THE WORLD BANK GROUP WASHINGTON, D.C. TRANSPORT PAPERS TP-1 MAY 2004 Public and Private Sector Roles in the Supply of Transport Infrastructure and Services OPERATIONAL GUIDANCE FOR WORLD BANK STAFF Paul Amos TRANSPORT SECTOR BOARD © 2004 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/ ACKNOWLEDGEMENTS The author would like to thank the members of the Transport Sector Board, the Private Participation in Infrastructure Group, and numerous members of the World Bank's Transport Network for their helpful contributions to this Guidance Note. CONTENTS 1 INTRODUCTION.................................................................................................. 1 1.1 Purpose of Guidance Note...................................................................................................... 1 1.2 Diversity of Transport Sector................................................................................................. 1 1.3 Scope of Guidance Note ........................................................................................................ 2 2 ROLES, REFORM AND PUBLIC-PRIVATE OPTIONS............................................................ 2 2.1 Transport Services: Public or Private?.................................................................................... 2 2.2 Transport Infrastructure: Public or Private?............................................................................ 4 2.3 Cases Where Transport Infrastructure and Services are Integrated........................................ 5 2.4 PPP's in Transport Infrastructure ........................................................................................... 5 2.5 The Regulatory Framework.................................................................................................... 7 3 OPERATIONAL GUIDANCE ...................................................................................... 8 3.1 Introduction.......................................................................................................................... 8 3.2 Road Transport..................................................................................................................... 8 3.3 Maritime and Inland Waterway Transport............................................................................... 9 3.4 Air Transport....................................................................................................................... 10 3.5 Railway Transport............................................................................................................... 10 3.6 Urban (Fixed Track) Mass Rapid Transit............................................................................... 11 3.7 Instruments of World Bank Group Support........................................................................... 11 ENDNOTES.............................................................................................................13 Public and Private Sector Roles in the Supply of Transport Infrastructure and Services 1 INTRODUCTION waterway transport, air transport, mass rapid transport, railway transport, and many kinds of 1.1 Purpose of Guidance Note informal transport. They serve different freight and passenger transport needs and in different The Bank's Infrastructure Action Plan1 sets out ways. They are often combined by customers a series of measures to revitalize the Bank themselves or by specialist brokers (such as Group's infrastructure business and requires travel agents and freight forwarders) to the Bank to provide a broad menu of options produce a single door-to-door passenger trip or for public and private sector infrastructure freight movement. In responding to country service provision. There is a need for the Bank needs, the Bank Group's work may vary from a to explore and offer clients alternative focus on investment in a single mode and solutions in the ownership, financing and market, to national or regional strategies operation of transport infrastructure and involving transport and logistics as a whole. transport services. Implementing a particular While the context of the Bank's interventions approach successfully will often depend on will vary, some issues are common to all supportive sector policies and regulatory interventions: processes. q the Bank's goals of economic develop- This Guidance Note: ment, growth and poverty reduction: Bank interventions involving either public, q provides a framework for Bank Group private or both sectors need to maintain staff for identifying and assessing the or increase transport access and afforda- different models for public and private bility for the poor; roles in the transport sector; q "fiscal space" in the country concerned, in q highlights policy and regulatory issues terms of public sector debt capacity for which are important in judging the public infrastructure loans or the capacity suitability of different models; and to assume long-term revenue support obligations and other contingent liabilities q summarizes the range of instruments that may be created by Public Private available to the Bank Group to support Partnerships (PPP); particular models. q effective government policies to ensure The transport challenges facing developing safety and security in all transport countries are many and various. What may be systems, whether operated by the public an acceptable policy in one country may be or private sectors; and anathema in another for political, geographical or historical reasons. And what may work in q the importance of environmental and one institutional and market environment may other safeguards. not work in another. Bank staff should match solutions to the country context. Therefore, In addressing such a diverse sector, this this Guidance Note does not prescribe fixed Guidance Note draws a basic distinction solutions. It offers guidance in thinking about between: the options available and the factors that are important in judging between them. q transport services that serve the public or commercial customers directly, and 1.2 Diversity of Transport Sector q transport infrastructure that is used by Of all infrastructure sectors, the products and the transport service providers. markets of the transport industry are most varied. There are several distinct transport This distinction is reflected, for example, in the products: road transport, maritime and inland difference between road provision and road 2 Public and Private Sector Roles in the Supply of Transport Infrastructure and Services haulage, or between port infrastructure and Section 3 presents operational guidance in the stevedoring services. In practice, some of the context of specific modes of transport. It then entities involved in transport infrastructure and sets out the main Bank instruments available services