43139 Public-Private Partnership Units Lessons for their Design and Use in Infrastructure THE WORLD BANK Public-Private Partnership Units 1818 H Street N.W. Washington, D.C. 20433, U.S.A. Tel: (202) 458-1876 Fax: (202) 522-1557/1560. Internet: www.worldbank.org E-mail: feedback@worldbank.org Printed in October 2007 This report is being published jointly by the World or accepts responsibility for any consequence of their Bank and the Public-Private Infrastructure Advisory use. The boundaries, colors, denominations, and other Facility IPPIAF). PPIAF is a multidonor technical assistance information shown on any map in this report do not facility aimed at helping developing countries improve imply on the part of PPIAF or the World Bank Group the quality of their infrastructure through private sector any judgment on the legal status of any territory or the involvement. For more information on the facility please endorsement or acceptance of such boundaries. see the website: www.ppiaf.org. 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Public-Private Partnership Units Lessons for their Design and Use in Infrastructure eassdt sustainable development department in east asia & pacific III The World Bank ~PPIAF PUBt.!C·PRIVATE INFRASTRUCTURE ADVISORY FACILITY Public-Private Partnership Units Contents Foreword vi Partnerships UK and Treasury 49 Taskforce, United Kingdom Acknowledgments vii Partnerships Victoria, Australia 51 Executive Summary 1 Public and Private Infrastructure 52 List of Acronyms 9 Investment Management Center 1 Introduction 11 (PIMAej, Republic of Korea Context for the Study 11 Conclusions from the Case Studies 54 Case Study Research 11 6 Generalizing the lessons Learned 61 Overview of the Paper 12 When PPP Units May Be Ineffective 61 2 Definitions 13 Lessons from Theory and Practice for 65 PPP Unit Design Definition of PPP 13 Where PPP Units Are Often Effective 68 Definition of a PPP Unit 20 Other Design Considerations 69 Definition of Success 21 Conclusion 71 3 Why Governments Enter into PPPs 23 The Wrong Reasons for PPP 23 Appendix: Case Studies The Right Reasons for PPP 23 1 Jamaica: National Investment 73 PPP Motivations for Developing Countries 24 Bank of Jamaica 4 Why Governments Create PPP Units 25 2 South Africa: National Treasury PPP Unit 78 Government Functions in PPP Procurement 26 3 Portugal: Parpublica PPP Unit 81 Government Failure 31 4 Infrastructure Investment Facilitation 84 Center, Bangladesh How Government Failures Determine 35 Unit Functions 5 UK Treasury PPP Unit and 86 Partnerships UK Alternatives for Addressing 36 Government Failure 6 Partnerships Victoria, Australia 88 5 PPP Unit Functions as Determinants 39 7 The Philippines BOT Centre 89 of Success 8 Public and Private Infrastructure 93 Infrastructure Investment Facilitation 39 Investment Management Center Center (IlFej, Bangladesh (PIMAej, Republic of Korea National Investment Bank of 41 Jamaica (NIBJ) Philippines Built Operate Transfer 43 (BOT) Center Parpublica PPP Unit, Portugal 46 South Africa Treasury PPP Unit 48 IV Contents Tables Boxes Table 1.1: PPP Units Studied in Detail 12 Box 2.1: Scope of PPP in the UK PFI 18 Program Table 2.1: Examples of Definitions of PPPs 14 Box 3.1: Objectives for PPPs in Victoria, 23 Table 4.1: Responsibilities of PPP Units 29 Australia throughout the PPP Ufe Cycle Box 4.1: Reasons for Creation of 32 Table 4.2: Alternatives to Addressing 37 Parpublica's PPP Unit Government Failure Box 4.2: Reasons for Creation of South 32 Table 5.1: Did PPP Units Achieve their 55 Africa's National Treasury PPP Unit Objectives Box 4.3: How PPP Units Ensure They Have 34 Table 5.2: Summary of Success or Failure 56 the Right Skills of PPP Units Table A.l: InFrastructure PPPs in Jamaica 74 Table A.2: Summary of PPP Activity 75 in Jamaica Table A.3: Summary of PPP Activity in 79 South AFrica Table A.4: Summary of PPP Activity in 84 Bangladesh Table A.5: Summary of PPP Activity in 91 the Philippines Figures Figure 2.1: A Broad Definition of PPPs 17 Figure 4.1: Government Functions, Failures, 25 and Roles of PPP Units Figure 4.2: Summary of Government 26 Functions with Respect to PPP Figure 5.1: Signed Deals and Capital 50 Value by Financial Year Figure 5.2: Correlation of Success with 59 Functions Figure 6.1: World Bank Government 61 Effectiveness Indicator Figure 6.2: World Bank Control of 63 Corruption Indicators Figure 6.3: location of PPP Units within 67 Government Figure A.l: Signed PPP Deals and Capital 88 v Value by Financial Year in the UK Foreword Specialized public-private partnership (PPP) units for More recently, consideration of such units in facilitating and managing