44083 noTE no. 37 ­ May 2008GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Worldwide trends in private participation in roads Growing activity, growing government support Cesar Queiroz and Ada Karina Izaguirre P rivate participation in roads revived rapid growth of investment in transport (Torres de strongly in developing countries in Mästle and Izaguirre 2008). 2005­06. The activity was concentrated in greenfield projects and in Asia and Latin Driving policy makers' renewed interest in attract- America. The main reason for the revival has ing private financing to roads is the need for greater been the willingness of governments to provide investments to keep road networks in acceptable support needed to attract the private sector. condition and carry out required expansions in Nevertheless, governments need to be aware a context of public budget constraints. Indeed, of the potential risks of such support. And when arrangements for private participation or, because of the monopolistic features of road more generally, public-private partnership are projects, they also need to ensure good gover- designed well, they can lead to greater financial nance so that the public reaps the full benefits efficiency (by leveraging public money through of the private sector's involvement. the mobilization of private capital, reducing the impact of road investments on the fiscal budget, In the early 1990s a growing number of developing and creating fiscal space to expand public service countries introduced schemes of private participa- delivery in other sectors), better distribution of tion in roads, and by the mid-1990s the private risks (by transferring design, construction, and activity had reached levels not seen before, with performance risks to the private sector, which is 50­60 projects a year reaching financial closure best able to manage such risks), and better gover- and annual investment commitments of $10­12 nance (by increasing the accountability of the billion (figure 1).1 After that, private activity in service provider through competitive bidding, roads, as in other infrastructure sectors, declined disclosure policies, and public reporting). sharply as a result of the economic crises affect- ing many developing countries and the overall Drawing on the World Bank and PPIAF's Private pessimism surrounding private participation in Participation in Infrastructure (PPI) Project Data- infrastructure (Harris 2003). base, this note analyzes recent trends in road projects with private participation as well as their In 2005­06, however, private participation in policy implications. roads revived strongly. Investment commitments to projects with private participation (hereafter, investment) amounted to $10 billion in 2006, Cesar Queiroz is a road and transport infrastructure just 20 percent below the peak, while the number consultant, and Ada Karina Izaguirre an infrastructure of road projects was 60, around the 1997 peak. specialist, in the World Bank's Finance, Economics, and Indeed, roads have been among the most active Urban Development (FEU) Department. This note is a infrastructure subsectors; investment grew by product of the Private Participation in Infrastructure (PPI) more than 70 percent in 2005 and by another Project Database, a joint initiative of PPIAF and the FEU 50 percent in 2006, contributing strongly to the PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Department in the World Bank's Sustainable Development Vice Presidency. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY the second. The rest of this note uses the term FigurE 1 concessions as it is used in transport, since the A strong revival in private activity in roads contractual issues in the two cases are similar. Private participation in roads in developing countries, 1990­2006 Private activity concentrated 18 70 ) 15 60 new The activity remained highly concentrated by 12 50 billions pr country. The top 10 countries attracted 90 percent 40 oject commitments 9 of investment in 2001­06, just as in the 1990s. US$ 30 s 6 20 But the countries on the top 10 list have changed: (2006 3 10 only Brazil, Chile, China, Indonesia, Malaysia, investment 0 0 and Mexico made the list in both periods. Coun- 1990 1995 2000 2006 tries in the top 10 usually had programs promoting BOT contracts concessions private participation in roads through many proj- divestitures new projects ects. The strong recovery in 2005­06 was driven primarily by India and Indonesia. Source: World Bank and PPIAF, PPI Project Database. Note: BOT = build, operate, transfer. The average size of road projects with private participation has generally fluctuated between BOT contracts predominate $100 million and $400 million (figure 2). During the review period (1990­2006) the number of In 2001­06 build-operate-transfer (BOT) projects projects reaching financial closure peaked in 2006, accounted for almost two-thirds (62 percent) of at 60. That was just slightly more than the previ- the total investment in privately managed road ous peak of 59 projects in 1997. projects in developing countries, with $18 billion committed to 71 projects. In the 1990s they repre- More government support sented only 39 percent of the total investment. In the 1990s most road projects with private partic- BOT projects have usually been designed to ipation in developing countries had toll collection The private connect, or to relieve congestion in, big cities, as the only source of revenues. By contrast, in where demand is less uncertain. For BOT road 2001­06 at least a third of such projects had some activity in projects to be financially viable, network planning form of government support.2 roads was must be well developed to accurately forecast traf- fic. In addition, some sort of government support How a government contributes financial support concentrated may be required to keep tolls at affordable and to