THE WORLD BANK GROUP 33910 WASHINGTON, D.C. TRANSPORT PAPERS TP-9 SEPTEMBER 2005 Launching Public Private Partnerships for Highways in Transition Economies Cesar Queiroz TRANSPORT SECTOR BOARD © 2005 The International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington, DC 20433 Telephone 202-473-1000 Internet www/worldbank.org The findings, interpretations, and conclusions expressed here are those of the author and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. To order additional copies of this publication, please send an e-mail to the Transport Help Desk transport@worldbank.org Transport publications are available on-line at http://www.worldbank.org/transport/ LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES iii TABLE OF CONTENTS Acknowledgments ..........................................................................................................iv Abstract ....................................................................................................................... v 1. Introduction ............................................................................................................ 1 2. Background ............................................................................................................. 1 3. Some Lessons Learned from Successes and Failures...................................................... 2 4. Concession Laws ...................................................................................................... 3 5. Unsolicited Proposals ................................................................................................ 5 6. Steps to Launch a PPP Program in Highways ................................................................ 5 7. Selection of the Strategic Private Investor or Concessionaire .......................................... 6 8. World Bank Partial Risk Guarantees ............................................................................ 7 9. Greenfield and Road Maintenance Concession Programs................................................. 9 10. World Bank/PPIAF Toolkit for PPP in Highways .............................................................10 11. Economic Feasibility of Projects .................................................................................10 12. Conclusions ............................................................................................................11 References...................................................................................................................12 LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES iv ACKNOWLEDGMENTS The author benefited from comments by Edgar Saravia, Martin Humphreys, Christopher Willoughby, Michel Audige, Natalya Stankevich, Andras Timar, Lauri Ojala, and C. Bert Kruk. This paper reflects only the author’s views, and should be used and cited accordingly. The findings, interpretations, and conclusions are the author’s own. They should not be attributed to the World Bank, its Board of Directors, its management, or any of its member countries. Cesar Queiroz Highways Adviser Transport and Urban Development Department The World Bank, 1818 H Street NW Washington DC 20433 USA LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES v ABSTRACT In many countries the private sector has been involved in financing infrastructure through concessions under a public-private partnership (PPP) program. PPP schemes, however, are somewhat underutilized in transition economies, where the potential financing gaps are significant and growing, and there seems to be an enormous potential for more private sector involvement in the financing and operation of highway assets in these countries. The reasons for the low private financing of road infrastructure in transition economies include lack of appropriate legal framework, economic and political instability and consequent high perception of risks, and relatively low traffic volumes. As new legislation is enacted (Russia, for example, passed a new concession law in mid 2005), institutions and economic growth become more sustainable (the Baltic states, as an example, have grown steadily over the last several years), and traffic increases on key roads and corridors, it seems fair to expect that the sector will become more attractive to private investors. Institutions such as the World Bank can contribute to enhance private financing of road infrastructure through greater use of their guarantee power, in addition to supporting, when required, the public sector contribution to the construction cost of a PPP project through loans. Partial risk guarantees are particularly relevant in the context of seeking more private involvement in the financing of road infrastructure. This paper reviews potential applications of partial risk guarantees, the required legal framework (for example, concession law) for attracting private capital for PPP schemes, possible steps for a country to launch a program of private participation in highways, the concept of greenfield and road maintenance concession programs, and the treatment of unsolicited proposals. It also summarizes potential applications of the World Bank Toolkit for PPP in Highways as an instrument to help decision-makers and practitioners to define the best PPP approach for a specific country. LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 1 Launching Public Private Partnerships for Highways in Transition Economies 1. INTRODUCTION There has been so far relatively low private financing of road infrastructure in transition Many governments do not have all the financial economies. The reasons for this include lack of resources required to expand, maintain, and appropriate legal framework, economic and operate their country’s highway networks and political instability and consequent high other transport infrastructure. The overall perception of risks, and relatively low traffic resources needed are enormous. In the United volumes. As new legislation is enacted (Russia, States, for example, it is estimated that $55 for example, passed a new concession law in billion will be required annually