coincide in one vertically integrated for deployment in public, private and PPP enterprise. Sometimes they are commonly projects. It shows how Bank Group owned but separately operated. Sometimes instruments can be combined to support they are both separately owned and operated. different public-private options. Part of the challenge of reform in transport is to sort out which of these models best suits 2 ROLES, REFORM AND PUBLIC-PRIVATE the circumstances; then, what the roles of OPTIONS public and private sectors should be. 2.1 Transport Services: Public or Transport services that are privately owned Private? and operated are widespread throughout developed and developing countries. By This section concerns the provision and contrast, privately-owned transport infrastruc- operation of those transport services which are ture (particularly transport networks) is separable from transport infrastructure; for exceptional. Publicly-owned transport infra- example, airlines, stevedores, shipping lines, structure, operated under concession by the barge companies, road haulage companies, private sector, is also relatively limited bus companies, freight forwarding and logistics compared to the sector as a whole. In companies, etc. For these services, the Bank developing countries in the ten years 1993- will normally favor private operation within 2002, three-quarters of all investment in competitive (or periodically contestable) private transport infrastructure projects in the markets and, where competitive pressures are Bank's Private Participation in Infrastructure limited, within an appropriate regulatory Project database2 took place in just six framework (Section 2.5). countries (Argentina, Brazil, Chile, China, Malaysia and Mexico). The State's dominance Government provision of transport services to in transport infrastructure provision may again the public has been found disappointing in be increasing. In 2002, the total investment in many countries. This may be for a number of private transport infrastructure projects in the reasons: database stood at USD 5.2 billion, about half the annual average over the last ten years of q contradictions in a government trying to USD 10.3 billion. be policy maker, regulator and operator at the same time; In accordance with the Infrastructure Action Plan, the Bank expects to play an increasing q confusion in trying to act commercially role in financing publicly-owned infrastructure while seeking social goals; in the transport sector. At the same time it has the instruments and the willingness to work q restrictions on management freedom across the range of forms of public, private and caused by public service norms and combined approaches to transport provision. procedures; for example, staffing levels and pay scales determined across sectors 1.3 Scope of Guidance Note rather than by business needs; In the remainder of this Note, Section 2 q constraints on financial autonomy and discusses the general issues about appropriate investment due to government budgeting public and private sector roles. It first processes; considers transport services, then transport infrastructure and the situations where these q competition for resources from the core are vertically integrated. It also identifies government functions of health, edu- forms of public private partnership (PPP). It cation, welfare, etc.; and suggests questions which Bank staff, as part of their project due diligence, should ask that will q where the activity creates surplus, cross- help them to judge whether PPP proposals are subsidization of other government activi- appropriate and likely to succeed. Finally it ties rather than re-investment in the stresses the importance of ensuring that profitable business. regulatory arrangements are appropriate. Public and Private Sector Roles in the Supply of Transport Infrastructure and Services 3 Behind many of these issues is the reality that discourage market entry by private companies governments have many policy objectives in who think they will not be able fairly to transport. These can include economic, finan- compete with a team owned by the referee. cial, social, environmental and numerous other These are not just theoretical constructs but objectives such as defense or national prestige. real impacts which have been frequently These objectives often conflict, some are diffi- observed in Bank experience. cult to measure, and their priority can alter day-to-day in response to political events. A Creation of "arm's length" between the policy government's inherent freedom to discern, functions of government and the commercial pursue and reconcile multiple and changeable functions of business management is, objectives is essential to the democratic therefore, central to transport services reform. process. But it can make it harder for govern- Privatization is usually the most effective form ments to run businesses well. of separation, with public interests protected by competition and/or independent regulatory Private businesses operating in competitive capacity, and specific intervention if necessary markets have more focused aims and to preserve access and affordability of services incentives. International experience suggests to the poor. Where public subsidy is necessary that technical efficiency (producing outputs at to enable the poor to enjoy a basic level of least cost) is more likely to be achieved by a service in line with poverty reduction policy, it private management responsible and account- is desirable for this to be explicit, rather than able for achieving a stable and measurable provided as generalized budget support to the commercial objective. Allocative efficiency service provider. Such subsidy mechanisms (producing outputs most closely meeting should be targeted, transparent and preferably market demands) is more likely to be achieved output based. in a competitive market where consumers are free to express their demands through market With sufficient commercial independence and choice and where prices tend towards good management, some publicly owned production costs. transport service companies will achieve standards of performance and sustainability to Direct government involvement in running attract Bank support. In judging such matters, transport companies can lessen both technical Bank staff should consider the record of the and allocative efficiency. In terms of technical incumbent state-owned services provider. A efficiency, the closer government is to framework for such assessment is summarized management, the more that decisions which in Table 1. If such an assessment gives serious affect technical efficiency (for example, staffing grounds for concern, then Bank financial or investment decisions) become influenced by support for such an entity may be justified in multiple