a concession project and how much it contrib- in East and sustainable levels. The toll road programs in utes are often limited to what is required to attract private financing and promote the success of the South Asia Mexico and Hungary in the 1990s, for example, failed to address these issues. But Mexico's new project. Among the mechanisms governments use and Latin program of public-private partnerships in roads, to support private financing are: America which started in 2006, does address them. · Shadow toll, paid to the concessionaire by the About a third of the investment in 2001­06 was government on the basis of the volume and committed to projects involving the expansion or composition of traffic and not charged to rehabilitation of existing roads--or concessions, motorists. This concept was created for design- in the terminology of the PPI Project Database. build-finance-operate roads in the United These projects entail lower capital costs per kilo- Kingdom and is also used in such countries as meter and allow more accurate traffic forecasting Finland and Portugal. Mexico has used shadow than new roads projects. Moreover, private inves- tolls in the contracts awarded in 2006. tors are usually allowed to start charging tolls after · Availability fee, paid to the concessionaire by the some initial rehabilitation works are completed, government on the basis of the availability of which improves the financial viability of projects. required capacity (number of lanes in accept- able condition), regardless of traffic volumes. An In roads as well as in other transport subsectors, inherent risk of such an approach is potential BOT contracts and concessions of existing assets overdesign of projects because payments to the are both called concessions, for "greenfield" proj- private sector are not linked to road use. India ects in the first case and for "brownfield" ones in has used availability payments (or annuities) Worldwide trends in private participation in roads like those offered through the World Bank guar- FigurE 2 antee facility. Much fluctuation in the average size of projects Average size of investment commitments to road The distribution of risks between the public and projects with private participation in developing countries, 1990­2006 private sectors varies with the form of public support. For both actual tolls and shadow tolls, ) 700 70 for example, the private investors assume demand 600 60 governments billions new (traffic volume) risk, but this risk is smaller under increasingly 500 50 shadow tolls because traffic volumes are not US$ pr 400 40 oject subject to the effect of toll rates. For availability (2006 300 30 s payments, demand risks remain with the public are providing size 200 20 sector, while the main risks assumed by the private support for 100 10 partner are construction risk and those associated average 0 0 with road performance during implementation of privately 1990 1995 2000 2006 the contract. managed road average size impact of projects of $1 billion or more new projects Estimating minimum toll rates projects Note: World Bank and PPIAF, PPI Project Database. Balancing the affordability and sustainability of projects with attractiveness to the private sector in some of its recently awarded road projects. usually requires estimating a minimum toll rate. Some countries have used availability payment All things being equal, this rate depends on the in combination with actual toll revenues. In construction cost and traffic volumes. As Queiroz Poland, for example, revenues for road conces- (2007) shows, estimating the minimum toll rate sionaires come from both tolls and availability required to attract private investors for motorway payments. In Peru the Interoceanic Highway projects is relatively easy. For example, if the initial contracts awarded in 2006 include periodic traffic volume is expected to be 20,000 vehicles payments from the government to complement a day, and the construction cost $4 million per toll revenues. kilometer, the minimum (weighted average per · Capital grants or subsidies, to cover part of the vehicle) toll rate to attract private sponsors would construction cost. Where toll revenues would be $0.09 per vehicle-kilometer, following some not be enough to recover the full construction basic economic and financial assumptions. Such cost of a project, reducing the privately financed calculations can be made using the financial simu- construction cost may make the project finan- lation tool from the PPIAF­World Bank Toolkit for cially attractive to the private sector. Colombia, Public-Private Partnerships in Highways (2002).3 India, and Mexico, for example, have offered capital grants since 2002. The grants were deter- That tolls are politically sensitive (though some- mined through the competitive bidding used to times less so than fuel taxes) is well known. select the concessionaires. A capital grant is also Indeed, in some countries tolls may not be viable. being considered for the St. Petersburg Western In cases such as these, shadow tolls or availability High-Speed Diameter motorway in the Russian payments could be considered as possible options. Federation, for which a concession is expected These alternatives to tolls can also be screened for to be awarded by late 2008. financial viability using the Toolkit for Public-Private · Minimum traffic or revenue guarantees, in which Partnerships in Highways. the government pays the concessionaire compensation if traffic or revenue falls below The need for good governance a specified minimum (for example, 90 percent of the expected traffic volume). In Spain, for Because road concessions have monopolistic example, the compensation is 50 percent of the features, good governance in managing them shortfall in revenues. Conversely, if revenues are is essential to ensure that the private sector's higher than forecast, the