over the next mid 2005), institutions and economic growth 20 years simply to maintain the highway and become more sustainable (the Baltic states, as bridges in their current condition. an example, have grown steadily over the last several years), and traffic increases on key In many countries, the private sector has been roads and corridors, it seems fair to expect involved in financing infrastructure through that the sector will become more attractive to concessions under a public-private partnership private investors. (PPP) program. Broadly defined, a concession is a legal arrangement in which a firm obtains 2. BACKGROUND from the government the right to provide a particular service (Kerf 1998). PPP schemes, Following the Second World War, virtually all however, are somewhat underutilized in investments in road infrastructure were made transition economies, where the potential by the public sector. A significant shift to financing gaps are significant and growing, and private provision only occurred during the there seems to be an enormous potential for 1990s. Funding commitments for partly more private sector involvement in the privately financed roads in developing financing and operation of highway assets in countries peaked in 1997 before the Asian, and these countries. subsequent Russian, financial crises, and actual private flows have been falling in recent With many countries increasingly interested in years. These declines have been accompanied attracting private capital to infrastructure by high profile cancellations or renegotiations projects, institutions such as the World Bank of some projects, a reduction in investor can contribute through greater use of their appetite for these activities and, in some parts guarantee power, in addition to supporting, of the world, a shift in public opinion against when required, the public sector contribution the private provision of infrastructure services to the construction cost of a PPP project (Harris 2003). On the other hand, private through loans. Partial risk guarantees are financing of roads has continued to grow particularly relevant in the context of seeking strongly in several OECD countries, including more private involvement in the financing of Australia, France and some major states of the road infrastructure. USA, and in some developing countries that were less affected by the broader regional This paper reviews potential applications of financial crises, such as Chile and South Africa. partial risk guarantees, the required legal framework (for example, concession law) for The last decade experience showed that attracting private capital for PPP schemes, private participation is not a panacea, but also possible steps for a country to launch a that, where commercial risks are shifted to the program of private participation in highways, private sector, private participation can help the concept of greenfield and road deliver infrastructure that is essential for maintenance concession programs, and the growth. The quality of regulation matters, and treatment of unsolicited proposals. It also the key is to develop regulatory frameworks summarizes potential applications of the World that are credible to investors and viewed as Bank Toolkit for PPP in Highways as an legitimate by road users. It is also essential instrument to help decision-makers and that anticipated traffic volumes on road practitioners to define the best PPP approach projects proposed by governments for partial for a specific country. or total financing by the private sector are LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 2 relatively high to ensure reasonable returns on and is the required public sector investments. contribution justified in terms of the additional benefits engendered by that The reality is that road infrastructure has to be contribution? paid for, whether provision is public or private, thus the need to sustain cost-recovering Risks associated with PPP programs should be schemes, such as appropriate toll rates. As adequately managed. The main risks of PPP pointed out by Harris (2003), the real issue is highway projects, in addition to changes in not public infrastructure versus private design during construction which can lead to infrastructure. It is more simple: the issue is significant costs increase, are those that affect less infrastructure versus more. Some lessons gross revenue. These revenue related risks learned from successes and failures of a usually reflect uncertainty in both the number of projects are summarized in the next predictability of future traffic volumes and the section. willingness of road users to pay tolls, together with the possibility that expected land-use 3. SOME LESSONS LEARNED FROM patterns do not materialize. . A study of 67 toll SUCCESSES AND FAILURES road cases by Standard & Poor’s (2002) found that actual traffic, on average, was 70 percent An analysis of the experience with motorway of the forecast volume, with a spread of 18 development in the past ten to fifteen years in percent to 146 percent. For countries without Hungary, the Czech Republic, Poland, Slovenia, previous tolling experience, the average actual Croatia, Romania, and Serbia showed that any traffic was only 56 percent of the forecast, PPP scheme, in order to be successful, requires compared with 87 percent for those with strong (material) Government support and previous experience. long lasting political will and engagement. This analysis highlights the following key pre- The World Bank has, together with the Public- requisites for successful PPP schemes (World Private Infrastructure Advisory Facility (PPIAF), Bank 2004): developed the Toolkit for Public-Private Partnership in Highways (World Bank/PPIAF ¾ A strong political will, an appropriate and 2003). This resource (discussed later), when stable regulatory and legal framework, used appropriately, provides a reliable way of and a stable macro-economic environ- screening potential transport projects for ment; private sector participation, prior to further detailed investigation. ¾ The willingness of the public sector to provide the (substantial) public