calculating the mechanism. PSC (AU 2016a, 84–109) provides detailed guidance both on Section 3.3 Structuring PPP Projects 141 Figure 3.4 Structuring PPP Projects INITIAL CONCEPT Screen as PPP Screen priority projects for PPP potential PREPARE OTHER AS PPP OPTIONS Identify and allocate risks and responsibilities KEY COMMERCIAL TERMS Structure PPP Appraise PPP Appraise project feasibility, commercial viability, value-for-money, fiscal responsibiity PROCEED OTHER AS PPP OPTIONS Define performance requirements Define payment mechanisms DRAFT PPP CONTRACT Draft PPP contract Create adjustment mechanisms Establish dispute resolution mechanisms Provide for termination identifying risk, and using various quantitative techniques to eval- Mitigating risks uate risks. An ADB handbook for risk analysis in project evalu- After full identification of project risks, a mitigation process should ation (ADB 2002, 9–28) also includes a chapter describing quan- occur—wherein, based on a cost-benefit analysis, some project titative techniques for assessing risk. PFRAM, the PPP Fiscal Risk characteristics or procedural steps may be adjusted. For instance, Assessment Model (IMF and WB 2016) designed by the IMF and additional geological surveys or traffic studies may be conducted the World Bank, identifies a large set of risks that may have a fiscal before the tender to reduce uncertainty and contain bidding costs. impact. Performance requirements that are not critical to project success In practice, many implementing agencies take a more qualitative and may create unacceptable risk to private operators may be elim- approach at this stage. Guidance on risk management by the Vic- inated. toria Managed Insurance Authority (VIC 2015, 79–83) provides helpful guidance on a risk heat map—a qualitative risk assessment 3.3.2 Allocating Risks approach, in which risks are categorized according to their likeli- hood of occurrence, and impact. Farquharson et al (Farquharson Allocating risk, in the context of a PPP, means deciding which par- et al. 2011, Appendix B) provides an example ‘risk register’ for a ty to the PPP contract will bear the cost (or reap the benefit) of a PPP project, which also takes a qualitative approach. Each risk is change in project outcomes arising from each risk factor. Allocating categorized as being low, medium, or high for both risk status (like- project risk efficiently is one of the main ways of achieving better lihood) and impact. Most effort should be directed to managing value for money through PPPs. Iossa et al (Iossa et al. 2007, 20) those risks identified as being both high likelihood, and high im- describe two main goals of risk allocation. The first is to create in- pact. centives for the parties to manage risk well—and thereby improve 142 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Box 3.7 PPP Risk Categories The following categories of risk are common to many PPPs: contract or expropriation. • Change in legal or regulatory framework—the risk that a • Site—risks associated with the availability and quality of the change in general law or regulation adversely affects the project site, such as the cost and timing of acquiring the site, project, such as changes in general corporate taxation, or needed permits or assuring rights of way for a road, the effect in rules governing currency convertibility, or repatriation of of geological or other site conditions, and the cost of meeting profits. environmental standards. • Default—the risk that the private party to the PPP contract • Design, construction and commissioning—risk that turns out not to be financially or technically capable to construction takes longer or costs more than expected, or implement the project. that the design or construction quality means the asset is not adequate to meet project requirements. • Economic or financial—risk that changes in interest rates, exchange rates or inflation adversely affect the project • Operation—risks to successful operations, including the risk outcomes. of interruption in service or asset availability, the risk that any network interface does not work as expected, or that the cost • Force Majeure—risk that external events beyond the control of operating and maintaining the asset is different than was of the parties to the contract, such as uninsurable natural expected. disasters, war or civil disturbance, affect the project. • Demand, and other commercial risk—the risk that usage of • Asset ownership—risks associated with ownership of the the service is different than was expected, or that revenues assets, including the risk that the technology becomes are not collected as expected. obsolete or that the value of the assets at the end of the contract is different than was expected. • Regulatory or political—risk of regulatory or political decisions that adversely affect the project. For example, this could For more detail, see Yescombe’s chapter on risk evaluation and include failure to renew approvals appropriately, unjustifiably transfer (Yescombe 2007), and Delmon’s chapter on risk allocation (Delmon 2015, Chapter 5), both of which start with descriptions harsh regulatory decisions, or in the extreme, breach of of typical types of PPP risk. project benefits or reduce costs. The second is to reduce the overall struction because it has the most expertise in that area. This also cost of project risk by insuring parties against risks they are not means it should bear the cost of construction cost over-runs or happy to bear. Box 3.8 - Allocating Land Acquisition Risk—com- delays. monly a significant risk for PPP projects. ŠŠBest able to control the impact of the risk on project out- comes, by assessing and anticipating a risk well and responding Risk allocation principles to it. For example, while no party can control the risk of an earthquake, if the private firm is responsible for project design, A central principle of risk allocation is that each risk should be it could use techniques to reduce the damage should an earth- allocated to whoever can manage it best. Irwin’s book on guaran- quake occur. tees and PPP risk (Irwin 2007, 56–62) defines this principle more precisely, stating each risk should be allocated to the party: ŠŠAble to absorb the risk at lowest cost, if the likelihood and impact of risks cannot be controlled. A party’s cost of absorb- ŠŠBest able to control the likelihood of the risk occurring—for ing a risk depends on several factors, including: the extent to example, the private party is usually in charge of project con- which the risk is correlated with its other assets and liabilities; Section 3.3 Structuring PPP Projects 143 premium—the equity investors will require, and the harder it will be to raise debt finance. Box 3.8 Allocating Land The principles and practice of risk allocation in PPPs is also increas- ingly the subject of academic research and literature. For exam- Acquisition Risk ple, Ng and Loosemore’s article on risk allocation in PPPs (Ng and Loosemore 2007) describes PPP risk categories and allocation Land acquisition can be one of the most challenging aspects approach and provides a case study of risk allocation in the New of developing a PPP project. Delays in obtaining land have created significant hurdles or even blocked some promising Southern Railway project (an underground airport-city rail link) in PPP projects. There are many options for dealing with New South Wales, Australia. Bing et al’s article on risk allocation risk associated with land acquisition delays or difficulties. in PPP/PFI projects in the United Kingdom (Bing et al. 2005) Some governments adopted a policy of freeing land before assesses how risks have been allocated in PFI projects in practice, to launching a project to the market, thereby accepting and identify risk allocation preferences. An IDB review of the Spanish taking this risk out of the contractual equation—such as for PPP experience (Rebollo 2009) includes several examples of risk transport projects in India. Others allocate to the private party the responsibility for identifying the plots of land that allocation used in different types of projects, from roads to hos- will be needed for the project, and for undertaking the pitals. The World Bank Group’s Report on Recommended PPP necessary processes to acquire that land and free it from Contractual Provisions (WB 2017e) discusses several contractu- occupancy. Still others prepare carefully the land acquisition al clauses related to core risks such as Force Majeure and Change process, detailing the need for land and the identification in Law. of owners, but then transfer to the private partner the responsibility for obtaining the land. The best option may depend on circumstances—not least the prevailing Limitations on risk allocation legislation regarding compulsory acquisition of land. There are some limits to how risks can be allocated in a PPP proj- India’s Toolkit for Highways (IN, Module 3), in its Module ect. These include the following: 3: Tools and Resources, presents several good and bad examples of how to handle land acquisition. Jonathan ŠŠLevel of detail of risk allocation—in theory, every project risk Lindsay’s paper (Lindsay 2012) discusses compulsory land could be identified and allocated to the party best able to bear acquisition in detail. it, thereby improving value for money. In practice, as Irwin describes (Irwin 2007, 63–65) the cost of doing so would be high, and likely outweigh the benefits in the case of less signifi- cant risks. In most cases, risks are allocated in groups, sometimes with exceptions for certain significant risks. For example, the private party may bear all construction risks, except certain key its ability to pass the risk on (for example, to users of the service geological risks, against which the government could provide an through price changes, or to third parties by insuring); and the indemnity. nature of its ultimate risk bearers. For example, the ability of governments to spread risk among taxpayers means they may ŠŠRisks that cannot be transferred—certain types of risk cannot have lower risk-bearing cost than private firms, whose ultimate be transferred through the PPP contract. For example, the pri- risk-bearers are their shareholders. vate party will always bear certain political risks—in particular, the risk that the government will renege on the contract or ex- As described in the OECD’s publication on risk sharing and propriate the assets. International institutions such as the Multi- value for money in PPPs (OECD 2008a, 49–50), applying these lateral Investment Guarantee Agency (MIGA) provide political principles does not imply transferring the maximum possible risk risk insurance to help mitigate this risk. to the private sector. Transferring to the private party the risks that it is better able to control or mitigate can help lower the overall ŠŠExtent of risk transfer to private party—the equity holders of project cost, and improve value for money. However, the more total the private party to the PPP contract—the PPP company—are risk transferred to the private party, the higher the return—or risk only exposed up to the value of their equity stake. Moreover, 144 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE lenders will typically only accept a relatively low level of risk, ŠŠInfrastructure Australia has produced standard commercial concomitant with their expected returns. In practice, this means principles for both economic and social infrastructure projects that the extent to which risk can be transferred is limited by the (AU 2011b), which describe in detail how risks and responsibil- level of equity in the project company, as described by Ehrhardt ities will be allocated. and Irwin (Ehrhardt and Irwin 2004). If losses due to a risk ŠŠHong Kong’s Introductory Guide to PPPs (HK 2008, Annex turn out to be greater than the equity stake, the equity holders E) provides a detailed example of a risk matrix for PPP of a can walk away from the project. Since the government is ulti- water treatment plant. mately responsible for making sure services are provided, the remainder of the project risk remains with the government—as ŠŠThe Government of Rio de Janeiro’s PPP Manual (RJ 2008, described by Iossa et al (Iossa et al. 2007, 25). Annex 2) provides an example of a risk matrix for a PPP infra- structure project. ŠŠIncomplete contracts—even well-designed contracts may suf- fer from the absence of certain necessary provisions. While PPP ŠŠSouth Africa’s PPP Manual, Module 4: PPP Feasibility Study contracts cannot provide solutions for every possible situation, (ZA 2004a, Annex 4) includes a standardized PPP risk matrix— they should provide rules (templates or formulas) for the range listing risks, and describing for each risk a typical risk mitigation of foreseeable scenarios, and a decision-making methodology mechanism and allocation. for any other situation. ŠŠThe Global Infrastructure Hub (GI Hub)’s report on Allocat- A combination of these limitations can mean that country charac- ing Risks in Public-Private Partnership Contracts (GIH 2016a) teristics affect the possibilities of risk transfer. Ke et al’s study of presents a series of 12 sample risk matrices in different infra- risk allocation (Ke et al. 2010) demonstrates this in their compar- structure sectors, specifically transport, energy, and water and ison of risk allocation for projects in China, Hong Kong, Greece, sanitation. In each of the sample risk matrices, there is a detailed and the United Kingdom. listing of project risks, along with a discussion of risk allocation, mitigation measures and government support arrangements. Risk allocation matrices There is also a comparison of the different risk allocation ar- rangements in developed and emerging markets. The GI Hub The output of the risk allocation process at this stage is often a website (GIH) also provides an interactive blog and Q&A fo- risk allocation matrix. The risk allocation matrix lists risks—often rum. sorted by category—and defines who bears each risk. This risk allo- cation is then put into practice by including the appropriate clauses in the PPP contract as described in Section 3.4 - Designing PPP 3.3.3 Translating Risk Allocation into Contracts. Farquharson et al (Farquharson et al. 2011, Appendix Contract Structure B) provides an example risk register (or matrix) for a PPP project. Much of the PPP literature focuses on risk allocation. Some of it Some governments capture the risk allocation principles described can give the impression that, once a preferred risk allocation has above in preferred risk allocations, often presented in the form of a been settled, this can somehow translate smoothly into a detailed preferred risk allocation matrix. These preferred allocations may be contract. Such an impression may be misleading. Many experi- generic, or specific to sectors or types of project. They are usually a enced PPP practitioners will go through an intermediate step in starting point for allocating risk on a particular project, since proj- which they define other elements of the contract structure such as: ects often have specific characteristics where a different risk alloca- “who will do what”?, and “how will the payments flow”? Unfor- tion would provide better value for money. Risk allocation matrices tunately, relatively few resources describe how the risk allocation should be checked again prior to signing the contract to review the translates into an overall contract structure. responsibilities of each party before it is legally binding. This final The World Bank’s Toolkit for PPP in Water Services (PPIAF review could also serve as an additional gate-keeping mechanism. 2006, 97–124) is an exception. It sets out a process for allocating The following are examples of preferred risk allocations and risk responsibilities and risks together—each responsibility being asso- allocation matrices: ciated with a bundle of risks. For example, the private party may be Section 3.3 Structuring PPP Projects 145 responsible for revenue collection, which carries the risk that some low from the allocation of functions and risks. For example, if the customers will not pay. The private party may be responsible for private party is better able to manage collection risks and demand construction, which entails a series of risks. Labor costs, the timing risks, then the private party will likely be remunerated directly from of equipment delivery, and the cost and time to obtain permits can user charges. However, if the private party can manage collection affect total costs and construction times, positively or negatively. risk but is not asked to take demand risk, then the payment struc- ture may involve the private party collecting user charges and re- The toolkit sets out an approach to contract structuring, starting mitting them to the public authority, while the public authority with identifying the major areas of responsibility, or functions: then pays the private party for asset availability, with a bonus for design and construction of new assets, finance, operations, and achieving high levels of collections. maintenance (for more on these functions see Section 1.1 - What is a PPP: Defining ‘Public-Private Partnership’). For each function, Finally, a necessary complement to defining the payment mecha- specific responsibilities can then be defined, and risks identified nism is defining how performance will be measured, monitored, that are associated with each responsibility. and enforced. For example, the government’s payment may be con- ditional on the availability of the asset, with a view to transferring The toolkit also describes the linkage between defining the details most operating risk to the private sector. This risk transfer can only of the payment mechanism—in this case, tariff review mechanisms, be achieved in practice if the standards defining “availability” are since the toolkit focuses on user-pays projects—and risk allocation. clear and practicable. Section 3.4.1 - Performance Requirements pro- Section 3.4.2 - Payment Mechanism goes into more detail. vides more details. Generalizing from this approach suggests that it may be helpful The following resources provide further guidance on the linkages to think of arriving at a PPP type (see Section 1.1 - What is a PPP: between responsibilities, risks, rights, and payment mechanisms, Defining ‘Public-Private Partnership’) from considering whether the which can inform development of the contract structure: public or private party is better able to carry out the key functions (Design, Build, Operate, Maintain, and Finance). This allocation of ŠŠIrwin (Irwin 2007, 61) briefly describes how responsibilities, functions may be based on an analysis of which party is best able rights, and risks should be allocated together. This follows from to bear the risks naturally associated with each function. Consid- the principle of risk allocation that a risk is allocated to the party eration of institutional linkages and political constraints will also best able to manage it: the rationale only holds if the party is come into play when deciding on which party can best perform also given the right and responsibility to make decisions related which function. to that risk. Once a basic PPP type is chosen, the remainder of the risk alloca- ŠŠIossa et al (Iossa et al. 2007, 26–31) describes how different PPP tion can be thought of as fine-tuning the basic function allocation. contract types—with different functions allocated to the private For example, if the private party is to be responsible for the Build party and different payment mechanisms—typically correspond function, but the public party is to retain geotechnical risk, this to different risk allocations. The authors also describe (33–34) would be included in the contract design as an exception to the how output specifications, payment mechanisms, and risk allo- basic functional principle that all construction-related risks are for cations need to be closely aligned. the private party to manage and absorb. ŠŠIndia’s online PPP Toolkit (IN) Module 1: PPP Background Beside allocation of functions, another key element in contract has a section on PPP model variants which describes typical structure is how the payments flow. Payment mechanisms may fol- risk allocations under different PPP contract types, thus giving a guide to how risk allocation can translate into choice of basic contract structure. 146 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Key References: Structuring PPP Projects Reference Description Irwin, Timothy C. 2007. Government Guarantees: Allocating and Valuing Chapter 4 defines risk, and explains the principles of allocating risk under PPP Risk in Privately Financed Infrastructure Projects. Directions in Development. projects. Chapter 5 provides examples of putting those principles into practice Washington, DC: World Bank. for three risks: exchange-rate risk, insolvency risk, and policy risk. Yescombe, E.R. 2007. Public-Private Partnerships: Principles of Policy and Chapter 14 on risk evaluation and transfer describes types of risk that are Finance. Oxford: Butterworth-Heinemann. common to PPP projects. Delmon, Jeffrey. 2015. Private Sector Investment in Infrastructure: Project Chapter 5 on risk allocation goes into more detail on PPP risk categories. Finance, PPP Projects and PPP Frameworks. 3rd edition. Alphen aan den Rijn, Netherlands: Wolters Kluwer. AU. 2016a. National Public Private Partnership Guidelines - Volume 4: Public Section 16: Identifying, Allocating, and Evaluating Risk describes in detail Sector Comparator Guidance. Canberra: Commonwealth of Australia. different methodologies for quantitatively valuing risk in PPPs. ADB. 2002. Handbook for Integrating Risk Analysis in the Economic Analysis of Chapter 2 describes quantitative techniques for assessing risk. Projects. Manila: Asian Development Bank. VIC. 2015. Victorian Government Risk Management Framework. Melbourne, A general guide on risk management frameworks, developed for public Australia: Victorian Government, Secretary Department of Treasury and sector managers in the State of Victoria, Australia. Includes examples of risk Finance. assessment, and risk management templates. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and Appendix B is risk register for a PPP project, providing an example of a risk Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private allocation matrix, and of a qualitative approach to assessing and prioritizing Partnerships in Emerging Markets. Washington, DC: World Bank. risks. Iossa, Elisabetta, Giancarlo Spagnolo, and Mercedes Vellez. 2007. Best Practices Section 3: Risk Allocation Incentives, and Types of PPP describes typical types on Contract Design in Public-Private Partnerships. Washington, DC: World of risk in PPP contracts, the principles of effective risk allocation as well as its Bank. limitations, and typical risk allocations under different types of PPP contract. OECD. 2008a. Public-Private Partnerships: In Pursuit of Risk Sharing and Value Chapter 3: “The Economics of Public-Private Partnership” includes a section for Money. Paris: Organisation for Economic Co-operation and Development. on the role and nature of risk, which describes the concept of optimum risk transfer. Ng, A., and Martin Loosemore. 2007. “Risk allocation in the private provision Describes classification and allocation of risk in PPP projects, and provides a of public infrastructure.” International Journal of Project Management 25(1) case study of risk allocation for a railway PPP project in Australia. 66-76. Bing, Li, A. Akintoye, P.J. Edwards, and C. Hardcastle. 2005. “The allocation Assesses how risks have been allocated in practice in PPP projects in the United of risk in PPP/PFI construction projects in the UK.” International Journal of Kingdom. Project Management 23 (1) 25-35. Rebollo, Andres, ed. 2009. Experiencia española en concesiones y asociaciones Review of the Spanish PPP experience. Includes a description of typical project público-privadas para el desarrollo de infraestructuras públicas: Marco general. structure divided by sectors and includes multiple examples of successful PPP Research for Programa para el Impulso de Asociaciones Público-Privadas en projects. Estados Mexicanos (PIAPPEM). Madrid: Deloitte España. Ke, Yongjian, ShouQing Wang, and Albert P. C. Chan. 2010. ‘”Risk Allocation Compares risk allocation for PPP projects in China, Hong Kong, Greece, and in PPP Infrastructure Projects: Comparative study.” Journal of Infrastructure the United Kingdom, exploring how country characteristics affect the risk Systems 16(4) 343-351. allocation that can be achieved in practice. Section 3.3 Structuring PPP Projects 147 Reference Description AU Guidelines. Accessed March 20, 2017. “National Guidelines for Volumes 3 and 7 describe in detail how the risks and responsibilities will Infrastructure Project Delivery.” Canberra: Australian Government, be allocated in social and economic infrastructure projects. The Roadmap Department of Infrastructure and Regional Development. Website. describes how the principles should be used—as a starting point for developing contracts for particular projects. HK. 2008. An Introductory Guide to Public Private Partnerships. Hong Kong, Section 6 provides guidance on managing risk. Annex E provides an example China: Efficiency Unit. risk allocation matrix for a water treatment plant. RJ. 2008. Manual de Parcerias Público-Privadas - PPPs. Conselho Gestor do Annex 2 provides an example of a typical risk matrix. Programa Estadual de Parcerias Público-Privadas. Rio de Janeiro: Governo do Estado do Rio de Janeiro. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African Annex 3 provides guidance on how to calculate the value of risk. Annex 4 Government, National Treasury. presents a standardized PPP risk matrix—listing risks, and describing for each risk a typical risk mitigation mechanism and allocation. PPIAF. 2006. Approaches to Private Sector Participation in Water Services: A Section 6: Allocating Risks and Responsibilities describes a process and Toolkit. Washington, DC: Public-Private Infrastructure Advisory Facility. principles for allocating both risks and responsibilities, as well as how the allocation can be defined in the contract, including through tariff rules. IN. Accessed March 15, 2017. “PPP Toolkit for Improving PPP Decision- Module 1: PPP Background has a section on PPP modal variants that describes Making Processes.” Public-Private Partnerships in India. New Delhi: typical risk allocations under different PPP contract types. Government of India, Ministry of Finance. ES. 2011. “Real Decreto Legislativo 3/20111, de 14 de noviembre, por The Spanish Procurement law regulates the public procurement PPP contracts el que se aprueba el texto refundido de la Ley de Contratos del Sector that can be used in Spain. Some of them are partially structured by the law and Público.” Boletín Oficial del Estado, 276 (1) 117729-117913. Madrid: some of them have a flexible risk allocation. Gobierno de España, Ministerio de la Presidencia. Toro Cepeda, Julio. 2009. Experiencia Chilena en Concesiones y Asociaciones Review of the Chilean PPP experience. Includes a description of typical project Público-Privadas para el desarrollo de Infraestructura y la Provisión de Servicios structure divided by sectors and includes multiple examples of successful PPP Públicos: Informe Final. Research for Programa para el Impulso de Asociaciones projects. Público-Privadas en Estados Mexicanos (PIAPPEM). Santiago, Chile. GIH. 2016a. Allocating Risks in Public-Private Partnership Contracts. Sydney: Outlines risk allocation and risk mitigation measures in several sectors, Global Infrastructure Hub. distinguishing between developed and emerging markets. 