and changeable political aims. More- the context of a credible reform program. At a over, as performance is politically influenced, it minimum, it should address the main is then difficult to hold managers commercially impediments to efficiency and financial accountable. So the incentives for technical sustainability within the public sector context. efficiency are further weakened. Allocative Alternatively (or additionally), it might seek by efficiency can be degraded too. Prices which stages to increase private sector participation. are set to reflect political aims rather than costs can lead to poor allocation of resources. Reform conditions attached to a specific Further, when government itself is a service investment loan should relate to matters within supplier, its financial interests can conflict with the ambit of responsibility of the main proposals for encouraging competition. The departmental counterpart and organizations efficiency benefits of contestable markets may that benefit from the loan. Individual projects then be foregone. should not carry wider sector policy conditions unless these are truly essential to the success State ownership can have such effects even of the investment itself. Particularly in middle when governments try not to intrude. The fact income countries, sector policies should usually of public ownership can, by itself, influence be addressed instead through the country enterprise managers to make political choices dialogue, analytic and advisory activities, and they think will satisfy their owners. It can also policy-based lending. 4 Public and Private Sector Roles in the Supply of Transport Infrastructure and Services Table 1: Judging the Economic Performance of State Transport Service Providers Performance Indicator Useful Analytic Methods/Questions Technical · benchmarking of labor and capital productivity against comparable state and Efficiency private operators; · existence of budget and business planning disciplines; · extent to which management/organization structure is commercially, rather than functionally, oriented; · quality of board/management (selection by merit, seniority or politics?). Allocative · benchmarking of service levels (coverage, frequency, reliability, customer Efficiency satisfaction, etc.) against comparable state and private operators; · record of delivering minimum levels of service (in line with specified policies for equitable access); · evidence of monopolistic practices in price-setting; · record of innovation as opposed to standard repetitive service; · absence of competitive neutrality vis a vis private competitors and evidence of stifled competition. Financial · benchmarking of working and operating ratio, and return on capital employed Performance against comparable state and private operators; · existence of line of business activity reporting where appropriate; · rationality of pricing policies, level and structure; · long-term trends in real revenue and cost per traffic unit; · adequacy of capital resources, rigor of investment selection and capital budgeting procedures. 2.2 Transport Infrastructure: Public or often not attractive to private investors Private? without some public funding or public risk-taking, or government policy guaran- By comparison with transport services, the tees; arguments for either public or private provision of transport infrastructure are less clear-cut. q where transport infrastructure costs are The concerns about the impacts of state- not recovered directly, there are distri- ownership on efficiency described in Section butive consequences which may be 2.1 also apply to infrastructure. But other politically significant (such consequences issues can arise which may counterbalance should be assessed as these usually tend these concerns, for example: to favor the non-poor); and q whereas most transport services can q transport infrastructure sometimes beneficially be made competitive or involves major planning, environmental, contestable, much transport infrastructure safety or social issues, which some either has attributes of natural monopoly governments (rightly or wrongly) believe (such as rail and waterway networks) or, warrants the level of public control that by virtue of locational advantage, creates ownership can provide. significant market power for those who control the prime site (this is the case for In many countries such concerns have many ports or airports); reinforced a deeply held perception of transport infrastructure as a part of the public q in some cases, such as roads, it is more estate which should be provided for the difficult to recover infrastructure cost common good, and not as a business for directly from user charges than it is to commercial gain. But, whether based on a charge for transport services (though in reasoned policy trade-off or founded on this many cases such as ports, airports, more intuitive cultural perception, it is the case airspace, etc., the infrastructure can be a that the public sector (including national and strong foreign exchange earner); local government) owns and operates most of the basic transport infrastructure in most parts q its financial returns are often very long- of the world. This includes nearly all roads, term and, therefore, risky. These risks are inland waterways, navigable airspace and Public and Private Sector Roles in the Supply of Transport Infrastructure and Services 5 shipping channels, most of the basic port and There is a prima facie case for vertical airport infrastructure, metro and tram separation where (a) the infrastructure networks, and nearly all railway infrastructure component may be viewed as a natural in four out of five continents (the American monopoly because of economies of scale continent being the exception). However, the and/or scope in its use; but (b) the services private sector is widely involved as designers component does not exhibit such economies and contractors, for both construction and and may be made competitive or periodically maintenance, in all these activities. contestable. In countries that are reluctant to privatize basic infrastructure, such separation Public ownership and operation of transport may also be a more acceptable model for infrastructure is, therefore, a common and introducing at least some private involvement legitimate policy choice. However, if chosen, (through the services side). Such benefits have the state-owned infrastructure providers been gained in many countries in the past by should be subject to similar tests of efficiency the separation of stevedoring from port and sustainability as state-owned transport infrastructure and of national airlines from service enterprises. Separation of enterprise their primary airports. In these cases both management from government policy functions private participation