80896 APRIL 2013 ABOUT THE AUTHORS RICHARD FLORIZONE A Winning Framework for Public-Private Partnerships: is the incoming President of Dalhousie University in Halifax, Canada, taking office July 1, 2013. In 2012, he served for six months as Senior Advisor to IFC’s Public-Private Partnership Advisory Unit, on secondment Lessons from 60-Plus IFC Projects from his position as Vice-Presi- dent Finances & Resources at the Despite global financial uncertainty and increased public mistrust of University of Saskatchewan, Canada. business, partnerships between the public and private sectors have LAURENCE CARTER continued to grow—driven by governments’ need to access external is the Director of IFC’s Public- Private Partnerships Advisory Department. financing and expertise, by the private sector’s search for new opportunities, and by governments’ desire to grow the private sector. This SmartLesson addresses the critical question: How can the public and private sectors build successful partnerships? Background that our experience applies equally well in developed countries. For public and private sector leaders and managers contemplating partnership for To define and test the framework, we the first time, public-private partnerships reviewed the projects in our unit over the (PPPs) can appear to be political and past seven years, consisting of more than economic minefields, filled with technical 60 PPPs in over 35 developing countries, complexities best left to experts. representing approximately $10 billion in Furthermore, the sheer volume of advice investment, and delivering improved services and information on PPPs is intimidating to more than 30 million people. The defining and unwieldy, with a simple Google search feature of all these projects is a long-term of the term “public private partnership� partnership between the public and private yielding over 20 million hits. sectors to deliver a public service, with some transfer of risk to the private partner. In the midst of this wealth of detailed information we saw a gap: We believe Ranging from hospitals in Africa to toll roads that senior leaders in the private and in South America to hydroelectric projects in public sectors could benefit from an Europe, and including both successful and overall framework for creating successful failed projects, our case experience offers a partnerships between the public and private rich and diverse array of lessons for anyone sectors. The framework should be simple and contemplating partnership between the based on real experience, and it should give public and private sectors. In fact, at the leaders a comprehensive “checklist� to help end of each project, IFC teams identified them navigate the wealth of critical issues, a handful of “lessons learned,� which we information, and advice on PPPs. By reviewing compiled into a database of over 350 lessons the extensive experience within IFC we have and then systematically analyzed. Review of developed just such a framework. other IFC projects further shaped our thinking. IFC is a member of the World Bank Group, Our research shows that the lessons fall into whose overall aim is to reduce poverty by three broad categories: economics, politics, providing economic and technical assistance and execution. Indeed these categories to developing nations. Within IFC, we work represent the three fundamental forces that in the Public Private Partnership Advisory drive the success or failure of PPPs. Economics, Unit, which has advised governments on politics, and execution are the spheres of structuring and bidding out PPP transactions activity that leaders must understand and for over two decades. Although we work manage if the projects are to be successful. with developing countries, we believe (See Figure 1.) SMARTLESSONS — APRIL 2013 1 Figure 1: Framework for Building Successful PPPs An understanding of these forces is the product of a wealth Given the poor condition of the infrastructure and the of wisdom from our project teams, hard-earned and economic risks, attracting or establishing a fully private grounded in real case experience over the past seven years. utility was not a feasible option. So a management From this experience we have identified specific lessons contract, with both incentive and penalty payments, was within each of these spheres. negotiated with an international operator to oversee the existing utility. The project has resulted in improvements LESSONS LEARNED in both service and financial performance—meeting the public policy objectives while improving the business. Economics Politics 1) Ensure sound economic fundamentals. 