148 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE 3.4 Designing PPP Contracts retaining clarity and limiting uncertainty for both parties. This is achieved by creating a clear process and boundaries for change. To The PPP contract is at the center of the partnership, defining the implement this style of contract in practice requires strong contract relationship between the parties, their respective rights and respon- management institutions, as described in Section 3.6 - Managing sibilities, allocating risk, and providing mechanisms for dealing PPP Contracts. Where possible, involving the future contract man- with change. In practice, the PPP contract can encompass several ager in designing or reviewing the PPP contract can help ensure documents and agreements, as described in Box 3.9 - What is the that change management processes are implementable in practice. PPP Contract? PPP contract design is a complex task. This section briefly sets out Most PPP projects present a contractual term between 20 and 30 some key considerations—and provides links to tools, examples, years; others have shorter terms; and a few last longer than 30 years. and further resources—in five areas of PPP contract design: The term should always be long enough for the private party to ŠŠPerformance requirements—defining the required quality and adopt a whole-life costing approach to project design and service quantity of assets and services, along with monitoring and en- management, guaranteeing service performance at the lowest cost. forcement mechanisms, including penalties The term depends on the type of project and on policy consider- ations—the project should be needed over the term of the contract, ŠŠPayment mechanisms—defining how the private party will the private party should be able to accept responsibility for service be paid, through user charges, government payments based on delivery over its term, and the procuring authority should be able usage or availability, or a combination, and how bonuses and to commit to the project for its term. The availability of finance, penalties can be built in and its conditions, may also influence the term of the PPP contract. ŠŠAdjustment mechanisms—building into the contract mecha- As shown in Figure 3.5 - PPP Contract Design Stage, the draft PPP nisms for handling changes, such as extraordinary reviews of contract is generally needed before a Request for Proposal (RFP) is tariffs, or changing service requirements issued. Detailed contract design takes significant time and resourc- ŠŠDispute resolution procedures—defining institutional mech- es—including from expert advisors. Approval is often required be- anisms for how contractual disputes will be resolved, such as the fore embarking on detailed design and investing these resources. role of the regulator and courts, or the use of expert panels or The draft PPP contract is typically included with the RFP sent to international arbitration prospective bidders. In some cases, the PPP contract issued with ŠŠTermination provisions—defining the contract term, hando- the RFP cannot be changed. In others, it may be changed because ver provisions, and circumstances and implications of early ter- of interaction with bidders during the transaction process. Aus- mination tralia National PPP Guidelines Roadmap (AU 2015) and the South Africa PPP Manual (ZA 2004a) provide an overview of Together, these sets of provisions define the risk allocation under PPP contract development and how it progresses at each stage of the contract. Obviously, the aim must be to draft these provisions implementing the PPP. so that the risk allocation chosen (as set out in Section 3.3 - Struc- turing PPP Projects) is achieved. The provisions dealing with ad- Aim of PPP contract design justment mechanisms and dispute resolution are intended to avoid A well-designed contract is clear, comprehensive, and creates cer- the need for renegotiation, by allowing changes to be made, and tainty for the contracting parties. Because PPPs are long-term, problems resolved, within the framework provided by the contract. risky, and complex, PPP contracts are necessarily incomplete—that Some countries have made efforts to standardize elements of PPP is, they cannot fully predict future conditions. This means the PPP contract design to reduce the considerable time and cost frequently contract needs to have flexibility built in to enable changing cir- involved in preparing and finalizing a given PPP contract. They cumstances to be dealt with as far as possible within the contract, have developed standardized contractual provisions or even com- rather than resulting in renegotiation or termination. plete standardized PPP contracts—Table 3.1 - Examples of Stan- The aim of PPP contract design is therefore to create certainty dardized PPP Contracts and Contract Clauses provides some exam- where possible, and bounded flexibility where needed—thereby ples. Other countries have chosen to incorporate certain elements Section 3.4 Designing PPP Contracts 149 Figure 3.5 PPP Contract Design Stage Identify and allocate risks and responsibilities KEY COMMERCIAL TERMS Structure PPP Appraise PPP Appraise project feasibility, commercial viability, value-for-money, fiscal responsibiity PROCEED OTHER AS PPP OPTIONS Define performance requirements Define payment mechanisms DRAFT PPP CONTRACT Draft PPP contract Create adjustment mechanisms Establish dispute resolution mechanisms Provide for termination Decide the procurement strategy Market PPP Manage PPP transaction Qualify bidders Manage bid process Reach financial closure of PPP contract design in legislation that governs all PPP contracts, required maintenance standards for a road, or defining the required as described in Section 2.2 - PPP Legal Framework. service quality and connection expansion targets for utility services provided directly to users. Performance indicators and targets are For example, in Chile the dispute resolution mechanism is estab- typically specified in an annex to the main PPP agreement. lished in the Concessions Law. The World Bank Group’s Report on Recommended PPP Contractual Provisions (WB 2017e) sets out A key feature of a PPP is that performance is specified in terms and analyzes certain contractual provisions dealing with particular of required outputs (such as road surface quality), rather than in- legal issues encountered in virtually every PPP contract, such as puts (such as road surfacing materials and design) wherever pos- force majeure, termination rights and dispute resolution. Another sible. This enables the private PPP company to be innovative in useful resource is the World Bank’s online PPP in Infrastructure responding to requirements as described in Farquharson et al Resource Center (PPPIRC 2017)—this website hosts a collec- (Farquharson et al. 2011, 34). For more guidance and examples on tion of actual PPP contracts and sample agreements for a range the differences between output and input specification, see Hong of contract types and sectors. To review the impact of contractual Kong’s guidance on managing outsourcing contracts (HK 2007, clauses on statistical classification, the 2016 Eurostat Guide to the 32–33), and Guidance on output specifications from the United Statistical Treatment of PPPs (EPEC 2016) reviews a large set of Kingdom’s Ministry of Defence (UK 2010a), which also sets out PPP contractual provisions typical in European government-pays a process for developing the specification for a PPP project. PPP contracts. Specifying outputs rather than inputs also keeps competition as open as possible and reduces the opportunities for corrupt prac- 3.4.1 Performance Requirements tices. The World Bank’s sourcebook on governance in the elec- tricity sector describes a power sector procurement, in which a The PPP contract should clearly specify what is expected from the particular technology was specified in the RFP, with the intent of private party in terms of the quality and quantity of the assets and limiting competition and facilitating corruption. services to be provided. For example, this could include defining 150 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Box 3.9 What is the PPP Contract? This section uses the term PPP contract to mean the contractual In addition to the PPP contract, there will also be numerous documents that govern the relationship between the public and contracts between the SPV and its suppliers and financiers. private parties to a PPP. In practice, the PPP contract may comprise Chief among them would be financing agreements between more than one document. For example, a PPP to design, build, the SPV and its lenders, and shareholder agreements between finance, operate, and maintain a new power plant, with power equity investors (see Section 1.3 - How PPPs Are Financed for supplied in bulk to a government-owned transmission company more on the PPP contractual structure). The PPP contract may may be governed by a power purchase agreement (PPA) between not be effective until these other contractual agreements are the transmission company and the PPP company, as well as an in place. The EPEC Guide to Guidance (EPEC 2011b, 23) lists implementation agreement between the responsible government topics that should be covered in a typical PPP contract—the ministry and the PPP company. Each agreement may, in turn, Table 3.1 - Examples of Standardized PPP Contracts and Contract refer to schedules or annexes to set out particular details—for Clauses provide further examples. The PPIAF Toolkit for PPP in example, detailed performance requirements and measures. Highways (WB 2009a) section on contracts describes the range of contractual agreements typically involved for different types of PPP. yyFollowing a formal performance warning procedure, lenders will The PPP contract should set out the following: be allowed to exert their step-in rights, in order to improve per- ŠŠClear performance targets or output requirements. Farqu- formance and avoid contractual default. Persistent unsatisfactory harson et al (Farquharson et al. 2011, 34–36) note perfor- performance can escalate into termination for default, as described mance targets should be SMART—that is, Specific, Measurable, in Section 3.4.5 - Termination Provisions. Achievable, Realistic, and Timely—and provides an example of ŠŠ Step-in rights for the public party, to take control of the SMART targets for a government accommodation PPP. concession (typically temporarily) under certain well-defined ŠŠHow performance will be monitored—specifies what infor- circumstances. As described by Iossa et al (Iossa et al. 2007, mation must be gathered, by whom, and reported to whom and 81–83), the intention is to enable the public party to resolve how frequently. This can include roles for the government’s con- problems threatening service provision when it is better able to tract management team, the private party, external monitors, deal with these problems, such as a riot in a PPP prison. regulators, and users (see Section 3.6 - Managing PPP Contracts). The following resources provide more guidance and examples on ŠŠThe consequences for failure to reach the required performance these three elements of setting performance requirements: targets, clearly specified and enforceable. This could include: yyKerf et al’s Guide to Concessions (Kerf et al. 1998, 70–74) de- yySpecifying penalty payments, liquidated damages or performance scribes issues and provides examples of performance targets in the bonds. Iossa et al (Iossa et al. 2007, 47–49) describe the pros context of concession contracts for utilities. and cons of these kinds of enforcement mechanism. The United yy4Ps paper on the United Kingdom’s PFI experience (4ps 2005, Kingdom’s standardized PPP contracts also include a chapter on 7–10) presents lessons learned on specifying output requirements. protection against late service commencement (UK 2007, Chapter These include the need for clarity to avoid differences in interpreta- 4), describing when and how liquidated damages or performance tion, leading to disagreement, and ensuring reporting requirements bonds may be used. are adequate. yySpecifying payment deductions for poor performance (or bonuses yyThe South Africa PPP Manual Module 6 Managing the PPP for good performance), built into the payment mechanism (see Sec- Agreement (ZA 2004a, Module 6, 25–26) briefly outlines how per- tion 3.4.2 - Payment Mechanism). formance requirements, monitoring and enforcement mechanisms Section 3.4 Designing PPP Contracts 151 Table 3.1 Examples of Standardized PPP Contracts and Contract Clauses Jurisdiction Standard Links Australia Guidelines issued by Infrastructure Australia on standard Infrastructure Australia’s PPP Guidelines (AU 2017): Volume 3 on social commercial principles for social and economic infrastructure PPPs infrastructure and Volume 7 on economic infrastructure. India Descriptions of model agreements for PPP in a range of transport Former Planning Commission (IN 2014d), (IN 2009) sectors Netherlands Standard PPP contract for DBFM in buildings and DBFMO in Ministry of Finance Publications (NL 2017) infrastructure New Zealand Draft standard PPP contract National Infrastructure Unit (NZ 2013) Philippines Sample contracts for PPP in bulk water supply, ICT, solid waste Public-Private Partnership Center: PEGR Sample Contracts (PEGR 2009) management, and urban mass transit. The PPP Center is currently developing standardized terms for broader application South Africa Standardized PPP provisions published alongside the South Africa National Treasury Standardized PPP Provisions (ZA 2004c) PPP Manual United Kingdom Standardized contracts for PFI projects; includes extensive Her Majesty’s Treasury: Standardized contracts (UK 2012c) guidance on each element of the contract should be established; more detail is set out in South Africa’s Stan- ŠŠUser charges—payment collected by the private party directly dardized PPP Provisions on performance monitoring (ZA 2004a, from users of the service Standardized PPP Provisions, 121–133). ŠŠGovernment payment—payment by the government to the yyThe Scottish Government has produced standard output-based private party for services or assets provided. These payments performance requirements for PFI schools (SCT 2004), which also could be: describe some key issues in defining performance requirements. yyUsage-based—for example, shadow tolls or output-based subsidies yyThe United States Department of Transportation’s Key Perfor- yyBased on availability—that is, conditional on the availability of an mance Indicators in Public-Private Partnerships (US 2011) re- asset or service to the specified quality views the indicators used in several countries and their efficiency. yyUpfront subsidies based on achieving certain milestones ŠŠBonuses and penalties, or fines—deductions on payments to 3.4.2 Payment Mechanism the private party, or penalties or fines payable by the private par- The payment mechanism defines how the private party to the PPP ty, due if certain specified outputs or standards are not reached; is remunerated. Adjustments to payments to reflect performance or or conversely, bonus payments due to the private party if speci- risk factors are also important means for creating incentive and al- fied outputs are reached locating risk in the PPP contract, as described in the EPEC Guide A PPP payment mechanism could include some or all of these el- to Guidance (EPEC 2011b, 24). ements, which should be fully defined in the contract—including Iossa et al (Iossa et al. 2007, 41–49) provides a helpful overview specifying the timing and mechanism for making the payments in of payment mechanisms for PPPs. The basic elements of PPP pay- practice. Key considerations in each case are described briefly fur- ment mechanisms can include: ther in this section. 152 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Defining user charges as an availability payment mechanism creates an alternative re- ward mechanism not related to the level of demand. Providing When a concession is paid by charging users, the approach to tar- an upfront capital subsidy means the private party bears less risk iff setting and adjustment becomes an important risk allocation than if the same subsidy is provided on an availability basis over mechanism. In some PPPs, the private party may be free to set the contract lifetime. Irwin’s paper on fiscal support decisions tariffs and the tariff structure. However, in many cases, user-pays (Irwin 2003) describes some of the trade-offs between different PPPs are in sectors with monopoly characteristics, and tariffs are types of subsidies to infrastructure projects (alongside user pay- typically regulated by government (along with service standards), ments), and how governments can decide which is appropriate. to protect users. A PPIAF note on tolling principles (Bull and Mauchan 2014) discussed toll policy trade-offs and risks. The ŠŠLinkage to clear output specifications and performance key question for risk allocation is how tariffs will be allowed to standards—linking payments to well-specified performance change—for example, with changes in inflation or other economic requirements is key to achieve risk allocation in practice. See variables, or changes in different types of cost and who can trigger Section 3.4.1 - Performance Requirements for more resources on a tariff revision. specifying output and performance targets in the contract. The section on defining bonuses and penalties provides more on Tariffs can be controlled by establishing tariff formulae in the PPP how adjustments to payments should be specified. contract, or by regulation, or a combination of the two. For exam- ple, a tariff formula may be set that establishes initial tariff levels, ŠŠIndexation of payment formulae—as for tariff specification, and a formula by which the tariff is allowed to regularly, automat- payments may be fully or partially indexed to certain risk fac- ically adjust in line with inflation. The contract may provide for tors, so the government bears or shares the risk. regular tariff formula reviews, at which point other factors could be considered—as described further in Section 3.4.3 - Adjustment The EPEC Guide to Guidance (EPEC 2011b, 24) provides a Mechanisms. helpful overview of how to define the payment mechanism for gov- ernment-pays PPPs. Yescombe (Yescombe 2007) provides more Kerf et al Guide to Concessions (Kerf et al. 1998, Sections 3.3 detailed description of the different options and their implications and 3.4) provides a helpful overview on price setting, and price for risk allocation and bankability. A note developed by the Scot- adjustment for user-pays concessions contracts. The World Bank’s tish Government (SCT 2007) describes experience with defining toolkit on water sector PPPs (PPIAF 2006, 108–118) also dis- and implementing payment mechanisms in PPPs. cusses tariff indexation and resets as a risk allocation mechanism for user-pays PPPs. Defining bonuses and penalties For further information on tariff-setting and adjustment, there is a Under both government- and user-pays PPPs, bonuses and pen- wide literature available on different approaches to tariff-setting for alties can be tied to particular outcomes. Under government-pays infrastructure regulation. The World Bank’s Body of Knowledge contracts, bonuses and penalties are typically adjustments to reg- on Infrastructure Regulation, available online (PURC 2012), in- ular payments. Governments may also provide bonuses or charge cludes a module on price setting (that is, setting the overall price penalties under user-pays contracts. level), and a module on tariff design (that is, how tariffs may vary for different customers or circumstances). Both modules describe Iossa et al (Iossa et al. 2007, 46–47) provide an overview of per- key issues and provide extensive links to further resources. formance-based payments. The Scottish Government note on designing payment mechanisms for PPPs (SCT 2007, 9–13) Defining government payments emphasizes the need to calibrate the payment mechanism—that is, to check the financial impact of penalties under different possible Key considerations when defining government payments include combinations of under-performance. The model contracts in Table the following: 3.1 - Examples of Standardized PPP Contracts and Contract Clauses ŠŠRisk allocation implications of different government payment provide further examples of the use of bonuses or penalties. For mechanisms. For example, under a usage-based mechanism, de- example, the United Kingdom’s standardized PPP contracts in- mand risk is either borne by the private sector or shared; where- clude a chapter on payment mechanisms (UK 2007, Chapter 7), Section 3.4 Designing PPP Contracts 153 which also describes calibration of penalties and bonuses based on to changes in the key financial terms of the contract to compensate financial analysis. for certain types of events beyond their control. Adjustments are based on a mutually-agreed financial model that is maintained over 3.4.3 Adjustment Mechanisms the lifetime of the contract. Three causes of unexpected changes that merit financial equilibrium revisions are typically defined as PPP projects are long-term, and are often risky and complex. For force majeure (major natural disasters or civil disturbances), factum example, a new toll highway faces obvious risks such as fluctuations principis (government action) and ius variandi (unforeseen changes in demand, but also hidden risks such as demand to provide more in economic conditions). The PPPIRC Website (PPPIRC) pro- interchanges in the future, or install new traffic management tech- vides more information and references on financial equilibrium nologies. More complex PPPs, such as water concession contracts, clauses in the section on Key Features of Common Law or Civil Law are even more exposed to unpredictable changes. Network assets Systems. may last more or less time than assumed. Demands for changes in treatment and distribution technologies may flow from new Changes to service requirements health research, while urban growth may create large investment demands, sometimes in unpredicted locations. It may be difficult for the contracting authority to accurately antic- ipate service requirements over the duration of the contract. Con- This means PPP contracts are necessarily incomplete—that is, they tracts typically build in approaches for handling changes to service cannot fully specify all future possibilities. The PPP contract there- requirements in response to changing circumstances (which could fore needs to have flexibility built in—to enable changing circum- also include changing technology). For example, the Hong Kong stances to be dealt with as far as possible within the contract, rather PPP Guide (HK 2008, 68–71) describes how changes in circum- than resulting in re-negotiation or termination. Such adjustment stance can be dealt with. The South Africa standardized contract mechanisms typically aim to create a clear process and boundaries provisions (ZA 2004a, Part K: 50) provide for four categories of for change. variation: The concept of financial equilibrium, common in civil law sys- tems, provides a broad mechanism for dealing with several differ- ŠŠVariations with no additional cost ent types of change. Other mechanisms are more specific—such as ŠŠSmall works variation mechanisms for changes to service requirements, changes to tariff formulae, other cost adjustments in response to market changes, or ŠŠInstitutional variations (changes in service requirements), and dealing with refinancing gains. ŠŠVariations requested by the private party As described in the EPEC Guide to Guidance (EPEC 2011b, 37–38), the administrative arrangements and processes for han- Changes to tariff or payment rules or dling change are often further defined as part of the contract man- formulae agement framework and materials (see Section 3.6.1 - Establishing Tariffs or payments are often specified by formulae, as described in Contract Management Structures). While rules and processes can be Section 3.4.3 - Adjustment Mechanisms, to allow regular adjustments specified for changes, room for discretion is likely to remain. The for factors such as inflation. The PPP contract can also include contract therefore needs to define a process that gives both public mechanisms for reviewing these formulae—whether periodic, or and private parties confidence that their interests will be respected. one-off changes in extraordinary circumstances (with specified triggers). Since these processes are analogous to regulatory tariff Financial equilibrium clauses reviews, regulatory guidance material may be useful. The World Civil law systems commonly espouse a concept of financial equilib- Bank’s body of knowledge on infrastructure regulation (PURC rium in contracting, which may be established in general adminis- 2012) section on price level regulation describes key issues in tariff trative law, or defined in more detail in PPP-specific law or a partic- regulation, and guides readers in accessing a wide range of refer- ular contract. Financial equilibrium provisions entitle an operator ences. 154 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Market testing and benchmarking ensure disputes are resolved quickly and efficiently, without inter- operating costs ruption of service. Dispute resolution mechanisms can be built into the PPP contract. Some governments define dispute resolution Some PPP contracts require periodic market testing or benchmark- mechanisms in international instruments (e.g. bilateral investment ing of certain sub-services in the contract, to allow costs to be ad- treaties or multilateral agreements), or in local PPP legislation, that justed to market conditions. This is typically done where a PPP may apply to all PPP contracts. includes provision of a long-lived asset (such as a school or hospital facility) together with soft services where market contracts are typ- As described by Kerf et al (Kerf et al. 1998, Section 3.10) dispute ically of shorter duration (such as cleaning). This approach is most resolution mechanisms for PPP can include the following: common in PPP contracts in the United Kingdom Private Finance Initiative (PFI) tradition. One objective is that the price charged ŠŠMediation and conciliation—a neutral third party is appoint- for the soft services should be kept in line with market conditions, ed to resolve a dispute by helping the parties settle their dis- through periodic challenges or benchmarking exercises. The other agreements. It may be used in the hope of not having to en- reason for market testing “soft” services is that service providers ter formal arbitration. A mediator typically acts as a facilitator, would normally be reluctant to provide a fixed price (with simple assisting the parties in identifying the best possible negotiated inflation indexation) for such services over a long period of time, solution or settlement—the solution itself will be developed by because the actual costs are likely to get out of line with the index- the disputing parties themselves. A conciliator has a still neutral ation. but more active role, also actively proposing solutions and set- tlement terms. A United Kingdom Operational Taskforce note provides detailed guidance on benchmarking and market testing approaches (UK ŠŠRecourse to a sector regulator—for PPPs in sectors under the 2006a). The United Kingdom’s Department of Health has also remit of an independent regulatory body, the regulator can be produced a code of best practice on benchmarking and market test- assigned responsibility for resolving certain disputes. This is a ing in hospital PFIs (NAO 2010b). This code provides guidance relatively simple and hence low-cost option, but can be risky for on how to manage the market testing process, focused on health the private party, particularly in case of concerns over regulator facilities contracts—see also (NAO 2011). independence or capacity. ŠŠJudicial system—generally, contractual disputes are subject to Refinancing jurisdiction of the courts, and the same is typically true of PPP During implementation, changes to the project risk profile or in contracts. However, parties to PPPs often consider the court sys- capital markets may mean the PPP company can replace or rene- tem as inappropriate for solving disputes, since it may be slow, gotiate its original debt on more favorable terms. As described in or lack technical expertise—particularly in developing coun- Section 1.3 - How PPPs Are Financed, many PPP contracts set out tries. Dispute resolution mechanisms for PPPs often try to avoid rules for determining and sharing the gains from refinancing. For resorting to the court system as far as possible. example, in 2004 the United Kingdom’s Treasury introduced into ŠŠPanel of experts as arbitrators—the PPP contract or law could its standard PFI contracts a 50:50 split of any refinancing gain designate a panel of independent experts, to act as arbitrators between the investors and the government. The EPEC Guide to in case of dispute. Decisions could be defined as non-binding Guidance on PPPs (EPEC 2011b) also provides a succinct summa- (in which case a further escalation mechanism is required), or ry of how refinancing can be treated in the PPP contract. binding. ŠŠInternational arbitration—the last resort for many PPPs is 3.4.4 Dispute Resolution Mechanisms international arbitration, which can be under a permanent ar- Because PPP arrangements are long-term and complex, contracts bitration institution such as the International Centre for Set- tend to be incomplete, as described in Section 3.4.3 - Adjustment tlement of Investment Disputes (see Box 3.10 - International Mechanisms. Where this creates room for differences in interpreta- Centre for Settlement of Investment Disputes) or involve ad hoc tion, disputes can arise. Defining a dispute resolution process helps arrangements such as an international expert panel. Section 3.4 Designing PPP Contracts 155 More than one of these approaches may be used, to allow for escala- which the contract may be terminated early, and the consequences tion of disputes should simpler methods fail. For example: of termination in each case. ŠŠChile concessions. The dispute resolution mechanism for PPP Contract term and asset handover contracts in Chile was established in the Concessions Law, and centers on the role of an independent panel of experts, as set out The PPP contract typically defines the contract term, and arrange- in Jadresic’s review of Chile’s experience with expert panels ments for any handover of project assets to the government. The (Jadresic 2007, 25–26). A conciliation panel of experts is estab- most common approach is for the government to choose the con- lished for each contract, comprising three experts—one chosen tract term, in the draft contract, as the best estimate of the time by the government, one by the private party, and a third by mu- needed for the private party to achieve its required return, at rea- tual agreement. The conciliation panel may be called on to pro- sonable tariffs or payment levels. A second option, with a simi- pose conciliatory terms to resolve disputes for agreement by the lar result, is to define tariffs or annual payments, and enable the parties. If agreement cannot be reached, the private party can contract length to be determined by bidders as one of the key bid either request the conciliation panel become an arbitration pan- variables. This approach was used, for example, in Mexico’s toll el (and reach a binding decision), or refer to the court system. road program (Fisher and Babbar 1996), where concessions were awarded to the bidder offering the shortest term. ŠŠBucharest Water Service Concession. The dispute resolution mechanism is defined in the PPP contract. It involves an eco- A third alternative is to let the length of the concession be deter- nomic regulator, a technical regulator housed in the municipal mined endogenously, as described by Kerf et al (Kerf et al. 1998, government, with recourse to an international panel of experts 83), by inviting bids on the basis of the least present value of in case of appeal. revenue (LPVR). This means the concession terminates when that value is reached—the higher the traffic, the sooner the concession ŠŠIn Mexico, the Federal Law on Acquisitions, Leases and Ser- terminates. This approach was set out by Engel, Fischer and Gale- vices (MX 2014) sets out the procedures for conflict resolution tovic (Engel et al. 2002) to manage the risk of fixed-term conces- during the implementation of the PPP contract. The Secretaría sions and has been used for toll roads in Chile and Colombia. de la Función Pública is the organization in charge of handling these processes. The law states that interested party must request Kerf et al (Kerf et al. 1998, 81–82) and Iossa et al (Iossa et al. for dispute resolution support from the Secretary. The Secretary 2007, 73–78) both describe the trade-off between a shorter conces- facilitates a dispute resolution meeting. Any agreements reached sion term—enabling the government to go back to the market to through this procedure will be binding, and the parties involved re-tender the concession—against the disincentive this can create must produce a report showing the progress made in imple- for concessionaires to invest, particularly towards the end of the menting the agreement reached. concession. ŠŠIn Uruguay, the Law on PPP Contracts (UY 2011) prescribes Given this disincentive, PPP contracts need to clearly define the that the parties must agree on an ad hoc arbitration panel to approach to transition of assets and operations at the end of the solve any disputes. contract. This typically includes defining how the quality of the assets will be defined and assessed, when and how to review asset The standardized contracts listed in Table 3.1 - Examples of Stan- condition ahead of the end of the contract (ideally several years dardized PPP Contracts and Contract Clauses provide further exam- prior), whether