sector Particularly helpful PPP resource guidance, contribution (up to 40-60 percent of total based on lessons learned, can be found in: (i) project cost in some cases). Public sector “Public and Private Sector Roles in the Supply support may also include the provision of of Transport Infrastructure and Services: existing assets as an in kind contribution, Operational Guidance for World Bank Staff” sovereign guarantees, and subsidies; (Amos 2004); and (ii) “Guidelines for the Development of Successful Public-Private Partnerships” (European Commission 2003). ¾ Sufficient traffic volumes to make it viable to the private sector - A new road is The European Commission (EC), recognizing unlikely to be financially viable without a that Accession Countries and Member States flow exceeding 10,000 vehicles per day, can potentially benefit from the PPP approach unless the government offers an to reform and upgrade infrastructure and additional substantial subsidy to the services, has published, in addition to the concessionaire. By contrast, the “Guidelines,” a Resource Book with a number rehabilitation of a road, particularly where of PPP case studies across countries and there are no competing corridors, can be sectors (EC 2004). Further related information viable where the flow is just some 6,000 can be found on the EC website at: vehicles per day; and http://europa.eu.int/comm/regional_policy/sou ¾ A robust economic and financial appraisal rces/docgener/guides/pppguide.htm of the project that asks, and endeavors to answer, three questions: is the project PPPs should only be considered if it can be beneficial for society, is it commercially demonstrated that they will achieve additional viable for the potential concessionaire, value compared with other approaches, if there LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 3 is an effective implementation structure, and if law and regulation provides more flexibility for the objectives of all parties can be met within amendments during the implementation of a the partnership. Regarding additional value, as PPP program. an example, the UK Government (HM Treasury 2004) has developed a value for money (VfM) It is usually beneficial to have a draft framework, the application of which (including concession law reviewed by a law firm with a a “Quantitative Evaluation” tool) is mandatory strong international project finance practice for all PPP projects proposed in the UK. Further and with a strong local knowledge base. information regarding the UK “value for money” assessment is available on the HM Public disclosure of concession agreements is Treasury website at: highly desirable. In recent years a growing number of countries have taken the step of http://www.hm- publishing concession agreements they have treasury.gov.uk/documents/public_private_part made. This has several benefits: (a) it provides nerships/key_documents/ppp_keydocs_vfm.cfm a further check on corruption, which in addition to its direct benefits can enhance the 4. CONCESSION LAWS legitimacy of private sector involvement in often sensitive sectors; and (b) when the concession agreement relates to the provision An appropriate concession law is fundamental of services to the public, it provides consumers for a country to establish an enabling with a clearer sense of their rights and environment for PPPs and it also serves as a obligations, and can facilitate public monitoring possible marketing tool for investors. It should of concessionaire performance. The lack of apply to construction, expansion, rehabilitation transparency in concession agreements may and maintenance of assets providing a public lead to serious public concerns, as highlighted service, aiming at improving the efficiency and in a recent report by Transparency modernization of public services. In general, a International (2005). concession law should include provisions for: It is usual practice for concessions law to ¾ Definition of concepts and terms; contemplate the concept of “negative concessions” in which there is a contribution ¾ Transparent competitive bidding; from the public budget, rather than a payment to the public budget. The law would make ¾ Allowing for bid evaluation on a net explicit the right of the public authorities to present value (NPV) basis; enter into multi-year contracts to make the required stream of payments to the ¾ Assurance of national treatment to foreign concessionaire. investors; A concession law needs to link with other laws, ¾ Assurance of compensation in the event of such as: expropriation; ¾ Laws regulating the provision of public ¾ Assurance of access to international services arbitration for foreign investors; ¾ It is common to find aspects of utility ¾ A general reference to the terms of services governed by sector-specific laws, specific contracts, which creates scope for some of which establish specialist flexible approaches between sectors and regulatory bodies. The relationship projects; and between those laws and bodies and concession agreements needs to be spelt ¾ Public disclosure of concession agree- out, for example regarding tariffs and ments. service standards. A concession law can be kept relatively simple ¾ Procurement laws and general, while specific regulation with detailed guidelines about the ways in which the ¾ In order to provide a clear legal procurement process will be conducted, framework, the regime for bidding for criteria, contract award, selection committees, concessions needs to be clear vis-à-vis etc. should be documented in operational other procurement laws. guidelines (or decrees). A separation between LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 4 ¾ Laws governing foreign investment with carefully defined safeguards for the concessionaire. ¾ The provisions of a concession law need to be clear relating to other laws that might ¾ Arrangements regarding the land required include restrictions of some kind on to provide the public services. foreign participation. It is important that Responsibilities of the granting authority regarding concessions there is no separate may include providing adequate