51767 noTE no. 47 ­ JunE 2009 GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Private participation in transport Lessons from recent experience in Europe and Central Asia Carolina Monsalve F acing fiscal constraints, many govern- investment in PPP transport projects increased by ments in Central and Eastern Europe only about 32.4 percent during the same period. and Southeastern Europe have pursued private finance for transport infrastructure About 87 percent of the investment took place more to move investments off budget than to in just four countries: Hungary, Poland, Croatia, improve efficiency and services. Results have and Bulgaria. Growth in 2005 was exceptionally been mixed--and suggest a need to focus more strong, driven by two transactions: the Buda- on public-private partnerships (PPPs) that can pest International Airport in Hungary and the achieve value for money. Today's economic A1 Gdansk­Torun Motorway in Poland. These environment will reduce the potential for PPP two transactions alone accounted for about half projects in the short term. Some PPP projects the region's total PPP investment in 2000­06. at an advanced stage of procurement may need Despite these outlier transactions, the group of additional public support, while ambitious proj- economies with PPP investment was more diversi- ects may need to be phased to reduce their fied in 2001­07 than in the earlier period. scale to what the market can absorb. The economies of Central and Eastern Europe and Experience with PPP projects Southeastern Europe were among the first in the broader region of Europe and Central Asia to fol- The first attempts to implement PPP projects in low the global trend of public-private partnerships the transport sector in Central and Southeastern (PPPs) in the funding of infrastructure projects. Europe faced obstacles that led in many instances Drawing on a new report (Cuttaree and others to delays, protracted negotiations, renegotiations, forthcoming), this note briefly reviews trends and and cancellations. Among privately managed experience in the use of PPPs in the transport road projects, several factors contributed to these sector in these economies and summarizes key problems: lessons learned. ·Lack of robust feasibility studies. Most of the unsuc- cessful projects lacked a solid feasibility study Trends in PPP investment carried out before procurement. For the Zagreb­ Macelj Toll Motorway, for example, financial Private participation in transport infrastructure viability discussions were not held until negotia- in the region of Central and Eastern Europe and tions were under way with the selected consor- Southeastern Europe got off to a good start in tium. The negotiations failed to reach financial the earlyApproved Logo Usage PPIAF 1990s, but never took off during that closure as a result of disagreements between the decade. Investment in PPP transport projects government and the consortium on the public remained low in 2000­03, then rose from 2004 sector contribution. onward, though- the growth was driven by only a Logo Black few countries and transactions (figure 1).2 Still, the ·Optimistic traffic forecasts. In the early years contrast between the 1990s and the mid-2000s is optimistic traffic forecasts hurt several Investment in FACILITY significant.INFRASTRUCTURE ADVISORYPPP transport projects PUBLIC-PRIVATE in the region in 2001­07 was more than twice that Carolina Monsalve is a transport economist in the Europe in 1994­2000 (figure 2).3 By comparison, global and Central Asia Region of the World Bank. Logo - 1-color usage (PMS 2955) Helping to eliminate poverty and achieve sustainable development PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FAC ILITY through public-private partnerships in infrastructure 2 Figu RE 1 investment started slowly, then rose from 2004 on Investment in PPP transport projects in Central and Eastern Europe and Southeastern Europe, 1993­2007 4.5 120 4.0 100 3.5 Share in ECA total (%) Investment (US$ billions) 3.0 80 2.5 60 2.0 1.5 40 1.0 20 0.5 0 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Investment Share in ECA total Source: World Bank and PPIAF, PPI Project Database. Note: Data for 2007 exclude Estonia and the Czech Republic. ECA = Europe and Central Asia. concessionaires because they bore the demand to the public sector. Moreover, to make the new risk. In the absence of minimum traffic or reve- system politically acceptable, vignette rates were nue guarantees, lenders sometimes requested an set at low levels and could not compensate for independent traffic review, delaying and poten- the heavy capital investments undertaken. In tially preventing financial closure. In other cases Poland, where the vignette system was intro- concessionaires had to bear the cost of lower duced for the national road system in 2006, the traffic, which often led to financial distress. Proj- state has been unable to settle a dispute with the ects that failed or never materialized because of concessionaire for the A4 Toll Motorway Project lower-than-expected traffic include the Czech on the level of compensation for lost revenue. Early Republic D5 motorway in 1993, the M1/M15 attempts toll road in Hungary, the Pitesti­Bucharest­ ·Noncompetitive procurement. Many countries Constanza motorway in Romania, and the A4 started their road concession program with lim- at PPP Zagreb­Gorican motorway in Croatia. ited competition and sometimes (often after a projects change in government) had to cancel negotia- ·Public resistance to tolls. With a PPP scheme and tions or renegotiate. Without competitive pro- faced in the absence of shadow tolls, users had to pay curement, negotiations typically take longer obstacles a larger share of the cost, in a region where road and can result in