a payment will be made on asset handover, and ples of dispute resolution clauses and options. how the amount of any payment will be determined. It can be particularly challenging to define handover standards at the start 3.4.5 Termination Provisions of a long-term contract. In addition, it may be difficult to get the private party to fulfill its investment commitments towards the end In most cases, PPP contracts have a defined term. The contract of the concession period. The following resources describe some typically sets out the contract termination date and arrangements possible approaches: for contract close and asset handover. The PPP contract, or in some cases the relevant PPP Law, should also specify circumstances in 156 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE ŠŠThe World Bank’s toolkit for PPPs in roads and highways Provisions for early termination (WB 2009a, Module 5, Stage 5) describes how asset standards The PPP contract needs to set out the conditions under which the at handover can be defined in terms of the remaining useful life contract may be terminated early, in which case the ownership of of different parts of the asset. the project assets typically reverts to the public sector. This includes ŠŠAustralia’s standard commercial principles (AU 2011b, 120– who may terminate and for what reason, and what if any compen- 124) specify use of an independent assessor, appointed near the sation payment will be made in each case. end of the contract term, to assess the quality of the assets, and There are three broad possible reasons for early termination: define the required handover condition. ŠŠDefault by the private party ŠŠThe United Kingdom’s standard PFI contract (UK 2007) requires inspection around two years before the end of the con- ŠŠTermination by the public party, whether due to default or for tract, on the basis of which any work required to bring the facili- reasons of public interest ty up to the required standard is specified. Fee payments may be ŠŠEarly termination due to an external reason (force majeure) withheld by the contracting authority and released only when the required work is carried out. In each case, the government typically makes a payment to the pri- vate party and takes over control of the project assets, which may EPEC Guide to Guidance (EPEC 2011b, 42) describes how be re-tendered under a new PPP contract. Contractually-defined bonds or guarantees can be used to ensure asset quality at handover. termination payments typically depend on the reason for termina- tion, as summarized in Table 3.2 - Types of Early Termination and Termination Payments. Table 3.2 Types of Early Termination and Termination Payments Termination Typical Triggers Defining Termination Payment Private party default • Failure to complete construction Termination payments are typically defined to ensure equity-holders bear the burden • Persistent failure to meet performance of default. Lenders may also be exposed to some possible loss—to strengthen their standards incentives to rectify problems—although this can affect bankability. Options include: • Insolvency of project company • Full value or a specified proportion of outstanding debt Lenders are typically given step-in rights to enable • Depreciated book value of assets them to remedy problems due to an under- • Net present value of future cash flows (subtracting costs of rectification) performing contractor—termination only occurs if • Proceeds of re-tendering the concession on the open market—thereby also this is ineffective, or if lenders choose not to do so overcoming the possible difficulty of finding budget space for termination payment obligations that are realized unexpectedly Public party default Public party fails to meet its obligations under the A fair contract should ensure the private party does not lose out if the public party contract chooses to default. Termination payments in this case are typically set to the value of debt plus some measure of equity, and may also include lost future profits (if any) Termination for public Many PPP or public procurement laws allow the Typically, should be treated in the same way as public party default; otherwise creates interest contracting entity to terminate for reasons of perverse incentives to voluntarily terminate instead of default (or vice versa) public interest Prolonged force majeure Should be carefully defined in the contract and Typically, in between the two options above, since neither party is at fault damage limited to uninsurable, prolonged force majeure events that preclude performance of obligations Section 3.4 Designing PPP Contracts 157 Box 3.10 International Centre for Settlement of Investment Disputes (ICSID) ICSID, part of the World Bank Group, is an autonomous consent. Its main advantage, in comparison to other arbitration international institution established in 1966 under the Convention mechanisms, is that the ICSID Convention provides for a on the Settlement of Investment Disputes between States and specialized and completely delocalized arbitration mechanism Nationals of Other States (known as the ICSID or the Washington and the enforceability of awards. Convention) with over 153 member States. ICSID provides facilities and services for the settlement international investment The ICSID website (ICSID 2017) provides more information and disputes. In addition, it offers fact-finding proceedings to examine examples of international dispute settlements—including cases and report on facts before a dispute arises. concerning roads, railways, ports, airports, energy, waste, water, wastewater, and other sectors. Many awards are available on the The ICSID Convention sought to remove major impediments to website, in either English, French, and/or Spanish (ICSID-Cases). the free international flows of private investment posed by non- The website also provides a set of model clauses regarding commercial risks and the absence of specialized international conciliation and arbitration—in English, French, and Spanish. methods for investment dispute settlement. ICSID was created ICSID also maintains a Panel of Arbitrators and a Panel of by the Convention as an impartial international forum providing Conciliators (mediators) (ICSID-Panels). facilities for resolving legal disputes between private investors and host states through conciliation or arbitration procedures. Recourse to the ICSID facilities is always subject to the parties’ Some of these approaches to defining the termination payment— ŠŠClement-Davies on PPPs in Central and Eastern Europe particularly when linked to the value of the project assets—require (EBRD 2007, 46) provides more information on lenders’ step- careful definition. in rights. The following resources provide more guidance on termination The standardized contracts listed in Table 3.1 - Examples of Stan- causes, arrangements, and payments: dardized PPP Contracts and Contract Clauses also provide further examples of termination clauses in practice. ŠŠEPEC Guide to Guidance (EPEC 2011b, 40–42) describes each of these causes of termination and the options for defining Notwithstanding careful provisions in the contract, early termina- termination payments in each case. tion is typically costly for both parties, and is a last resort when oth- er avenues have been exhausted. As described in the EPEC Guide ŠŠA more detailed EPEC publication on termination provisions to Guidance (EPEC 2011b, 40), this means the contractually-de- (EPEC 2013) provides a review of current European practice fined termination payments are important even if termination does and guidance on termination and force majeure provisions in not happen, since it defines the fallback position of each party in PPP contracts. any dispute resolution or renegotiation. ŠŠYescombe (Yescombe 2007) also describes termination causes Early termination payments are usually tailored in such a way that and options for termination payments, in greater detail. debt providers always have an interest in keeping the contract alive ŠŠEhrhardt and Irwin (Ehrhardt and Irwin 2004, 46–49) note and services operational, thereby inducing them to step-in before that many PPP termination clauses protect lenders from any issues of poor performance lead to default by the private party. losses (that is, do not allow the PPP company to go bankrupt)— they describe why this can cause problems, and how bankruptcy could be a realistic option. 158 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Key References: Designing PPP Contracts Reference Description EPEC. 2011b. The Guide to Guidance: How to Prepare, Procure, and Deliver Section 2.2.5 on preparing the draft contract briefly describes typical contract PPP Projects. Luxembourg: European Investment Bank, European PPP content; Box 3 provides more detail on defining payment mechanisms. Section Expertise Centre. 4 on project implementation describes dealing with change within the contract, dispute resolution, and termination. WB. 2009a. “Toolkit for Public-Private Partnerships in Roads and Highways.” Module 4: “Laws and Contracts” includes a section on contracts describing World Bank. Website. PPP contract types and typical contract contents and provisions, including sample boiler plate clauses. The section on agreements, bonds and guarantees describes other common elements of the contractual structure, including agreements with lenders. AU Guidelines. Accessed March 20, 2017. “National Guidelines for Set out why and how key risks and responsibilities should be allocated in the Infrastructure Project Delivery.” Canberra: Australian Government, contract, for social infrastructure (government pays) (AU 2008) and economic Department of Infrastructure and Regional Development. Website. infrastructure (user pays) (AU 2011b). The roadmap document (AU 2011a) describes the process of developing the contract, and provides guidance on deciding which set of commercial principles to use. PPPIRC. Accessed March 13, 2017a. “PPP Arrangements / Types of Public- The PPP in Infrastructure Resource Center hosts a collection of actual PPP Private Partnership Agreements.” Public-Private Partnership in Infrastructure contracts and sample agreements for a range of contract types and sectors. Resource Center. Website. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and Chapter 4 on selecting projects includes a section on specifying output Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private requirements, and defines and provides examples of SMART output Partnerships in Emerging Markets. Washington, DC: World Bank. specifications. HK. 2007. Serving the Community By Using the Private Sector: A User Guide to Guide to contract management, in the context of outsourcing services. Includes Contract Management. Hong Kong, China: Efficiency Unit. several sections relevant to designing PPP contracts, including developing service specifications, and dealing with termination and dispute resolution. UK. 2010a. Output-Based Specifications for PFI/PPP Projects: Version 0.2 Provides detailed guidance on output-based specification, and a process for Consultation Draft. London: Ministry of Defence. developing the specification for a PPP project. Iossa, Elisabetta, Giancarlo Spagnolo, and Mercedes Vellez. 2007. Best Practices Provides guidance on several elements of contract design, including risk on Contract Design in Public-Private Partnerships. Washington, DC: World allocation, designing the payment mechanism, building in flexibility and Bank. avoiding renegotiation, contract duration, and other contractual issues to do with dealing with change. UK. 2007. Standardization of PFI Contracts: Version 4. London: UK Provides detailed guidance and standard wording where appropriate on Government, HM Treasury. every aspect of the PPP contracts used for United Kingdom PFI PPPs (predominantly user-pays). The website http://www.hm-treasury.gov.uk/ppp_ standardised_contracts.htm provides additional materials, including marked up versions showing changes made to previous versions. Kerf, Michael, R. David Gray, Timothy Irwin, Celine Levesque, Robert R. Section 3: “Concession Design” provides detailed guidance on designing PPP Taylor, and Michael Klein. 1998. “Concessions for Infrastructure: A guide to contracts, focusing on contracts in which the private party provides services their design and award.” World Bank Technical Paper No. 399. Washington, directly to users. Topics covered include allocating responsibilities, price setting DC: World Bank. and adjustment, performance targets, penalties and bonuses, termination, dealing with unforeseen changes, and dispute settlement 4ps. 2005. 4ps Review of Operational PFI and PPP Projects. London: Public- Summarizes the results of interviews with stakeholders in operational PPP Private Partnerships Programme. projects in the United Kingdom. Includes sections with lessons learned on output specification, payment mechanisms, and contract flexibility Section 3.4 Designing PPP Contracts 159 Reference Description ZA. 2004a. Public Private Partnership Manual. Pretoria: South African Module 6 of the manual, “Managing the PPP Agreement” briefly outlines Government, National Treasury. how performance requirements, monitoring and enforcement mechanisms should be established. The standardized PPP provisions set out and explain key provisions across all elements of the PPP contract. SCT. 2004. Output Specification – Building our Future: Scotland’s School Sets out model output specifications for schools PPP projects as well as some Estate. Edinburgh: Scottish Executive. guidance on key issues in defining output-based specifications. US. 2011. Key Performance Indicators in Public-Private Partnerships: A State-of- A state-of-the practice description of domestic and international practices for the-Practice Report. Washington, DC: United States Government, Department key performance indicators in PPPs, based on a comprehensive literature review of Transportation, Federal Highway Administration. and eight case studies from Australia, British Columbia, the United Kingdom and the United States. PPIAF. 2006. Approaches to Private Sector Participation in Water Services: A Section 6.3: “Designing Risk Allocation Rules” describes several aspects of Toolkit. Washington, DC: Public-Private Infrastructure Advisory Facility. PPP contract design for user-pays PPPs—including payment mechanisms, and termination clauses. Section 7 on developing institutions to manage the relationship includes a discussion on dispute resolution. Irwin, Timothy C. 2003. “Public Money for Private Infrastructure: Deciding Describes different payment mechanism for subsidies to infrastructure When to Offer Guarantees, Output-Based Subsidies, and Other Fiscal projects—including output-based payments and upfront capital subsidies—and Support.” Working Paper No. 10. Washington, DC: World Bank. how the government can decide which is most appropriate. Yescombe, E.R. 2007. Public-Private Partnerships: Principles of Policy and Chapter 13: “Service-fee Mechanism” describes the different possible payment Finance. Oxford: Butterworth-Heinemann. mechanisms (focusing on government-pays PPPs) and their implications for risk allocation and bankability. Chapter 15: “Changes in Circumstances and Termination” describes mechanisms to deal with changing costs and risks (compensation and relief events), step-in and substitution, and termination payment provisions for different causes of termination. SCT. 2007. Briefing Note 1: Payment Mechanisms in Operational PPP Projects. Describes experience with defining and implementing government-pays Edinburgh: Scottish Government. payment mechanisms in PPPs. HK. 2008. An Introductory Guide to Public Private Partnerships. Hong Kong, Section 9: “Changes of Circumstance” provides guidance on the types of China: Efficiency Unit. changes that the PPP contract should be able to deal with. Jadresic, Alejandro. 2007. “Expert Panels in Regulation of Infrastructure in Describe the expert panel approach used in Chile to deal with regulatory Chile.” Working Paper No. 2. Washington, DC: Public-Private Infrastructure conflict. Section 6 focuses on the use of expert panels in public works Advisory Facility. concession contracts. Ehrhardt, David, and Timothy C. Irwin. 2004. “Avoiding Customer and Describes the problems associated with protecting lenders from losses in case of Taxpayer Bailouts in Private Infrastructure Projects: Policy toward Leverage, termination due to private party default, and provides some policy suggestions Risk allocation, and Bankruptcy.” World Bank Policy Research Working Paper for alternatives. 3274. Washington, DC: World Bank. EBRD. 2007. Law in Transition 2007: Public-private partnerships and Discusses some of the main issues in developing concession agreements in legal reform in Russia. London: European Bank for Reconstruction and transition countries—including risk allocation, tariff structure, performance Development. standards, dealing with change, termination and step-in rights for lenders. Cassagne, Juan Carlos, and Gaspar Ariño-Ortiz. 2005. Servicios Públicos: Describes regulatory reform in public services, including achieving regulation Regulación y Renegociación. Buenos Aires: Abeledo-Perrot. through effective PPP contracts. Includes guidance on mechanisms for tariff changes, and for dispute resolution. 160 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE 3.5 Managing PPP Transactions services provided. Achieving these objectives generally requires a competitive, efficient, and transparent procurement process, as In the transaction stage, the government selects the private par- outlined in the PPIAF toolkit for PPPs in roads and highways ty that will implement the PPP. This process will also determine procurement section (WB 2009a) under competitive bidding; in the effective terms of the contract. This stage follows the structur- the Caribbean PPP Toolkit (Caribbean 2017, Module 5); and by ing, appraisal, and detailed preparation of the PPP described in Farquharson et al (Farquharson et al. 2011, 112) in describing the the previous sections of this module. It concludes when the PPP outcome of the procurement phase. reaches financial close—that is, when the government has selected and signed a contract with a private party, and the private party Since most governments use a competitive selection process to pro- has secured the necessary financing and can start deploying it in cure PPP contracts as the best way to achieve transparency and the project. value for money, this section assumes a competitive process is fol- lowed. In practice, there may be a few circumstances where direct The aim of the PPP transaction stage is twofold: negotiation could be a good option. However, many reasons put ŠŠTo select a competent firm or consortium forward to negotiate directly are spurious, as described in Box 3.11 - Competitive Procurement or Direct Negotiation. ŠŠTo identify the most effective and efficient solution to the pro- posed project’s objectives—both from a technical, and value for Box 3.16 - Direct Negotiation of Unsolicited Proposals outlines several money perspective preparation requirements for those procuring authorities that need to directly negotiate an unsolicited proposal. To the latter end, the process typically establishes some of the key quantitative parameters of the contract, such as the amounts the The transaction stage typically includes the following five steps, as government will pay or the fees users will pay for the assets and shown in Figure 3.7 - Transaction Steps: Figure 3.6 Managing PPP Transactions Define performance requirements Define payment mechanisms DRAFT PPP CONTRACT Draft PPP contract Create adjustment mechanisms Establish dispute resolution mechanisms Provide for termination Decide the procurement strategy Market PPP Manage PPP transaction Qualify bidders Manage bid process Reach financial closure SIGN CONTRACT EXIT PROCESS PPP CONTRACT Set up contract management structures Manage PPP contract Monitor and manage PPP delivery and risk Deal with change Section 3.5 Managing PPP Transactions 161 Box 3.11 Competitive Procurement or Direct Negotiation A competitive selection process is the recommended route to criteria should be clearly specified in the procurement legal procure PPP contracts. Key advantages are transparency and use framework. Direct negotiations should only be pursued of competition to choose the best proposal—the mechanism most once suitable safeguards for value for money, transparency, likely to result in value for money. The alternative to a competitive accountability, and public interest have been established and process is to negotiate directly with a private firm. operationalized. There can be good reasons to negotiate directly, but these are On the other hand, several reasons commonly put forward relatively few—see for example Kerf et al’s guide to concessions to negotiate directly with a private proponent of a PPP can be (Kerf et al. 1998, 109–110) and the World Bank (2017) Guidelines misleading—see the section in PPIAF’s toolkit for PPPs in roads and for the Development of a USP Policy (WB 2017d) sections on direct highways (WB 2009a), Module 5: Procurement on overall principles negotiation. These reasons include: for procurement. For example, some argue direct negotiation is faster—though in practice, challenges often make the process • Small projects with known costs, where the costs of a longer. Often, direct negotiation is also considered when a PPP idea originated from an unsolicited proposal from a private competitive process would be prohibitively high given the level company. However, there are ways to introduce competition of expected returns; in this case that help ensure value for money from the resulting • Cases where there is good reason to believe there would be no project, as described in Section 3.7 - Dealing with Unsolicited Proposals. Based on these considerations, some countries do competitive interest—for example, small extensions of an asset not allow non-competitive procurement processes at all,such as for which a contract is already in place; and Brazil, under the Federal PPP Law of 2004 (BR 2004a). Elsewhere, • The need for rapid procurement in the case of emergencies direct negotiation may be allowed in particular circumstances. For example, Puerto Rico’s PPP Act allows for direct negotiations if the and natural disasters, where speed may outweigh value for investment value is under $5 million, there is lack of interest after money considerations, although this is often not the case when issuing an RFP, the normal procurement process is burdensome, dealing with PPPs, better able to deal with long-term needs unreasonable, or impractical, or the technology required is only than with urgencies. available from a single company (PR 2009, Article 9.(b).ii). Whenever a government allows for direct negotiations under specific circumstances, these circumstances and their associated ŠŠDeciding on a procurement strategy, including the process Section 3.5 - Managing PPP Transactions describes each of these and criteria for selecting the PPP contractor steps, and provide further resources and tools for practitioners in- terested in managing PPP transactions. ŠŠMarketing the upcoming PPP project to interest prospective bidders (as well as potential lenders and sub-contractors) ŠŠIdentifying qualified bidders through a qualification process, 3.5.1 Deciding the Procurement either as a separate step before requesting proposals or as part of Strategy the bidding process The first step in managing a PPP transaction is defining the pro- ŠŠManaging the bid process, including preparing and issuing a curement strategy. This includes defining the following key aspects Request for Proposal, interacting with bidders as they prepare of the procurement process: proposals, and evaluating bids received to select a preferred bidder ŠŠExecuting the PPP contract and ensuring all conditions are ŠŠPre-qualification—whether to use a pre-qualification process met to reach contract effectiveness and financial close—this to select the firms or consortia that will participate in the bid- may require final approval from government oversight agencies ding process 162 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Figure 3.7 Transaction Steps Decide Manage the bid Reach financial procurement Market the PPP Qualify bidders process close strategy ŠŠBid process—whether to use a single-stage process to select the objectives may depend on the context. For example, allowing dia- preferred bidder, or a multi-stage process in which proposals logue with bidders can lead to stronger proposals. However, it can and the bidding documents may be reviewed and iterated also make the process less transparent—so may not be the right choice in a country where achieving transparency and minimizing ŠŠNegotiation with bidders—to what extent discussions with the risk of corruption is the more important consideration. This bidders may lead to changes in the initial draft contract: either means the best procurement process may depend on the country during the bidding process (with multiple bidders), or after final context, and the nature and capacity of the government institutions bids have been submitted involved, as well as on the characteristics of the particular project. ŠŠBasis for award—whether to rank proposals and choose the There may also be some constraints in how the procurement strat- preferred bidder based on a single financial or value-related cri- egy can be defined. Firstly, as described in Section 2.2 - PPP Legal terion (after screening for technical merit), or some weighted Framework, the procurement strategy for a PPP may be constrained evaluation of financial and technical criteria by any laws or regulations on overall government procurement. This section briefly describes each of these aspects, with links to Moreover, many governments choose to set PPP-specific procure- guidance, resources and examples in each case. An additional point ment rules, in PPP laws, regulations or guidance material—that is, for consideration, also described in this section, is dealing with bid defining the procurement strategy for the PPP program as a whole costs—whether to charge a fee or require a bond to participate in rather than on a project-by-project basis. Doing so can improve the bid process; or conversely whether to provide support with bid transparency of PPP procurements; although there are also advan- costs. tages to retaining flexibility to adapt processes to the needs of par- ticular projects. Table 3.3 - Examples of PPP Procurement Procedures The main goals of the procurement strategy, as described above, provides examples of PPP procurement procedures as defined in are both to find the best solution to the project’s objectives (from a national or international laws and regulations. Finally, where the technical and value for money perspective), and to select a compe- project involves funding from a multilateral development bank or tent firm or consortium to implement that solution. This typically other agency, the procurement options may also be constrained requires a fair, competitive, transparent, and efficient procurement by the procurement rules of the funding agency. For example, the process. However, the best procurement strategy to achieve these World Bank publishes and regularly updates regulations and guid- Figure 3.7a Procurement Strategy ance on its Procurement Framework (WB 2017f ), which any project with World Bank funding must follow—the framework includes specific recommendations for procurement of PPPs. Decide procurement Market the PPP Qualify bidders Qualifying bidders strategy Most bidding processes set out qualification criteria that all par- ticipating firms must meet. Requiring bidders to set out their Section 3.5 Managing PPP Transactions 163 qualifications helps ensure a competent firm is selected with the ca- ŠŠPPIAF’s toolkit for PPPs in roads and highways (WB 2009a) pacity to implement the project. Clear qualification requirements includes a section: Concessions: Main Steps in competitive bid- can also encourage experienced firms to participate, and to invest ding. in preparing quality proposals, as it reduces the risk that the bid ŠŠFarquharson et al (Farquharson et al. 2011, 118–120) describes process will be undermined by low-quality firms submitting very the pre-qualification process, some of its advantages and disad- low bids. vantages, and the possible pitfalls. The authors also describe the Most governments require bidders to pre-qualify—that is, check option of a pre-revision phase, in countries where pre-qualifica- bidders’ qualifications before the start of the tender process, with a tion is not allowed by procurement law. view to capping the number of bidders. Typically, pre-qualification involves ranking potential bidders according to specified qualifica- In practice, country approaches vary. For example, Infrastructure tion criteria. The top-ranking bidders—usually between three and Australia Practitioner’s Guide (AU 2015, 16) recommends us- six—are then invited to submit proposals. ing pre-qualification to select a particular number of bidders—at least three, sometimes more. On the other hand, Singapore PPP The alternative is to set pass/fail qualification criteria, and qual- Handbook (SG 2012, 60) precludes pre-determining the number ify and invite proposals from all firms that pass. While this ap- of qualified bidders, because this would limit competition. Table proach can be used in a pre-qualification process, it is more typ- 3.3 - Examples of PPP Procurement Procedures provides more exam- ically done simultaneously with the bidding process—sometimes ples of PPP procurement processes, including whether and what called post-qualification. Under this approach, bidders can self- type of pre-qualification process is included. screen against the published qualification criteria before investing resources in preparing a proposal. For a few, large and very complex process the self-selection process (aided by the due-diligence that Bid process financing parties will exert upon prospective bidders) may be suffi- The bid process is the process from issuing Requests for Proposal to ciently stringent that no qualification is needed. select a preferred bidder. The quickest and simplest is a single-stage Prequalification has both advantages and disadvantages: bid process, in which bidders present both technical and financial proposals, which are evaluated to select the preferred bidder. ŠŠThe main advantage is in limiting the number of bidders. By reducing the number of bidders, the probability of success in- The alternative is a two or multi-stage bid process. Under this creases, and bidders may be incentivized to invest more effort approach, bidders present an initial proposal, which may include in developing an efficient project and presenting a competitive comments on the RFP and draft contract, and may or may not bid. At the same time, the effort and resources required from include a financial bid. Based on these proposals, the government government to evaluate bids can be reduced. reviews and possibly revises the RFP and draft contract, and re- quests revised proposals accordingly. The government may engage ŠŠThe main disadvantage is that making public the list of in discussion with bidders to varying extent, as described under pre-qualified bidders may enable collusive behavior. More- Negotiation with bidders: during bidding process. The government over, pre-qualifying a set number of bidders can mean the same may also eliminate some bidders at this stage, and the revision pro- top-ranking firms tend to be invited to bid in a given sector, cess may be repeated more than once. Bidders then submit final providing further temptation for collusion in the bidding pro- proposals, including a final financial bid. cess. A multi-stage process can have advantages over a single-stage pro- In some developing countries (particularly with new PPP pro- cess for complex projects, particularly where there is room for in- grams) the problem can be too few rather than too many bidders— novation. It can help ensure solutions are aligned to needs, and im- in this case, there may be no advantage to pre-qualification, and it prove final quality of proposals. On the other hand, the multi-stage may unnecessarily extend the procurement process. process is longer, more complex to manage and more expensive for The following resources provide more discussion and detail on the all parties involved. Care needs to be taken to retain competitive pros and cons of pre-qualification: pressure, protect intellectual property, and maintain transparency. 