site treatments for local and foreign investors. condition, right of access, expropriation and acquisition of land, contingent Many countries distinguish between environmental liabilities, etc. concessions for public works, concessions for the delivery of public services, and concessions ¾ The concept of contract renegotiation, as for the exploitation of natural resources. A it is better to be prepared to manage the concession law would need to reflect such process when renegotiation may be distinctions. necessary. Concession laws should establish clear mechanisms for There are situations in which one of the renegotiation and amendments (as a way bidding criteria is based on minimum public to minimize contract distress and contribution (or “subsidies”) to construction or cancellation). The renegotiation of reconstruction costs. A Concession Agreement projects is not an unusual occurrence may include: (i) re-build 1 and/or build; (ii) (Harris et al. 2003). In fact, about half of operate; and (iii) maintain. It may cover the all concessions become subject to re- whole spectrum of PPP, i.e., management and negotiation, often due to inflated demand maintenance contracts, operation and or yield estimations, or unrealistic maintenance contracts, and Build-Operate- operating cost assumptions (Amos 2004). Transfer (BOT) concessions. While not all renegotiation is undesirable, opportunistic renegotiation should be Other useful provisions in concession laws discouraged in both existing and future include: concessions (Guasch 2004). ¾ The concept of “cannon” or “entry ticket ¾ Provision for international arbitration. fee,” which is a current practice worldwide. It is usually through the ¾ Award of contracts through a two-step “cannon” that the government’s approach in which the qualitative transaction costs in moving the project requirements (for example, experience, from initial conception to eventual financial capability, management plan) signature of a contract are reimbursed by and some of the quantitative requirements the concessionaire. However, in the end (for example, investment plans) are the cannon is going to be recovered by judged on a pass/fail basis. All bidders the concessionaire either through a higher that pass this stage are by definition subsidy or higher tariffs/tolls. qualified and step two judges the financial offers. ¾ The concept of periodic independent assessment of the concession assets to be ¾ Exceptions to competitive bidding. For carried out by an expert acceptable to example, most countries permit sole both parties and paid, preferably, by the sourcing in the case of very small concessionaire. contracts (where the costs of a tender would be disproportionate to the benefits) ¾ Amendments of concession agreements. and in emergency situations (where there International experience illustrates two is no reasonable time to conduct a tender, general approaches: (a) provide no which may be a particular concern when it special rights for the grantor to relates to the delivery of public services). unilaterally amend or terminate, and so leave this to be determined by the parties A recent review of compliance of transition by agreement; or (b) provide the economies with international practices government with such special rights, but regarding concession legislation is summarized in Table 1 (EBRD 2004). Three countries showed a very high degree of compliance, 1 Re-build may include, for example, rehabilitation, namely Bulgaria, Kyrgyz Republic and modernization, refurbishing. Lithuania. LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 5 Table 1. Level of Compliance/Conformity with International Practices regarding Concession Legislation: Case of Transition Countries with and without Concession Law. Very High High Compliance/ Medium Low Compliance/ Very Low Compliance/ Largely Conforms Compliance/ Partly Conforms Compliance/ Fully Conforms Generally Does Not Conform Conforms Bulgaria Ukraine Hungary Belarus Slovak Republic Kyrgyz Republic Croatia Moldova Serbia and Armenia Montenegro Lithuania Uzbekistan Romania Bosnia and Czech Republic Herzegovina Slovenia Macedonia Latvia Russia Tajikistan Turkmenistan Kazakhstan Albania Estonia Georgia Azerbaijan Poland Source: EBRD. "Concession Assessment Project.” Cover Analysis Report, 2004. 5. UNSOLICITED PROPOSALS 2001). It is essential to eliminate or minimize the perception, as well as the reality, of Unsolicited proposals, which seem attractive to corruption in PPP programs so that such some governments in their wish to accelerate programs can best contribute to a country’s road or motorway construction in the country, economic development. tend to be so controversial (usually involving allegations of corruption), that in fact they may Some governments have adopted procedures take longer to negotiate than an open, to transform unsolicited proposals for private competitive tender procedure. In theory, infrastructure projects into competitively unsolicited proposals could generate beneficial tendered projects. Such countries include ideas; in practice, there have been a number Chile, the Republic of Korea, the Philippines, of unfavorable experiences, mostly as a result and South Africa (Hodges 2003). of exclusive negotiations behind closed doors (in a recent case, a contract signed between a 6. STEPS TO LAUNCH A PPP PROGRAM IN government and a private company included a HIGHWAYS clause that prohibits any leakage of the signed contract). A first step in launching a PPP program in highways in a country is to define the priority Several countries have adopted specific projects where the government envisages legislation to deal with such proposals, while soliciting private investors financing of the total some governments have simply forbidden or partial cost of the project. In the case of unsolicited proposals to reduce public sector Russia, for example, several high priority corruption and opportunistic behavior by projects for potential PPP in highways have private sector companies. The general been described, such as Moscow-St. experience with unsolicited proposals is often Petersburg motorway, outer