3) Secure political champions. Governments sometimes see PPPs as a way to rescue Any project requires a champion: someone to articulate and financially challenging projects. While PPPs can indeed refine the vision, guide progress, and advocate for support. improve project economics, basic economic assumptions For PPPs, political champions are particularly vital, given such as revenues, costs, and level of investment must the significant public stake in them. Our teams repeatedly integrate into a reasonable and sustainable business case. cite the importance of political champions, and it is rare for An example is a successful African water project where the major projects to survive without them. This is most evident customers’ ability to pay was the critical issue. It determined in high-profile or publicly sensitive sectors such as airlines, cash flow and the amount of debt, driving the overall size where carriers are often viewed as national treasures. In and success of the project. In contrast, a European toll- airline transactions in Asia, Africa, the Caribbean, and road project died when political leaders insisted that two elsewhere, we have found waxing or waning political extra lanes be added, and the subsidy required would have support to be the difference between project success and been enormous. PPPs can deliver successful and financially failure. A strong champion or multiple champions can make attractive projects—but they can’t perform economic all the difference, as in a recent successful hospital project miracles. in Africa, where the team cited the strong support of both the minister of finance and the minister of health as a key 2) Structure the partnership to optimize cost, quality, reason for the project’s success. and investor return—in other words, to achieve both the public policy and business objectives. 4) Build stakeholder support. There are many partnership options to choose from, ranging PPPs typically feature a large assortment of interested and from conventional procurement of goods and services to influential stakeholders, with diverse economic, political, management contracts, through to full private ownership. social, and environmental concerns. Indeed, the majority of The challenge is defining a partnership that meets the public our projects cite stakeholder support as a critical element policy goals while creating or strengthening a successful, to project success or failure. But the most successful sustainable business. Defining the right partnership requires projects and leaders do more than just identify and manage knowledge of similar past transactions, understanding stakeholders; they also develop a deep understanding of of the local market, and innovation. One example is an stakeholders’ interests and optimize the business case electricity project in a recently war-torn developing state. accordingly. Two water projects in Asia illustrate this 2 SMARTLESSONS — APRIL 2013 lesson vividly. Water is a particularly sensitive sector, and Execution many water projects fail—not because of economics, but because of social, political, and environmental concerns. 7) Use a disciplined approach—time and complexity In one country, a key feature of the project was a legal are your enemies. requirement that the private partner be 60 percent locally owned. The project moved forward successfully and is now A disciplined approach to project management is valuable yielding fresh water, with better service and lower rates in any project. But it is particularly important in PPPs, to residents. In a second country, a lack of local investors where transactions can be complex and timing is often contributed to public unease, which was a key driver of the critical because of limited political windows. An example project’s ultimate failure and termination. is a failed power generation project in South Asia, where a project was terminated when a new government was 5) Assess and manage the key social and elected. Overall, our experience suggests that the longer a environmental impacts. project takes, the less likely it is to succeed. We recommend clear project timelines and accountabilities as well as strong Attention to social and environmental issues is a orchestration of external advisors. precondition for success, and at IFC this has become one of the first things we consider in accepting or rejecting a 8) Secure a mix of global and local expertise. project. Addressing social and environmental issues is not just the right thing to do; it is also good business, with The quality of teams is particularly important given the major projects unraveling when these issues are not fully potential technical, economic, and political complexities considered. An example is a European hydroelectric project inherent in PPPs, and having the right balance of global that was shelved because of specific concerns regarding and local expertise is critical. Global experts can bring water levels. Through a technical redesign, the team was critical knowledge and best practices from other sectors able to solve these issues, and the project was restarted and or geographies—expertise that is not easily obtained successfully completed. elsewhere. Yet perhaps even more important is the presence of local, on-the-ground capabilities. Again and again, IFC 6) Foster a stable and supportive regulatory project teams note the importance of both global and local environment. expertise and presence. An example is a desalination project in the Middle East, which cited the combined expertise of A sound regulatory environment is often a condition for its global and local technical consultants as one of a handful the success of a PPP. This is particularly true in sectors where of key drivers of the project’s success. fundamental elements of the business case—such as prices— are driven by regulation, and a stroke of the pen can create 9) Support a transparent, competitive bid process. or destroy a business. In Southeast Asia, a program to foster private sector participation in rural electricity production Unsolicited