164 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Table 3.3 Examples of PPP Procurement Procedures Negotiations Basis for Example Reference Pre-qualification Bid Process with Bidders Award Brazil Federal Concessions Law No mandatory pre- One-stage bid process No language in law about Lowest tariff or (BR 1995, Law 8987) qualification step negotiations with bidders largest payment and Federal PPP Law (BR during tender to government or 2004a, Law 11079) a combination of the two. If tied, implementing agency must hire Brazilian company. Chile Concessions Law (CL Pre-qualification based on One-stage bid process No language in law about Financial, or 2010b, Law 20410) any of five elements stated negotiations with bidders combined financial/ in the law: legal compliance, during the bid process. technical technical and financial There guiding language experience, results of previous on negotiations during public works, and compliance implementation with labor and social security laws Egypt Executive Regulations Pre-qualification based on set Can use one-stage process; or a Competitive dialogue Financial, or under PPP Law (EG compliance criteria two-stage process with technical allowed in the two-stage combined financial/ 2011) and financial bids submitted at procedure, before final technical both stages. First-stage bids are bids are submitted non-binding EU open Described in EPEC No pre-qualification One-stage bid process No negotiation or Lowest price or procedure Guide to Guidance dialogue allowed with most economically (EPEC 2011b, 22) bidders; clarifications are advantageous tender permitted EU restricted Pre-qualification— One-stage bid process No negotiation or dialogue Lowest price or procedure number of bidders may allowed with bidders; most economically be restricted to no less clarifications are permitted advantageous tender than five EU negotiated Pre-qualification— On-going multi-stage process Allowed throughout the process Lowest price or procedure number of bidders may of negotiation most economically be restricted to no less advantageous than three tender EU competitive Pre-qualification— Multi-stage bid process (a Dialogue permitted on all Most economically dialogue number of bidders may variant of the negotiated aspects prior to submitting advantageous be restricted to no less procedure) final bids. No further changes tender than three after final bids submitted (clarifications are permitted) Mexico Law on Purchases, Leases, No mandatory pre- One-stage bid process No language in law about Combination and Services to the Public qualification step negotiations with bidders of technical and Sector (MX 2014) during tender financial criteria[1] Section 3.5 Managing PPP Transactions 165 Negotiations Basis for Example Reference Pre-qualification Bid Process with Bidders Award Philippines BOT Law Implementing Pre-qualification set out as One-stage bid process Direct negotiation with Financial (following Rules and Regulations norm; agency may choose a single bidder is allowed pass/fail qualification (PH 2006) simultaneous qualification as if only one firm qualifies and technical an alternative and submits a complying criteria) proposal South Africa South Africa PPP Manual Pre-qualification—the number Single stage process, unless Feedback from pre- Combined financial, Module 5: Procurement of bidders “must be kept to there is no clear preferred qualified bidders strongly technical, and (ZA 2004a) a minimum of three and a bidder, in which case a Best and advised before issuing Black Economic maximum of four” where Final Offer (BAFO) stage may an RFP; clarifications Empowerment possible be added, to invite final bids only during proposal preparation and evaluation; dialogue allowed with bidders prior to issuing request for BAFO The following resources provide more information on the bid pro- negotiations with bidders. Negotiating at any stage can be challeng- cess options: ing, and risks reducing the transparency of the bid process. For this reason, some governments do not allow negotiation on the contract ŠŠFarquharson et al (Farquharson et al. 2011, 113–114) summa- at any stage of the process (although room for negotiation on bid- rizes the advantage of sequential screening over multiple stag- ders’ proposals may remain). es—improving the quality of bids. In a multi-stage bidding process (see Section 3.5.4 - Managing the ŠŠPPIAF’s Toolkit for PPPs in Roads and Highways (WB Bid Process), government may choose to dialogue or negotiate with 2009a) section: “Concessions: Main Steps in competitive bid- multiple bidders in between bidding stages. This can help clarify ding” describes one- and two-stage bid processes. aspects of the RFP, draft contract, and bidders’ initial proposals, Many countries’ PPP frameworks leave open the decision of wheth- and result in proposals that more closely meet the government’s er to use a single or multi-stage bidding process, depending on the requirements. In other cases, governments may negotiate with a nature of the project. Some also leave the option of asking for sec- single bidder after a preferred bidder has been selected. ond bids open to resolve the problem of no clear bidder emerging For example, in 2004 the European Commission introduced the from a single-stage process. For example, the South Africa PPP competitive dialogue procedure for procuring PPPs in the Euro- Manual procurement module (ZA 2004a, Module 5, 51–52) pean Union. Under this process, having received initial bids, the states that a single-stage process with a clear winner is preferred, government can enter into a dialogue with bidders on all aspects of but that a best and final offer may be requested from two or more the RFP, contract, or proposals, before re-issuing a final version of bidders. Table 3.3 - Examples of PPP Procurement Procedures pro- the RFP documents and inviting final bids. The United Kingdom vides further examples. Treasury’s guidance on the competitive dialogue procedure (UK 2008) provides more details. In Australia, a similar process may be Negotiation with bidders: during used, called an interactive tender. The Australian National PPP bidding process Practitioners’ Guide (AU 2015, 70–71) describes the interactive A major difference between procurement approaches in different tender process; protocols for the process are also provided in an countries is in the extent to which the government enters into appendix. 166 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Kerf et al (Kerf et al. 1998, 110–112) provide further examples of The best way to avoid the need for post-bid negotiation is to pre- competitive negotiations, and when it may be useful. The World pare a clear and comprehensive RFP and draft contract. Market Bank’s water sector toolkit (PPIAF 2006, 169–170) also describes sounding and pre-RFP consultation with bidders, as well as hir- the advantages and disadvantages of this approach. In general, com- ing experienced advisors, can help ensure the contract structure petitive negotiation has been used less in less developed countries. is acceptable to investors. For particularly complex contracts, the competitive negotiation procedure described above could be the Negotiation with bidders: post-bid best alternative. Once a preferred bidder has been identified, governments may Basis for Award then enter into post-bid negotiation—that is, further dialogue with that bidder to finalize the PPP contract. If negotiating with The government needs to evaluate the proposals received, to rank a preferred bidder—even if a reserve bidder is maintained as a the proposals and select the preferred bidder. The criteria for doing fallback option—the implementing agency can no longer rely on so typically include the technical merit of the proposal, and some competitive tension to ensure value for money. This may result in measure of their cost—given the overall aim of achieving value for clauses that create additional benefits to the private party or reduce money, or the optimum combination of costs and benefits. There performance requirements. Expectations of post-bid negotiation are two, broad options for how proposals will be evaluated and the may attract opportunistic bidders, and consequently discourage preferred bidder selected: more serious bidders, reducing competition during the bid process ŠŠSelection based on financial criteria—one approach is to un- itself. For this reason, most governments limit the extent of post- dertake the evaluation in two stages, with the final selection bid interaction to clarification and fine-tuning of proposals; some based on the financial bid variable(s). Under this approach, do not allow it at all, particularly where transparency of the process technical proposals are evaluated first, on a pass-fail basis—only is a primary concern. Table 3.3 - Examples of PPP Procurement Pro- bidders that pass the technical evaluation proceed to the finan- cedures provides some examples. cial evaluation. The winning bidder is selected on the basis of The need for post-bid negotiation typically arises for two reasons: the best financial proposal from those that passed the technical because the RFP requirements or draft contract were not clear, or evaluation. In certain countries, concerns over corruption lead because they were not acceptable to bidders and their lenders (in governments to focus on objective criteria, such as the user fee particular, with respect to the proposed risk allocation). For either or annual availability payment. Therefore, they only require a reason, bidders may incorporate changes in their proposals, mean- financial proposal—quality is screened through the qualifica- ing the proposals no longer fully meet the government’s require- tion of bidders. ments. Some legal frameworks mitigate this issue by mandating ŠŠSelection based on financial and technical criteria—in some that conditional proposals will be excluded. cases, proposals are evaluated based on a weighted combination The following resources provide more guidance on the problems of financial and technical criteria. This more closely encapsu- with post-bid negotiations, and whether and to what extent to al- lates the idea of maximizing value for money. On the other low for negotiation or dialogue with a preferred bidder: hand, defining appropriate, quantitative criteria and how they will be weighted can be difficult and rely on subjective judg- ŠŠEPEC’s Guide to Guidance (EPEC 2011b, 31) briefly describes ment by the evaluation team, which can undermine transparen- what matters should and should not be subject to negotiation cy of the tender process. These technical criteria also function post-bid, and the typical elements of a negotiation framework. as incentives for bidders to focus on particular technical issues when preparing proposals. ŠŠYescombe (Yescombe 2007) also describes on the risks of post- bid negotiations, and why they typically arise. The following resources further describe these options, with ex- amples: ŠŠKerf et al’s Guide for Concessions (Kerf et al. 1998, 123) focus- es on the importance of limiting the extent of negotiation in the ŠŠPPIAF’s Toolkit for PPPs in Roads and Highways, in the sec- post-bid phase, and how this can be achieved. tion: Concessions: Main Steps in competitive bidding, describes Section 3.5 Managing PPP Transactions 167 evaluation rules, financial evaluation criteria, and the multi- Approach to Bid Costs and Payments ple-parameter approach. This section also presents the evalua- Preparing a proposal for a PPP project is an expensive exercise. tion criteria for 13 Latin American road concessions. Equally, running a high-quality procurement process for a PPP is ŠŠThe Caribbean PPP Toolkit (Caribbean 2017, Module 5,6) costly to government. Governments have different approaches to presents and discusses several examples of award criteria for PPP dealing with bid costs and commitments. projects. Governments have found different ways to deal with bid prepa- ŠŠKerf et al Guide to Concessions (Kerf et al. 1998, 118–123) has ration costs. In some jurisdictions, the government may share sections on technical and financial proposal evaluation. These bid costs, to encourage more bidders to participate. For example, describe choices regarding technical and financial criteria, and Australia’s PPP Practitioners’ Guide (AU 2015, 29) states that bid the pros and cons of a combined score approach, with examples costs may be reimbursed, but only in very limited and clearly de- in each case. fined circumstances. Conversely, Chile has a mechanism for asking pre-qualified bidders to jointly finance the engineering and other The best option, and the specific financial and technical criteria, studies needed for the government to prepare for the transaction may depend on project characteristics. It may also depend on the (CL 2010b). This was an element of the reform to the PPP law that capacity of the public sector to undertake more complex evalua- took place in 2010. tions, or on the risk of corruption, or perceived corruption, which A KPMG review of PPP procurement in Australia (KPMG could make transparency the most important objective. 2010) describes typical bid costs for the private party to a PPP Many governments allow either approach to be used. In Brazil, in different countries. The report also draws on a survey of PPP both the Federal Concessions Law (for user-pays PPPs) (BR 1995, practitioners to provide recommendations for how bid costs can be Article 15) and the Federal PPP Law (for government-pays PPPs) reduced. These recommendations focus on improving the efficien- (BR 2004a, Article 12) allow both approaches. In all cases, the ap- cy of the PPP procurement process, as well as touching on the pros proach and criteria should be set in advance, and clearly commu- and cons of governments contributing to bid costs. nicated to potential bidders. Section 3.5.4 - Managing the Bid Pro- cess provides more guidance and resources on selecting the specific 3.5.2 Marketing the PPP evaluation criteria. Marketing the PPP helps attract bidders and investors. This is par- Bid Bonds ticularly important in the early stage of a PPP program—govern- ments need to make a positive effort to build bidder interest to Many governments require bidders to submit a bid bond, to en- increase competitive pressure. Marketing also helps identify who sure commitment to the process, and prevent the winning bidder might be the potential bidders. This can feed into designing qual- from withdrawing without good cause. For example, the Spanish ification criteria to avoid a situation where no firms qualify—as procurement law (ES 2011) prescribes that bidders should pro- described in Kerf et al (Kerf et al. 1998, 114). vide a temporary guarantee to back their proposal and increase it to meet the definitive guarantee once the contract is awarded. The At a minimum, marketing the PPP requires advertising the launch Philippines BOT Law (PH 2006, Section 7.1 Clause b (vi)) im- of the tender process. Many governments have requirements for plementing regulations require a bid bond of between one and two how PPP tenders should be advertised. For example, the EPEC percent of the estimated project cost. Kerf et al’s guide to conces- Guide to Guidance (EPEC 2011b, 27) notes that EU governments sions (Kerf et al. 1998, 126) provides further examples, and briefly must publish a notice in the Official Journal of the European Union. describes the pros and cons of requiring a bid bond. The authors The South Africa PPP Manual (ZA 2004a, 24) describes that the note, for example, that the United Kingdom government discour- procurement must be advertised in the Government Gazette, on ages the use of bid bonds for PPP projects on the basis that they are the institution’s website, and through press advertisements. The expensive, and should only be sought in exceptional circumstances. Caribbean PPP Toolkit (Caribbean 2017, Module 5, Section 5) discusses the marketing of PPPs and presents practical examples. 168 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Figure 3.7b Marketing the PPP process. The pros and cons the two approaches are described in Section 3.5.1 - Deciding the Procurement Strategy. The pre-qualification process consists of preparing and issuing the Decide procurement Market the PPP Qualify bidders Request for Qualifications (RFQ)—along with advertising the strategy launch of the tender process, as described in Section 3.5.2 - Mar- keting the PPP—and evaluating the information received to select a group of qualified bidders. The Caribbean PPP Toolkit (Caribbean 2017, Module 5, Sec- Some governments take a more proactive approach to marketing to tion 6.4) discusses qualification criteria. Farquharson et al (Far- generate investor interest prior to the official project launch. This quharson et al. 2011, 113–120) describes the purpose of pre-qual- could include: ŠŠConducting investor presentations, meetings, or road shows Figure 3.7c Bidder Qualification to present the project. The scale and location of meetings can be tailored to the expected interested investors—for example, whether likely to be local or international. Manage the bid Market the PPP Qualify bidders ŠŠReleasing teaser material about the project. This could include process publishing material in industry publications, such as Global Water Intelligence, or dedicated project development platforms, such as Zanbato. There is limited guidance material available on marketing PPP projects. Farquharson et al briefly describes the advantage of re- ification, typical types of criteria and processes, and provides brief leasing information about the project prior to the formal launch, guidance on project launch. The EPEC Guide to Guidance (EPEC to attract bidder interest (Farquharson et al. 2011, 10). It also de- 2011b, 27–28) also provides a helpful overview of the pre-qualifi- scribes the value of marketing a pipeline of projects, rather than a cation process. single opportunity. Particularly for new PPP programs, this gives investors a stronger incentive to engage. Preparing and issuing the Request for Qualifications The GI Hub has developed the freely-available Global Infrastruc- ture Hub Project Pipeline (GIH 2016b) to assist governments in For procurements that include a pre-qualification stage, the pro- marketing PPP projects. The Pipeline allows governments to pro- curement process is officially launched when the Request for Qual- vide the market with early visibility of their projects and choose ifications (RFQ) is issued. The RFQ typically includes enough in- at what stage of a project’s development the marketing campaign formation on the project for potential bidders to decide whether should begin. The Pipeline also gives the governments the ability to they are interested, and information on how the project will be demonstrate the progress of their projects through different stages procured. It should also clearly set out the process and require- of development. ments for the qualification process. Information on the project at this stage could include an overview 3.5.3 Qualifying Bidders of technical and service requirements, key commercial terms (al- though not typically a draft contract), and a list of the further in- The next step is often to carry out a bidder pre-qualification pro- formation that will be made available at the procurement stage. cess to select the companies and consortia that will be invited to Information on the qualification process typically includes the submit proposals. Not all countries select qualified bidders in ad- qualification criteria (see Box 3.12 - Firm Qualification Criteria), vance, instead assessing qualifications as part of an open bidding the information required from firms and the format in which that Section 3.5 Managing PPP Transactions 169 information should be presented, and the timeline and process for ŠŠIndia Planning Commission Guidelines for PPPs: Pre-Qual- evaluation. The following resources describe further the typical ification of Bidders (IN 2014b) includes a model RFQ, as well content of RFQ documents: as guidance on the steps of a qualification process. ŠŠSouth Africa PPP Manual procurement module (ZA 2004a, ŠŠThe World Bank PPPIRC website (WB 2009a) includes a 23–24) outlines the content of the RFQ document. This in- page on Procurement Processes and Standardized Bidding Docu- cludes information about the project, procurement processes, ments with a link to a draft standard RFQ for Power Purchase instructions to respondents, information required about bid- Agreements, as well as links to actual bidding documents, in- ders, and the evaluation process. cluding RFQs. ŠŠSingapore’s PPP Handbook (SG 2012, 56–60) lists RFQ con- Some governments require approval of the RFQ documents, before tents, highlighting that it is not required to include the draft issuing the procurement notice as described in Section 3.5.2 - Mar- contract at this stage. keting the PPP. The procurement notice typically advises compa- nies on how to obtain the RFQ package. Governments may also ŠŠAustralia’s National PPP Practitioners’ Guide (AU 2015) alert investors directly that the RFQ package is available. calls the RFQ Expressions of Interest (EoI). Pages 11–14 list the content that Request for EoIs should include—background, Evaluating the information received to project scope and timetable, financial and commercial informa- identify qualified bidders tion, evaluation criteria, general terms and conditions, and EoI response requirements. Having received statements of qualifications from interested firms, the implementing agency (or the designated evaluation team) must ŠŠThe World Bank’s toolkit for concessions in highways (WB evaluate those qualifications against the pre-defined qualification 2009a) section on prequalification describes the information criteria. that should be included in the RFQ, and the information that should be requested from companies. Box 3.12 - Firm Qualification Criteria describes typical firm quali- fication criteria with resources and examples. These criteria can be The following provide model, or example RFQ documents: defined and applied on a pass/fail basis, or used to rank firms, and qualify a certain number. Box 3.12 Firm Qualification Criteria One of the aims of the procurement process is to select a or including firms that are poorly-qualified. The following provide competent firm with the capacity to implement the project. It is discussion and examples of firm qualification criteria: important to consider the qualifications of the firms behind each proposal. This can be done through a pre-qualification process • Kerf et al Guide to Concessions (Kerf et al. 1998, 115–6) gives to identify bidders, or as part of the first stage of the tender examples of pre-qualification criteria and procedures used in a process (sometimes called post qualification). In either case, clear selection of PPP projects. qualification criteria should be established before beginning the procurement process. • Australia National PPP Practitioner’s Guide section Evaluating Expressions of Interest (AU 2015, 60–62), which includes a Firm qualification criteria can be quantitative or qualitative. detailed description of the criteria to be applied at the EOI They typically involve considering the sponsoring firms’ financial stage. robustness, previous experience with similar projects, and the experience of key members of the management team. The Philippines’ Implementing Rules and Regulations under the BOT Law (PH 2006, Section 5.4) describes three categories—legal Careful selection of these criteria is important to avoid excluding requirements, experience or track record, and financial capability. firms (for example, smaller firms) that could make good partners; 170 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Once the evaluation is completed, the implementing agency needs Preparing and issuing Request for Proposal to inform qualified firms or consortia, and those that have been un- documents successful. As described in the South Africa PPP Manual procure- The bid process formally begins when the government issues ment module (ZA 2004a, 25), the list of qualified firms is typically Request for Proposal (RFP) documents to participating bidders. published. The agency also needs to make sure it provides sufficient These documents set out the project structure, requirements, and information on the decision to unsuccessful firms. the details of the bid process. High-quality, detailed, and clear RFP documents are important to ensuring a competitive process and a 3.5.4 Managing the Bid Process PPP that achieves value for money. RFP documents typically in- clude the following: The central step of procuring PPP projects is generally managing the bid process. This may follow pre-qualification to select the ŠŠInformation on the PPP project opportunity. This could in- participating bidders (although not always, as described in Section clude: 3.5.1 - Deciding the Procurement Strategy). The bid process ends with the selection of a preferred bidder, with whom the implement- yyAn Information Memorandum describing the key features of the ing then works to execute the contract and reach financial close. project and the commercial terms of the PPP The steps in managing the bid process will vary depending on the yyDraft project agreements—that is, the output of the detailed PPP chosen bid process and basis for award, as described in Section 3.5.1 contract design process described in Section 3.4 - Designing PPP - Deciding the Procurement Strategy under Bid process. This section Contracts describes and provides guidance on the following elements of man- yyCopies of any permits or approvals obtained for the project aging the bid process: yyA description of the detailed technical information amassed during ŠŠPreparing and issuing Request for Proposal documents the project preparation stage that will be provided to bidders in a ŠŠInteracting with bidders during the bidding period data room ŠŠReceiving bids ŠŠInformation on the bid process. This could include: ŠŠEvaluating bids to select the preferred bidder yyDetailed bid rules and instructions to bidders, setting out the pro- cess and requirements ŠŠDealing with problems such as receiving only one bid, or no fully compliant bids yyA timetable, which should build in enough time to allow bidders to prepare quality proposals ŠŠFinalizing the contract with the preferred bidder yyBox 3.13 - Evaluation Criteria Farquharson et al (Farquharson et al. 2011, 121–124) provides an yyBid bond requirements (if any), as described in the section on Ap- overview of the bid process and highlights some of the important proach to bid costs and payments under Section 3.5.1 - Deciding the points for implementing agencies to consider at this stage. Procurement Strategy Table 3.4 - Examples and Guidance on Preparing RFP Documents. Figure 3.7d Bid Process Management For further examples, the World Bank PPPIRC website (PPPIRC) page Procurement Processes and Standardized Bidding Documents in- cludes a link to a draft RFP for Power Purchase Agreements and a BTO PPP for roads, and links to actual bidding documents from Manage the bid Reach financial Qualify bidders process close PPP projects. The World Bank has also issued sample bidding doc- uments for output and performance-based road contracts (WB 2006c), along with some guidance in the foreword to the docu- ments. Section 3.5 Managing PPP Transactions 171 Interacting with bidders during proposal of the bidders requests it, the contracting agency should hold a preparation meeting with bidders to clarify any questions they may have, and listen to their concerns and comments. Based on this meeting After the RFP has been issued, bidders will prepare detailed pro- the contracting agency may incorporate changes to the tender posals responding to its requirements. During this process, govern- documents or may extend the submission date up to six days. ment needs to define how and to what extent it will interact with bidders as they prepare their proposals. Rules on the channels and As described in Negotiation with bidders: during bidding process un- permissible topics for interaction with bidders are usually set in the der Section 3.5.1 - Deciding the Procurement Strategy, some gov- RFP—this is important for transparency. ernments use an interactive tender or competitive dialogue process involving more extensive engagement with bidders as they prepare At a minimum, this interaction involves providing information to their proposals. Under this type of process, bidders typically initial- bidders and responding to requests for clarification on the RFP. ly submit technical proposals, which are then the subject of feed- In some cases, the government may consider updating the RFP back and discussion with the contracting authority, to refine the documents as a result. Typical channels for these types of commu- proposed solutions to meet the authority’s needs, before submitting nication include: a final proposal. Some bidders may be dropped out of the process ŠŠA data room that is a physical or virtual space where bidders at different stages. can find all available information that is relevant to the project. For more detail and guidance on this procedure according to EU ŠŠQuestion and answer iterations allow bidders to submit ques- regulations, see the Government of the United Kingdom’s Guid- tions in writing; the implementing agency responds in writing ance on the Use of Competitive Dialogue (UK 2008). Australia’s to all bidders (ensuring that all bidders have access to the same National PPP Practitioners’ Guide (AU 2015, 70–71) describes information). how a similar interactive tender process is typically used in Aus- tralia. ŠŠBidder’s conferences allow the implementing agency to present the project and respond to questions from bidders. Some gov- ernments impose limits on when clarifications can be sought to Receiving bids avoid revealing information close to the bid deadline that could benefit some bidders over others A reliable and credible system to ensure bids are handled confiden- tially is important, to prevent any opportunity for bid-tampering, The following provide more information and examples of these ap- and to protect commercially sensitive information in bids. proaches to interaction with bidders: Often bids are delivered in hard copy in sealed envelopes. Typically, ŠŠPPIAF’s Toolkit for PPPs in Roads and Highways (WB financial and technical bids are delivered in separate envelopes— 2009a) in its section “Concessions: Main Steps in competitive financial bids are only opened for bidders that pass the technical bidding” describes what technical information should be avail- assessment, and are often opened publicly to avoid any possibility able in the data room. of bid tampering. For example, the Philippines BOT law rules ŠŠThe ADB PPP Handbook (ADB 2008, 71) presents a sample and regulations set out a two-envelope system for receiving bids data room index. (PH 2006, Rule 7). The World Bank sample bidding documents for output- and performance-based road contracts (WB 2006c, ŠŠAustralia’s national PPP practitioners’ guide (AU 2015, 24– 19–21) also describe a sealed-envelope bid system, but allow for use 25) briefly describes the use of a data room and a query process. of an electronic sealed bid system as an alternative. One advantage ŠŠThe Singapore PPP Handbook (SG 2012, 61–62) presents the of an electronic system is that it prevents bidders from monitoring type of information that will be exchanged during the feedback or interfering with physical bid delivery. period when the RFP has been issued. Dumol’s diary of the Manila Water privatization by concession ŠŠIn Colombia, Law 80 of 1993 (CO 1993) states that, after (Dumol 2000, 85–98) includes a detailed description of the pro- distributing the RFP documents to pre-selected bidders, if any cess for bid submission and bid opening in practice. 