Moscow ring road, negative, reflecting the fact that projects of Moscow-Minsk highway, access to this type have usually represented poor value Domodedovo airport, St. Petersburg Western for money, and were frequently incompatible High-speed Diameter Road, bridge on Volga with the actual development needs of the river at Volgograd. More details on the Russian countries, and their ability to pay. They also PPP program are provided by Eijbergen (2005). often lead to allegations of corruption. Other countries that have identified preliminary Corruption has been shown to be associated projects for PPP consideration include Latvia with the lack of adequate transport (for example, Riga-Jelgava motorway), infrastructure in a country, as well as low Lithuania (for example, RailBaltica), Estonia economic development (Queiroz and Visser (for example, fixed link to Saaremaa Island), LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 6 Albania (for example, Durres to Kukes http://siteresources.worldbank.org/INTPROCU highway), Ukraine (for example, Lviv- REMENT/Resources/Procurement-May- Krakovets and Vinnytsia-Kyiv highways). 2004.pdf Other steps to launch a PPP program would Steps in the selection process include: include (some of these steps can be done in parallel): a) Advertising. A notice requesting expressions of interest to prequalify a) Enact relevant legislation (for example, should be published in at least one concession and toll road laws); international newspaper and one of national circulation and should include the b) Carry out feasibility study of priority scheduled date for availability of projects. Employ reputable consultants, prequalification documents. using well prepared terms of reference (TOR). Identify/quantify social and b) Investor Feedback. Meeting with selected economic benefits; carry out financial potential investors/concessionaires to assessment to help check the potential for solicit feedback on the options being attracting private capital (for example, analyzed as well as on the key parameters relatively high overall financial rate of and assumptions underpinning the return and return on equity); conclusions of financial feasibility. c) Carry out environmental and social c) Public Information. Implement an assessment, including development of appropriate program to disseminate mitigation plan and land acquisition plan information to the public on the financing for the right of way; and construction of the proposed facility (or project). d) Assess the willingness of users to pay; review tolling / payment options (for d) Prequalification of Concessionaires. example, actual tolls, shadow tolls, Develop operational and financial criteria vignette system); to be used in judging the suitability of prospective bidders, and conduct a e) Define performance standard for the new transparent pre-qualification process. investment and the service standards Prequalification ensures that invitations to during the operation period. bid are extended only to those who have adequate capabilities and resources. 7. SELECTION OF THE STRATEGIC PRIVATE Prequalification shall be based entirely INVESTOR OR CONCESSIONAIRE upon the capability and resources of prospective bidders to perform the Open and transparent competitive bidding is particular contract satisfactorily, taking usually perceived as a prerequisite to ensuring into account their (a) experience and past the efficient allocation and use of scarce public performance on similar contracts, (b) resources. The World Bank Procurement capabilities with respect to personnel, Guidelines recommend the use of international equipment, and construction, and (c) competitive bidding (ICB) to select the financial position. All bidders that pass this concessionaire or entrepreneur under BOO stage are by definition qualified for the (Build, Own, Operate), BOT (Build, Operate, next phase. Transfer), BOOT (Build, Own, Operate, Transfer) or similar type of concessions for e) Inviting pre-qualified firms/consortiums to projects such as toll roads, tunnels, harbors, submit bids. Define the procedures for the bridges. The Guidelines state that the ICB pre-qualified bidders to carry out their procedures may include several stages in order own due diligence of the proposed project. to arrive at the optimal combination of In addition, a Data Room prepared by the evaluation criteria, such as the cost and Client should be made available to magnitude of the financing offered, the potential investors, to enable them to fully performance specifications of the facilities assess the investment opportunity. offered, the cost charged to the user, other income generated by the facility, and the f) Bidders' review and comments. In order period of the facility’s depreciation. The to minimize opportunities for post-bid Guidelines are available at: negotiations on substantive issues with the winning bidder, major transaction LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 7 documents (such as concession contract, 8. WORLD BANK PARTIAL RISK shareholders agreement) should be GUARANTEES circulated to the bidders for review and comments before bids are submitted. The The World Bank through its guarantee clear understanding to bidders should be instruments can help accelerate growth in that the period designated for review and transition countries by mobilizing larger providing comments will be their only amounts of private financing for infrastructure opportunity to influence the terms of the development and other projects of national bidding process. importance. g) Competitive Bidding Process. Once the By covering government performance risks structure of the transaction has been that the market is not able to absorb or approved, organize a competitive bidding mitigate, the World Bank’s guarantee mobilizes process to award the concession contract new sources of financing at reduced financing to a strategic investor. Steps in the costs and extended maturities, thereby bidding process include supervising the enabling commercial/private lenders to invest lawyers/engineers in the preparation of in projects in transition countries. Guarantees