PPP

International Best Practice and Regional Application

Tegucigalpa, Honduras
April 23 - 25, 2008

Sponsored by the Spanish Trust Fund

 Case Study
Session 5.1

Highways

Sabino Escobedo, TAG Financial Advisors

 Session 5.1
Day 2 – Session 6
Readiness of Government Day 1: Session 1.1
Upstream Private Overview of Day 1:Session 1.2
Policy Sector PPP Challenges:
Readiness View Capacity
of Building
Latin America
Government For PPP
Day
Day1-
1-Session
Session55 Day 1:Session 1.3
Day 2:Session 5 Considering
Case
Case Study:
Studies: PPP
PPP
Case
(1)Highways Study: Approach
Private
Approach
(2)WaterHighways
Participation
Highways
& Sanitation
(3) Ports
Day 1:Session 2.1
Planning the
Day 1:Session 3
Day 2 :Session 4.2 Process
Case Study:
Selecting an Transmission
Operator
Day 2 :Session 4.1 Day 1:Session 2.3 Day 1:Session 2.2
Standards, Involving Regulation
Tariffs, Subsidy, Stakeholders & Institutions
Financials
Session 5.1
PPP’s in the Transport Sector

• PPP’s in the Sector

• Case Studies
Developing Effective PPPs in
the Transport Sector

Main Objective:
Mobilize Private Capital and
Management into Transport
Infrastructure Development
Contents
 Transport Infrastructure Investment
 The Economics of Transport Infrastructure
 Fiscal Space (Public Investment)
 The Real Gap : Cost Recovery and Affordability
 Key Drivers of our clients demands

 Public Private Partnerships (PPPs)

 Leveraging Public Money
 Public Sector options for Infrastructure investment
 Risk Assessment and Risk Allocation

 Bank’s response to infrastructure finance needs

 The shift in development burden from central to local entities
 Performance based subsidies
 Innovative risk mitigation products

 Way Forward
The Economics of Transport
Infrastructure Investments
 Infrastructure investments are inherently “lumpy” (involve huge sunk costs
and create assets that are long-lived and location-specific).
 Creation of Infrastructure has economics both of scale and scope (i.e.,
minimum size of facilities, inelastic adjustment of capacity to demand, long
term project completion, etc.).
 Infrastructure supply systems contain elements of natural monopoly
(competition).
 Demand is wide spread (difficult to target).
 Revenues are usually in local currency (mismatch if foreign debt financing).
 Transport services have an essentiality component that raise legitimate
public policy concerns of affordability.

 However ………..
 Sound transport infrastructure allows countries to integrate to the global
economy and increases competitiveness (transport and telecom sectors
are the highest contributors to a country’s competitiveness) impacting
economic growth.
 Transport infrastructure development has a strong impact on
competitiveness, growth, poverty alleviation and MDGs.
Fiscal limits to increased public
investments in infrastructure
 Public Investments needs are sizeable in most countries but difficult to
quantify.
 Countries face important trade-offs between infrastructure spending and
other expenditure items (i.e., health and education).
 Little empirical evidence that reductions in public investments had an
adverse impact on growth.
 Countries with relatively high public debt burden have a limited scope for
increasing investment via public borrowing.
 Significant scope to improve the quality of infrastructure investment.
 Changes in fiscal accounting cannot create room for additional spending
for infrastructure.
 Most of the public enterprises in the pilots did not meet the “commercially
run” criteria.
 Effective PPPs is encourage as a way to bring in leveraging and efficiency
in infrastructure investment.
The Service Delivery Gap
The Service
 There is limited affordability in the provision of Delivery Gap
most of infrastructure services (when including the
costs of the required infrastructure facilities), Tariffs
specially when considering low income end-users.
Cost recovery
 Infrastructure services has strong characteristics
as a public good and creates major positive
externalities.

 Full cost recovery is only possible in some

situations (i.e., air transport). Most of the basic
public services have strong limitations to reach Affordability
full cost recovery even in developed markets
(mass transport systems).