and competition in is similarly important. Therefore, where the transport services can be facilitated by State is the owner, the Bank usually favors the separation. corporatization and commercialization of government agencies responsible for transport In the case of railways and mass transit infrastructure provision. It also encourages the (metros and tram systems) the situation is competitive procurement of capital invest- more complex. The technological and economic ments and operating resources where interface between the infrastructure and the practicable, which may include facilities vehicles that use it is complex. When management services. This contrasts with separated, the management of this interface traditional models in which transport infra- can be difficult and/or costly. Moreover, the structure was often built, managed and ability to sustain significant "on-track" maintained by government departments and, competition on passenger railways may not be therefore, subject to many of the same risks to so evident, though periodic contestability of efficiency outlined for transport services in concessions and franchises can be introduced. Section 2.1. To make public infrastructure There is as yet no persuasive evidence (from companies effective normally requires that the few countries where it has been imple- they have a dedicated source of income from mented) that the economic advantages of user charges, and that any budgetary vertical separation of rail infrastructure from contributions are determined by an explicit rail operations will always offset the technical long-term financial agreement (with disadvantages. The Bank remains open-minded appropriate efficiency incentives) between the on this issue and is prepared to work with both enterprise and its owner government. kinds of railway structure, depending on the circumstances and the commitment of If a government decides to pursue a policy of operators and government to efficiency and increased private participation in transport sustainability. infrastructure there are favorable areas of transport infrastructure for full private 2.4 PPP's in Transport Infrastructure ownership or for PPPs. PPPs are discussed specifically in Section 2.4. Private and PPP There are a number of different models of approaches are discussed in relation to specific private sector participation in transport modes in Section 3. infrastructure; IFC has been involved in financing such approaches for many years. The 2.3 Cases Where Transport main forms are summarized in the Bank's Infrastructure and Services are Criteria and Terminology of the Private Integrated. Participation in Infrastructure Project database (Appendix 1).3 Four of these forms can be Transport infrastructure and transport services characterized as public-private partnerships in are sometimes provided in one vertically cases where they share risks between the integrated operation. When such integration public and private sectors. These are manage- extends a natural infrastructure monopoly into ment contracts, lease contracts, concessions a transport services supply market, the need for existing transport infrastructure, and for such integration should be questioned. concessions for new "greenfield" transport infrastructure. 6 Public and Private Sector Roles in the Supply of Transport Infrastructure and Services In all cases, the arrangement must be budgetary impact, either actual and/or financially attractive to the private sector to be contingent. viable. But the degree of risk transfer to the private sector tends to increase progressively Practicality: Significant increases in private through these categories. As risk increases, participation in transport projects can generally the cost of debt and equity to the private only occur when there is a strong policy sponsors will increase; the projected returns commitment to private approaches across a then need to be higher if the PPP is to be range of government functions and a defined financeable. Public sector risk often remains administrative process for handling PPP project substantial in transport concession agreements proposals. For most major transport projects to facilitate the transaction at acceptable cost. PPP financing requires a sophisticated legal The public sector risks are sometimes enabling and enforcement environment. It also expressed through full or partial revenue needs skilled legal and financial advisors and, guarantees but there are many other types therefore, often involves high transaction and gradations of risk-sharing which can differ costs. Not all sponsoring ministries have by project. This section considers in particular sufficient capacity to implement, or to manage how Bank staff should judge the appropriate- implementation by specialist advisers. ness for Bank Group support of those PPP Ministries need patience and staying power to concessions which involve significant levels of drive the process over what might be several public sector cost and risk. It is important that years preparation, and need an ongoing standards for judging PPPs are not inclined capability to ensure the agreement is properly against them compared to conventional public monitored. A PPP also requires a willing private procurement, but any complex mix of public partner. It is prudent to do some early market and private interests poses some specific tests to establish whether there will be issues which need to be considered: significant private sector interest by credible participants. Up-front market fears of a tainted q What are the objectives of the PPP? selection process, or of weak regulation or of an inability to enforce concession agreements, q What are the chances that a PPP can are danger signals which suggest that the actually be implemented? institutional environment needs strengthening before PPPs can be successful. q Is the PPP approach likely to provide best value for money? Value for money: PPP proposals should be expected to provide equivalent or better value Project Objectives: As emphasized in Section for money than a public sector project 1.2, PPP projects need to meet the same approach. It is necessary to develop a public criteria as fully public ones to qualify for Bank sector "base case" (or comparator situation), Group support. They should maintain or and against this to assess the incremental net improve transport access and affordability to benefits that may be obtained by the PPP. the poor. They must meet the Bank Benefits may accrue from earlier environmental and other safeguards. They implementation (particularly if government is should be economically justified. Government fiscally constrained), lower whole life costs and entities sometimes propose PPPs with no clear possibly better service. It is important to make reason for doing so other than to