the tender documents, administering the can mitigate a variety of critical sovereign risks offering period for bidders due diligence, and effectively attract longer term commercial and preparing the bid procedures and financing in sectors such as power, water, selection criteria. transport, telecom, oil and gas, and mining. Guarantees can also enhance private sector h) Bid Evaluation. Evaluate the bids received interest in public private partnerships. based on the agreed, transparent selection criteria, and recommend award A website dedicated to World Bank guarantees to the best evaluated bidder is available at: i) Transaction Closure. The principal parties http://web.worldbank.org/WBSITE/EXTERNAL/ complete and execute the concession PROJECTS/EXTFININSTRUMENTS/EXTGUARAN contract, shareholders agreement and TEES/0,,contentMDK:20267847~hlPK:545970 other documents necessary for the ~menuPK:64143502~pagePK:64143534~piPK satisfactory closing of the transaction. :64143448~theSitePK:411474,00.html j) Public disclosure of the concession The World Bank operational policy regarding its agreement. By providing a further check guarantee program, OP 14.25, states that the on corruption, this can enhance the objective of a guarantee is to mobilize private legitimacy of private sector involvement. sector financing for development purposes. The World Bank may guarantee private loans International financial institutions (IFI) such as with or without an associated World Bank loan; the World Bank can cooperate and assist in all the World Bank does not guarantee equity of these steps. Forms of assistance may investments. The World Bank provides include: guarantees only to the extent necessary. The operational policy is available at: a) Technical assistance to all required processing stages, including establishing http://wbln0018.worldbank.org/institutional/m good regulatory capability; anuals/opmanual.nsf/toc1/A505EC4B4C9EB16 58525672C007D0976?OpenDocument b) In case the project requires government subsidies (for example, government Although guarantees may be structured in contribution to the construction cost), the different ways, there are two basic kinds. IFI could consider financing a part of such Partial credit guarantees cover debt service subsidies; defaults on a specified portion of a loan, normally for a public sector project. Partial risk c) The IFI could provide a partial risk guarantees cover debt service defaults on a guarantee (PRG) to support the selected loan, normally for a private sector project, concessionaire so it can borrow at lower when such defaults are caused by a interest rate and/or longer maturity. government's failure to meet its obligations LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 8 under project contracts to which it is a party. ¾ Encourage larger co-financing The nature and scope of government contractual undertakings that the World Bank The private sector benefits because it can: backs vary depending on specific project, sector, and country circumstances. The World ¾ Reduce risk of private transactions in Bank requires that the underlying contracts for emerging countries partial risk guarantees contain appropriate dispute resolution procedures; if there is a ¾ Mitigate risk that the private sector does dispute about the government's obligations, not control the World Bank's guarantee is triggered only after the government's liability has been ¾ Open new markets determined in accordance with such procedures. Both kinds of guarantees may ¾ Lower the cost of financing and extend cover scheduled interest as well as principal maturities payments on a loan. ¾ Improve project sustainability Both governments and the private sector benefit from a guarantee. Governments benefit because it can: The World Bank guarantee instruments have proved to be a powerful instrument in ¾ Catalyze private financing in infrastructure catalyzing private financing to frontier markets. Twenty two guarantees with about US$ 1.4 billion exposure to the World Bank ¾ Facilitate privatizations and public private have achieved a remarkable leverage by partnerships catalyzing more than US$ 12 billion of private resources for projects worth US$ 24 billion ¾ Reduce government risk exposure by (see examples in Figure 1). Each dollar of passing commercial risk to the private guarantee financing has leveraged close to 5 sector dollars of private finance. They have been mostly used so far for energy projects, but ¾ Improve impact of private sector they should be equally useful for toll road participation on tariffs projects too. Figure 1. Examples Of Guarantees’ Leverage in Catalyzing Private Resources. Vietnam Phu M y 2-2 Bangladesh Haripur Colombia PBG Argentina Cote d'Ivoire Power Thailand EGAT M orocco Jorf Lasfar Lebanon Power Pakistan Uch Guaranteed Amount China Ertan Private Capital M obilized Jordan Telecom China Zheijiang Pakistan Philippines Leyte China Yangzhou 0 500 1000 150 2000 US$ M illion LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 9 Partial risk guarantees are particularly relevant build-own-operate (BOO) contracts and, the in the context of seeking more private most common form, build-operate-transfer involvement in the financing of road (BOT). Partial risk guarantees are appropriate infrastructure. Such guarantees cover specific for enhancing a project’s limited recourse government obligations spelled out in support project financing, the most common method of agreements with the project entity. Examples financing concessions for transport of such agreements include concession infrastructure. Figure 2 provides an illustration agreements, implementation agreements, of how a partial risk guarantee can apply to a build-own-operate-transfer (BOOT) contracts, highway concession contract (Queiroz 1999). Figure 2. Structure of a Highway Concession Contract and World Bank Guarantee. Government Indemnity WB Obligations: Agreement World Guarantee Commercial • Toll rate Bank • Permits/consents Lenders • Forex • Change in law • Political events Concession Loans Concessionaire • Termination Project company obligations: Construct and operate