Time
 There is a role for the provision of “smart”
subsidies to make possible the delivery of the
service.
Output
Output
BasedAid
Based Aid
Approaches
Approaches
Key Drivers for Client Demands
 Change in the risk profile of our client base:
• 80s : developed and developing countries
• 2000s forward:

 Middle Income Countries

 Transition Economies
 Post Conflict
 Failed States

 Need to fill the service delivery gap (full cost recovery not possible at
the required pace for market driven incentives to support investments)

 Fiscal Space for Public Investments will be limited at best (limited new
borrowing capacities to allocate to infrastructure development)
Leveraging Public Money
• Need to reconcile infrastructure development needs with criteria for fiscal
prudence.
• Need to mobilize additional private capital to match the gap if
infrastructure development is to keep its pace sustaining economic growth.
• Need to maximize private capital mobilization per unit of public sector
contribution (e.g., direct investment, subsidies, guarantees, etc.).
• Need to develop PPPs approaches as a procurement tool for better and
efficient allocation of scarce public sector resources (the concept of value for
money).
• Need to develop an adequate risk management framework to manage
contingent liabilities arising for public money support to PPPs development.
 PPPs : Spectrum of Options

Transport Infrastructure Provision of Transport

Facilities Services
PPPs in Transport

• Pure Public Option:

 Funded via ordinary revenues

 Funded via earmarked taxes (i.e., gas taxes for road network development)
 Funded via public debt financing (i.e., future tax payers)

• Public Private Partnerships Options:

 Funded via tolls or tariffs (i.e., full cost recovery basis)

 Funded via tolls or tariffs with initial co-investment contribution (e.g.,
Bridge Rosario-Victoria, Argentina)
 Funded via tolls or tariffs with minimum revenue guarantee (e.g., Motorway
Santiago-Valparaiso, Chile)
 Funded via tolls or tariffs with supplemental subsidies (e.g., BA metro
system)
 Funded via shadow tolls or subsidies (e.g., Portugal toll roads)
Public Sector Options for
Infrastructure Investments
SSA Toll Roads Case (1):
• Parameters:
– 40 KM toll road linking two important urban centers (existing
road under very poor conditions)
– Traffic Study : 70,000 vehicles per day
– Total Investment : $ 200 million
– Annual operating & maintenance costs: 5% of total investment
($ 10 million)
– SSA Credit Rating: B+
– If private options are considered:
• Debt : Equity ratio : 75%-25%
• Debt services conditions: 10 year @ 10%
• Equity expected rate of return: risk free rate + premium =
5%+11% (16%)
SSA Toll Roads Case (2):
• Required Annual Cash Flows (including remuneration to debt &
equity)

– Operating & Maintenance : $ 10 million

– Debt Service : $ 24 million
– Equity returns: $ 8 million
– Total = $ 42.4 needed in annual revenues ($ 3.52 million per
month assuming no seasonality

• Required Average tariff per vehicle

– $ 3.52 million / 70,000*30 = $ 1.68 per vehicle

SSA Toll Roads Case (3):
Scenario 1 : Willingness to pay = zero

(A) Pure Public Investment

Funded via tax payers (government budget) an/or
donors’ assistance
Performance risk is assumed by Government
Upfront investment of $ 200 million

(B) PPP via 100% shadow toll road equivalent to $ 1.68 per vehicle
Concession structured as an performance based scheme with shadow toll
paid by government budget allocations [tax payers] on the basis of
performance based criteria (i.e., maintenance and safety of road usage).
Shadow toll payments likely to need strong backstopped by MLAs and
Donors (e.g., guarantees, liquidity facilities)
Upfront investment by the PPP special purpose company.
SSA Toll Roads Case (4):
Scenario 2 : Willingness to pay = between zero and $ 1.68 per vehicle
($0.84 per vehicle)

(C) PPP via a collected toll fare ($0.84) plus a supplemental subsidy
($0.84).
Subsidy can be paid as a shadow toll or can be structured as a traffic
minimum revenue guarantee (defining a predetermined level of total
revenues). Performance risk is transfer to the private sector. No initial
disbursement by the public sector.

(D) PPP via a co-investment between the Public and Private sector. Size of
public co-investment will be equal to the difference between total
investment and the investment amount supported by the existing tariff
(i.e., $ 126.7). Performance risk is transfer to the private sector. Initial
disbursement by public sector.
SSA Toll Roads Case (5):
Scenario 3 : Willingness to pay = equivalent to required tariff ($ 1.68)

(E) PPP via a collected toll fare ($1.68)

Depending on the robustness of the traffic studies and the

willingness to pay [affordability] analysis, government and/or donors
might need to provide some type of support to the traffic revenue
scheme. Performance risk is transfer to the private sector
 PPP : Risk Assessment
Project Specific Risks Country (Economy wide) Risks

 Inflation, interest rate and exchange

 Completion Risk (engineering & rate fluctuations
construction cost / time cost control)  Political Risk (expropriation, political
 Operational Performance Risk violence, currency convertibility &
(technical & operational know-how) transfer)
 Environmental Risk (future liabilities,  Regulatory Risks.
Risks (Government’s
project delays, costs overruns) default on contractual obligations, i.e.,
 Credit Risk (project leverage) pricing formulas, right of way )
 Legal Environment (rule of law,
law i.e.,
judicial system, regulatory procedures
and arbitration)
Demand (traffic) Risk
Pricing Risk (regulated
and non-regulated)
Environmental (past
liabilities) Risk
PPP : Risk Allocation
 Principle : Risk should be allocated to those best able to manage them