concessionaire shares involvement yields the maximum benefit for the the surplus with the government, also on a 50 public. Good governance in this case requires percent basis. competitively selecting the strategic private inves- tor, properly disclosing relevant information to Other forms of public support to private projects the public, and having a regulatory entity oversee also are available, such as partial risk guarantees the contractual agreements over the life of the concession. to peak levels in 2006. More than two centuries ago Adam Smith (1776) Driving this revival has been the rising demand wrote that "a high road, though entirely neglected, for transport infrastructure, driven in turn by does not become altogether impassable. The the strong economic growth in many developing proprietors of the tolls upon a high road, therefore, countries. In addition, the revival has been greatly might neglect altogether the repair of the road, and facilitated by the willingness of governments to yet continue to levy very nearly the same tolls." provide support to attract the private sector, such To avoid such situations, which might occur even as through capital grants, availability payments, today, many countries have established regulatory and guarantees. Nevertheless, governments need agencies that monitor the performance of roads to be aware of the potential costs and risks of such under concession. support (such as contingency liability). Road concession contracts typically include Moreover, the monopolistic features of road required standards for construction, operation, concessions mean that good governance is essen- maintenance, and toll collection. For monitor- tial, to ensure that the private sector's involvement ing the quality of the road during the life of the brings the maximum benefits to the public. Here, concession, several indicators of condition are good governance requires competitive selection of usual, such as roughness, skid resistance, lumi- the strategic private investor, regulatory oversight nescence of pavement markings, and the presence of the contractual agreements, and proper disclo- and condition of signs, lighting, and other safety sure of relevant information to the public. features. Performance on these indicators that falls outside the boundaries of acceptability may lead Notes to penalties for the concessionaire. 1. Investment data are in real terms (2006 U.S. dollars adjusted using the U.S. consumer price index). The data are from the While competitive selection of the private inves- Private Participation in Infrastructure (PPI) Project Database and include projects that reached financial closure in 1990­2006. tor or operator is usually the preferred approach, The investment data refer to commitments and include private sometimes private companies approach govern- and public contributions. They do not cover road maintenance ments with new project ideas, typically called contracts. For more information, see the Web site at http:// ppi.worldbank.org. "unsolicited proposals." Such proposals often 2. Government support to some road projects may have been become controversial if governments negotiate omitted as a result of lack of public information. the project rights directly with the original propo- 3. Information on actual toll rates in different countries is published nent without sufficient transparency or competing by the International Bridge, Tunnel and Turnpike Association proposals. To avoid those situations, some coun- (http://www.ibtta.org/). tries have developed effective systems to channel References unsolicited proposals into processes that incorpo- Harris, Clive. 2003. "Private Participation in Infrastructure in rate transparency and competition (Hodges and Developing Countries." Working Paper 5, World Bank Washington, Dellacha 2007). DC. Hodges, John, and Georgina Dellacha. 2007. "Unsolicited Infrastructure Proposals: How Some Countries Introduce Conclusion Competition and Transparency." Gridlines series, no. 19. PPIAF, Washington, DC. Developing countries now have a vast expe- PPIAF and World Bank. 2002. Toolkit for Public-Private Partnerships in Highways. Washington, DC: PPIAF. GRIDLINES rience with road concessions: 32 of them implemented 476 road projects with Queiroz, Cesar. 2007. "Public-Private Partnerships in Highways in Transition Economies: Recent Experience and Future Prospects." Gridlines share emerging knowledge private participation in 1990­2006. Transportation Research Record: Journal of the Transportation Research on public-private partnership and give an These projects, involving invest- Board, no. 1996: 34­40. overview of a wide selection of projects from ments of $104 billion, covered Smith, Adam. 1776. An Inquiry into the Nature and Causes of the various regions of the world. Past notes can be highway, bridge, and tunnel Wealth of Nations. Adam Smith Institute, 2001. found at www.ppiaf.org/gridlines. Gridlines are a facilities. Data show that after Torres de Mästle, Clemencia, and Ada Karina Izaguirre. 2008. publication of PPIAF (Public-Private Infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY "Recent Trends in Private Activity in Infrastructure: What the Shift Advisory Facility), a multidonor technical assistance a decline in the late 1990s, Away from Risk Means for Policy" Gridlines series, no. 31, PPIAF, facility. Through technical assistance and knowledge private participation in roads Washington, DC. dissemination PPIAF supports the efforts of policy revived in 2005 and returned makers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA infrastructure. The views are those of the authors and do PhONE (+1) 202 458 5588 FAX (+1) 202 522 7466 not necessarily reflect the views or the policy of PPIAF, PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY gENErAL EMAiLppiaf@ppiaf.org wEB www.ppiaf.org the World Bank, or any other affiliated organization.