highway; maintain and rehabilitate to keep up quality 9. GREENFIELD AND ROAD MAINTENANCE (RM/R/O concessions) an existing road or road CONCESSION PROGRAMS links. Each concession can include individual links or a set of links in a given area of the country (i.e., area-wide concessions). Greenfield PPP projects include investment in new construction, usually on a new alignment, The steps in the process of launching a road by the concessionaire, while in road concession program include preparation of all maintenance/rehabilitation/operation (RM/R/O) the relevant concession documents, technical, concessions the concessionaire agrees to financial and economic analysis, competitive assume responsibility for an existing road or selection of concessionaires, evaluation of part of a road network. Several concession proposals, as well as award of the concession options are available and each country should contract. When the main purpose of the select the most appropriate for its specific concessions is to obtain additional funds to needs. . Through the most common forms of those available in the budget for roads, or concession, a country can transfer to the release limited public funds for use on other private sector the responsibility to: (i) build, roads (for example, secondary and rural operate and transfer (BOT) back to the public roads), shadow-tolls (whereby payment to sector (at the end of the concession period) a concessionaires are made out of the budget, road facility (for example, a motorway, bridge, based on traffic volumes and classification) and tunnel), or (ii) maintain, rehabilitate, operate availability fees (whereby payment to concessionaires are made out of the budget, LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 10 based on lane availability) would not be ¾ In the absence of Government subsidies, feasible options, except insofar as they ceteris paribus, what would be the return postpone the budgetary burden. on equity (ROE)? Typically, under a greenfield concession, tolling ¾ While subsidies may be paid by the is used as a method of generating a cash flow Government during the construction sufficient to service a loan for part of the period, it recovers some of this payment investment and to cover operating costs, , through taxes during the operation period. while under a maintenance concession What would be the Government program, tolling is used to raise funds contribution to the proposed project that principally for operation . Tolling would lead to a financial balance for the recommendation must have regard to the government throughout the concession prevailing social conditions as well as the period? market response of travelers and freight shippers to tolls. Consideration should be given ¾ In the absence of Government subsidies, to the institutional options and regulatory ceteris paribus, what would be the arrangements with respect to public and required initial toll rate to yield a return public-private approaches to toll roads. on equity of 16 percent? All concessions require an institutional ¾ Assuming that an initial average toll rate structure, such as a dedicated unit (which of US$0.06 per vehicle-km is the highest could also run the competitive bidding process) acceptable by road users, an investment to monitor the private sector performance, cost of US$3 million per km (typical for a including compliance with the performance four-lane road on flat terrain), and an standards defined in the concession initial traffic volume (AADT) of 15,000 agreement. The concession contract and vehicles per day, what is the minimum public - private sector arrangements for a new concession life that would generate a investment concession and for a maintenance return on equity (ROE) likely to attract a concession may be different, but a country can private sector concessionaire (say an ROE pursue both types of concessions at the same of 15 percent or higher)? time. 10. WORLD BANK/PPIAF TOOLKIT FOR A recent update of the financial simulation tool PPP IN HIGHWAYS is particularly appropriate to answer questions such as the ones above. The Excel file with the The main objective of the Toolkit for PPP in updated Tool is available on the World Bank Highways is to provide policy makers from website at: economies in transition with some guidance in the design and implementation of a Public http://wbln0018.worldbank.org/ECA/Transport Private Partnership (PPP) in the highway .nsf/ECADocByLink/01C97A272081983D85256 sector. The Toolkit is structured under five FD20061ECB8?Opendocument headings (or modules) and is navigated through a series of tree diagrams under each 11. ECONOMIC FEASIBILITY OF PROJECTS of these headings. It also includes a library and interactive financial models. It is a multimedia product available on a CD ROM and from the While the Toolkit for PPP in Highways can World Bank's web site at: provide a useful assessment of the "financial" viability of a concession, the economic viability http://rru.worldbank.org/Documents/Toolkits/ of a project is an essential criterion to Highways/start.HTM determine whether it is beneficial for the country to proceed with a particular initiative. Using basic assumptions about a specific Three main questions require answering; motorway project, the financial simulation tool firstly, the project has to be beneficial to the of the Toolkit is helpful to answer key country in economic terms; secondly, the questions on the financial feasibility of the project has to be commercially viable; and project. For example, questions such as the thirdly, if a public contribution is necessary, ones below can be answered with minimum the provision of this contribution needs to be effort using the Toolkit: economically viable for the country. A very ¾ What is the internal financial rate of return useful tool for assessing the economic viability (IRR) of the project? LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 11 of a roads project is the Highway Development the concept of greenfield and road and Management (HDM-4) model. In using the maintenance concession programs, and the model, careful thought is required to ensure