 Allocating PPP Risk Guidelines:

 Allocate to the party best able to influence the risk factor (e.g., constructions
costs – completion risk).
 Allocate to the party that can best anticipate or respond to the risk factor
--influence impact or sensitivity of risk factor on project value (e.g., adapting size
of the facility to demand fluctuations)
 Allocate to the party best able to absorb the risk
 Natural hedges (correlation between risk factors and stakeholder assets and
liabilities)
 Access to markets offering derivatives and insurance
 Access to specialized financial institutions (IFIs, MLAs, Donors, etc.)
 Ability to spread the risk among other risk bearers (shareholders and taxpayers)
 Risk Aversion
 Toll Road Finance: Risk Mitigation
Non-Sovereign Sovereign

Completion Performance Environment Demand Political Risk Regulatory Macroecon

Risk Risk al Risk Risk Risk (inc. omic Risk
Risks Land
Acquisition
Risk)
Cost overruns Revenue Hidden Revenue Expropriation, Revenue Revenue
and delays. generation liabilities generation transfer, generation. generation.
Cash
Flow
and convertibility Tariff Devaluation
effect operational Cease of Adjustment; / inflation
costs increase revenue Right of Way, impact of
generation Termination cash flows
payment

Impact High Low Low High Low High High

EPC Contract Performance Environment Traffic Political Risk Concession Local
and based al Minimum Insurance Contract currency
performance contracts Assessment Revenue Partial Risk financing
Risk bonds Guarantees / Guarantees
Mitigation
Instrument VPN
Concession
Partial
Credit
Guarantees
Provider Private Private Private Private/ Private/ Public TBD
Public Public
 Developing Local Capital
Markets : Chile
• By the early 1990s, a sizable infrastructure gap had emerged in Chile, and significant investment was needed to
prevent transportation and other bottlenecks from becoming a major obstacle to future growth

• A challenge for the government was to close this gap while maintaining fiscal discipline that had placed
public debt on a rapidly declining path. The solution lay in promoting private sector involvement in the
provision of public infrastructure through public-private partnerships (PPPs). Chile thus embarked on an ambitious
concessions program in 1994, centered around a number of projects to develop the highway network.

• The concessions program in Chile covers 44 contracted projects with a total value of US$5.7 billion
(about 6¼ percent of 2004 GDP). These include: 8 projects to rehabilitate and upgrade the Route 5 highway
which runs the length of Chile, with financing from tolls (US$2 billion); 11 other highway projects for connecting
roads to Route 5 (US$1.3 billion); 10 airport projects (US$240 million); 6 urban road projects (US$1.8 billion); and
9 other projects (including prisons, public buildings, a reservoir, for US$360 million). Approximately 75% was
funded in the local capital markets via local currency infrastructure bonds.

• The government provides guarantees to concession operators. A minimum revenue guarantee is provided
for highway and airport concessions, under which concession firms are compensated when traffic or traffic
revenue falls below an annual threshold. In return for the minimum revenue guarantee, the concession firm enters
into a revenue sharing agreement in which it shares a percentage of revenue with the government once a
threshold is exceeded.
PPP and Risk Management
Framework
PPP
PPP Sector Teams Projects
Coordinating Entity
Ministryofof Coordinating Entity
Ministry (Minister or Council
PublicWorks
Public Works (Minister or Council MOF
of Ministers) MOF
Water of Ministers) RiskManagement
Management
Ministryofof Risk
Ministry
Energy
Energy
Roads

Ministryofof Electricity
Ministry
Communication
Communication Gas CentralPPP
Central PPPUnit
Unit Selection Criteria
Selection Criteria
Risk Exposure
Risk Exposure
Ministryofof Pricing
Ministry Airport Coordinating Role
Coordinating Role Pricing
Transport
Transport Monitoring
Procurement Rules Monitoring
Procurement Rules
Ports Screening Documentation
Ministryofof Screening Documentation
Ministry Monitoring
SOEs
SOEs Railways Monitoring
Communication
Communication
Local
Local
Sanitation
Governments
Governments Telecom
OtherPublic
Other Public
Institutions
Institutions Public Sector Support for PPP
(guarantees, subsidies, etc.)
Bank’s response to client demands
(PPPs support)
 Shift in development burden from central to local entities :
the challenge of financing sub-national entities (IFC
Municipal Fund, WBG scale up currently under
consideration)
 Use of performance based subsidies (OBA approaches)
 Innovative Risk Mitigation Products (new applications
partial risk guarantees)
 Public Financial Support for PPP’s development (risk
management framework)
 Infrastructure Finance Vehicles (guarantee funds)
 Infrastructure:
Developing Local Capital Markets
• There is no best substitute for foreign exchange risk mitigation than matching the currency revenue
generation with the currency of debt payment services (matching assets and liabilities).

