Islamic Republic of Iran World Bank Transport Sector Joint Workshop

1. Islamic Republic of IranWorld BankTransport SectorJoint Workshop Private Investment in Transport Infrastructures and Services April 28, 2004 Michel Bellier Lead Transport Specialist World Bank

2. Overview • International Trends on Private Participation in Infrastructure and Key Issues • Transport Sector Specificities • PPI Models • Policy and Transaction Specific Recommendations

3. International Trends on Private Participation in Infrastructure(PPI) and Key Issues

4. Investment in Infrastructure Projects with Private Participation Developing countries, 1990-2002 Source: World Bank PPI Projects Database.

5. Breakdown of Investment in Infrastructure with Private ParticipationDeveloping Countries, 1990-2002 Total Private Investment = $US 805 billion (in US$ 2002 billion) Source: World Bank PPI Projects Database

6. Why Is Private Participation Considered By Government ? • Fiscal stresses and competition for public resources • Leading to cuts in public investment • Conflicting Government policy objectives • Contradictions between Government roles: • Policy maker, regulator and operator • Inefficiencies of Public sector monopolies • Restrictions on management freedom caused by service norms and procedures

7. Public Sector Legacy : Inefficiency $ bn annually 200 123 55 Source: WDR 1994

8. Benefits From Private Participation • Better technical efficiency • Private management responsible and accountable • Avoids political interference • Allows placing performance risk on private sector • Allocative efficiency more likely achieved by competition in the market or for the market • Better response to markets or technological changes • Financial markets and innovative products

9. Key Issues Learned From Past Experience • Private provision may entail new or hidden costs for government • Realized guarantees and liabilities • Major public role still required in most sectors • Continued need to prioritize and accurately account for public expenditure on infrastructure

10. Key Lessons Learned From Past Experience (2) • Unrealistic expectations (government, investors) lead to failure • Arguments over the impact on access and prices, particularly for the poor, but overall benefits • Few arguments over technical efficiency • Difficulties to sustain cost-covering fees is a major threat to the sustainability of private operations • Effective regulation critical to achieve benefits • Shift in public opinion due to disillusionment • Reduced enthusiasm of many investors in developing countries infrastructure

11. Government Resists Private Participation When • Strategic issues are at stake • Ownership is believed necessary to control social impacts • Private monopoly would exploit users

12. Private Sector Finds Entry Unattractive When • Risks are not properly allocated or the legal/regulatory framework impedes mitigation measures • There is no secure revenue flow • There is a high probability of commercially damaging government interference • Sunk capital will not be recovered

13. Transport Sector Specificities

14. What is Special About Transport? • Varied products and markets • Two components: infrastructure and services • Transport services serving customers • Transport infrastructure • Integrated with service provision, or • Commonly owned but separately operated by several providers, or • Separately operated • Significant externalities (environment, safety) • Prominence of social and strategic considerations

15. The Case for PPI in the Transport Sector • Large benefits for services activities • Less arguments for infrastructure • Natural monopoly (road networks) • Significant market power (ports/airports) • Difficulty to recover infrastructure costs • Requires a dedicated source of income • When integration extends a natural monopoly, separate provision of services may be considered • Market monopoly and not technical monopoly • Mixed results in rail sector

16. Cost Reductions From Private Sector Supply in the Transport Sector • Road maintenance: 50% in Colombia • Rail labor costs: 50% in Argentina • Bus operations: 40% in UK • Shipping costs: 30% in Venezuela • Ports: 30% in Brazil

17. INFRASTRUCTURE SERVICES Urban Road Usually public construction and management Access expressways and bridges can be tolled Free entry and competitive franchises in the bus market, Reduce barriers to entry of the informal sector Interurban road Independent public road agencies may be commercialized Construction and maintenance contracted out to private sector. Concession of high traffic volume toll roads Private freight services in competitive markets Competitive or periodically contestable private operations for passenger services Scope for Private Sector in Transport (1)