deliver this assessment against an appropriate politically high-profile but uneconomic projects distribution of risks. If too little risk is at no cost to the budget. Or they have aims transferred to the private sector, the likely which are clear but wholly unrealistic, involving costs to government will be correspondingly the private sector assuming high risks for low higher. At the other extreme, if inappropriate rewards. Such projects are usually doomed, risks are transferred that the private sector but it can still be costly in time, money and cannot realistically manage or well quantify, government credibility to get to the point of the financing costs will escalate, again failure. Alternatively, such projects may be increasing the costs relative to the comparator. saved only by the gradual accretion to Where business assumptions seem optimistic, government of all the risks they had hoped to staff should also take a realistic view of the transfer. This defeats the main purposes of a contingent costs to government of possible re- PPP. Properly structured private involvement negotiation at some stage in favor of the should deliver risk transfer and efficiency concessionaire. About half of all concessions benefits. But a PPP can never turn a poor become subject to re-negotiation, often due to investment into a good one. And all PPPs by inflated demand or yield estimations, or their nature will involve some long-term unrealistic operating cost assumptions. Public and Private Sector Roles in the Supply of Transport Infrastructure and Services 7 Table 2 summarizes some factors that might of the "practicality" screening factors, the suggest to Bank Group staff that a PPP chances of successful implementation are low approach involving significant public cost and and of wasted effort high. The third level is risk would be appropriate for Bank support. most complex: detailed financial due diligence There are three suggested levels of screening. by Bank staff will usually only be justifiedwhen The first is in regard to basic objectives and PPP proposals can be pre-qualified at the first these are necessary conditions for proceeding. two levels of screening. Indeed, value for The second level screening is a more practical money can only be finally assessed when one: if the proposed project fails to meet most priced proposals are actually available. Table 2: Due Diligence Factors for PPP Transport Infrastructure Proposals Screening 1: Project Objectives · Project meets overall tests of economic value · Government has clearly articulated aims for deploying private sector skills and capital · Planned risk allocation realistically reflects ability to bear risk · Access and affordability of services to the poor maintained or increased · Project meets Bank environmental and other safeguards Screening 2: Practicality · Adequate enabling legal and compliance environment · Government willing to cede appropriate commercial controls to private sector to achieve project objectives · Credibility of cost recovery proposals through user fees/ budget contributions · Strong administrative capacity by promoting ministries · Government willingness to accept and recruit experienced advisors · Record of successful PPP's in the country in other sectors · Record of successful PPP's in the sector in other countries · Expectation of continuing commitment through changes of government · Record of fair and transparent procurement · Existence of or credible plans for regulatory arrangements which will be adequate to protect the parties in their delivery of proposed objectives (see 2.5) · Strong early private sector interest including likelihood of financing at acceptable risk premiums Screening 3: Value for Money · Net benefit compared to public sector approach · Proposals are financially sustainable taking account of sensitivity to assumptions (and possibility of renegotiation where sensitivity to aggressive market or cost assumptions is high) · Impact on government capital expenditure and long-term operating expenditure is realistic and sustainable, allowing for contingent liabilities. 2.5 The Regulatory Framework as is usually the case in road haulage), market forces will normally be preferred to economic The economic regulations which govern regulation. Examples of transport sector transport are important in situations where (a) regulation can be found elsewhere.4 the transport infrastructure or service involved is a natural monopoly (such as a railway Where the establishment of a regulatory entity network or a major city airport), and/or (b) can be justified on public interest grounds, the where it confers significant market power (for Bank Group favors independent regulation example. a time-bound exclusive operating rather than regulation by a government concession for bus services, or for providing all department. This is an especially important stevedoring services at a particular port); aim in markets where government is a player and/or (c) when the rights and obligations in an industry, either by virtue of ownership of contained within a PPP agreement rely on one of the participants (for example, by regulatory interpretation. These conditions do owning a shipping company or airline) or not always apply, particularly in the supply of because it is a customer (for example, as a transport services. In cases where there is contract purchaser of public transport reasonable competition in supply (for example, services). Fully independent regulation is not 8 Public and Private Sector Roles in the Supply of Transport Infrastructure and Services always achievable in the short-term, but it arrangements can provide a remedy to the should be an explicit objective and be reflected parties in the event of dispute. in the way that service is regulated from the outset. Safety regulation is not the subject of this Guidance Note, but is essential for transport Vague proposals to appoint a regulator should operations. An efficient safety regime, never be accepted simply as a token solution encompassing both the infrastructure operator to make private participation politically and service provider, should underpin any acceptable. Even where independent regulation balance of public and private roles. There is no is established, experience suggests it can be intrinsic reason for preferring either public or ineffective, captured or subverted by special private transport operations on safety grounds. interest groups, including government. The But economic regulation, introduced alongside details of the proposed regulatory structure private sector approaches, should be should be fully analyzed, namely: structured in a way which will not reduce safety incentives nor inadvertently create q its real independence from special safety disincentives. In some cases, such as air interests of