• Financing transport facilities and services (local currency based) in the foreign debt markets adds substantial
risk to the structuring of adequate PPPs creating the need for additional public money support.

• Local institutional investors (I.e., pension funds, insurance companies, life annuities, etc.) have a natural
demand for long-term local currency debt instruments to match their liabilities.

• In most cases, local capital markets initiate their development via the creation of a sovereign bond market
(long-term yield curve). After the establishment of such market, investors develop a need to diversify the risk
profile of their investments and the return mix, providing the incentives for the development of a private bond
market, creating the opportunity for the introduction of infrastructure or utilities bonds (long-term annuities).

• It is in the government’s best interest to stimulate, via adequate securities regulation and institutional
investors overseeing, the development of local capital markets as a source of long-term local currency
funding for needed PPPs infrastructure projects.
Innovative Risk Mitigation Products
 Local Currency Debt Instruments
 Development of Local Capital Markets (e.g., Chile and Korea)
 IBRD (on-lending to private sector)
• Currency conversion option in fixed spread loans (FSL)
• Currency swap
• Rolling forward/1
 IFC Local Currency
• Loans and Hedging Products
• Partial Credit Guarantees (asset backed securities)

 Regulatory risk support

 Partial Risk Guarantee supporting transaction related regulatory framework
• Privatization of electricity utilities in Romania.
• Guarantee Facility for Peru PPPs infrastructure development (15 projects,
wholesaling PRGs)
• Nam Theun 2, PRG supporting LAO’s government commitments (IDA and MIGA
guarantees).
• Tariff Indexation Risk Transfer (supplemental subsidies)
Public Financial Support for
Infrastructure Development
When should governments offer support to
public private partnerships:
 Internalize externalities (e.g., sanitation)
 Redistributing resources (e.g., subsidize access to
services)
 Mitigate political and regulatory risks
 Closing the gap between cost recovery and affordability
 Market failure in financial markets (e.g., lack of depth for
local currency funding)
Public Financial Support for
Infrastructure Development (2)
Financing vehicles:
• Need to reconcile infrastructure investments needs with fiscal prudence.
• Ring-fenced government sponsored vehicles to limit amount of contingent
liabilities arising from public support to public-private partnerships projects (i.e., co-
investment, guarantees, subsidies, off-take contracts, etc.) and assist to improve
governance and transparency of the allocation of government contribution (risk
management).
• Funded by government’s contribution (tax payers) and donors-multilateral
interventions.
• Limited experience with government sponsored vehicles (I.e., infrastructure
funds, guarantee funds, etc. )
– Relatively unsuccessful experiences with state-owned development banks in
the 80s and 90s
– Keen interest by some of our larger clients (e.g., Russia, India, Indonesia, etc..)
 Way Forward
 Rebuild and adapt the PPI Model of the 90s on the basis of the lessons and experiences of the recent years and the immediate
needs to reach MDGs by 2015. Private sector still is a key driver to sustain infrastructure development and economic growth.

 Broader use of PPP schemes as a way to maximize public money leveraging for infrastructure development. Need to develop
adequate risk mitigation instruments to support public contribution to infrastructure projects. Options other than private
ownership of infrastructure assets are also effective to mobilize private capital and management into infrastructure development.

 MLAs and Donors direct engagement with sub-national entities (well run public utilities) without central government support to
assist them accessing private financial markets. Need to improve accountability and use of performance based incentives
(commercially run entities).

 Development of local capital markets (local currency debt instruments) as a mechanism for improving effective access to
infrastructure financing by PPPs.

 Increasing use of output based subsidies as a way to utilize better private sector resources via effective allocation of
performance risks (PPPs to deliver services to poorer communities).

 Build solid institutional capacities in the public sector to improve “good” infrastructure PPPs as well as the risk management of
contingent liabilities arising from PPP support . Development of specialized financing vehicles (public sector driven).
 Case Study
Session 5.1

THANK YOU!
Highways

Sabino Escobedo, TAG Financial Advisors

 Contacts

For comments or further details contact:

Junglim Hahm jhahm@worldbank.org

Richard Cabello rcabello@ifc.org
Sabino Escobedo sescobedo@tagfinancialadvisors.com
David Stiggers davidstiggers@comcast.net
 Case Study
Session 5.1

THANK YOU!
Highways

Sabino Escobedo, TAG Financial Advisors