172 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Evaluating bids non-conforming bids—but that non-conforming bids may also be considered, particularly if no conforming bids are attractive; As described in the Partnerships Victoria Practitioners’ Guide (VIC 2001, 40–42), the evaluation process involves ŠŠBid clarification, which can involve a bidder presentation and a Q&A session. The guide notes that this should not include any ŠŠAssessing bid completeness and compliance with minimum re- opportunity to change bids; quirements of bid process; ŠŠDetailed review by evaluation teams, following the pre-defined ŠŠAssessing conformity with requirements of the project brief. evaluation criteria. Box 3.13 - Evaluation Criteria provides op- The Guide notes that conforming bids are evaluated before tions and guidance for setting evaluation criteria; Box 3.13 Evaluation Criteria The selection of evaluation criteria can be key to ensuring the PPP Procuring authorities should assess, with their transaction advisors, provides value for money. Evaluation criteria should be decided in whether the project and the draft contract, as it is, are commercially advance and set out in the RFP documentation. Some countries viable and bankable—avoiding post-bid negotiations, before specify evaluation criteria options in legislation. Evaluation criteria contract signing or before financial close, that may significantly typically incorporate technical and financial elements. These change the project and its risk allocation, but that were not may be evaluated separately—typically with a pass/fail technical evaluated in the bid process. The risk-allocation implications of evaluation, followed by ranking on financial criteria) or combined those post-bid negotiations may be far more significant than the and weighted to rank bids (as described in Section 3.5.1 - Deciding user fees and other criteria assessed during the tender process. the Procurement Strategy under Basis for Award). If allowing bidders to present, in their proposals, changes to the draft contract, procuring authorities should define which specific The options for specific criteria depend on the nature of the changes are allowed, and how they will be scored in the bid project, as described (with examples) by Kerf et al (Kerf et al. 1998, evaluation criteria. 118–122)—for example, whether existing assets are involved, and whether the project will be user-pays or government-pays. The following resources provide further guidance and examples on choosing evaluation criteria: Many PPPs are ranked based on a financial criterion subject to passing other technical and financial requirements. The EPEC’s Guide to Guidance (EPEC 2011b, 23) briefly discusses the most common option for a financial evaluation criterion is the criteria that could be used for bidder selection. remuneration of the private sector. This could be the lowest tariff to users, or lowest cost to government (whether as a government- Guasch (Guasch 2004, 97–105) describes the choice of award pays PPP, or subsidy in addition to user charges). The Least Present criteria, drawing on his extensive review of the factors leading to Value of Revenue criterion, introduced in Chile and Peru for toll renegotiation in concession contracts in Latin America. roads, is another alternative, described by Engel, Fischer and Galetovic (Engel et al. 2002). Related criteria can include length of The World Bank Toolkit for PPP in the water sector (PPIAF 2006, concession, or amount of investment. 171–179) describes and provides examples of evaluation criteria options for awarding a user-pays PPP contract in the water sector Where technical requirements have been clearly set out in the including technical, financial, and combined approaches. proposal, technical evaluation requires checking compliance with those requirements. As Kerf et al (Kerf et al. 1998, 118–119) Australia’s National PPP Practitioners’ Guide (AU 2015, 62–65) describe, in some processes bidders are asked to submit project describes a more holistic approach to evaluating bids. It includes design, business, or investment plans, which are evaluated based quantitative and qualitative Value for Money, commercial and on multiple criteria. The authors note the drawbacks of this financial evaluation, service delivery evaluation, and project design approach—including the possible subjectivity of assessing plans, evaluation. and the likelihood of plans changing substantially over the lifetime of the concession. Section 3.5 Managing PPP Transactions 173 ŠŠPreparation of evaluation reports, detailing the process followed options in this case, depending on the reason for only receiving and the analysis of the evaluation teams. Comprehensive report- one bid: ing is important to the transparency of the process. In some ŠŠRe-package and re-tender may be the best approach if the low cases, bidders may be invited to formally comment on a draft turnout seems to be because of deficiency in the tender. report, with the evaluation team required to address comments in the final version. ŠŠConduct thorough due diligence and select the sole bidder may be a better option if it appears that the bidder believed the Partnerships Victoria Practitioners’ Guide (VIC 2001, Chapter process would be competitive, and is in full compliance with the 19.2) provides tips for evaluation, and lists what should be includ- requirements. ed in an evaluation report. South Africa PPP Manual Module 5: Procurement (ZA 2004a, 45–51) also provides detailed guidance World Bank procurement guidelines (WB 2011b, 25) note that on how to evaluate bids, as well as a description of South Africa’s rejection of all bids is justified where there is a lack of effective approach to defining evaluation teams. competition, but says “even when only one bid is submitted, the bidding process may be considered valid, if the bid was satisfactori- ly advertised, the qualification criteria were not unduly restrictive, Dealing with issues—only one bid received and prices are reasonable in comparison with market value.” The If only one bid is received, this can raise concerns about wheth- United Kingdom Government’s guidance on the competitive di- er that bid will provide value for money. As described in EPEC’s alogue procedure (UK 2008, Box 5.7) provides further guidance. Guide to Guidance (EPEC 2011b, 29–30) there are two broad Table 3.4 Examples and Guidance on Preparing RFP Documents Jurisdiction Reference Description Australia National PPP Practitioners’ Guide (AU 2015, Details the content of the RFP. 17–22) Brazil Federal PPP Law (BR 2004a, Law 11079, Article Describes the minimum information that the tender documents must include. These 11) are a draft PPP contract, the proposal guarantee required from the bidder (up to one percent of total contract amount), the conflict resolution procedures, and the guarantees that that government will make available to ensure its payments. Chile Concessions Law (CL 2010b) The Chilean PPP Unit housed within the Ministry of Public Works provides access to the complete RFP of all their PPP projects. Colombia Law 80/1993, General Statute for Procurement Article 24 describes the information that PPP tender documents must include. by the Public Administration (CO 1993, Articles This includes: requirements to be eligible to participate as a bidder, rules for 14 and 30) preparing bids, cost and quality of goods, works and services needed to carry out the project, term of the contract, and bidder selection rules. Article 30 sets out the tender process—including the rights and responsibilities of the actors involved, and deadlines and timeframes for each step. Colombia Law 1150 (2007) Law to Introduce Efficiency and Establishes that the contracting agency must publish a preliminary version of the Transparency Measures in Law 80 of 1993 (CO tender documents. This is a non-binding activity—that is, the contracting agency is 2007, article 8) not forced to carry out the tender after publishing these preliminary documents. India Ministry of Finance Model RFP Document (IN Provides a full generic model RFP, intended for use by contracting authorities at the 2014a) national level. South Africa PPP Manual module on procurement (ZA 2004a, Describes first how bidders can participate in finalizing the RFP; then describes in 27–41) detail the content of the RFP. 174 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Dealing with issues—no clear preferred Many governments define and limit the extent of negotiations pos- bidder or no conforming bids sible at this stage. For example, the EPEC’s Guide to Guidance (EPEC 2011b, 31) describes a European Union rule that no issues In some cases, despite multiple bids being received, there may not that are material to the procurement can be changed—that means be a clear preferred bidder. For example, this could be because no that no change that could have resulted in a different result from bids conform to requirements; or because a non-conforming bid the bidding process should be incorporated during the post-bid ne- appears to present a better value-for-money option than conform- gotiation phase. Where changes are allowed at this stage, the final ing bids. contract is often subject to further approval. One common cause of this problem is poor clarity or quality of the The following resources provide guidance on carefully managing RFP documents—the references listed above under Preparing and post-bid negotiations: issuing Request for Proposal documents provide guidance on prepar- ing a clear, comprehensive, and well-structured RFP. The multi- ŠŠAustralia’s National PPP Practitioners’ Guide (AU 2015, 30) stage and competitive dialogue procedures described in Section provides guidance on setting up a negotiation framework that 3.5.1 - Deciding the Procurement Strategy also help avoid this issue, includes, among other things, defining the negotiation issues by enabling changes to the RFP during the bid process that help and the timetable, setting the dispute resolution processes, and ensure final bids are all comparable and compliant. ensuring that the participants have the authority to make deci- sions on behalf of their organizations. One option if no bids conform, and none appear to be of high quality, is simply to re-package and re-tender the project. The alter- ŠŠSouth Africa PPP Manual Module 5 (ZA 2004a, 59–61) de- native is to extend the procurement process, to identify a preferred scribes principles for negotiation, and the negotiation process. bidder—typically, through discussions with the higher-ranked bid- ŠŠADB PPP Handbook (ADB 2008, 79–80) briefly describes ders on the points where the bids do not conform, often followed important elements for negotiation—including having a fall- by asking for a revised bid. back plan (which may be the second-place bidder). For further guidance, see Australia’s National PPP Practitioners’ Guide (AU 2015, 27–28), which describes two options in cases where no preferred bidder can be selected—entering into a Best and 3.5.5 Achieving Contract Effectiveness Final Offer (BAFO) process with two bidders, or structured nego- and Financial Close tiations. The South Africa PPP Manual Module 5 (ZA 2004a, 51–56) also describes in detail when and how to run a BAFO pro- Once the government and the preferred bidder have signed the cess, if no clear preferred bidder can be identified. PPP contract, they are contractually committed to implementing the PPP. However, there are several additional steps before project Finalizing the PPP contract with the implementation can begin. The preferred bidder may need to fi- preferred bidder nalize the financing agreements for the PPP and will likely need to sign contracts with other parties in the PPP structure—for exam- Once the preferred bidder has been selected, governments some- ple, sub-contractors and insurers. The implementing agency typ- times enter into further discussion to finalize the PPP contract. ically also has tasks to fulfill, such as finalizing permits. Detailed Extensive negotiation at this stage can undermine the competitive contract management protocols and manuals are often also devel- tender process, as described in Section 3.5.1 - Deciding the Procure- oped during this period (see Section 3.6 - Managing PPP Contracts ment Strategy under Negotiation with bidders: post-bid. However, for more details). some level of negotiation may be necessary to clarify elements of the proposal or contract, particularly when the bid process has not The PPP contract typically includes completion of (some of ) these included significant interaction. If financing arrangements have elements as Conditions Precedent, which must be met for the con- not already been finalized, lenders may also have demands at this tract to become effective. PPP contracts often specify a final date by stage that create pressure to negotiate on elements of the contract which the contract terminates, and/or a bid bond is forfeited, if the and risk allocation. Conditions Precedent are not met. As noted in the PPIAF Toolkit Section 3.5 Managing PPP Transactions 175 Figure 3.7e Financial Close Meeting conditions for contract effectiveness and financial close Financial close occurs when all the project and financing agree- Qualify bidders Manage the bid Reach financial ments have been signed, all conditions on those agreements have process close been met, and the private party to the PPP can start drawing down the financing to start work on the project. As noted in Yescombe, financial close conditions are often circular—the PPP contract does not become effective until funding is available for draw down (that is, funding availability is a Condition Precedent for contract effec- for PPPs in Roads and Highways (WB 2009a) section on Con- tiveness), and vice versa (Yescombe 2007). tract Award, failing to specify requirements and stipulate a period for financial close can hold up project implementation for years. The EPEC Guide to Guidance (EPEC 2011b, 34) briefly de- scribes common Conditions Precedent, and includes a checklist for Finalizing financing agreements governments on finalizing the PPP contract and reaching financial close. Example requirements include: EPEC Guide to Guidance (EPEC 2011b, 31–33) describes the range of financing agreements for a typical PPP. These financing ŠŠFinalizing all project agreements and contracts agreements are often not finalized until after the contract has been ŠŠSecuring final approval from relevant government entities—for awarded. In most cases, interested lenders are identified at the pro- example, review and approval of the procurement process and posal stage. However, before those lenders will commit to provide final contract finance, they often carry out detailed due diligence on the project and PPP agreements (as described in Farquharson et al (Farqu- ŠŠSecuring permits and planning approvals harson et al. 2011, 124–125). There are risks associated with this ŠŠCommencing or completing project land acquisition process—lenders may require changes in the PPP agreements be- fore agreeing to finance the project, or financing terms may change This process often requires a lot of detailed work and effort by both from what was assumed in the proposal. One way to mitigate these the public and private parties to bring the transaction stage to a risks can be to ask for firm financing commitments at the proposal close and begin project implementation. stage—but this can be difficult and expensive to procure, and risk reducing competition. Section 1.3 - How PPPs Are Financed provides more information on the risks associated with PPP financing and reaching financial close. Did you know....? Most urban infrastructure in London was built under long-term lease contracts In 17th century London, some landlords divided their estates into units that were leased to builders under 99-years BOT contracts. Private investors constructed the housing and streets in each unit, including a public square, a market and a church, and then leased the houses. After 99 years, the houses would become property of the landlord. Areas such as Queen Square, Russell Square, Torrington Square, and many other London squares were not the result of an urban plan, but of private initiatives and long-term contracts. Source: Peter Ackroyd, London: A Biography (Chatto & Windus, 2000) 176 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Key References: Managing PPP Transactions Reference Description WB. 2009a. “Toolkit for Public-Private Partnerships in Roads and Highways.” Module 5: “Implementation and Monitoring, Stages 3: Procurement,” and 4: World Bank. Website. “Contract Award.” Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and Chapter 9: “Managing Procurement” talks through each stage of the Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private procurement process. Includes a case study of the Inkosi Albert Luthuli Central Partnerships in Emerging Markets. Washington, DC: World Bank. Hospital, South Africa describes the procurement process for the hospital, which included a multi-variable bid evaluation approach. Kerf, Michael, R. David Gray, Timothy Irwin, Celine Levesque, Robert R. Section 4: “Concession Award” provides detailed guidance and examples on Taylor, and Michael Klein. 1998. “Concessions for Infrastructure: A guide to choosing the procurement process, pre-qualification and shortlisting, bid their design and award.” World Bank Technical Paper No. 399. Washington, structure and evaluation, and bidding rules and procedures. DC: World Bank. GIH. 2016b. “GI Hub Launches Project Pipeline.” Press release. Global The GI Hub Pipeline is a freely-available platform on which governments can Infrastructure Hub. December 6. Website. market their PPP projects to prospective bidders, lenders and other key private sector stakeholders. PPIAF. 2006. Approaches to Private Sector Participation in Water Services: A Section 9: “Selecting an Operator” provides guidance on choosing a Toolkit. Washington, DC: Public-Private Infrastructure Advisory Facility. procurement method, setting evaluation criteria, managing the bidding process, and dealing with other issues. EPEC. 2011b. The Guide to Guidance: How to Prepare, Procure, and Deliver Section 2: “Detailed Preparation” includes information on selecting the PPP Projects. Luxembourg: European Investment Bank, European PPP procurement method and bid evaluation criteria. Section 3: “Procurement” Expertise Centre. describes the bidding process, through to finalizing the PPP contract, with detailed information on reaching financial close. UK. 2008. Competitive Dialogue in 2008: OGC/HMT joint guidance on using Describes and provides guidance on carrying out the competitive dialogue the procedure. London: UK Government, HM Treasury. procurement procedure. Describes some challenges—such as receiving only one bid. Also describes the post-bid stages, with guidance on issues that may be resolved post-bid. Yescombe, E.R. 2007. Public-Private Partnerships: Principles of Policy and Section 6.5 “Due Diligence” describes some of the issues the implementing Finance. Oxford: Butterworth-Heinemann. agency should check before contracting is completed—including describing the requirements to reach financial close. KPMG. 2010. PPP Procurement: Review of Barriers to Competition and Draws on a survey of PPP practitioners, to provide recommendations for how Efficiency in the Procurement of PPP Projects. Sydney: KPMG Australia. the efficiency of PPP procurement processes can be improved, and barriers to entry reduced. The recommendations focus on improving the efficiency of the PPP procurement process, as well as touching on the pros and cons of governments contributing to bid costs. ADB. 2008. Public-Private Partnership Handbook. Manila: Asian Section 7: “Implementing a PPP” describes several aspects of PPP procurement, Development Bank. including selecting the process, pre-qualification, bid evaluation, and preparing the tender documentation. WB. 2011c. Guidelines Procurement of Goods, Works, and Non-Consulting Sets out the procurement procedures that any project receiving World Bank Services under IBRD Loans and IDA Credits and Grants by World Bank funding must use. Borrowers.  Washington, DC: World Bank. Dumol, Mark. 2000. The Manila Water Concession: A key government official’s Describes in detail the entire process of the Manila water concession, from diary of the world’s largest water privatization. Washington, DC: World Bank. deciding on the best option for privatization, to running the tender process, to dealing with the many issues that emerged. Section 3.5 Managing PPP Transactions 177 Reference Description Engel, Eduardo, Ronald Fischer, and Alexander Galetovic. 2002. “A New Describes and explains the advantages of the Least Present Value of Revenue Approach to Private Roads.” Regulation 25 (3). criterion introduced in Chile’s toll road program. Guasch, José Luis. 2004. Granting and Renegotiating Infrastructure Concessions: Chapter 7 provides guidance on optimal concession design, drawing from the Doing it right. Washington, DC: World Bank. preceding analysis of the prevalence of renegotiation of concession contracts in Latin America. Includes guidance on selecting appropriate evaluation criteria. BR. 2004. Lei No. 11.079 de 30 de dezembro de 2004. Brasília: Presidência da Clarifies process for PPPs, including describing the contents of the RFP República, Casa Civil. documents, and the possible evaluation criteria. BR. 1995. Lei No. 8.987 de 13 de fevereiro de 1995. Brasília: Presidência da Sets out the tendering procedures for (user-pays) concessions in Brazil (which República, Casa Civil. also apply to government-pays PPPs). CL. 2010b. Ley y Reglamento de Concesiones de Obras Públicas: Decreto Supremo Chapter III sets out in some detail the procurement process for PPPs, including MOP Nº 900. Santiago: Gobierno de Chile, Ministerio de Obras Públicas. pre-qualification, the bid process, possible evaluation criteria, and processes for contract award. EG. 2011. Executive Regulation of Law No. 67 of 2010, Issued through Prime Part Three sets out in detail the tendering, awarding, and contracting Minister Decree No. 238 of 2011. Cairo: Government of Egypt.  procedures for PPPs, including pre-qualifications, tender stage, competitive dialogue, and awarding and contracting procedures. Also specifies an approach for appeals. IN. 2007. Panel of Transaction Advisors for PPP Projects: A Guide for Use of the This users’ guide describes the processes and the tasks involved in appointing a Panel. New Delhi: Government of India, Ministry of Finance. transaction advisor for a PPP transaction using the panel. MX. 2014. Ley de Adquisiciones, Arrendamientos y Servicios del Sector Público. Sets out the rules for carrying out tender processes in Mexico. It includes Mexico City: Gobierno de México, Cámara de Diputados. the possible contracting options—public tenders, sole sourcing, and direct invitations to bid to at least three potential bidders. PH. 2006. The Philippine BOT Law R.A. 7718 and its Implementing Rules and Implementing Rules 3-11 set out in detail the procurement process and Regulations. Revised 2006. Manila: Public-Private Partnership Center. requirements at each stage: pre-qualification, bid process and evaluation, when and how a negotiated procedure may be used, dealing with unsolicited proposals, and contract award and signing. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African Module 5: Procurement sets out the procurement process and guidance: Government, National Treasury. including pre-qualification, issuing the RFP, receiving and evaluating bids, negotiating with the preferred bidder, and finalizing the PPP agreement management plan. AU. 2015. National Public Private Partnership Guidelines - Volume 2: Sets out key project phases, including three procurement phases: Expressions of Practitioners’ Guide. Canberra: Commonwealth of Australia. Interest, Request for Proposal, and Negotiation and Completion. Also provides guidance and protocols for the interactive tender process. SG. 2012. Public Private Partnership Handbook. Version 2. Singapore: Section 3 sets out PPP procurement process options and principles. Government of Singapore, Ministry of Finance. IN. 2014b. Public-Private Partnership Request for Qualification: Model RFQ Sets out a model RFQ, with an explanatory introduction. Document. New Delhi: Government of India, Planning Commission. PPPIRC. Accessed March 9, 2017. “Public-Private Partnerships Provides a library of PPP documents, including a selection of model and in Infrastructure Resource Center website.” Website. example procurement documents. 178 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Reference Description WB. 2006c. Procurement of works and services under output-and performance- Includes a comprehensive, sample bidding document, as well as sample based road contracts and sample specifications. Sample bidding documents. specifications in an annex. A foreword also provides some overview guidance. Washington, DC: World Bank. CO. 1993. Ley 80 de 1993. Bogotá: Congreso de Colombia. General procurement law, which also applies to PPPs, defines who is authorized to carry out tender processes transparency requirements, and the contents of the tender documents, and sets out the structure of the awarding procedures. CO. 2007. Ley 1150 de 2007. Bogotá: Congreso de Colombia. Sets out rules to ensure the objective selection of the winning bid, procedures to verify the veracity of the information presented by bidders. IN. 2014a. Public-Private Partnership Model RFP Document. New Delhi: This report provides a Request for Proposal for PPP Projects template as well as Government of India, Planning Commission. a short memorandum on the guidelines for invitation of financial bids for PPP projects. IN. 2014c. Model Request for Proposals (RFP): Selection of Technical Consultant. Sets out a model RFP with an explanatory introduction. New Delhi: Government of India. VIC. 2001. Practitioners’ Guide. Melbourne, Australia: Victorian Department of Sets out project phases, as described above, as they apply in the State of Treasury and Finance, Partnerships Victoria. Victoria, Australia’s PPP program. Similar to the national approach; includes more detail on the bid evaluation phase. 