any of the parties to the transport, safety and other regulation may be regulation, including any government- most efficiently organized on a regional basis. owned participants in the industry; 3 OPERATIONAL GUIDANCE q the effectiveness of its legal rights and obligations to meet its regulatory 3.1 Introduction objectives; and International experience in market economies q the skills and resources available to it to indicates some common patterns. Broadly, carry out its functions on a continuing private ownership of transport services has basis. In some countries resource been much higher than for transport constraints may suggest the desirability of infrastructure; it has been more common for a multi-sector regulator or the contracting freight transport than for passenger transport; out of some regulatory functions. it has been predominant in road haulage and freight forwarding, but in most parts of the When Bank Group projects depend on an world remains exceptional for railway services. effective regulatory framework, Bank staff International experience is one important should consider how to give support to factor in determining the range of acceptable governments to establish appropriate options. The Bank should also be ready to regulatory regimes. They should also try to advocate more radical options where the ensure availability of financing and skills for a enabling environment is supportive and clear minimum regulatory toolkit (including asset benefits can be anticipated. Without being valuation, regulatory accounting methods, overly prescriptive, the remainder of Section 3 efficiency measurement techniques, consulta- considers public and private roles within tion processes, etc.).5 Monitoring of regulatory different modes of transport and those which performance should thereafter be an important would be more likely to meet the Bank's part of the project monitoring. criteria for support. More detailed analysis of these sub-sectors with international examples, A recent World Bank Working Paper6 makes a is given in a series of sector toolkits and strong case for considering the merits, papers.7 8 9 10 specifically within PPP structures, of creating "regulatory contracts." These contracts set out 3.2 Road Transport the specific rights and obligations of the public and private parties, rather than relying on the Road Infrastructure. Construction, rehabili- interpretation of a regulatory body. Regulation tation and maintenance is expected to be by contract is typically used in the transport financed mainly by the public sector for the sector for specific projects rather than foreseeable future, with work executed under industry-wide regulation. Toll-road concessions competitively-bid contracts. The Bank supports and long-term ports and airport concessions the creation of independent Roads Boards to are often regulated by contract. A regulatory represent user groups in overseeing the road entity is not required if there is sufficient network. Construction and maintenance should confidence that contract law and arbitration be the responsibility of specialist Road Public and Private Sector Roles in the Supply of Transport Infrastructure and Services 9 Agencies rather than government depart- and how to regulate such services (if there is ments. The Bank sometimes endorses public any persuasive public interest case for enterprise style "Road Funds" to redress long- intervention) without stifling their entrepreneu- term under-funding of maintenance. These rial nature or reducing their affordability. should be supported by road users through appropriate charge mechanisms, and subject 3.3 Maritime and Inland Waterway to high governance standards with oversight Transport by the Roads Board. There continues to be scope for PPP approaches to deliver additional Navigation Infrastructure. Responsibility for capacity in the form of major highways, providing and maintaining common user bridges and tunnels. It is likely that multi-year, facilities, such as shipping channels, canal area-wide road maintenance contracts and navigation, navigation safety aids, is almost concessions will provide increasing opportuni- universally a public sector role. This is partly ties for the private sector. Intelligent Transport because of traditional concepts of "freedom of Systems (ITS) technologies, such as area-wide navigation" and partly because of the difficulty road pricing, are also possible candidates for of levying direct user fees. There have been PPP as technology risks may be partly defrayed very few PPPs in this area. Many functions to the private sector. (such as dredging, provision and maintenance of navigation aids) can be beneficially Road Haulage. International experience contracted out to private companies. Also, suggests that road freight services are best some stand-alone facilities, such as major new provided by the private sector in competitive ship-locks, may be privately supplied and costs markets. It is unlikely that the Bank would recovered through user fees. provide financial support for a state-owned road haulage company. However, the industry Port Infrastructure. Public ownership of port is poorly developed in many client countries infrastructure is common throughout the where there may be a case for enterprise world. For the larger public ports, the Bank development assistance to road freight favors a "landlord" model. In this model the operators, and to help build freight forwarding role of the public sector is as a corporatized capacity. and commercially run port landlord. The public sector landlord does not provide stevedoring Road Passenger Services. The Bank's services to shippers but is responsible for preferred model is the creation of competitive maintaining channels, wharves, utilities and or periodically contestable operations by common areas (such as internal roadways). private bus companies, with specific reim- Many of these functions, such as tug services, bursements or public service contracts to meet maintenance of wharves, etc., may themselves public service obligations. However, public be contracted out to the private sector. ownership remains widespread in some borrower countries. Support may be given for Private ownership of ports is also supported, those that have efficient and sustainable and competition between ports is beneficial business models, and/or in association with the where it can be sustained. When private implementation of credible reform plans investment is conditional upon exclusive rights, involving staged approaches to private then it is important that allocation of such participation in service delivery. rights is by a fair and transparent process and that an appropriate regulatory framework is Informal Services. These include pedestrians adopted. carrying goods, bicycles, country-boats, and