PUBLIC PRIVATE PARTNERSHIPS IN INFRASTRUCTURE: BEST PRACTICES AND PROSPECTIVE POLICY FRAMEWORK

1. IBRD PUBLIC PRIVATE PARTNERSHIPS IN INFRASTRUCTURE: BEST PRACTICES AND PROSPECTIVE POLICY FRAMEWORK J. Luis Guasch Head of World Bank Expert Group on PPP World Bank and Professor, University of California, San Diego jguasch@worldbank.org March, 2010 Forum: PPP and Infrastructure, Maputo, Mozambique

2. CONTEXT • At last Governments have become convinced of the impact of infrastructure on growth, competitiveness, trade and poverty and of the urgency of implementing appropriate measures • And are also aware of the significant needs and required investments to improve their infrastructure: the coverage and quality of infrastructure services • In contrast to the crisis of the 1990s, governments have not cut, in fact many have increased their investments in infrastructure: many considering scaling up investmnets in both public works and PPPs

3. INDIANA JONES: MOVING FORWARD • A Map: The Vision • A Guide: The Knowledge • Food and Water: Resources

4. PART I: OVERVIEW OF PPPs

5. Never Forget the Ultimate Objective: Improve Sector/Service Delivery Performance

6. Objectives: Sector Performance Final Efficiency of service provision Alignment of costs and tariffs Coverage: percentage of population with access to reliable services/network Quality and reliability of the service Operational and financial firm’s performance Through: Sectoral Policies Investments Regulatory Oversight

7. Objectives: Sector Performance Sector Performance is driven by four components: all critical for success!!! Sectoral Policies Done by Sector Ministry Embedded in Sector laws and normatives Investment Done by public sector and private sector (PPPs) Regulation Done by mostly Sector Ministry with assistance from Regulator if exists Embedded in laws, decrees and/or contracts Implementation of the previous three Of Sectoral Policies, done by Ministry or/and “Regulator” Of Regulation done by “Regulator” Of Investment done by line Ministries and/or private sector Embedded in contracts (sometimes in laws), norms

8. Sectoral Policies Inter Alia they include Strategic planning-and identification and prioritization of projects Market structure Entry and evolution Mode of service provision Extent and modes of Subsidies Coverage targets and access Cost Recovery Oversight

9. Regulation Two components (plus instruments) Governance (inter alia, includes) Structure and characteristics of oversight: including issues of autonomy, transparency and accountability Financial and labor regimes Procedures Conflict resolution Substance (inter alia includes) Risk allocation and mitigation Tariff structure (for both users and providers) Mode of regulation Asset Base Incentives Renegotiation framework Financial equilibrium Information requirements Output mode

10. INVESTMENTS • Public Works • Private Sector Participation: Concessions and PPP • Hybrids • But … a process, and evolving, all relevant

11. What Are PPP and What They Can Do For You?

12. PPP • The truth about PPP: Opportunities and Limits? • What can PPP do for you? • When and How are PPP the right choice as a modality of infrastrcuture service provision?

13. What are PPPs? • “Public-Private Partnership” is a generic term for the contractual relationships formed between the private sector and public bodies often with the aim of introducing private sector resources and/or expertise in order to help provide and deliver public sector assets and services. The term PPP is, thus, used to describe a wide variety of working arrangements from loose, informal and strategic partnerships, to design build finance and operate type service contracts and formal joint venture companies

14. Options on Modalities of Private Participation in Infrastructure

15. What can the Private Sector do under a PPP?: Combinations of the following options: • Management and Lease Contracts (Any financing done by the public sector) • Brownfield Projects: • Build, Rehabilitate, Maintenance, Lease, Operate Transfer • Greenfield Projects: • Design, Build, Operate, Maintenance, Transfer, (some cases own) • Divestitures: • Full or Partial

16. Definitions: “PPPs”

17. Key Elements of PPP • Long lasting contract: 10 to 30 years • Ownership stays with Governments (rare exceptions) • Cost Recovery by investors is through users payments , or governmnet payments or a hybrid of both • The private sector operator has the right to provide the service for the duration of the contract (that is its only assets-the right to thre flow of payments from users or government) • At the end of contract, the service and assets are transferred back to the Government without any compensation

18. Objectives & importance of PPPs • PPP have proven critical as a component of a country infrastructure strategy • They can effectively complement (and partially replace) traditional public works. • The benefits can be, relieving fiscal pressures on government budgets, providing partial financing for infrastructure programs in contexts of tight fiscal space, bringing significant know-how in operations, and technology, reducing unit costs, addressing (through the bundling of construction and maintenance) the recurrent problems of rehabilitation and maintenance. • The end results of PPP programs is the acceleration of infrastructure investments and through them reducing the infrastructure gap, increasing coverage and network expansion and increasing productivity and productive opportunities