treatment of unsolicited proposals. The paper the correct specification of benefits and costs. also summarized potential applications of the HDM-4 has been frequently used for World Bank Toolkit for PPP in Highways as an prioritization/economic analysis of proposed instrument to help decision-makers and motorways. The World Road Association practitioners to define the best PPP approach (PIARC) coordinates the availability, support for a specific country. and training opportunities for HDM-4 users, and future research and development In many countries the private sector has been activities. PIARC maintains an HDM-4 involved in financing infrastructure through Information Center, which can be accessed at: concessions under a public-private partnership (PPP) program. PPP schemes, however, are http://www.piarc.org/en/projects/hdm4/ somewhat underutilized in transition economies, where the potential financing gaps More information on HDM-4 applications is are significant and growing, and there seems available on the University of Birmingham web to be an enormous potential for more private site at: sector involvement in the financing and operation of highway assets in these countries. http://civ-hrg.bham.ac.uk/isohdm/abouthdm4.htm The reasons for the low private financing of 12. CONCLUSIONS road infrastructure in transition economies include lack of appropriate legal framework, This paper discussed potential applications of economic and political instability and partial risk guarantees to assist countries in consequent high perception of risks, and transition to seek more private involvement in relatively low traffic volumes. As new the financing of road infrastructure. It also legislation is enacted (Russia, for example, presented a review of the required legal passed a new concession law in mid 2005), framework (for example, concession law) for institutions and economic growth become more attracting private capital for PPP schemes, sustainable (the Baltic states, as an example, possible steps for a country to launch a have grown steadily over the last several program of private participation in highways, years), and traffic increases on key roads and corridors, it seems fair to expect that the sector will become more attractive to private investors. LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 12 REFERENCES Amos, Paul. 2004. “Public and Private Sector Roles in the Supply of Transport Infrastructure and Services: Operational Guidance for World Bank Staff.” World Bank Transport Paper No. 1. Washington, D.C.: The World Bank. http://siteresources.worldbank.org/INTTRANSPORT/214578-1099319223335/20273720/tp-1_pp- roles.pdf EBRD. 2004. "Concession Assessment Project". Cover Analysis Report, European Bank for Reconstruction and Development. London. Eijbergen, Ben L.J. 2005. “Potential for Public Private Partnerships in the Provision of Transport Infrastructure and Services Within the Russian Federation.” World Bank, Draft Discussion Paper, January 2005. European Commission. 2003. “Guidelines for the Development of Successful Public-Private Partnerships.” Brussels. http://europa.eu.int/comm/regional_policy/sources/docgener/guides/ppp_en.pdf European Commission. 2004. “Resource Book on PPP Case Studies.” Brussels. http://europa.eu.int/comm/regional_policy/sources/docgener/guides/pppresourcebook.pdf Guasch, J. Luis. 2004. “Granting and Renegotiating Infrastructure Concessions – Doing It Right.” World Bank Institute Development Studies. Washington, D.C.: The World Bank. Harris, Clive. 2003. “Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy Lessons.” World Bank Working Paper No. 5. Washington, D.C.: The World Bank. Harris, C., Hodges, J., Schur M., and Shukla, P. 2003. “Infrastructure Projects: A Review of Canceled Private Projects” Public Policy for the Private Sector, Note No 252. Washington, D.C.: The World Bank http://rru.worldbank.org/Documents/PublicPolicyJournal/252Harri-010303.pdf Hodges, J. 2003. “Unsolicited Proposals - Competitive Solutions for Private Infrastructure” Public Policy for the Private Sector, Note No 258. Washington, D.C.: The World Bank http://rru.worldbank.org/Documents/PublicPolicyJournal/258Hodge-031103.pdf Hodges, J. 2003. “Unsolicited Proposals - The Issues for Private Infrastructure Projects” Public Policy for the Private Sector, Note No 257. Washington, D.C.: The World Bank http://rru.worldbank.org/Documents/PublicPolicyJournal/257Hodge-031103.pdf Kerf, Michel, et.al. 1998. “Concessions for Infrastructure: A Guide to Their Design and Award.” World Bank Technical Paper No. 399. World Bank, Washington, D.C. Queiroz, C. and Visser, A. 2001. "Corruption, Transport Infrastructure Stock and Economic Development." Infrastructure and Poverty Briefing for the World Bank Infrastructure Forum, CD-ROM. World Markets Research Centre Ltd. Washington, D.C.: The World Bank. Queiroz, Cesar. 1999. “Highway Concessions and World Bank Guarantees.” International Road Federation Regional Conference on European Transport and Roads. Lahti, Finland, 14-16 June 1999. Standard & Poor’s (S&P). 2002. “Traffic Risk in Start-Up Toll Facilities.” Transparency International. 2005. “Granting a Concession for the Trakia Motorway: Interim Report.” Sofia, Bulgaria. http://www.transparency-bg.org/?magic=0.5.71.2 UK HM Treasury. 2004. Value for Money Assessment Guide. London. http://www.hm-treasury.gov.uk/media/95C/76/95C76F05-BCDC-D4B3-15DFDC2502B56ADC.pdf LAUNCHING PUBLIC PRIVATE PARTNERSHIPS FOR HIGHWAYS IN TRANSITION ECONOMIES 13 World Bank and Public-Private Infrastructure Advisory Facility (PPIAF). 2003. “Toolkit for Public-Private Partnership (PPP) in Highways. http://rru.worldbank.org/Documents/Toolkits/Highways/start.HTM World Bank. 2004. “Reducing the 'Economic Distance' to Market: A Framework for the Development of the Transport System in South East Europe.” http://wbln0018.worldbank.org/ECA/Transport.nsf/ECADocByLink/BEF3FC761FF49D0785256FB20050 8860?Opendocument World Bank. 2004. “Guidelines: Procurement Under IBRD Loans and IDA Credits.” Washington, D.C. May 2004. http://siteresources.worldbank.org/INTPROCUREMENT/Resources/Procurement-May-2004.pdf