Private sector funding of environment, water, climate change investments

1. Private sector funding of environment, water, climate change investments Practical recommendations for a successful PPP framework November 2017 FinProjectLLP

2. Introduction • Office • 180 Dostyk Avenue • Business Center “Koktem” • 7th Floor • Almaty A25D6T5 • Republic of Kazakhstan • Contact Details • Теl. +7 727 3469 300 • Mobile: +7 777 780 89 72 • E-mail: dzhankobaev@finproject.kz This presentation was prepared specially for the WECOOP2 workshop, 23-24 November 2017, Almaty, Kazakhstan, based on the article by Timur Dzhankobaev “PPPs in Kazakhstan: at a Cross Roads”, The Securities Market Journal, #5, 2017, Moscow, Russian Federation. Timur Dzhankobaev is General Director of FinprojectLLP. FinprojectLLP and ScholzvonGleich LLP cooperate and maintain a joint project office to, in particular, provide independent financial advice with regard to large capital-intensive financing projects such as infrastructure and PPPs. Both Finproject and ScholzvonGleich possess many years of combined experience in large financing projects with governments and large corporations at both policy and transaction levels, including the introduction of successful PPP frameworks and solutions – from the development of the appropriate methodology to legislation and closing(including the regulatory framework, procurement processes, planning and project pipeline development, as well as pilot projects and their financing in local currency). At project level, we help bring private equity investors and provide investment management advice throughout the projects’ lifecycle.

3. Public-private partnerships are key to private investment into infrastructure • It is a very well known fact that infrastructure investment is a main driver of economic growth, directly and indirectly via the multiplier. In turn, developed infrastructure is underlying favorable investment climate enabling new investment flowing into a country. • The demand for new modern infrastructure is well in excess of the funding capabilities of the public sector in many countries of the world, and this gap is bridged by private sector investment based on public-private partnerships(PPPs). • The entire purpose of a PPP is for the public sector to use various instruments available to it (1) to reduce the risks of private sector investing into long-term, capital-intensive projects, such as infrastructure, and (2) to provide through private sector the services that heretofore were provided by the public sector. • The complexity arises at the stage of project preparation because to raise financing into the project and to ensure its seamless performance throughout the entire project’s lifecycle of 30 years and above, one must consider and balance off the goals and interests of all major stakeholder groups, i.e.: (1) end-users (tariffs, quality); (2) public sector, i.e. fiscal (value-for-money) and strategic (development); (3) creditors (financial security); and, finally, (4) private sector (return on investment).

4. Introduction of a successful PPP framework – practical recommendations The methodology and principles Ignoring this complexity can be costly as it risks setting misleading objectives, unproductively using limited resources, disappointing the investors and, sooner or later, driving the process into a corner.Those who adapted, thrive. Based on our practical experience, we have the following three recommendations for the policy makers working on the introduction of PPP frameworks in the region, i.e. (1) focus on large projects, (2) simplify the processes, and (3) calculate value for money. Focus on large projects. High transaction costs make little room for small PPPs. Small PPPs is an example of misleading objectives. Concentration is the answer. Simplify the processes. Transparency and competitiveness of the tender are the two basic principles of a successful PPP legislation, which is fundamentally different from budgetary and public procurement legislation due to the private sector carrying the risk. French PPP Law is a good example to follow. Calculate value for money (VfM). VfM is a good proxy for evaluation of a PPP project from fiscal standpoint. It is calculated based on a well-established methodology to be approved by the authorities, before and after the tender. VfM can cut the projects’ lead times as no other ‘budgetary expertise’ is required.

5. Introduction of a successful PPP framework – practical recommendations Process and organization Due to the complexity, i.e. the need for a successful project to balance the interests of many stakeholders, how the process is organized at policy level is even more important than legislation. The first thing to do is to separate fiscal and strategic roles and to introduce VfM calculation methodology. Long-term planning, development of the project pipeline and decision-making should be elevated to a strategic level, e.g. a permanent interdepartmental/ interregional working group, a PPP task force, reporting directly to Prime Minister or President (as the case may be from country to country). VfM calculation, based on the empirical evidence of successful PPP frameworks elsewhere, should ideally go to a professional PPP Center under the Ministry of Finance with ‘veto power’. The ‘veto’ by the Ministry of Finance in case of negative VfM can be overcome on other criteria than fiscal, at the strategic level. The rule of thumb is that in case of negative VfM, PPP should be used only to procure unique services having strategic value that cannot be procured otherwise. The rest should be procured directly, with any savings going to the increase of direct budgetary spending.

6. Introduction of a successful PPP framework – practical recommendations Planning (1) High density and (2) relatively high personal incomes of population are the two key factors for a successful PPP project. With these two conditions present, VfM of a PPP can be positive even under availability payments scenario when the public sector guarantees to the private sector cash flows subject to compliance with the quality standards. Large urban areas, or agglomerations, answer both.PPPs, therefore, should be planned in large urban agglomerations with the most potential for the development and growth.Modern, high quality infrastructure, in turn, supports the development, sustainability, and high living standards of urban agglomerations. Some of the key infrastructure in urban areas, such as water supply/ waste water treatment, solid waste treatment, etc., predominantly serving the City, is located outside of the cities on the adjacent municipal territory, the Oblast, which is part of the urban agglomeration, but a different municipality. The neighboring municipalities sometimes do not even communicate due to different agendas preventing effective planning, to the detriment of critically important projects. These are important issues that should be addressed centrally, at the strategic level as above.

7. Introduction of a successful PPP framework – practical recommendations Project pipeline The primary candidates to go into a good project pipeline are transportation projects (toll road, city by-passes, by-pass railroads, rapid transport systems, airport development, etc.), new sources of energy generation and transmission, including renewables, modernization of distribution grids, water supply/ waste water treatment systems, modern hospitals under modern management standards, city environment development projects, broadband, etc. But the most potential is in a new industrial zone(-s) based on a PPP framework to stimulate private investment using PPP contract as a proxy for the autonomous (ex-territorial) regime that is the main principle underlying a successful free economic zone as it guarantees stability, uninterrupted business processes, which is even more important than tax concessions, enabling to compete successfully (with similar regimes worldwide) for value-added chains of leading global manufacturers. Therefore, private sector and investment act as the main drivers behind the investment into, first: (i) development of a modern high-quality and affordable infrastructure, including environment, water, and climate change, and then on this basis, (ii) production of high value added goods and services.