lower value for money. And use had been largely free. In some cases users international financial institutions, because of that often responded to tolls by switching to parallel roads, their procurement rules, were prevented from led to delays further contributing to traffic and revenue short- advising on the structuring and cofinancing of falls. And in some cases, such as the M1/M15 projects, leading to unnecessary delays and cost and other highway in Hungary and the Trakia motorway increases. problems in Bulgaria, increases in toll rates, even when justified by inflation or traffic levels, led to legal ·Subsequent revision of legal and regulatory framework. action or public resistance. Projects were often implemented in isolation from the sector policy, with the need for spe- ·Changing financial support mechanisms. In response cific laws or regulations considered only late in to public resistance to tolls, some governments the process. In the A1 Toll Motorway Project introduced a vignette system, in which the in Poland, for example, the decision to amend toll is collected by selling motorway stickers the Toll Motorway Act, which defined the legal (vignettes). In Hungary, for example, direct tolls framework for private participation in the sec- in the M5 Toll Motorway Project were replaced tor, was made only at the procurement stage. In by a general motorway vignette and the payment part because of that, it took nearly seven years of availability fees to the concessionaire. These to advance from selection of the concessionaire shifts transferred a significant traffic risk burden to signature of the concession agreement. Private participation in transport 3 Key elements for success Fi gu R E 2 The experience with transport infrastructure in investment was up sharply in the 2000s-- and more diversified by economy Central and Southeastern Europe in the past Investment in PPP transport projects in Central and 10­15 years shows that, to be successful, a PPP Eastern Europe and Southeastern Europe by economy, scheme must have strong government support and 1994­2000 and 2001­07 long-lasting political engagement. Analysis of the 9 The focus Czech Republic experience points to other critical elements. 8 Slovak Republic Project selection and design 7 Romania in PPP ·Modesty and realism in planning and implementa- 6 Latvia schemes tion. Some vast and complex projects had to Estonia needs to US$ billions be reduced in scale because they were too large 5 Albania for the market to digest. Size and complexity 4 Bulgaria shift to increase project risk, making it more difficult to attract private investment in a country lacking 3 Croatia Poland achieving a positive track record. For large motorway proj- 2 Hungary value for ects, a phased approach to construction could mitigate some of the problems resulting from 1 money 0 scale. 1994­2000 2001­07 Source: World Bank and PPIAF, PPI Project Database. ·Comprehensive feasibility studies. International experience confirms that preparing comprehen- sive feasibility studies, with robust financial and economic analysis, can help avoid problems and sector, as was also done in the region. Inflation delays during procurement. Particularly impor- and foreign exchange risk is usually accepted by tant are providing accurate estimates of traffic the public sector. and (where there are user charges) users' willing- ness to pay and determining the public sector's ·Adequate return for lenders and sponsors. Return on contribution. Sensitivity analysis is critical for investment determines the attractiveness of a determining the resilience of the financial model project to the private sector. The return is always to changes in assumptions. adjusted for the risk profile of the project. A riskier undertaking is expected to yield a higher ·Value-for-money analysis. The value added by pri- return, to compensate for the operational, com- vate participation in transport infrastructure is mercial, financial, legal, or political uncertainties. greater efficiency and savings rather than pure Potential concessionaires and their lenders also off-balance-sheet investment. Thus the focus in expect a sufficiently high debt service coverage the region needs to shift from looking at how ratio to provide cushion for debt repayment.4 much investment can be attracted to looking at how much value or savings is derived from Procurement and contract monitoring private participation. The key measure is value ·Open and competitive procurement. Economies in for money, a concept based on the idea that PPP the region have often opted for limited competi- proposals should provide at least as much value tion in procurement. Taking the noncompetitive as traditional public sector procurement. route leads to less public acceptance and thus paves the way for a possible reversal of decisions ·Appropriate risk sharing. Appropriate allocation of when there is a change in government. As noted, risk between the public and private sectors can it also precludes participation by international increase the value for money of a PPP project financial institutions. and ultimately reduce the financial contribu- tion from the government, the tariff required ·Caution with unsolicited proposals. Growing inter- from users, or both. By contrast, transferring est in large infrastructure projects usually brings the maximum risk to the private sector gener- a rash of unsolicited proposals from potential ally increases the total project cost and the risk financiers. These offers may come with disput- of project failure, as happened in the early PPP able claims about their benefits or about the projects in the region. Some risks, such as con- confidentiality of proprietary technology. The struction delays, cost overruns, or operational reality is