3.6 Managing PPP Contracts ŠŠThe efficiency expectations of the contract are achieved and the Managing PPP contracts involves monitoring and enforcing the handback provision in the contract are met. PPP contract requirements; and managing the relationship be- These aims of contract management are elaborated in the 4ps tween the public and private partners. The contract management Guide to Contract Management for PFI and PPP Contracts in stage spans the lifetime of the PPP agreement from the effective the United Kingdom (4ps 2007, 5). The South Africa PPP Man- date of the contract to the end of the contract period. ual section on PPP Agreement Management (ZA 2004a, Module Managing PPP contracts differs from managing traditional gov- 6, 11–12) describes what is needed and what is meant by successful ernment contracts. PPPs are long term and complex, and contracts management of a PPP contract, as well as what can go wrong, and are necessarily incomplete—that is, the requirements and rules in why. EPEC’s 2014 Guidance for Managing PPPs (EPEC 2014b) all scenarios cannot be specified in the contract. Therefore, the condenses European experiences on the topic. The Caribbean PPP management of PPP contracts must be flexible in both available Toolkit (Caribbean 2017, Module 6) presents Caribbean examples resources and skills to meet the whole-life expectations of the con- and discusses contract management best practices. tract. The aims of contract management for PPPs are to ensure The foundations for effective contract management are laid early in ŠŠServices are delivered continuously and to a high standard, in the PPP implementation process. Many aspects of contract man- accordance with the contract, and payments or penalties are agement—such as procedures for dealing with change, and dispute made accordingly; resolution mechanisms—are set out in the PPP agreements, as de- scribed in Section 3.4 - Designing PPP Contracts. ŠŠContractual responsibilities and risk allocations are maintained in practice, and the government’s responsibilities and risks man- This section describes four key aspects of putting contract manage- aged efficiently; ment into practice for PPP projects: ŠŠChanges in the external environment—both risks and opportu- ŠŠEstablishing contract management institutions—defining nities—are spotted and acted on effectively; and and establishing the key responsibilities and communication Section 3.6 Managing PPP Contracts 179 al nature of PPP contracts where different contract management mechanisms that will enable a proactive, effective relationship skills will be required at different times during the contract’s life. between the public and private partners to the contract. This includes designating a PPP contract manager (or management ŠŠMonitoring PPP delivery and risk—monitoring and enforc- team) within the implementing agency who will be dedicated spe- ing contract compliance and service performance by the private cifically to the management of the PPP contract, as well as defin- party, ensuring the government delivers on its responsibilities ing the roles of other entities within government in managing the under the contract efficiently, and monitoring and mitigating PPP. Commitment, collaboration and coordination are needed to risk by the implementation of frequent and robust reporting manage a PPP contract effectively. The government will need to mechanisms during the whole-life of the contract. be clear on where the contract manager has autonomy, and can act with discretion, and where it needs to consult or gain approval ŠŠDealing with change—putting into practice the mechanisms from someone else—a higher level officer, or another entity such described in Section 3.4 - Designing PPP Contracts to deal with as a Finance Ministry. It also requires establishing communication contract adjustments, dispute resolution, and contract termina- and contract management protocols for the relationship with the tion, as well as deciding whether, when and how to renegotiate. private party. ŠŠManaging contract expiry and asset handover—managing The United Kingdom Treasury Operational Taskforce project the transition of assets and operations early enough to ensure transition guidance (UK 2006a) is a helpful overview of the re- that the handback criteria or contracted handback condition of sources that are needed to establish efficient contract management the asset is met at the end of the contract term. institutions. The guide covers resource planning for contract man- The United Kingdom Treasury’s Operational Taskforce, part of agement, setting up monitoring and management arrangements, the PPP Unit, has produced comprehensive guidance notes cover- and establishing the communication approach. ing several topics on contract management for PPPs (UK 2006a). Designating a PPP contract manager and 3.6.1 Establishing Contract management roles Management Structures The implementing agency typically has primary responsibility for Establishing the contract management structures means defining contract management throughout the life on the contract. This re- responsibilities for contract management within government, and sponsibility is often centered on a designated PPP contract manag- how the relationship with the private party will be managed. It also er—the main point of contact within government for all matters entails taking consideration of the long term and cyclic operation- relating to the PPP. Figure 3.8 Contract Management Stage of PPP Process PPP CONTRACT 180 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Some countries allocate responsibility for procurement to a special- The 4Ps Guide to Contract Management for PFI and PPP Proj- ized team or agency, benefiting from specialized knowledge on PPP ects (4ps 2007, 8–10) describes the process of setting up a con- tendering and negotiation. The rationale behind this approach is tract management team. Drawing on the experience of contract that contract negotiation requires highly specialized skills that are managers in the UK, the guide emphasizes the benefit of having different from those required for contract management. However, the contract manager involved early—ideally when contract man- in this configuration, it is important that the institutional memory agement provisions in the contract are being designed. Continuity concerning the history of the contract be documented and trans- is also important during the contract lifetime, since the contract mitted to the contract management team. In particular, the history will most likely outlast its management team. The guide describes of the discussions concerning the drafting of critical clauses of the how careful succession planning, supported by a detailed contract contract may provide valuable information to the contract man- management manual, can help ensure continuity (4ps 2007, 19). agement team. Roles of other entities in contract The PPP contract typically designates a particular public sector en- management tity as the contractual counterpart—for example, a health board for a new hospital. The contract may also specify the individual Several other entities within government can also have roles to play contact point (and should provide for this to be changed simply, by in managing a PPP contract, typically working with the contract- notice to the private party) and articulate the duties and responsi- ing authority and designated contract management team. These bilities of the contract point or counterpart. In practice, there is a can include: lot more to contract management than these statements in the con- ŠŠSector regulators, who often have responsibility for monitoring tract. The PPP contract manager—or management team—needs: service standards and managing changes in tariffs for PPP com- ŠŠSufficient resources. Depending on the complexity of the con- panies providing services directly to the public (see Section 2.3 tract—and resources available—the manager may be support- - PPP Processes and Institutional Responsibilities). For example, in ed by a team, with members responsible for different aspects Peru, contract management responsibilities in the transport sec- of contract management. The same individual or team could tor are mostly allocated to OSITRAN—the agency in charge of also manage more than one PPP contract. Farquharson et al’s regulating and supervising the management of public transport chapter on contract management (Farquharson et al. 2011, infrastructure. OSITRAN oversees monitoring the concession- 136–137) highlights the need for the implementing agency to aire’s compliance with the concession contract. This includes budget for the cost of the team and their training. monitoring economic, commercial, operation, investment, ad- ministrative, and financial aspects of the contract. OSITRAN ŠŠAppropriate skills. The 4Ps Guide to Contract Management also has the authority to resolve controversies between users and for PFI and PPP Projects in the United Kingdom (4ps 2007, the concessionaire. Similar regulatory agencies exist in other in- 15–16) provides a typical job profile and skills required for a frastructure sectors in Peru. contract manager. The United Kingdom Operational Task- force guidance (UK 2006a, 2) emphasizes five key skills: com- ŠŠThe Finance Ministry is often involved, particularly where po- munication, negotiation, change management, financial com- tential changes to the contract could have a fiscal implication. petence (to understand the payment mechanism), and analytical In Chile, the Concessions Law (updated 2010) states that any skills. This taskforce was set up to address concerns about a lack changes introduced to the PPP contract during implementation of commercially-skilled contract managers in public authorities. must be done through a supreme decree of the Ministry of Pub- lic Works, and that the decree must be approved by the Ministry ŠŠAppropriate seniority. The South Africa PPP Manual mod- of Finance (CL 2010b). ule on contract management (ZA 2004a, 15–16) notes that the contract manager should be senior enough to have the ear of ŠŠCentral PPP units or other specialized support units may have senior staff at the implementing agency and other government a role in supporting the contracting authority’s contract man- entities. Seniority is also required to give the counterparty the agement team. Farquharson et al notes this can be particularly confidence that decisions can be made quickly and effectively. useful for dealing with complex issues, such as a refinancing, Section 3.6 Managing PPP Contracts 181 that may only occur once in a project lifetime (Farquharson ŠŠThe South Africa PPP Manual module on contract manage- et al. 2011, 137–138). For example, the United Kingdom has ment (ZA 2004a, 13–17) describes a similar structure, setting a central PPP unit that reports directly to the UK’s Treasury out the focus and typical parties to communication at the stra- and works across all other central UK government departments tegic, business, and operational level. involved with PPP contracts. The PPP unit provides help and Some governments formally establish the communication and re- guidance to public sector managers of PPP projects on contract lationship management arrangements in a contract administration management strategies and implementation, benchmarking, manual, or plan. The 4ps Guide (4ps 2007, 19–20) describes and technical operational compliance, achieving whole life value for provides suggested contents for an operational contract manual, money, and refinancing of operational contracts. which includes defining the governance structure and communi- The World Bank’s Water PPP Toolkit (PPIAF 2006, 126–130) cation approach. describes a range of options for institutional structures for moni- The relationship between the government agency and the pri- toring and managing PPPs, focusing on PPPs providing services to vate party is also important. The United Kingdom Operational users, with examples. It also sets out criteria for choosing the most Taskforce note on project transition describes the importance of appropriate institutions. building good relations with the contractor (UK 2006a, 21–22). Other actors within and outside government may also be drawn on The 4ps Guide (4ps 2007, 26) also describes the need for trust, to fulfill particular roles. For example, private contractors and end while also setting boundaries and being ready to challenge. The users can play a role in service monitoring, as described in Section guide emphasizes the need to avoid developing a ‘cozy’ relationship 3.6.2 - Monitoring and Managing PPP Delivery and Risk. Indepen- that could lead to opportunism. dent expert advisors or panels are also often used to help deal with change or operational compliance disputes in the PPP contract, Regulation by contract as described in Section 3.6.3 - Dealing with Change. In Chile, a permanent PPP advisory board (Panel técnico de concesiones) pro- Most governments implement PPPs without creating an overall vides recommendations in case of dispute between the parties, by sector regulatory regime. A common approach to sector regulation request of any party (CL-Panel). is to address tariff and service standards directly through the con- tract with a private service provider. In this approach, no special Communication and contract management tools or regulatory bodies are required. The contract itself sets out protocols the service standards to be reached. Besides establishing institutions, the government needs to specify In the case of a concession contract, the contract will also estab- the structure for communication between the public implementing lish the tariff, and rules and processes for adjusting the tariff. In a agency and the private party. This often requires relationships at lease or affermage contract, tariff setting powers may be retained by different levels of both organizations—from the more senior lev- the government, but the payment to the operator—which is also els (if dealing with emerging problems with the contract), through linked to the amount of the service supplied—is set in the contract. those primarily responsible for contract management, to the day- This approach is used in many countries. For example: to-day operational staff. For example: ŠŠUrban water concession, Senegal—in 1995, the government ŠŠThe 4ps Guide to Contract Management for PFI and PPP implemented reforms to bring in private operators under an af- Projects in the United Kingdom (4ps 2007, 11–13) describes fermage and performance contracts to improve the performance the set-up recommended for municipal councils in the United of the water sector. Provisions within the contracts outlined Kingdom, which comprises a partnership board at the most se- performance standards and indicators, allowed for monitoring nior level; a contract management board, and an operational by a committee, and included an effective dispute resolution management team to deal with day-to-day management. The mechanism. The private operator was legally obliged to meet guide describes how often each would meet and the types of the standards—such as water quality, access, non-revenue wa- issues they would deal with. ter—set out under the contract (WB 2006b). 182 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE ŠŠManila water concessions, Philippines—when the Govern- ŠŠEvaluate and allocate risk to the appropriate party resulting ment of the Philippines decided to end a water crisis in Manila from contract change by offering two concession contracts for supply of water in the city, it considered establishing an independent statutory regula- The actual activities undertaken and skills required will differ be- tor. However, it decided that going to congress to pass the nec- tween implementation stages—design, construction, implementa- essary laws would be too time-consuming and risky. It therefore tion, preparation for contract close and project close. For an over- created a regulatory office for the two concession agreements view of service delivery management—including key elements of within the public utility (which remains the asset owner and risk management and performance management, see the South counterpart to the PPP contract). A clause in the concession Africa PPP Manual module on contract management (ZA 2004a, agreement required the private operators to cooperate with the 20–28) and Fortea et al’s Seguimiento de una Concesión (Fortea et regulatory office, which in turn was responsible for interpreting al. 2011) which describes the project monitoring process in Spain. the regulations in the agreements (Dumol 2000). Monitoring and enforcing service ŠŠThe Bucharest water concession, in Romania, also provides performance and contract compliance an interesting example of a regulatory structure created under contract. The concession had two different regulatory bod- The implementing agency needs to ensure the private party meets ies—a technical regulator created to monitor the technical per- its obligations under the partnership by monitoring outputs or ser- formance of the private operator against the indicators set out vice and performance standards. This does not generally involve under the concession contract, and an economic regulator to detailed monitoring of construction, which is the responsibility of approve tariff adjustments according to the formula set out by the private party. Instead, it means monitoring against the perfor- the concession contract. mance indicators established in the contract, as described in Section 3.4.1 - Performance Requirements. In many cases, infrastructure and For further discussion of issues specific to regulation by contract equipment are certified to obey the contractual specifications by and case studies, refer to Regulation by Contract: A New Way reputable independent engineering firms under careful public sec- to Privatize Electricity Distribution? (Bakovic et al. 2003) and tor scrutiny. The 4ps guide to contract management for PPPs Explanatory Notes Series on Key Topics in Regulation of Water (4ps 2007, 28–36) provides an overview of managing service per- and Sanitation Services (Groom et al. 2006). formance (focused on government-pays PPPs), and a checklist of key issues. 3.6.2 Monitoring and Managing PPP As described in Section 3.6.1 - Establishing Contract Management Delivery and Risk Structures, monitoring service performance and contract compli- ance is often the responsibility of the contract manager and man- To achieve the whole life value for money promised by a PPP, gov- agement team. For PPPs in sectors that are regulated, the sector ernment needs to make sure that the planned allocation of respon- regulator may also undertake some or all monitoring responsibility. sibilities and risks is put into practice, monitored, recorded and In either case, sources of monitoring information can include: continually analyzed and verified. Throughout the lifetime of the contract, the contract manager needs to: ŠŠData provided by the private party. Typically, the private party ŠŠMonitor contract compliance and service performance by the is responsible for providing project performance data in regular private party, and ensure penalties or bonuses are paid appro- reports to the contracting authority. The content, format and priately frequency of these reports should be specified in the contract. For example, the Partnerships Victoria Contract Manage- ŠŠMonitor and ensure compliance by government with its respon- ment Guide (VIC 2003, 54–55) describes how reporting re- sibilities under the contract quirements can be specified, including suggested templates for ŠŠMonitor and mitigate risks the different contract stages. The usefulness of data provided by the private party depends on auditing and checking by the public sector. Section 3.6 Managing PPP Contracts 183 ŠŠIndependent experts can be used to carry out checks on con- A risk management plan lists each risk and associated responsibili- struction, maintenance on service standards, while avoiding ties borne or shared by the government; it identifies those that may concerns of bias in results. For example, the Partnerships Vic- undermine sustainability of the PPP, and so lead to risk of default, toria Contract Management Guide (VIC 2003, 55) describes or poor performance. For each risk, the plan should also identify how independent reviewers are used at construction and service the information needed to monitor the risk, and possible actions delivery stages. India’s guidelines on monitoring PPP projects to mitigate the risk or its impact. These information requirements (IN 2012) also describe the use of an independent engineer to should also be part of the reporting requirements defined in the monitor compliance during design, construction, and opera- contract. Farquharson et al provides a sample extract of a risk tions. management plan for a PPP, which lists risks, and for each risk de- scribes the owner, status, estimated impact, comments, mitigating ŠŠService users have a wealth of information on the quality of actions, target dates for action, and current risk status (Farquharson service and the prevalence of faults, which the government can et al. 2011, 153–158). draw on by setting up processes for feedback. The 4ps Guide to Contract Management (4ps 2007, 33) describes a maintenance Some risks that are contractually allocated to the private party may helpdesk, to be established by the service provider, as a good also require monitoring by the public party, if they could put it at practice. Another good practice is collecting user feedback, cre- risk. For example, if lifecycle and maintenance activities are not ating a contractual obligation on the contractor to have frequent implemented according to plan, long-term performance and asset customer satisfaction surveys—at least annually. handback may be at risk and could impact the public sector. The risk management plan should be developed by the contract These arrangements should be specified in the contract, as de- manager prior to the start of the contract. It should then act as scribed in Section 3.4.1 - Performance Requirements. a resource and guide through the duration of the contract. The The implementing agency also needs to ensure enforcement mech- contract manager typically collects the relevant risk monitoring in- anisms are implemented as appropriate based on the monitoring formation from the private party, and relevant external information information received. This could include adjusting payments (for (such as on economic trends), to regularly update the plan. The government-pays PPPs) following the rules in the contract, or in contract manager then needs to: severe cases, calling performance bonds. It also includes commu- ŠŠMonitor indicators against expected levels, to identify emerging nicating with the contractor and monitoring attempts to rectify risks. For example, traffic levels failing to climb as projected may performance shortfalls. To avoid an accumulation of unnecessary indicate a risk that a minimum traffic payment will be triggered. disputes, good practice recommends creating an escalation ladder from day-to-day contract management discussions, senior manage- ŠŠTake the planned mitigating actions, where there are risks that ment discussions, arbitration, and on to the formal dispute resolu- the implementing agency can control (or ensuring private party tion mechanisms. When all else fails, contract enforcement will be is doing the same). For example, if government is responsible require a judicial ruling. Finally, it could include identifying if and for associated infrastructure that is falling behind schedule, the when trigger points are reached for default, step-in by the lend- plan may be to transfer responsibility for that infrastructure to a ers or the public party, or termination (see Section 3.6.3 - Dealing higher level team in government, or to the private party. with Change). ŠŠEven where risks cannot be controlled, consider possible actions and responses. For instance, if floods threaten critical water ser- Monitoring and managing government vice facilities, government may start work with the private party responsibilities and risks on an emergency response, including alternative supplies, ra- tioning, and a service re-instatement plan. A crucial element in ensuring good performance and sustained ser- vice delivery under a PPP contract is monitoring and managing the Box 3.14 - Example of Weak Risk Monitoring—Victoria Trams and risks and responsibilities allocated to government. A central tool Trains provides an example of weak risk management, where the often used by implementing agencies in doing so is a risk manage- government’s contract monitor collected risk information, but ment plan. failed to act on it. 184 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE The following resources provide further guidance and examples of ŠŠRenegotiations risk management approaches: ŠŠDisputes ŠŠThe South Africa PPP Manual module on contract manage- ŠŠContract expiry or termination ment (ZA 2004a, 20–24) describes how risk monitoring and management should center around a risk management plan. Planned reviews and adjustments ŠŠThe Partnerships Victoria Contract Management Guide Well-structured PPP contracts build in adjustment mechanisms (VIC 2003, 49–54) describes the monitoring information—be- for dealing with the more common types of unexpected change, yond KPIs—that the government will typically collect, to mon- as described in Section 3.4.3 - Adjustment Mechanisms. In addition itor risks to the sustainability of the contract. to being aware of, and following, the rules in the contract, con- tract managers need to make sure required institutional elements are in place, as described in the EPEC Guide to Guidance (EPEC 3.6.3 Dealing with Change 2011b, 37–38). For example, this could include ensuring expert Over the life of a typical PPP contract—10 to 30 years—devel- panels have been identified and are qualified, and all steps are clear opments will occur that could not have been predicted when the to all parties involved. contract was signed. It is also likely that the parties will dispute contract interpretation, or whether both parties have been per- Renegotiation or contract variations forming as agreed. In some cases, these disputes may result in early Many PPP contracts are renegotiated, often early, as described by termination of the contract. These risks cannot be avoided—but Guasch in his book on renegotiation in PPPs (Guasch 2004). they can be managed. Renegotiation refers to changes in the contractual provisions, rather Some general guidance material that is available on dealing with than through an adjustment mechanism provided for in the con- change in PPPs is: tract. Renegotiation is something to avoid where possible. Good use of adjustment provisions, as outlined above, can obviate the ŠŠThe United Kingdom’s National Audit Office publication need for renegotiation. on managing the PFI relationship (NAO 2001), which empha- sizes the need for public authorities to address the question of Still, renegotiations will from time to time be needed, and govern- contract management early in the project preparation and the ments will benefit from understanding good policy for conducting presence of appropriate skills within the public authority. It also them. Partnerships Victoria’s Contract Management Manual highlights the importance of an open and cooperative attitude. (VIC 2003, Section 7.3) describes the understanding that public parties should have of the private party’s financial health, as well as ŠŠA shorter overview on similar topics is provided in Quick’s arti- project performance. While not focused specifically on renegotia- cle on managing PPP contracts (Quick 2003), which also adds tion, having this information and understanding will benefit gov- an Australian perspective. ernment as it considers decisions that could result in renegotiation. ŠŠUNESCAP’s PPP guidebook (UNESCAP 2011, Chapter 6) Some examples of renegotiations that may offer some insights into offers an overview of contract management intended for devel- good practice, and which have been documented include: oping countries. It focuses on institutional arrangements for contract management, and mechanisms for dispute resolution. ŠŠThe Melbourne Tram and Train concessions. When these concessions were in financial difficulty, the government decid- These materials do not provide the detailed guidance that would ed to renegotiate rather than terminate, as this was expected to benefit government officials. Therefore, this section also provides provide better value for money—see Ehrhardt and Irwin (Eh- examples of where these issues have come up, and ways in which rhardt and Irwin 2004). To provide transparency and quality as- they have been handled, from which practitioners can draw lessons. surance on the process, the government announced early in the These change situations can usefully be discussed in four categories: process that, after the negotiations were complete, they would ŠŠPlanned reviews and adjustments be subject to an ex-post value for money analysis. This analy- Section 3.6 Managing PPP Contracts 185 sis was published as an Auditor General’s report (VIC 2005), resolved entirely through a private sector financial restructuring. which describes the renegotiation process and results. Johnston and Gudergan subsequently reviewed the experience to draw lessons for PPP governance (Johnston and Gudergan 2007). ŠŠThe United Kingdom National Air Traffic Services (NATS) An OECD paper on PPP renegotiation in the US (Gifford et al. PPP, also described by Ehrhardt and Irwin (Ehrhardt and 2014) presents renegotiation cases in the United States and shows Irwin 2004), was a more controversial restructuring. The PPP how they are linked to opportunism and may affect infrastructure Company faced falling revenue because of a sharp downturn in development. air travel after the 9/11 terrorist attacks in the United States. The company looked certain to default on its debt. The Board Road contract renegotiations in Portugal and Spain, during the of the Civil Aviation Authority (the public party to the PPP) recent economic and financial crisis, present an interesting case of was split. The Board member directly responsible for the con- renegotiation under fiscal stress—but lessons have not yet been re- tract insisted the government should not renegotiate, stating the ported. The British National Audit Office (NAO 2013b) reported solution was a private sector financial restructuring, in which on similar renegotiations for reducing service levels and obtaining the lenders to the company would bear some of the losses. The project savings. majority of the Board disagreed, however, and instead agreed to change the terms of the contract as part of a package deal that Disputes also involved some debt restructuring. Contractual disputes arise when one party believes the other has In contrast to the United Kingdom NATS experience, the Gov- not done something it was contractually obliged to do, but the ernment of New South Wales managed to avoid renegotiating the other party disagrees as to what its obligations were, or what should PPP contract for a highway tunnel under Sydney’s central business be done to remedy the situation. district when it went into financial distress. Instead, the matter was The Partnerships Victoria Contract Management Guide (VIC 2003, Section 8.3) includes a section on dispute resolution. A help- ful distinction is made between issues and disputes, as set out in Table 3.6 - Distinction between Service Delivery Issues and Disputes. Box 3.14 Example of Weak Risk The Partnerships Victoria Contract Management Guide also Monitoring—Victoria Trams contains sample templates for specifying how issues may be esca- and Trains lated (VIC 2003, Template M) and disputes resolved (VIC 2003, Template N). The practical advice offered focuses on the desirabil- The trams and trains franchises in Melbourne, Australia ity of speedy informal resolution of disputes, understanding the provide an educational example of the implications of other side’s position, and avoiding inappropriate dispute processes, inadequate risk monitoring. The government awarded a since these can damage the long-term relationship. series of franchises for the city’s urban transport system. Demand risk was largely borne by the private parties. Focusing on finding practical solutions quickly, and taking into Demand turned out to be substantially lower than expected, account the other side’s position, often yields positive outcomes resulting in financial difficulties for the companies. The government’s contract monitor was receiving information when trying to resolve disputes. However, countries do not neces- from the private