bids and noncompetitive processes are often focused first on establishing a supportive regulatory tempting—either for governments wanting to move environment, including clear guidelines for subsidies. The quickly or for companies looking to gain an advantage. For program has resulted in lower cost and increased access and large PPP contracts, we strongly recommend transparent, reliability, and it has stabilized the previously unpredictable, competitive bid processes. Not only is it good business large, and unsustainable subsidies required for this service. practice, but also anything less risks undermining long-term Box 1: Questions to Reveal Red Flags Economics • Can the project proceed now without further • Are the basic economics of the project strong (that is, approvals from the country’s Parliament or other does it have a good economic rate of return)? legislative body? • Does the project have small fiscal implications • Is the current government expected to be in power compared to the government budget (or, better, for more than a further 12–15 months? would it be a net fiscal contributor)? • Has the country been free of high-profile • Is the government, or off-taker, seen as creditworthy nationalizations (direct or through regulation) in the by investors? Or could insurance or guarantees past five years? effectively compensate for poor creditworthiness? Execution Politics • Has adequate preparatory work been done (for • Is there both top-level political support (president, example, an economic and social feasibility study, land minister of finance) and support from the relevant acquisition, and so on)? line ministries? • Is the project part of a larger program of PPPs? • Is the project supported (or at least not opposed) by • Is there a single government entity responsible for a broad spectrum of the key stakeholders (politicians, implementing PPPs, and does that entity have a track unions, companies, consumers, nongovernmental record of successful execution? organizations)? Has adequate and meaningful • Have reputable transaction advisors been retained? consultation been undertaken? SMARTLESSONS — APRIL 2013 3 public support of the partnership. In one You may find, as some of our teams have Asian country, the government had been reported, a natural tendency to focus on the heavily criticized for moving too quickly one or two spheres within the framework on a previous airport privatization. On a that you are most comfortable with and subsequent waste management project the have the most control over. Avoid this project team paid particular attention to tendency by assessing your efforts against a fair and transparent bid process, citing the framework—to identify areas you may this as a critical element in the project’s have overlooked. success. There are circumstances where sole- bidder negotiations can be advantageous Policymakers and investors should watch to governments, but these are exceptions to for “red flags� in each of the three spheres, be managed with care. indicating areas to focus on. Box 1 suggests 12 questions that government policymakers 10) Plan for ongoing contract or investors might ask, with a “no� response monitoring and review. indicating a red flag. Partners need to have the capacity to Perfect answers are not required for every monitor and manage their contracts, question. For example, we had a European ensuring compliance and resolving health-care project where the health disputes. They also need to contemplate minister and project champion changed five the possibility of renegotiation as the times. Despite these political weaknesses, situation changes over the years. The need the project nevertheless succeeded because to renegotiate is not necessarily a sign of its strength in other dimensions. However, of failure; it also can result from projects while two or three red flags may not be that are overly successful. An example is a a deal killer, if over half of the questions successful Latin American hospital project, in Box 1 are answered with a “no,� then where improvements to services increased it might be worth reexamining whether the demand beyond the original business undertaking a PPP at that time would be case, encouraging the government and the appropriate. private partner to revisit the level of subsidy. For governments, the capacity established Ultimately, the challenge for leaders is for PPP monitoring and review can also to deeply understand and address the provide a base of expertise for undertaking three spheres—economics, politics, and further PPP projects. execution—in an integrated way. Chief executive officers need to understand that Putting the framework into action political issues and stakeholder interests are just as important to a politician as Whether you are in the public or private shareholder value is to a chief executive sector, these hard-won lessons provide a officer. Political leaders, for their part, need practical framework for building successful to understand that chief executive officers public-private partnerships. Use it as an and PPPs can’t create economic miracles. overall guide to the types of issues and tasks With this understanding, true partnerships you must pay attention to. will grow and flourish. DISCLAIMER SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. 4 SMARTLESSONS — APRIL 2013