19. PPPs • If done well, PPP can bring significant gains-efficiency, welfare, financial and even fiscal • Can accelerate investment program and levels of service • Improve Service Delivery:Quality and Speed • Creating Fiscal Space • Cost Savings • Effective Risk Transfer • Transparency • But it does require, careful thinking-developing the capacity, procedures, filters, institutions, knowledge, oversight and use of best practices on designing transactions/contracts

20. OVERALL RECORD OF PPPs • PPP’s impact mostly positive: • Raising finance and creating fiscal space • Coverage, quality and efficiency have generally increased • And it could have been even better if better designed, yet… • But, have PPP been a “beautiful relationship”? Certainly not, manageable yes, but some concerns have arised, mostly from poor design and implementation, and that, as of today, with our knowledge can be fixed

21. Private Sector Participation (PSP) is associated with the following: A 12% increase in residential connection for water utilities; A 54% increase in residential connections per worker for water utilities and 29%increase for electricity distribution companies; A 19% increase in residential coverage for sanitation services; An 18%increase in water sold per worker and a 32% increase in electricity per worker; A 45% increase in bill collection in electricity; An 11% reduction in distribution losses for electricity and 41% increase in the number of hours of daily water service.

22. Potential Impact of PPP in RDC (Congo) • Improving power supply could reduce costs to firms by as much as 80 percent • Providing feeder roads reduce costs of moving agricultural produce by 70 percent • River dredging and upgrading could reduce costs of transport by 50 percent • Road rehabilitation and upgrade could reduce costs of road transport by 40 percent • Port upgrades and reforms could reduce costs of cargo handling by 30 percent • Rail rehabilitation could reduce costs of surface transport by 30 percent

23. Impact of PPP: Changes in Trends… Distribución de la electricidad Telecomunicaciones fijas Distribución del agua Transición Post-transición Transición Post-transición Transición Post-transición Númber of users (*) Output (*) Númber of employees Númber of employees – Sector Labor Productivity (*) Distributional losses Quality of Service Coverage (*) Prices ? ? Nota: (*) Estas variables fueron reportadas tras considerar los efectos fijos de la firma y otros fenómenos contemporáneos en la economía. Fuente: Andres, Foster y Guasch (2004).

24. Impact of Infrastructure/PPP on Poverty/Inequality and Job Creation Access to services significantly increases household earnings Infrastructure does create jobs

25. Poverty: Increases in Household Earnings from Access to Infrastructure Services: Complementarities of infrastructure 60% 50% 40% % change of PC HH Income 30% 20% Pipeline water Water + Water + elect + Water + elect + 10% electricity phone phone + road 0% Peru, 2004 • Infrastructure does have a strong impact on household’s welfare • There exists complementarities in the provision of different types of infrastructure Source: Escobal and Torero, 2004. Page 25

26. Increase in earnings of households benefiting from rural roads (in $US annual) Source: ENDES-INEI

27. Job Creation Impact of Infrastructure Investments by type for US$ Billions Sources: Authors calculations, World Bank project documents, RDEL (2009) and USDOT.

28. Geographic Zones from Peru: Economic Potential, Productive Efficiency, Access Costs, Poverty

29. Where-which fields/areas - are PPPs Possible?

30. Often Used and Possible Projects/Sectors for PPP: Traditional Transport (Roads, Ports, Airports, Railways, Bridges), Electricity, Rural Electrification, Gas, Telecom, Backbone Water and Sanitation: Treatment Plants, upstream and downstream, full service provision, effluents Solid Waste Collection and Disposal Urban Transportation: Buses and Metros, Suburban Light Rail Urban Roads Logistic Terminals Housing Schools, Hospitals 30

31. Increasingly Used and Possible Projects/Sectors for PPP: Non- Traditional Slum Upgrading Jails/Prisons, Correctional Facilities Public Buildings: Municipal Administration, Sports Stadiums, Concert Halls, Cultural Centers Access to Common areas Street Lighting Recreational Parks, Sports Facilities Land registration, Cadaster Fire Stations Day Care Centers Parking's Security-Installing, monitoring and managing security cameras around the city 31

32. What Makes a PPP Project Successful? Successful PPPs are characterized by comprehensive planning, clear contractual rules and contingencies, competitive procurement and credible contract enforcement. Countries with strong public sector institutions have typically performed best. Examples include the United Kingdom, Portugal, South Africa, Australia and Chile.

33. Yet, the benefits PPP can provide are not automatic: Critical Factors for Success • Communications • Credible Commitment by Government • Credible Leadership of the initiative • Underpinned by appropriate framework: • Legal • Institutions • Regulatory/Oversight • Processes • Conflict Resolution • Guided by Best Practices: • Capacity, capacity and capacity