parties, which showed deteriorating sarily find it appropriate to seek resolution through informal mech- financial performance. However, the monitor failed to hear anisms. For a variety of reasons, they often prefer to follow the the alarm bells or take any remedial action. Performance formal steps set out in the contract. Whichever route they choose continued to deteriorate to the point that the private to follow, they should seek to reach a practical solution. parties’ best option was to walk away from the contract, and the government had no option but to renegotiate. There are numerous examples of the costs that governments end up bearing because of choosing inappropriate dispute resolution Source: (Ehrhardt and Irwin 2004) methods. For example, the Government of Tanzania was justifi- ably dissatisfied with the performance of the private firm operating the water system in Dar es Salaam. The PPP contract provided a 186 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE dispute resolution mechanism under which the government could ŠŠAct quickly when problems start to arise very likely have achieved the redress it sought, and won damages ŠŠHave teams with the right skills and appropriate levels of deci- from the contractor. However, as described in a review of the dis- sion-making authority working on resolving the issue pute case (Triantafilou 2009, 6): ŠŠFollow processes set out in the contract “While the contractual relationship was headed inevitably towards dissolution, Tanzanian government officials, motivated by electoral ŠŠLook for win-win solutions, considering the broader public in- concerns, among others, took a series of drastic measures that went far terest and the private parties’ options beyond the contractually mandated process for termination of the Proj- Resolve the issues at the lowest level possible and only escalate if ect Contracts. In May 2005, Tanzanian government officials, caus- they are not resolved ing public furor, repudiated unilaterally and rather publicly the lease agreement with City Water while calling on the performance bond posted by BGT, reinstated the previously waived VAT on purchases by 3.6.4 Contract Expiry and City Water, repossessed forcibly the assets previously leased to City Water, and deported City Water’s BGT-appointed management.” Asset Handover Cases of PPP disputes and how they have been handled are available The final task in managing a PPP contract is to manage the tran- on the website of the International Center for the Settlement of In- sition of assets and operations at the end of the contract term. The vestment Disputes (ICSID, a part of the World Bank Group)—see approach to this transition should be clearly defined in the con- Box 3.10 - International Centre for Settlement of Investment Disputes. tract. As set out in Section 3.4 - Designing PPP Contracts, this typi- In July 2010, an ICSID arbitration tribunal ruled that the Argen- cally includes defining how quality of the assets will be defined and tinian government unfairly refused to allow the private concession- assessed, whether a payment will be made on asset handover, and aires to raise tariffs during the period after the devaluation of the how the amount of any payment will be determined. Options in- Argentine peso in 2001 and awarded damages to the private com- clude clearly specified handover requirements, or the involvement panies—see Box 1.6 - When PPPs fail—The case of the 1993 water of independent assessors. concession in Buenos Aires on this conflict. A principle of a PPP contract is to achieve value for money during Overly also provides a critical review of the use of international ar- its whole life. Whole-life value for money includes achieving the bitration, in a range of PPP and similar cases (Overly 2010). Many contracted handback criteria, which must be managed in a timely of these cases suggest that governments can minimize the costs of and robust manner. Contract management teams must be aware of disputes to the public sector if they: the expected contract handback conditions and ensure that prepa- Table 3.5 Distinction between Service Delivery Issues and Disputes Service Delivery Issues Disputes Need not involve any difference of opinion or Involves a difference of opinion or position between the parties (by definition) position between the parties Interruption or other disturbance to service Need not involve any interruption or other disturbance to service delivery delivery May trigger an abatement of service fees, or other Generally, will not in themselves trigger an abatement of service fees remedies Source: (VIC 2003) Section 3.6 Managing PPP Contracts 187 ration works, maintenance and asset management has been com- of the PPP contract period. Transferring assets to the public agency pleted and any post-contract conditions will be met. requires a thorough assessment of the quality of the assets at han- dover. Typically, the PPP contract will include quality standards As noted in The World Bank’s Toolkit for PPPs in Roads and that the assets and facilities are required to meet at the end of the Highways section on handover of facilities at contract end (WB contract period. 2009a, Module 5, Stage 5), there has been relatively limited prac- tical experience in completion of PPP agreements. Equally, there An audit will assess the state of the assets several years before the is limited practical guidance on dealing with this stage of contract termination date. The audit indicates which assets need to be im- management. proved before handover can occur. This procedure is particularly relevant because the project will represent an asset for the contract- The final task in managing a PPP contract is to manage the tran- ing authority after the expiration of the PPP contract. As such, the sition of assets and operations at the end of the contract term. The contracting authority should have a financial incentive to ensure approach to this transition should be clearly defined in the con- the asset is returned in the best condition possible. tract. As set out in Section 3.4 - Designing PPP Contracts, this typi- cally includes defining how quality of the assets will be defined and Sometimes the concessionaire is required to issue a specific bond assessed, whether a payment will be made on asset handover, and or guarantee to cover the last few years of the contract period. The how the amount of any payment will be determined. Options in- bond should have a minimum value that ensures the concessionaire clude clearly specified handover requirements, or the involvement has sufficient financial incentive to continue the contract until the of independent assessors. contracted end date and hand over the assets at the defined quality. A contract can be terminated regularly, that is, at the end of the agreed concession period, or it can also be terminated prematurely Early Termination (either by the public agency or the concessionaire) in the case of serious, pre-defined events, for instance: The PPP contract must include clear procedures and provisions for early termination of the project. The contract should describe ŠŠExtended Force Majeure in detail the specified circumstances that allow the contracting au- ŠŠConcessionaire default thority to terminate the contract. It should also include possible compensation—to both parties. A breach of contract must be fun- ŠŠInsolvency or bankruptcy of the concessionaire damental in nature and should (where possible) be subject to a cure ŠŠA serious deficiency in service provision (e.g. where health or period. safety is jeopardized) that is not promptly remedied Usually (but not necessarily) there is a payment from the public ŠŠVoluntary termination by the contracting authority authority to the concessionaire. This payment, or compensation from the concessionaire to the procuring authority, should be based Section 3.4.5 - Termination Provisions discusses the several types of on rules clearly stated in the PPP contract. early termination and corresponding contractual provisions. This possibility of early termination implies that, from inception, the Early termination is a serious event as the contracting authority contract manager needs to have a plan for termination. might suddenly be required to take over implementation or op- eration of the service. As early termination might also influence future PPP projects negatively, this should be the last resort—poor Regular Termination performance and poor communication among partners should be The most important element of termination is handing over proj- carefully addressed by the contract manager to avoid, if possible, ect assets and services back to the contracting authority at the end degenerating into early termination. 188 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Key References: Managing PPP Contracts Reference Description 4ps. 2007. A Guide to Contract Management for PFI and PPP Projects. London: Provides guidance intended for local authorities in the United Kingdom Public-Private Partnerships Programme. responsible for monitoring PPP contracts: from setting up the contract management approach, to managing service performance, relationships, and contract administration. Includes checklists and a troubleshooting guide. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African A comprehensive guide to PPP agreement management in South Africa, Government, National Treasury. from setting up the institutional framework, to managing over the project lifetime, dealing with change, through to the end of the contract. Describes two key tools: the PPP Agreement Management Plan, and the PPP Agreement Management Manual. UK. 2012d. “Operational Taskforce website.” Infrastructure. HM Treasury Provides detailed guidance for PPP implementing agencies on four elements Website Archives. Website. of PPP contract management: benchmarking and market testing; project transition, which covers setting up a contract management framework; managing contract variations; and managing contract expiry. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and Chapter 10 provides an overview of what is needed for successful contract Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private management after signing, with an emphasis on experience in emerging Partnerships in Emerging Markets. Washington, DC: World Bank. markets. Includes tips on managing contracts and a case study on contract management for a water concession in Sofia, Bulgaria. PPIAF. 2006. Approaches to Private Sector Participation in Water Services: A Section 7 provides guidance on developing institutional arrangements to Toolkit. Washington, DC: Public-Private Infrastructure Advisory Facility. manage the PPP contract relationship. It includes guidance on how to decide which government institution should be allocated which role, on relationship management, and tools to deal with change. Fortea, Carlos Sorni, Emilio Gardeta Torrodellas, Sergio Herrán Vitoria, Juan Describes the Spanish methodology for the monitoring of PPP projects. Pablo Matute Tejerina, and Jorge Vitutia San Millán. 2011. “Proyecto Fin de Master: Seguimiento de una concesión.” Universidad Politécnica de Madrid. Website. VIC. 2003. Partnerships Victoria Guidance Material: Contract Management Describes key elements of effective relationship and contract management Guide. Melbourne, Australia: State of Victoria, Partnerships Victoria. and provides detailed guidance, templates and tools on all stages of contract management. IN. 2012. Institutional Mechanism for Monitoring of PPP Projects: Guidelines. Describes institutional frameworks for monitoring PPPs and includes annexes New Delhi: Government of India, Planning Commission. with sample monitoring reports. NAO. 2001. Managing the Relationship, to Secure Successful Partnership in PFI This report was based on a survey of contractors and government officials on Projects. Report by the Comptroller and Auditor General HC 375. London: what makes for successful PFI contract management. It emphasizes the need for National Audit Office. public authorities to address the question of contract management early in the project preparation; appropriate skills in the public authority; and an open and cooperative attitude. Quick, Roger. 2003. “Long-Term Ties: Managing PPP contracts.” Public Briefly describes key features of successful contract management arrangements, Infrastructure Bulletin 1 (2). drawing on Australian experience. UNESCAP. 2011. A Guidebook on Public-Private Partnership in Infrastructure. Chapter 6 provides guidance on contract management intended for developing Bangkok: United Nations Economic and Social Commission for Asia and the country governments, focusing on institutional arrangements and dispute Pacific. resolution. Section 3.6 Managing PPP Contracts 189 Reference Description Groom, Eric, Jonathan Halpern, and David Ehrhardt. 2006. “Explanatory Note 4 describes the relationship between sector regulation and PPP contracts. Notes on Key Topics in the Regulation of Water and Sanitation Services.” Water Supply and Sanitation Sector Board Discussion Paper 6. Washington, DC: World Bank. EPEC. 2011b. The Guide to Guidance: How to Prepare, Procure, and Deliver Chapter 4: Project Implementation, Section 4.1: Contract Management PPP Projects. Luxembourg: European Investment Bank, European PPP describes and provides links to references on some key issues in contract Expertise Centre. management, including attributing management responsibilities, managing project delivery, managing change, dispute resolution, and termination. PURC. 2012. “Body of Knowledge on Infrastructure Regulation.” University of Section IV: Price Level Regulation describes key issues in tariff regulation, and Florida, Public Utility Research Center. Website. guides readers in accessing a wide range of references. UK. 2006b. Benchmarking and Market Testing in NHS PFI projects: Code of Best Provides guidance intended for contract managers on how to use market testing Practice. London: National Health Service. exercises to review the cost of soft services in health sector PPPs. Guasch, José Luis. 2004. Granting and Renegotiating Infrastructure Concessions: Reviews the occurrence and drivers of re-negotiation in PPP contracts in Latin Doing it right. Washington, DC: World Bank. America, and provides some policy lessons for reducing the prevalence of early renegotiations. Ehrhardt, David, and Timothy C. Irwin. 2004. “Avoiding Customer and Describes the experience of default and re-negotiation in several PPP contracts Taxpayer Bailouts in Private Infrastructure Projects: Policy toward Leverage, including the Melbourne Tram and Train Concession, and the United Risk allocation, and Bankruptcy.” World Bank Policy Research Working Paper Kingdom National Air Traffic Services PPP. 3274. Washington, DC: World Bank. Johnston, Judy, and Siegfried P. Gudergan. 2007. “Governance of Public- Reviews the experience of the Sydney Cross-City Tunnel PPP contract, drawing Private Partnerships: Lessons learnt from an Australian case?” International lessons for PPP contract management. Review of Administrative Sciences 73. Triantafilou, Epaminontas E. 2009. “No Remedy for an Investor’s Reviews the international arbitration settlement of a water service PPP own Mismanagement: The Award in the ICSID Case Biwater Gauff v. in Tanzania. Tanzania.” White & Case International Disputes Quarterly Winter 2009, 6-9. Overly, Megan Shepston. 2010. “When Private Stakeholders Fail: Adapting Describes challenges in international arbitration mechanisms, with case studies Expropriation Challenges in Transnational Tribunals to New Governance of arbitrations. Theories.” Ohio State University Law Journal 71 (2). WB. 2009a. “Toolkit for Public-Private Partnerships in Roads and Highways.” Module 5: Implementation and Monitoring includes a section on hand back of World Bank. Website. facilities at contract end, which describes some key considerations at this stage. 190 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE 3.7 Dealing with infrastructure plan can harness the private sector’s interest in developing commercially viable project solutions. Unsolicited Proposals ŠŠWhen governments do not have the technical and financial An unsolicited proposal (USP) is a proposal made by a private par- resources to develop preliminary feasibility studies, a well-de- ty to undertake a PPP project, submitted at the initiative of the signed USP process can require the USP proponent to include private firm, rather than in response to a request from the govern- these studies as part of the USP submission. This can reduce ment. By managing USPs appropriately, governments may benefit bottlenecks at an early stage of the PPP process. from this approach while reducing potential risks. However, un- solicited proposals may also create challenges that risk providing ŠŠUSPs also can also widen the range of potential solutions avail- poor value for money, particularly if the government chooses to able to address infrastructure gaps. Private providers of technol- negotiate a PPP directly with the project proponent; and they may ogy often possess greater knowledge about potential solutions to risk diverting scarce financial resources to non-priority projects. infrastructure challenges than public sector officials leading the planning process. ŠŠSection 3.7.1 - Benefits and Pitfalls of Unsolicited Proposals dis- cusses strengths and weaknesses and describes how some coun- However, unsolicited proposals also create substantial challenges: tries have introduced specific policies for dealing with unsolic- ŠŠMost PPPs require government fiscal support: the government ited proposals for PPPs. These policies are designed to provide typically accepts risks, and the associated contingent liabilities, incentives to private proponents (to varying degrees) to submit even if direct subsidies are not needed. As described in the high-quality PPP proposals; to deter poor quality proposals; to PPIAF Toolkit for PPPs in Roads and Highways (WB 2009a, introduce competitive tension; and to promote transparency. Module 5, Stage 3: “Procurement”), experience suggests that ŠŠSection 3.7.2 - Creating Competitive Tension describes how com- proposals submitted by private companies often do not ade- petition can be introduced, while rewarding the original propo- quately assess the risks associated with the project, which may nent with some form of advantage or compensation. be borne by the government. ŠŠSection 3.7.3 - Dealing with Intellectual Property and Confiden- ŠŠUnsolicited proposals do not originate as part of a government tiality provides guidance and resources on dealing with requests planning process, and, in some cases by definition, are not part for confidentiality. of sector plans. This raises the question of whether the service proposed is sufficiently integrated with other sector plans for ŠŠSection 3.7.4 - Defining Clear Policy and Processes describes and demand and benefits to be robust to changing circumstances provides examples of processes for receiving, appraising, and im- and priorities. plementing unsolicited proposals for PPP projects. ŠŠUnsolicited projects may divert government attention from a planned approach to infrastructure as a whole. In a government 3.7.1 Benefits and Pitfalls of planning process, public agencies identify projects that respond Unsolicited Proposals directly to infrastructure plans and previously identified societal and economic needs. The primary motivation of a private entity Considering unsolicited proposals allows governments to benefit submitting a project idea is, however, to further its own inter- from the knowledge and ideas of the private sector. For example: ests, which may not be aligned with those of the government or society. The role of the government is to ensure that the pro- ŠŠUSPs may allow governments to identify and prioritize projects, posed USP project is structured to meet societal needs and can help overcome challenges related to early stage project identi- be tendered to ensure fair terms, conditions and pricing. fication and assessment, and generate innovative solutions to infrastructure challenges. ŠŠNegotiating with a project proponent based on an unsolicited proposal in the absence of a transparent or competitive procure- ŠŠAn appropriately designed USP process that allows private enti- ment process can create problems. It could result in poor value ties to propose project ideas that are in line with a government’s for money from the PPP project, given a lack of competitive Section 3.7 Dealing with Unsolicited Proposals 191 tension, or provide opportunities for corruption. Even if there are no clear indications of corruption, if a company is seen to benefit from a PPP without opening the opportunity to com- Box 3.15 Costs of Direct petitors that could nonetheless give rise to complaints about the fairness of the process. This lack of transparency can undermine Negotiation—Independent the legitimacy and popular support for the PPP program. Power Tanzania Box 3.14: Costs of Direct Negotiation—Independent Power Tanzania The Government of Tanzania and the Tanzania Electricity provides an example of a power project in Tanzania that was di- Supply Company entered into contractual agreements with rectly negotiated following an unsolicited approach by the private Independent Power Tanzania Limited (IPTL) of Malaysia investor, which under arbitration was found to have provided poor for the supply of 100 megawatts of power over a 20-year value for money, and possibly been corrupt. period. This transaction was directly negotiated following an approach by the private investors during a power crisis. The The PPIAF Toolkit for PPPs in Roads and Highways section on transaction was contested by some government officials, unsolicited proposals (WB 2009a, Module 5, Stage 3: “Procure- the international donor community, and other interested ment”) further describes these challenges of unsolicited proposals. stakeholders. The grounds of the contest were that the wrong technology (heavy fuel oil instead of indigenous gas) It sets out the view of the World Bank as follows: was used, that it was not part of the least-cost generation “…there is a place for genuine and innovative [unsolicited] propos- plan, that it was not procured on a transparent and als, but these are the exceptional case. The private sector must put up competitive basis, and that the power was not needed. strong independently analyzed cases for unsolicited proposals at an early The government ultimately submitted the case to stage, before governments are sucked in to supporting projects that are arbitration. Under the final arbitral ruling, the project costs financially weak, high risk, will take up significant human resources were reduced by about 18 percent. Even so, the costs remain of the government, and will likely take a longer than normal time to well above international comparators. In the arbitration implement because of these difficulties.” hearings, the government alleged that the contract award had been corrupt, but failed to produce evidence to satisfy the Tribunal of this. The government has not subsequently pursued the corruption investigation. However, legal 3.7.2 Creating Competitive Tension disputes between the IPTL and the government continued. Many private companies submit unsolicited proposals with a view Sources: (WB 2009b); (Eberhard and Gratwick 2010) to directly negotiate a contract for the proposed project—creating the problems described in Section 3.7.1 - Benefits and Pitfalls of Un- solicited Proposals. Box 3.11 - Competitive Procurement or Direct Ne- gotiation describes some circumstances in which entering into di- Other countries adapt the competitive tender process, to provide rect negotiations may make sense, as well as some less well-founded some advantage or compensation to the project proponent for de- arguments often presented for doing so. Box 3.16 - Direct negoti- veloping a project, while retaining competitive tension and ensur- ation of unsolicited proposals describes several preparation require- ing transparency. There is no international consensus on the best ments for those procuring authority that wish to directly negotiate way to subject unsolicited proposals to competition and at the an unsolicited proposal. same time allow sufficient incentives for the private sector to sub- The alternative is to subject unsolicited proposals to a competitive mit USPs. Several approaches have been adopted to incentivize the process. Some countries accept proposals and simply follow the USP proponent: normal competitive procurement process. However, this is relative- ly unlikely to generate large numbers of USPs, since the proponent ŠŠAutomatic short-listing—a two-stage bid process is used, in receives no direct return on its investment in the project idea other which the highest-ranked bidders from the first stage are invited than the benefits of more familiarity with the project than potential to submit final proposals in a second stage (see Section 3.5.4 competitors in a tender and potential reputational benefits. - Managing the Bid Process). The proponent is automatically in- 192 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE cluded in the second stage. This approach is used in the South Intellectual property is typically protected by law. Whereas gov- Africa roads sector, as set out in a South Africa Roads Agency ernments should obviously respect intellectual property rights in policy note (ZA 2004a). the management of unsolicited proposals, this typically does not require specific additional protection. ŠŠBid bonus—the proponent receives a scoring advantage—typi- cally defined as an additional percentage added to its evaluation There are different approaches to dealing with intellectual proper- score—in an open bidding process. This approach is used in ty in an unsolicited proposal, which may depend on the nature of Chile, where the bid bonus can be between 3 and 8 percent the proposal. For example, the UNCITRAL Legislative Guide for of the financial evaluation score (in addition, the proponent is Privately-Financed Infrastructure Projects section on unsolicit- reimbursed for the cost of detailed studies (CL 2010c). ed proposals (UNCITRAL 2001, 91–97) describes two options: ŠŠRight to match— The right to match (also known in some ŠŠWhere possible, the government can competitively tender the countries as ‘Swiss challenge’) has presented significant an- project by specifying required outputs and not the required ti-competitive properties—in the Philippines under the right technology to deliver those outputs. This approach is consis- to match approach, all 11 PPP contracts awarded from unso- tent with good practice in defining output-based performance licited proposals by 2006 went to the original proponent. It requirements for Section 3.4.1 - Performance Requirements. operates like this: Following an unsolicited approach, an open ŠŠIn cases where intellectual property is crucial to the project, bidding process is conducted. If unsuccessful, the proponent has such that it could not be implemented otherwise, the UNCI- the option to match the winning bid and win the contract. TRAL guidance suggests direct negotiation may be warranted, ŠŠDeveloper’s fee—the proponent is paid a fee by the govern- along with procedures to benchmark project costs. ment or the winning bidder. The fee can simply reimburse some The Partnerships Victoria Practitioner’s Guide (VIC 2001) also project development costs, or be defined to provide a return on provides guidance, and takes a slightly different approach. Propo- developing the project concept and proposal. This is one option nents must identify any confidential information they wish to pro- for dealing with unsolicited proposals permitted in Indonesia tect (subject to agreement with government). The project is then under the presidential regulations governing PPP (ID 2005). tendered based on output specifications without revealing technol- It is to be noted that the developer’s fee option is different from ogy information if possible. If the intellectual property is “crucial the other incentives presented above in the sense that it does not to the existence of the service need,” the government negotiates apply as an advantage during the bidding process. with the proponent to obtain the rights to the necessary intellectu- al property, before procuring the project competitively. Table 3.5 - Examples of Procurement Strategies for Unsolicited Pro- posals provides further examples and references. These alternatives Information that does not strictly qualify as intellectual proper- have not all proved equally effective at enabling competition. ty can still be considered commercially sensitive or confidential. Chile, for example, is a clear exception—of 19 concessions award- In general, governments are encouraged not to protect such in- ed from unsolicited proposals as of 2015 only seven were awarded formation and disclose all information included in an unsolicit- to the original proponent. ed proposal. By doing so, governments create an incentive for the proponents to not include the information they deem confidential in the unsolicited proposal, which would then avoid any further 3.7.3 Dealing with Intellectual Property disclosure and confidentiality issues. and Confidentiality To the extent that exceptions to this approach are strictly neces- Legal provisions for the protection of proprietary information and sary, governments are advised to reach agreement with the pro- intellectual property rights encourages investors to submit innova- ponent on non-disclosure of specific elements of the unsolicited tive unsolicited proposals. At the same time, the government needs proposal prior to moving on to the next phase of project imple- to be careful not to allow proponents to claim confidentiality of mentation. Where governments decide not to disclose information (elements of ) their proposal too easily, with the sole aim to limit that is considered confidential (based on the arguments provided competition. by the proponent), the perception of corruption by stakeholders Section 3.7 Dealing with Unsolicited Proposals 193 may increase. This challenge is particularly relevant in the case of publicly and privately initiated PPP projects. The institutional USPs that include innovative technologies or alternative technical structure includes the government agencies involved in PPP initia- solutions. Guidance on intellectual property and confidentiality tion, preparation, implementation, and oversight. Each of these en- concerns is further provided in the World Bank report on the tities should have a clear role and mandate at each stage of the PPP Framework for Unsolicited Proposals (WB 2017d). process to avoid duplication of tasks and ensure that the necessary checks and balances are integrated into the institutional structure. 