small-motorized vehicles, with the latter Stevedoring Services. Within the "landlord increasing dramatically where incomes rise. A port" concept the stevedoring services would rich variety of small-scale transport operators be privately run. This can be achieved through exist in many developing countries, frequently a number of different leasing, concession or being more significant than formal providers ownership structures. If the traffic can sustain and providing major sources of low-income it, competition between stevedores is also employment. These modes often provide the desirable. The Bank does not rule out financial only viable low-cost means of local transport. support for existing public stevedoring services In the absence of developed capital markets, in ports that have proven efficient and the Bank Group may help support such sustainable business models; or as transitory activities through micro-finance initiatives. It arrangements leading to private participation may also have a role in advising on whether and, if possible, competition. At very small 10 Public and Private Sector Roles in the Supply of Transport Infrastructure and Services common user ports (such as river ports), the arrangements). This is true of both complete various activities may not be economically airports and key airport infrastructure facilities, separable and an integrated publicly-owned such as passenger and freight terminals. port may be an appropriate solution, possibly with a private management/maintenance Airport Services. The private sector is contract. preferred as supplier of airport services, such as baggage handling, catering, aircraft fuelling, Shipping/Barge Services. Sea and river car parks, etc. Private supply can be achieved transport services are usually best provided by through a number of different and well the private sector within competitive markets. developed management, leasing, concession or It is, therefore, unlikely that the Bank would ownership structures. However, for regional provide direct financial support for investments airports, the various activities may not be in state-owned shipping companies unless as economically separable from the landlord part of a privatization plan. There are specific functions. An integrated publicly-owned airport circumstances, such as road ferries, which are may then be an appropriate solution, possibly essentially part of an otherwise public road with a private management contract. network when the Bank might consider funding publicly-owned vessel services. However, even Airline And Airfreight Services. Airline (and in such cases, the trend is towards contracting general aviation) services are usually best services on the basis of competitive bidding. provided by the private sector within competitive markets. It is unlikely that the 3.4 Air Transport Bank would provide direct financial support for investments in state-owned commercial air- Air Navigation Infrastructure. The public lines, unless as part of a privatization plan. sector provides air navigation services in nearly all countries. Air navigation is a 3.5 Railway Transport geographic monopoly. However it is also an area in which there are well-developed and Railway Infrastructure. Railway infra- accepted systems for levying direct user air structure includes railway track, bridges, navigation charges. Revenue potential is often tunnels, marshalling yards, transformers and sufficient to make a PPP approach attractive, electrical catenary, telecommunications and but most countries have chosen not to do so train control systems. Most of the recent partly because of public concerns about safety. increases in private participation in rail While ANS services are likely to remain in the infrastructure has been through the public sector in most countries, there is a concessioning or privatization of vertically strong case for corporatization of ANS integrated, predominantly freight railways. The functions. This approach is supported by the Bank Group has supported a number of railway International Civil Aviation Organization privatizations of this type, and will continue so (ICAO). to do. Airport Infrastructure. Most major airports By contrast, most predominantly passenger in most countries are publicly owned and railways remain publicly-owned with budgetary operated, though private participation is support for both train operations and increasing. Governments have often been infrastructure investment. Typically they reluctant to privatize major airports for cannot be financially self-supporting either as strategic and/or regional monopoly reasons, public or private companies. In general, Bank and the minor ones because they are not support for such railways will be given where financially self-supporting. The Bank is unlikely they can efficiently fulfill an important social to support a more traditional departmentally and/or economic role which cannot easily be administered airport except as part of a replaced by other means. Financial support for transition to a more commercial model. a vertically integrated railway will often be in the context of sector reforms involving One approach is to corporatize within a corporatization and restructuring on business framework similar to a "landlord port" model, lines, with targeted and sustainable revenue with a state-owned company hosting a range support mechanisms. of different private "tenants." But airports can also provide good opportunities for PPPs have a promising role in railway infra- privatization or for long-term private structure in certain well defined conditions. this concessions (with appropriate regulatory is particularly so for separable or Public and Private Sector Roles in the Supply of Transport Infrastructure and Services 11 "greenfield" projects, such as dedicated high in middle-income countries. Where they can be speed lines, new freight lines, new railway economically justified, some form of private telecommunications systems, major station participation will normally be the preferred redevelopments, etc. It is much harder to graft approach, though heavy financial support is a PPP approach onto a specific infrastructure usually unavoidable and the fiscal capacity of project located on an already operating governments may be a major constraint. passenger railway. This involves complex interface risks involving train operations, 3.7 Instruments of World Bank Group engineering possessions, and financial and Support safety impact. Such risks may be difficult to allocate and manage. The World Bank Group has a range of general instruments that can be used to assist in the Train Operations. Most railways internation- development, improvement and sustainability ally remain vertically integrated, either within of transport infrastructure and services: the same company or within related