18. INFRASTRUCTURE SERVICES Urban rail Success of concessionary systems yet to be proved. LRT are potential cases (concession or affermage) Performance based management contracts (social objectives should be embodied) Interurban rail Separation of infrastructure from services to encourage competition, but long-term efficiency yet to be proven. Vertically integrated concession (freight, passengers to lesser extent)  PPP of greenfield projects Partial concession or franchising of specialized services (multiple operators) Outsourcing of support activities  Scope for Private Sector in Transport (2)

19. INFRASTRUCTURE SERVICES Ports Public corporatised and commercially run landlord functions may remain for strategic planning purposes. Concessionning or privatization of ports or terminals Airports Airports: . corporatised landlord model . passenger and freight terminals can provide good opportunities for privatization or concession Airlines Airports: specific services by private sector ·   Airside ·   Landside Private provision of ·   Channeling and dredging ·   Tug services ·   Stevedoring ·    Landside . Portside · Scope for Private Sector in Transport (3)

20. PPI Models

21. The Spectrum of Choices (Ranked by increasing risk transfer to private sector) • Public supply and operation • Corporatization and performance agreements • Management contracts • Leasing (Affermage) • Franchise • Concession (BOT) • Build-Own-Operate (BOO) • Divestiture by license • Divestiture by sale • Private supply and operation

22. Difference Between Options • Risk allocation • Incentives • Operational requirements • Regulatory requirements • In all models, a contract defines objectives, duties and rights of parties

23. Management Contracts • Put relationship between government and supplier on a formal basis • Are best seen as either • Appropriate for a government agency • An interim stage to concessioning • But • Tend to be badly enforced • Have only weak incentives to efficiency • Examples: Urban rail, airport terminal

24. Leasing (Affermage) • Responsibilities of public sector • Defines enterprise objectives • Finances infrastructure and equipment and retains ownership of assets • Responsibilities of the operator (Lessee) • Deploys operating resources • Takes some commercial risks, and makes most marketing decisions • Payment of lessee from users charges and partly related to results • Examples: LRT

25. Franchise • Delegation of operating rights to a private provider • Services defined in the contract • Infrastructure financed by government • Operating equipment generally financed by private sector • User charge • Revenue risk born by the franchisee • Examples: urban bus services

26. Concessions General Characteristics • Specific exploitation rights awarded to a private company • Financing, construction and operations • Usually long term contract • Incentive to generate and secure revenue • Consistent with public ownership of assets • Consistent with quality regulation by public sector • Examples: toll roads, airport terminals, ports

27. Concessions Regulation • Regulation critical when natural monopoly or market power, or PPP agreement rely on regulatory interpretation • Regulation by the contract or a regulator • Independent regulation recommended • Monitoring fulfillment of contract conditions • Technical regulation • Economic regulation • Ensuring users protection

28. Concession Requirements • Economically justified projects • Financial return meeting investors thresholds • Acceptable outcome (user access/affordability) • Properly structured contracts to deliver risk transfer and efficiency benefits • Sophisticated legal enabling and enforcement environment • Expert concession design team (legal, financial) • Competitive procurement

29. Key Recommendations

30. Policy Recommendations • Government role: policy maker, investment decision, regulator of infrastructure services • Not a provider of services, determines outputs • Promoting ministries should have strong capacity • Enabling legal and compliance environment • Effective regulation • Expectation of continuing public commitment throughout the duration of the PPI contract • Competitive procurement where possible • Competition for the market when monopoly

31. Transaction Recommendations • Project has to be economically viable • Government point of view • Acceptable impact on the access and affordability of services to users • Project has to be financially viable • Private sector point of view • Possibly with public financial or risk mitigation support • Arms length contractual relationship between government and private provider

32. References • Guides on the design of PPP and procurement of private participation • Concessions for Infrastructure • Hiring Advisors • Toolkits (http://rru.worldbank.org/Toolkits/index.ht) • Port Reform • Public Private Partnerships in Highways • Private Participation in Infrastructure Advisory Services (PPIAF)

33. Thank You For Your Attention