usually very different, and the informa- setbacks, can usually be transferred to the private tion asymmetry between a weak public sector, 4 the potential bidder, and large, well-informed finance for transport infrastructure as a way to dis- contractor groups can lead to the public sector guise public expenditure and push it off budget-- conceding far more than it should. rather than as a way to optimize risk allocation or promote innovation or efficiency. This in part legal and institutional framework reflects genuine macroeconomic and fiscal con- ·Appropriate and stable legal and regulatory frame- straints. But PPP schemes are useful even in the work. The role of the legal framework is to create absence of such constraints, as a way to achieve a favorable environment for attracting private greater value for money than the government can financing and to put in place checks and bal- in providing goods and services on its own. ances that will ensure that a PPP project delivers its expected value to the public. Because PPPs In the short term the international economic situa- are legal arrangements between the state and the tion will reduce the potential for PPP projects. But private sector, the legal and regulatory frame- governments can still achieve value for money by work is paramount in creating transparency, clar- involving the private sector. Those with PPP proj- ity, and investor interest and avoiding lengthy ects at an advanced stage of procurement should negotiations and renegotiations. take a close look at the financing options available and carefully consider their fiscal implications. ·Central unit to lead preparation. PPPs are com- These PPP projects will probably need additional plex projects requiring extensive coordination public support during construction and operation between public agencies. Countries with suc- because the private sector may be unable to raise cessful PPP programs tend to have a central PPP long-term debt in local currency and demand for unit, based in a line ministry, to lead project some services may decline in the short term. Phas- preparation. Several countries in the region have ing projects might reduce them to a scale that the such a unit. Also important is to engage experi- market can absorb. Finally, contracts should be enced PPP transaction advisers to support the written so as to allow governments to capture the government. benefits of the economic upturn, especially if they give additional support to the private sector. ·Role for international financial institutions. Interna- tional financial institutions can offer risk mitiga- Notes tion instruments, such as guarantees, that insure 1. As defined here, Central and Eastern Europe comprises the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak the private sector against government perfor- Republic, and Slovenia, while Southeastern Europe comprises mance risk. In this way they can help mobi- Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, the lize new sources of financing while lowering the former Yugoslav Republic of Macedonia, Montenegro, Romania, and Serbia. financing costs and extending maturities. They can also offer favorable loans with longer repay- 2. For information on trends in private participation in infrastructure in Europe and Central Asia, see Vagliasindi and Izaguirre (2007). ment terms. And they can help governments 3. Amounts are recorded in nominal terms. The increase in real master the complexities of PPPs by providing terms would be smaller. technical assistance and capacity building and 4. Debt service coverage ratio is the cash flow available for servicing disseminating best practices. debt in a given period (usually six months or one year) divided by the debt service (principal and interest) for the same period. 5. Fiscal space is the ability of a government to take on new Conclusion borrowing to support its expenditure choices, given its current income, current expenditures, and existing debts. PPIAF a PPP and traditional Choosing betweenApproved Logo Usage GRIDLINES References public procurement is a critical policy Cuttaree, Vickram, Martin Humphreys, Stephen Muzira, and Gridlines share emerging knowledge decision. Governments with weaker Jukka-Pekka Strand. Forthcoming. "Private Participation in the Transport Sector: Lessons from Recent Experience in Europe and on public-private partnership and give an and limited fiscal public finances Logo - Black Central Asia." Transport Sector Board/PPIAF Working Paper, World overview of a wide selection of projects from space may be especially attracted Bank, Washington, DC. various regions of the world. Past notes can be to PPPs.5 In Central and South- found at www.ppiaf.org/gridlines. Gridlines are a Vagliasindi, Maria, and Ada Karina Izaguirre. 2007. "Private publication of PPIAF (Public-Private Infrastructure many V IS O RY FA C IL eastern EuropeT R U C T U R E A D govern- IT Y PUBLIC-PRIVATE IN F R A S Participation in Infrastructure in Europe and Central Asia: A Look at Advisory Facility), a multidonor technical assistance ments have championed private Recent Trends." Gridlines series, no. 26, PPIAF, Washington, DC. facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policy makers, nongovernmental organizations, research institutions, and others in designing and implementing Logo - 1-color usage (PMS 2955) strategies to tap the full potential of private involvement in c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA infrastructure. The views are those of the authors and do PhonE (+1) 202 458 5588 FAX (+1) 202 522 7466 not necessarily reflect the views or the policy of PPIAF, gEnERAl EMAil ppiaf@ppiaf.org wEb www.ppiaf.org PUBLIC-PRIVAT E INFRASTRUCTURE ADVISORY FACILITY the World Bank, or any other affiliated organization.