divisions or companies under a holding structure. Fully q Policy Dialogue separated models (as in some countries of Europe and in Australia) have yet to prove a q Technical Assistance more efficient long-term approach. As noted in Section 2.3, the Bank is prepared to work with q IFC Investment Loans integrated and separated railway enterprises on financing infrastructure and rolling-stock q IBRD/IDA Investment Loans needs, depending on the commitment of q IBRD/IDA Program Loans operators and government to efficiency and sustainability. Moreover, the emergence in q MIGA Guarantees and Insurance Products recent years of a few independent international private train operating companies to supply q IDA/IBRD guarantees freight and regional passenger services is promising. It is drawing the private sector into These instruments are a means to the ends the industry and promoting some contestability summarized in Section 1.2, whether inter- of markets. ventions are in the public or private sectors or structured as PPPs. The instruments are 3.6 Urban (Fixed Track) Mass Rapid summarized in Table 3, with brief comments Transit on their application. The instruments are not mutually exclusive. For example, World Bank For both technical and economic reasons these and IFC loans, and MIGA guarantees could all systems, mainly metros, are in nearly all cases contribute to delivery of a single PPP project. vertically integrated. Most existing systems are In addition there are specific instruments, such publicly-owned and some are very well- as the Global Environment Facility, that give managed. But there are also examples of grants to projects that promote sustainable successful concessioning of metros and this urban transport, and can be used to support approach should be considered when an public or private approaches. incumbent public operator is failing. Financial support for rehabilitation, extension and re- Bank Group staff should take a broad view of equipment of MRT's can be considered both the spectrum of roles which the public and through public and PPP approaches, depending private sectors can legitimately play in the on circumstances. transport sector; equally, of the range of Bank Group instruments available to support policy Building new MRT systems is very complex and and investment options along that spectrum. very expensive. New MRT systems are rare in By so doing, the Bank Group will provide a poorer countries, but becoming more common better service to its clients. 12 Public and Private Sector Roles in the Supply of Transport Infrastructure and Services Table 3: Indicative Applications Of Main World Bank Group Instruments Public Transport Private Transport PPPs in Transport Infrastructure and Infrastructure and Infrastructure and/or Services Services Services Policy Insights into local problems and presentation of well-researched policy options for sector Dialogue and/or projects (public, private and PPP), and international experience with lessons learned. Technical Can be used to identify TA is not provided to PPPs typically impose Assistance and/or implement private companies, but heavy requirements for institutional, organizational, benchmarking studies of professional services that regulatory or business the private sector, and TA can help to fund, process reforms in post-privatization or subject to successful initial government enterprises; or concession performance screening (see Table 2). to move them towards can be useful to provide greater private participation. models for other governments considering such policies. IFC Loans IFC financial support could IFC loans can be made to IFC loans can be made to be given for a publicly any private company in the the successful private owned entity in the context transport sector (whether bidder in a PPP transport of pre-privatization equity. infrastructure or transport scheme. IFC could alternatively help operators). provide financing needs (including acquisition costs) of a private purchase of a State-owned entity. IBRD/IDA IBRD/IDA loans can be Loans can be made to IBRD/IDA loans can be Investment made for public sector government, or guaranteed made to the public sector Loans transport enterprises, either by government, for on- to meet a capital financial for investment, structural lending to small and commitment to a PPP reforms or transition costs medium private transport scheme. May complement such as labor force operators, for example, as an IFC loan as above. restructuring. part of a rural development project. IBRD/IDA Can be used by client Part of a program loan Policy/ subject to a program of could be used to support Program sector reforms which would the public sector financial Loans be inappropriate to commitment to a PPP. associate with a specific investment loan. MIGA MIGA is available to provide non-commercial risk Guarantees guarantees (Transfer and Inconvertibility, Expropriation, War and Civil Disturbance and Breach of Contract) to investors, including Contractors and Operations & Maintenance providers, as well as commercial banks. Breach of Contract coverage is of particular interest for PPPs as it guarantees the investor/lender against the non- honoring of sovereign or sub-sovereign obligations regarding the PPP project, including payment obligations. IBRD/IDA Partial risk and partial credit guarantees can cover debt or Guarantees cash flow to private investors for specified project risks related to areas of government responsibility or payment obligation or specified political risks. Subject to counter- guarantee from government. Public and Private Sector Roles in the Supply of Transport Infrastructure and Services 13 ENDNOTES 1. Infrastructure Action Plan. July 2003. Infrastructure Vice Presidency. World Bank, Washington, DC. 2. Private Participation in Infrastructure Project Database. World Bank, Washington, DC. http://rru.worldbank/org ppi/ 3. Criteria and Terminology of the Private Participation in Infrastructure Project Database (Appendix 1). World Bank, Washington, DC. 4. Estache, A. and G. de Rus, eds. 2000. Privatization and Regulation of Transport Infrastructure: WBI Development Studies. World Bank, Washington, DC. 5. Estache, A. 2003. Institutional Aspects of Infrastructure Regulation. Conference Paper, Berlin. 6. Bakovic, T., B. Tenenbaum, and F. Woolf. 2003. Regulation by Contract. Working Paper No 14. World Bank, Washington, DC. 7. Public-Private Options for Developing, Operating and Maintaining Highways: Toolkit for Policymakers. 2003. World Bank, Washington, DC. 8. Port Reform Toolkit. 2003. World Bank, Washington, DC. 9. Kopicki, R. and L. Thompson. 1995. Best Methods of Railway Restructuring and Privatization. World Bank, Washington, DC. 10. Gwilliam, K., L. Thompson and N. Shaw. 1996. Concessions in Transport. TWU-27. World Bank, Washington, DC.