3.7.4 Defining Clear Policy The effectiveness of the USP policy will also depend on the capabil- and Processes ities and experience of the public officials responsible for handling USPs. Governments are therefore advised to assess the levels of ex- The World Bank report on the Framework for Unsolicited Pro- perience of the relevant public officials prior to accepting USPs posals (WB 2017d) discusses the need for a clear framework on and, if necessary, devise strategies for increasing institutional ca- USPs. Governments must first decide whether to allow USPs as pacity over time. part of their PPP program. This decision should be based on an informed understanding of the advantages and disadvantages of The purpose of the USP policy is to ensure clarity, predictability, USPs. A government’s decision on USPs need not be permanent. transparency, and accountability for both public agencies and pri- However, the government’s position should be clear and well-pub- vate sector entities. Governments must decide how to incorporate licized to ensure that: the USP Policy in their existing legal framework. Governments may incorporate a USP policy in various legal instruments, including: ŠŠPrivate entities only expend resources when they know the gov- ernment will consider their proposals. ŠŠIn regular procurement laws used for conventionally delivered projects (non-PPP-specific) ŠŠPublic agencies know whether to accept such proposals and how to respond to them. ŠŠIn PPP-specific laws or policy documents The effectiveness of a USP Policy will be influenced by the wid- ŠŠAs a standalone document er institutional and political environment for both privately and publicly initiated PPPs. Governments must ensure that the panied Governments are advised to consider their country’s unique cir- with: cumstances before defining their USP legal framework. Con- text-specific factors have a significant impact on the choice of USP ŠŠEffective PPP policies and regulations that follow international policy features. These context-specific factors may include: best practice ŠŠAn effective institutional organization governing both publicly ŠŠThe current state of the country’s infrastructure and its future and privately initiated PPPs infrastructure needs ŠŠThe development of institutional and human capacity for the ŠŠThe government’s human, institutional, and financial capacity public officials and agencies tasked with PPP development and to deliver infrastructure projects implementation. ŠŠThe extent to which a PPP enabling environment is in place The success of the USP Policy will be in part determined by the ŠŠThe government’s experience with both publicly and privately effectiveness of the PPP legal and policy framework. A USP Pol- initiated PPPs icy is not expected to replace PPP policies or procurement laws but rather complement them in areas that are specific to privately There are multiple ways in which the government may define the initiated PPPs. Governments are advised to rely on the standard parameters of USPs that it receives: PPP process for elements that are common to both publicly and privately initiated PPPs. ŠŠPublic definition of project concept: The public agency identi- Adopting a USP policy should be accompanied by an assessment fies and defines the project concepts and allows private firms to of the effectiveness of the institutional structure that handles both submit proposals for the implementation of the same projects. 194 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Table 3.6 Examples of Procurement Strategies for Unsolicited Proposals Jurisdiction Reference Key Features Chile Public works concession regulations (CL Two-stage process for accepting unsolicited proposals—initial proposals are screened; if accepted, 2010b, Title II: Bids Submitted by Private the private party must conduct detailed studies and prepare a detailed proposal. The government Parties) then prepares bidding documents based on the detailed proposal, and puts the project out to competitive tender. • Costs of carrying out studies are reimbursed (paid by the winning bidder; or by the government if project never proceeds to bid stage). Costs agreed at initial project approval stage. • Proponent receives a bid bonus of a pre-defined percentage (between 3 and 8 percent depending on the project) added to financial evaluation score. Colombia National PPP Law (CO 2012a, Law 1508, • Unsolicited proposals that do not modify existing projects or pertain to a project that has Title III) already been promoted by a state entity are accepted. • There is a two-stage process for accepting unsolicited proposals: • Pre-feasibility—Private party must submit documents detailing the proposed project (including project scope, estimated cost and specifications). If accepted, private parties begin the feasibility stage. • Feasibility—Private party must prove their capability to implement the project and conduct multiple project studies (i.e. risk, environmental and social, technical feasibility). • If their proposal is accepted, private party will be informed of the project conditions and granted an additional amount to compensate study costs. Indonesia Presidential Regulation 56 (ID 2011, Unsolicited proposals welcomed for projects not already in priority list. Accepted proposals are Chapter IV) put through normal competitive process. Proponents may either be awarded a bid bonus, of up to 10 percent, or paid a developer’s fee for the proposal. The approach is set by the contracting authority, based on an independent appraisal. Italy Legislative Decree no. 163 (IT 2006, Contracting authorities publish three-year plans on an annual basis; private companies are invited Articles 153–155) to make proposals for infrastructure listed in these plans (following clear content requirements— including detailed studies—and timeline). Proposals are evaluated by the contracting authority. • A type of right to match process is used to procure the project. A first stage is used to identify two competing bidders, who together with the proponent enter into a negotiated procurement procedure. If a competing proposal is preferred, the proponent is given the right to match that proposal, in which case the proponent is awarded the concession. Mexico Ley de Asociaciones Público Privadas – Unsolicited proposals will be accepted for non-existent/completed projects. amended (MX 2012, chapter 3) • Proponents must submit a feasibility study outlining the project with their proposal. • If accepted, the proponent will be compensated for study expenses and may receive up to 10 percent developer’s fee and a competitive bidding process will begin. Section 3.7 Dealing with Unsolicited Proposals 195 Jurisdiction Reference Key Features Philippines BOT Law 1994 (Republic Act No. 7718) Unsolicited proposals welcomed for projects not already in priority list. Rules and Regulations (PH 2006, Rule • The contracting authority must advertise the opportunity for at least three weeks, and invite 10) – last amended with Executive Orders 8 competing proposals within a 60-day time limit. (PH 2010) and 136 (PH 2013). • If competing proposals are received, a right to match process is followed—if the proponent is not the winning bidder, it is given the opportunity to match the winning bid and win the contract. • If no competing proposal is received, the authority may negotiate with the proponent. South Africa (roads SANRAL policy for unsolicited proposals Unsolicited proposals must comply with clear content requirements, and are evaluated by the sector) (ZA 1999a); USPs specifically addressed in Agency. National Treasury Practice Note No 11 of • If the proposal is accepted the Agency and the developer enter into a Scheme Development 2008/2009 Agreement, under which the private party is responsible for detailed development of the PPP, including developing tender documentation. The agreement includes a developer’s fee payable by the winning bidder to the proponent. • The project is put out to competitive tender, in a two-stage best and final offer process. The top two bidders from the first round are invited to re-submit best and final offers; the proponent is also invited, if not already in the top two. South Korea ADB review of PPP experience in the South Unsolicited proposals must be evaluated by the contracting authority and the PPP unit (PIMAC). Korea (Sanghoon n.d., 67–69) • The opportunity is published and alternate proposals are requested, within a 90-day time limit. • The proponent receives a bid bonus of up to 10 percent, added to the overall bid evaluation scores. The proponent may modify its original proposal at the bidding stage, but its bonus is reduced to a maximum of five percent. Bonuses are disclosed in the request for alternate proposals. • Losing bidders are compensated in part for proposal costs, to encourage competition. Uruguay Article 37 of Law Number 18.786 (UY Proponent is entitled to a bid bonus of up to 10 percent of the final evaluation score. 2011) – last amended in 2015 • Proponent is reimbursed for the cost of detailed studies only if not successful in winning the contract. Commonwealth of Virginia PPP Implementation Guidelines Proposals are welcome that comply with the detailed requirements set out and are evaluated in Virginia, United (VA 2005) the same way as government-originated projects. States of America • Proposals for PPPs requiring no government oversight or support are advertised for 90 days; (highways sector) those for PPPs requiring government support for 120 days. If no competing proposal is received, the government may negotiate directly with the proponent. 196 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE ŠŠPublic definition of infrastructure need: The public agency de- on the assessment, the public agency determines whether the proj- fines a wider infrastructure need or priorities and allows private ect should enter the procurement stage. firms to submit proposals for specific projects that respond to Governments will need to decide on the extent to which the USP those needs. proponent will be involved in this process. There are two main ŠŠOpen solicitation: The public agency does not provide guidance options regarding the role of the USP proponent in project devel- and considers any type of privately initiated proposals regardless opment: of whether they correspond to a previously defined project con- cept or infrastructure plan. ŠŠProject development by the public agency: The public agency undertakes project development with support from external These options are not mutually exclusive and may be combined advisors. This option maximizes competition and retains maxi- within a USP policy. mum government control of the project development and struc- Clear processes for handling unsolicited proposals are important turing. This option is most likely to maximize value for money for transparency, helping build confidence among all stakeholders and public interest considerations. that projects developed from unsolicited proposals deliver value for ŠŠProject development by the public agency & USP proponent: money. Clear processes can also help incentivize private developers Allows public agencies to engage the USP proponent for specific to invest resources in developing good-quality project proposals, feasibility studies. By involving the USP proponent, however, and encourage potential competitors to engage in the bidding pro- the public agencies will likely struggle to generate competition cess. during a competitive tender process as competing bidders may The World Bank report on the Framework for Unsolicited Pro- perceive that the USP proponent has an undue advantage due to posals (WB 2017d) describes a well-defined process to assess, ap- involvement during the project development stage. prove and bid out a project from an unsolicited proposal, as illus- During the procurement stage, the public agency prepares and un- trated in Figure 3.9: USP Process Flow. dertakes the procurement process. An effective procurement pro- First, a private company submits an unsolicited proposal. A well-ar- cess ensures that the PPP contract represents a fair market price and ticulated submission framework helps to ensure that the USP meets protects the interests of the government and society throughout the the government’s requirements and is processed efficiently. It also life of the project, including through a sustainable and robust risk provides guidance to USP proponents in developing quality pro- allocation. A transparent and accountable procurement process also posals that comply with the public agency’s requirements. ensures stakeholder support and minimizes the likelihood of legal or political challenges to the project at a later stage. Then, the public agency evaluates the USP and determines whether to develop it in greater detail. A well-articulated USP evaluation In most cases, a competitive tender will enable the government to process ensures that only projects that meet public objectives and achieve lower final project costs and generate greater value for mon- basic feasibility criteria are considered for the project development ey. However, some governments may choose to allow USP projects stage. to be directly negotiated with the USP proponent under specific circumstances. Governments also need to determine if any incen- During the project development stage, the feasibility studies will be tive is given to the proponent. developed in more detail than the (preliminary) feasibility studies developed by the USP proponent as part of its USP submission. At For further details on for the development of a USP policy and for the end of this stage, the public agency reassesses the project against the management of USPs, please refer to the World Bank report the same evaluation criteria used during the evaluation stage. Based on the Framework for Unsolicited Proposals (WB 2017d). Section 3.7 Dealing with Unsolicited Proposals 197 Figure 3.9 USP Process Flow USP proponent submits USP to public agency. Public Project Identification agency checks whether the USP submission is compliant USP IS COMPLIANT EXIT PROCESS The public agency: INITIAL Verifies whether the USP meets the evaluation criteria; CONCEPT Screen and Appraise Proposal requests evidence of USP proponent qualifications (if relevant); uses benchmarking and market testing (if relevant) to evaluate the project; discloses relevant documentation; and determines the most appropriate project development and procurement method. PREPARE PPP EXIT PROCESS KEY The public agency: Either (1) undertakes project development with its external COMMERCIAL Structure PPP Appraise PPP TERMS advisors or (2) signs a Project Development Agreement with the USP proponent for specific studies; uses benchmarking and market testing (if relevant) to evaluate the project; discloses relevant documentation; and confirms the most appropriate procurement method. PROCEED AS PPP EXIT PROCESS DRAFT To prepare for procurement, the public agency: Secures right-of-way and/or acquires land; obtains PPP Draft PPP contract CONTRACT environmental and social clearance; develops a draft PPP contract (with external advisors); if competitively procuring, develops draft documentation; if preparing for a direct negotiation, signs the Direct Negotiation Protocol; and uses benchmarking and market testing (if necessary). PROCEED TO PROCUREMENT EXIT PROCESS The public agency either: (1) undertakes competitive tender or (2) directly negotiates the PPP contract with the USP Manage PPP transaction proponent according to the Direct Negotiation Protocol. SIGN PPP CONTRACT EXIT PROCESS CONTRACT Set up contract management structures Manage PPP contract Monitor and manage PPP delivery and risk Deal with change 198 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Key References: Dealing with Unsolicited Proposals Reference Description WB. 2017d. Guidelines for the Development of a Policy for Managing Unsolicited These guidelines provide advice and recommendations for governments that are Proposals in Infrastructure Projects. Washington, DC: World Bank and Public- considering the development and realization of an unsolicited proposal (USP) Private Infrastructure Advisory Facility. policy in infrastructure projects. PPIAF. 2014. Unsolicited Proposals—An Exception to Public Initiation Recommends measures that countries can adopt to better manage USPs, of Infrastructure PPPs: An Analysis of Global Trends and Lessons Learned. recognizing that countries have different levels of capacity to identify, prioritize, Washington, DC: Public-Private Infrastructure Advisory Facility. prepare and procure projects; competency in PPP project implementation; and maturity of their PPP markets and frameworks. WB. 2009a. “Toolkit for Public-Private Partnerships in Roads and Highways.” Module 5: “Implementation and Monitoring, Stage 3: Procurement” includes a World Bank. Website. section on unsolicited proposals, which describes their benefits and challenges, and provides examples of both successful and unsuccessful PPPs from unsolicited proposals. PPPIRC. Accessed March 9, 2017. “Public-Private Partnerships Section on procurement processes and standardized bidding documents in Infrastructure Resource Center website.” Website. briefly describes the World Bank’s view on unsolicited proposals, and provides examples from and links to some countries’ relevant law and policies. UNCITRAL. 2001. Legislative Guide on Privately Financed Infrastructure Section E provides guidance on both policies and procedures for dealing with Projects. Vienna: United Nations Commission on International Trade Law. unsolicited proposals. Distinguishes between proposals that do or do not require proprietary technology. Key References: Dealing with Unsolicited Proposals (Examples) Reference Description ZA. 1999a. Policy of the South African National Roads Agency in Respect of Describes the policy and sets out the procedure for dealing with unsolicited Unsolicited Proposals. Pretoria: The South African National Roads Agency. proposals for national roads PPPs. Includes a description of the required content of the proposal, the process for detailed preparation of the PPP and tender documents, and the tender process that will apply. ID. 2005. Peraturan Presiden Republik Indonesia Nomor 67 Tahun 2005. Jakarta: Chapter IV states that unsolicited proposals will be accepted for projects not President of the Republic of Indonesia. already on a priority list, and briefly outlines the process and procurement approach. The English version of regulation 56 is available on Bappenas’s website, (ID 2011). CL. 2010b. Ley y Reglamento de Concesiones de Obras Públicas: Decreto Supremo Title II of Regulation Number 956 of the Public Works Concessions describes MOP Nº 900. Santiago: Gobierno de Chile, Ministerio de Obras Públicas. in detail the process and for dealing with unsolicited proposals, including the required content of initial proposals, how detailed studies will be managed, how proposals will be evaluated, and procured. IT. 2006. Decreto Legislativo 12 aprile 2006, n. 163. Rome: Presidente della Articles 153–155 describe when unsolicited proposals are accepted, how they Repubblica.  are evaluated, and the procurement process that applies. Kim, Jay-Hyung, Jungwook Kim, Sunghwan Shin, and Seung-yeon Lee. Pages 61–69 describe the implementation procedures for PPP projects, 2011. Public-Private Partnership Infrastructure Projects: Case Studies from the including those originated as unsolicited proposals. Republic of Korea. Volume 1, Institutional Arrangements and Performance. Manila: Asian Development Bank. Section 3.7 Dealing with Unsolicited Proposals 199 Reference Description PH. 2006. The Philippine BOT Law R.A. 7718 and its Implementing Rules and Rule 10 states that unsolicited proposals will be accepted for projects not already Regulations. Revised 2006. Manila: Public-Private Partnership Center. on a priority list, sets out how proposals should be evaluated, how competing bids will be invited (under a Swiss Challenge process), and how the government may negotiate with the proponent in the absence of competing bids. VA. 2005. Public-Private Transportation Act Guideline. Richmond: Sets out the process for developing and implementing PPPs, both from solicited Commonwealth of Virginia, Virginia Department of Transportation. and unsolicited proposals. Includes detailed guidance on the required content of unsolicited proposals. UY. 2011. Ley Nº 18.786: Contratos de Participación Público-Privada Article 37 discusses the advantages granted to the proponent submitting an para la Realización de Obras de Infraestructura y Prestación de Servicios unsolicited proposal. Conexos. Montevideo: Gobierno de la República Oriental del Uruguay, Poder Legislativo. VIC. 2001. Practitioners’ Guide. Melbourne, Australia: Victorian Department of Section 21: “Unsolicited Proposals” sets out how intellectual property in Treasury and Finance, Partnerships Victoria. unsolicited proposals will be dealt with. CO. 2012a. Ley 1508 de 10 de enero de 2012. Bogotá: Congreso de Colombia. Title III discusses the treatment of unsolicited proposals. MX. 2012. Ley de Asociaciones Público Privadas. Mexico City: Gobierno de Chapter 3 outlines the unsolicited proposal selection process. México, Cámara de Diputados. Key References: Practical Guidance on Implementing PPP Projects - PPP Program Material Reference Description AU. 2015. National Public Private Partnership Guidelines - Volume 2: Detailed guidance material for implementing agencies on how to implement Practitioners’ Guide. Canberra: Commonwealth of Australia. PPP projects under the national PPP policy, including project identification, appraisal, PPP structuring, the tender process, and contract management. Includes detailed guidance in annexes on technical subjects. CO. 2014. Manual de Procesos y Procedimientos para la Ejecución de Proyectos A guide for civil servants from national, regional and local governments that de Asociación Público-Privada. Bogotá: Gobierno de Colombia, Ministerio de sets out in detail the processes and requirements for identifying, assessing, Hacienda y Crédito Público. preparing, tendering, and implementing PPP contracts. IN. Accessed March 15, 2017. “PPP Toolkit for Improving PPP Decision- Online toolkit describing PPP process and providing sector-specific guidance Making Processes.” Public-Private Partnerships in India. New Delhi: and tools for practitioners on all stages of managing a PPP. Government of India, Ministry of Finance. RJ. 2008. Manual de Parcerias Público-Privadas - PPPs. Conselho Gestor do A guide for civil servants of the State of Rio de Janeiro on developing and Programa Estadual de Parcerias Público-Privadas. Rio de Janeiro: Governo do implementing PPPs. Defines PPPs and provides guidance on drafting a Estado do Rio de Janeiro. preliminary proposal, carrying out detailed technical studies, managing the tender, and managing the contract. ZA. 2004a. Public Private Partnership Manual. Pretoria: South African Manual for implementing agencies setting out in detail the process and Government, National Treasury. requirements for developing and implementing PPPs in accordance with national PPP regulation. Includes modules on PPP Inception, the PPP Feasibility Study, PPP Procurement, and Managing the PPP Agreement. Includes tools and templates in annexes for use at each stage. 200 PPP REFERENCE GUIDE : MODULE 3 – PPP CYCLE Reference Description PPIDB. Accessed March 7, 2017. “Private Participation in Infrastructure A detailed Methodological Guidebook for PPPs that sets out the rationale Database.” The World Bank. Website. for PPPs; the process for developing and implementing a PPP; and provides detailed guidance for each step. APMG. 2016. Accessed March 19, 2017. PPP Certification Program Guide. In A comprehensive manual that describes in detail the basics of PPPs and the eight chapters. APMG-International. Website. processes for developing and implementing them. Caribbean. 2017. Caribbean PPP Toolkit. Washington, DC: World Bank, Inter- Discusses PPP policy and institutional structures, project identification and American Development Bank and Caribbean Development Bank. screening, business case development and project structuring, transaction implementation and tender processes, and post-implementation project monitoring. Also covers how to protect the public interest while attracting private investment. Draws on experiences with PPP projects in the Caribbean and globally, drawing out lessons of experience and highlighting accepted best practices. Key References: Practical Guidance on Implementing PPP Projects, Other Guidance and Toolkits Reference Description Kerf, Michael, R. David Gray, Timothy Irwin, Celine Levesque, Robert Describes and provides examples on several of the important steps in R.Taylor, and Michael Klein. 1998. “Concessions for Infrastructure: A guide developing and implementing PPPs—focusing on user-pays PPPs, or to their design and award.” World Bank Technical Paper No. 399. Washington, concessions. Includes sections on detailed design, the tender process, and the DC: World Bank. institutional (regulatory) structure for contract management. Farquharson, Edward, Clemencia Torres de Mästle, E. R. Yescombe, and Describes and provides guidance on the whole PPP process, highlighting the Javier Encinas. 2011. How to Engage with the Private Sector in Public-Private experience of developing countries. Briefly covers project selection; the focus is Partnerships in Emerging Markets. Washington, DC: World Bank. on preparing and bringing the project to market and engaging with the private sector. WB. 2009a. “Toolkit for Public-Private Partnerships in Roads and Highways.” Module 5: Implementation and Monitoring provides guidance and links World Bank. Website. to further material on project identification, feasibility studies and analysis, procurement, contract award, and contract management. PPIAF. 2006. Approaches to Private Sector Participation in Water Services: A Provides guidance on the PPP process, from planning and upstream policy, to Toolkit. Washington, DC: Public-Private Infrastructure Advisory Facility. the detail of structuring a PPP and implementing a transaction. Focus is on user-pays PPPs in the water sector. WB. 2007a. Port Reform Toolkit. 2nd ed. Washington, DC: World Bank. Provides guidance on several aspects of PPPs in the port sector—including guidance on risk identification, financial analysis, contract structuring, and contract management approaches. Flanagan, Joe, and Paul Nicholls. 2007. Public Sector Business Cases using Provides guidance on how to produce business cases. It is intended to help the Five Case Model: A toolkit. Westchester, Illinois: Healthcare Financial anyone involved with, or overseeing, a project to understand the work that is Management Association. necessary to prove a case for investment. IN. Accessed March 15, 2017. “PPP Toolkit for Improving PPP Decision- An online toolkit designed to improve decision-making for PPP practitioners Making Processes.” Public-Private Partnerships in India. New Delhi: across India. Government of India, Ministry of Finance. IN. 2013b. Guidelines for Formulation, Appraisal and Approval of Central Sector A compendium which brings together the guidelines notified by the central Public Private Partnership Projects. New Delhi: Government of India, Ministry Government of India for the formulation, appraisal and approval of central of Finance. sector PPP projects. Also provides a template with a checklist for financial support to PPPs in infrastructure under the Viability Gap Funding Scheme. Section 3.7 Dealing with Unsolicited Proposals 201 Did you know....? Systemic government support helped Korea complete hundreds of PPP projects The Government of Korea began to push PPP projects in the 1990s, but its success was limited because of the 1997 financial crisis. The passage of the Act on Private Participation in Infrastructure changed that and the number of user-pays PPP projects started to grow. A 2005 amendment expanded the scope of the Act to include government-pays social infrastructure, including schools, military residences, housing, and cultural facilities. Consistent and systemic government support helped the country overcome challenges, learn from experience, and establish a stable PPP market, yielding hundreds of successful PPP projects. As of the end of 2008, more than 400 projects were underway. By 2017, approximately 110 user-pays projects and 140 government-pays projects were operational. Source: Public-Private Partnership Infrastructure Projects: Case Studies from the Republic of Korea. Volume 1, Institutional Arrangements and Performance. Asian Development Bank (2011) All the references in the PPP Reference Guide Version 3 are available in the PPP Knowledge Lab library, togeth- er with the entire Guide and its PDF version. Both the Guide and references are accessible at: pppknowledgelab.org. Each document has a unique ID number which is indicated at the end of each reference, for example [#2279]; documents can be searched in the library by this ID number as well as by title or author. 203 References 4ps. 2005. 4ps Review of Operational PFI and PPP Projects. Adokpo Migan, Sylvain with Tremolet Consulting. 2015. Benin - London: Public-Private Partnerships Programme. [#2279] Innovative Public-Private Partnerships for Rural Water Services Sustainability: A Case Study. Water and Sanitation Program 4ps. 2007. A Guide to Contract Management for PFI and PPP Report. Washington, DC: World Bank Group. [#2620] Projects. London: Public-Private Partnerships Programme. [#4326] AfDB. 2011. Climate Screening and Adaptation Review and Evaluation Procedures. Abidjan: African Development Bank 4ps. Accessed March 16, 2017. “Public Private Partnerships Group. [#4453] Programme (4Ps) website.” Website. [#4575] AfDB. 2013. Initiative for Risk Mitigation: Needs Assessment for ADB-Safeguards. 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Guidelines for Climate Proofing Investment in the Akitoby, Bernardin, Richard Hemming, and Gerd Schwartz. Transport Sector: Road Infrastructure Projects. Manila: Asian 2007. “Public investment and public-private partnerships.” Development Bank. [#4454] Economic Issues 40, Washington, DC: International Monetary Fund. [#4173] ADB. 2013. Guidelines for Climate Proofing Investment in the Energy Sector. Manila: Asian Development Bank. [#4455] Alcazar, Lorena, Manuel A. Abdala, and Mary M. Shirley. 2000. The Buenos Aires Water Concession. Washington, DC: World Bank. [#4467] 204 PPP REFERENCE GUIDE : REFERENCES APMG-PPP. Accessed March 19, 2017. “APMG Public-Private Bain, Robert, and Lidia Polakovic. 2005. Traffic Forecasting Risk Partnerships Certification Program website.” APMG- Study Update 2005: Through Ramp-Up and Beyond. London: International. Website. [#3216] Standard and Poor’s Financial Services. [#4184] APMG. 2016. Accessed March 19, 2017. 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