Introduction to Public Private Partnerships (PPPs)* July 2019

1. Introduction to Public Private Partnerships(PPPs)*July 2019 *With appreciation to Professors. Michael Klein (Johns Hopkins) and. Michael Bennon (Stanford)

2. AGENDA • What projects and services eligible for PPP? • What’s difference between “privatization” and PPP? • Why are governments attracted to PPP? • What’s division of PPP responsibility between government and private contractors? • What are pre-conditions for PPP success? • Who are the stakeholders? • What’s financial structure of most infrastructure PPPs • If PPPs make good sense (sometimes), why do they often fail? • PPP government capacity • Takeaways Professor Roger Leeds Leadership Academy for Development

3. What can be done using PPP structure? • Almost Anything!!!!!!! • Infrastructure (airports, bus terminals, roads, trains), services (cleaning public parks, building/managing prisons, providing health care)…. • But is PPP the same as privatization…? Professor Roger Leeds Leadership Academy for Development

4. What’s difference between PPPs & Privatization? • Privatizations definitively transfer ownership of government asset to private operator • PPPs- contractsbetween government & private contractor for finite time period, renewable upon mutual agreement (no ownership transfer). • Service contract- private company contracted to clean government buildings, collect parking meter revenues, maintain public parks, collect garbage • Management Contract - private company manages public airport • Concession –private firm build-operate-transfer (“BOT”)- bus station, toll road Professor Roger Leeds Leadership Academy for Development

5. Why Governments do PPPs?“If there is a private deal to be made, then it’s already done.”* • Overcoming government capacity constraints • Expertise • Money- Government budget constraints • Efficiency-Private companies often (not always) more efficient operator than governments • Motivating private sector-PPPs signal govt. commitment to encouraging larger private sector role in economy *World Bank PPP specialist Professor Roger Leeds Leadership Academy for Development

6. What Functions May Government Delegate to Private Contractor? • Design • Build • Rehabilitate • Finance • Maintain • Operate • Any combination of these 6 activities. For example: • Revenue generating infrastructure (toll roads) • Services (e.g. health care, prison management, garbage collection) • Parking meters: private contractor installs meters, collects cash, maintains and repairs meters, shares revenue with government Professor Roger Leeds Leadership Academy for Development

7. What Specific Roles/Skills Must Government Have To Increase Odds of PPP Success Factor? Regardless of responsibilities delegated to private contractors, government has essential role from start-to-finish: Requires multiple skill sets within government: • Legal authorizationgranting of concession/contract • Design & supervise transparent, competitive bidding process • Negotiate final contract • Regulate operating rules & prices (e.g. electricity, telecom) • Monitor contractors- ensure they comply with well defined performance metrics • Enforce contractual obligations Professor Roger Leeds Leadership Academy for Development

8. Pre-conditions For PPP Success(Problematic in Developing Countries) • Credible, effective legal framework All PPPs involve multiple legal contractualobligations, such as: • Specific performance requirements/metrics • Transparent, well defined pricing methodology • Payment terms and conditions • Contract adjustment mechanisms • Clearly defined dispute resolution mechanism • Specified causes for contract termination Professor Roger Leeds Leadership Academy for Development

9. Pre-conditions For PPP Success 2. Accountability & transparency- clear, performance metrics ensuring private contractors accountable for specified, enforceable results 3. Reconciling multiple stakeholder interests: • Customers -users of toll road, bus/airport terminal passengers • Multiple private firms-operators, financiers, attorneys • Multiple governmentagencies (federal, state and municipal)-sector-specific regulatory authorities [electricity, telecom), ministers, legislators, mayors • Development finance institutions 4. Success always requires supportive political leadership 5. What about money? Professor Roger Leeds Leadership Academy for Development

10. Financing PPPs: Multiple Sources • Equity (Ownership) • Government • Private companies • Private equity (Equity investors have highest risk if underperformance) • Debt • Bank loans • Bond markets • Government financial institutions • Development finance institutions (World Bank, IFC, IADB) • Suppliers • “Credit Enhancement” firms Most difficult PPPs: large, complex, expensive, capital intensive infrastructure Professor Roger Leeds Leadership Academy for Development

11. Infrastructure PPPs-“Project Finance” • “Non-Recourse”- Most infrastructure PPPs financing based on forecasted cash flows generated by the project, rather than private sponsor’s balance sheet • In the event of non-payment or under-performance, capital suppliers (e.g. banks) only have “recourse” to project company—”Special Purpose Vehicle” (SPV)-- not parent company • SPVs created and controlled by equity investors, who bear both highest financial risk (lowest “seniority” in event of default) and upside gains if project successful • All debt and equity financing for project flows through SPV SPVs involve multiple stakeholders, whose interests not always aligned Professor Roger Leeds Leadership Academy for Development

12. SPV Stakeholders Equity InvestorArranges financing, Negotiates contracts Invests equity Lenders Bank loansDFI Loans – Exim, WB, BNDES Bonds – Private Underwriters ContractorsDesigns, engineers, builds the asset Provides services/equipment Equity Profit Debt service Services SPV Special Purpose Vehicle Owns concession Pays debt One asset one business Debt Fees Output Services Fees Taxes OperatorOperates project after completion Permits $ Payment UsersTakes project output GovernmentApproves, monitors & owns project *“

13. Capital Intensive Infrastructure Projects:Highly Complex/Multiple Project-Specific Risks • Design • Site selection • Construction (e.g. multiple causes of delay, cost overruns) • Force majeure (e.g. unavoidable natural catastrophes) • Revenue • Operations and maintenance • Market (e.g. commodity price cycles) • Political • Credit default But PPPs also fail due to weak government capacity Professor Roger Leeds Leadership Academy for Development

14. PPP Success/Failure Often Linked to Government Capacity • Arbitrary actions by government, political groups, or individuals undermining PPP performance • Fraudulent bidding (e.g. favoritism) • Weak contract enforcement • Expropriation • Regulations that undermine private sector confidence (e.g. changes in regulations, taxes) • Non-Governmental obstruction (e.g. unions, activist groups) Professor Roger Leeds Leadership Academy for Development

15. Other Explanations for PPP Fail Failure* • Inadequate access to finance • Conflicts of interest/disputes among SPV stakeholders • Weak political will required to challenge entrenched stakeholders and traditional ways of managing infrastructure • Ideological opposition to private sector involvement with “public goods” • Unclear government decision-making process • Corruption, special interest lobbies • Unattractive financial returns for private investors *Public Administration Review (March | April 2013) Professor Roger Leeds Leadership Academy for Development

16. Conclusions/Takeaways • PPPS not “privatization”--contracts for specified task between government entity &private concessionaire; no ownership change • Rationale for PPPs- lack of government capacity (e.g. skilled manpower) & resources (e.g. capital) • Financial arrangement between government & private contractor may be relatively simple (e.g. garbage collection) or highly complex (e.g. capital intensive infrastructure) • Key PPP success factor include • Political will • government’s active involvement start-to- finish. • credible legal/regulatory framework & enforcement • transparent & fair bidding process • government willingness & ability to reconcile multiple private and public sector stakeholders interests • Well structured SPVs • Multiple explanations for PPP failure Professor Roger Leeds Leadership Academy for Development

17. What’s been your experience With PPPs? Professor Roger Leeds Leadership Academy for Development