infrastructure investments regions like Africa, East Asia, and South Asia has have existed for years in countries like the UK, the been driven by the increasing recognition of ramping Netherlands, the Czech Republic, Greece, Ireland, up infrastructure investment. While governments often and Italy. In 2003, the PPP Alliance, sponsored by seem eager to create such units, not everyone in the the UN Economic Council for Europe, issued good global PPP market place is convinced that these units governance guidelines for institutional arrangements add value. Potential private sponsors often argue established in support of PPPs, including the use of such that the solution to the problem of poorly structured, units. Other high income countries, such as Australia unsustainable PPP projects is to involve the private and Canada, also have established government sector in such deals as early as possible, to solicit institutions that support PPP development. their guidance on what is and is not a sustainable, Such units have recently begun to proliferate in the commercially viable project, before final decisions developing world. In some cases, PPP functions were are taken regarding project structure. Some sponsors simply added to the responsibilities of the centralized argue that the entire project development process privatization units that the World Bank and others be turned over to private companies, that trying to strongly encouraged developing countries to create use government units to develop projects just adds during the first wave of State Owned Enterprise another layer of bureaucracy that complicates and privatizations beginning in the late 1980s. Countries slows the process. like Zambia and the Cote d'ivoire were leaders in The objective of this report is therefore to determine creating privatization agencies with the necessary the nature of the contribution made by PPP units to powers, independence, resources, and reputation, "successful" PPPs, keeping in mind that such units considered by the Bank and others to be essential clearly are neither always necessary nor sufficient in managing successful privatization programs. In for the success of PPP programs. With an emphasis other cases, new units have been created to focus on replicability, this effort develops a conceptual only on PPPs. South Africa has created such a unit in framework, and drawing upon real world examples its National Treasury. (eight case studies), attempts to illustrate which of the many possible functions of such units correlate with successful PPP programs. ~~~ Jyoti Shukla Christian Delvoie Manager Director, Sustainable Development Dept. Public-Private Infrastructure East Asia and Pacific Region vi Acknowledgments This report originated as part of a joint initiative The report has benefited from advice from between the Public Private Infrastructure Advisory numerous reviewers, including Richard Cabello; Facility (PPIAF) and the East Asia and Pacific Arvind Gupta; Junglim Hahm; Clive Harris as peer Sustainable Development Department of the World reviewers; and Michel Kerf, Nasser Munji, Jyoti Bank. It was funded by PPIAF. Apurva Sanghi of Shukla, and Clemen cia Torres. Involvement of Michael the World Bank's East Asia and Pacific Sustainable Schur, especially in the early stages of this project, is Development Department led this project. The gratefully acknowledged. This report would not have consultant hired was Castalia. been published were it not for the invaluable efforts of Raj Raina during the publication process. Vice President James Adams Sector Director Christian Delvoie Team Leader Apurva Sanghi vii Executive Summary This paper seeks to answer the question of whether Center (Philippinesl, the National Treasury PPP Unit specialist public-private partnership (PPPl Units have (South Africa), the Private Infrastructure Management contributed to successful PPPs, and if so, under what Center and Private Infrastructure Investment Center conditions. It concludes that: (Korea), the National Investment Bank of Jamaica, and • Relatively successful PPP Units directly target Partnerships UK and the UK Treasury PPP taskforce. specific government failures present in their countries. Clear focus on the role of the Unit Context for the Study in responding to the failures of the existing The genesis of this paper is the recent enthusiasm government institutions is needed to promote a among donors and governments for establishing more appropriate institutional solution under the PPP Units-that is, units tasked with implementing or circumstances. advising on PPPs. Just in the past year, Albania, Egypt, Malawi, Mozambique (Maputo), Nigeria, Tanzania, • PPP Units with executive power tend to be more and Turkey moved to establish PPP Units. effective than those that are purely advisory. It is important, however, that the power be coupled While there may be good reasons for establishing with a mandate to promote and facilitate good PPP Units in each of these countries, the growing PPPs, or the Unit may simply wield a veto without popularity of these institutional structures is reminiscent adding value. ofa similar institutional trend in the 1990s: establishing • Ineffective governments tend to have ineffective independent infrastructure regulatory agencies . PPP Units. Where government agencies are During that decade, many policy makers, lenders, corrupt and uncoordinated it will be difficult for donors, and advisors sought to transplant models of a PPP Unit to escape the same fate. successful independent regulation from the UK and parts of the United States to developing countries, • Without high-level political support for the PPP with mixed results. Advisors are now becoming Program, a PPP Unit will most likely fail. aware that good regulation is not about following a • In parliamentary systems, effective PPP Units have one-size-fits-a/l"best practice" approach, but requires tended to be attached to treasury departments painstaking institutional design, proceeding from a (Ministries of Finance). This reflects the natural clear understanding of a country's needs, capacity, role of the treasury in coordinating government culture, and administrative traditions. Similarly, the key policies and expenditure, its mandate to manage conclusion of this study is that good implementation fiscal risk, and the power treasuries derives from of PPP programs-including the usefulness of PPP holding the purse strings of government. In a Units-is not about following a single "best practice" nonparliamentary system a PPP Unit may do best approach. if attached to a powerful coordinating agency. The World Bank and the Public Private Infrastructure These conclusions are drawn from a qualitative Advisory Facility (PPIAF) have commissioned this study assessment of 8 PPP Units around the world. The PPP because they hope to speed up the learning process Units studied were: Partnerships Victoria (Victoria, in the design of institutions to implement PPPs. The Australia), the Parpublica Ministry of Finance PPP Unit study aims to help developing country governments (Portugal), the Infrastructure Investment Facilitation and their advisors move beyond assumptions and Center (Bangladesh), the Built Operate Transfer (BOT) developed countries' models. The paper provides 1 Public-Private Partnership Units a template for identifying government failures, and Similarly, it adopts a fairly inclusive definition of considering in each country's specific context whether PPP Units, to include any organization designed to : a PPP Unit would best address those failures . • Promote or improve PPPs. A PPP Unit may This paper defines a PPP as an agreement between manage the number and quality of PPPs by a government and a private firm under which the trying to attract more PPPs, or trying to ensure private firm delivers an asset, a service, or both, in that the PPPs meet specific quality criteria such return for payments contingent to some extent on the as affordability, value-for-money (VfMJ, and long-term quality or other characteristics of outputs appropriate risk transfer. delivered . It uses a broad definition of PPP because • Have a lasting mandate to manage multiple of the different goals of each country's PPP strategy. PPP transactions, often in multiple sectors. As shown in Figure 1, this definition may range from This distinguishes the PPP Units studied from management or service contracts to privatization, PPP teams working within a single ministry, or depending on each country's circumstances and committees assembled to work only on specific objectives for PPPs . transactions. Figure 1 Definilion o f PPPs ~"'Cl < c ... III _III III Privatization - Regulated 1------1 Concession "'C "'C "'C "'C ... III " " 0 III - C. 0 III ... 0 III III C III ~ :::l ;:;: Tram and Train Contracts (VIC) o· :::l 1 Jamuna Bridge (Bangladesh) Johannesburg Water (South Africa) Hotels (Jamaica) " c ... 1 III " c !2: (i' 2 Executive Summary A successful PPP Unit is defined as "a PPP Unit budget than with any real risk-transfer, innovation, that contributed to the implementation of a successful or efficiency gain. This is the wrong reason for PPP program." pursuing PPPs. The definition of a successful PPP Unit therefore Governments thathavea long historyofexperience requires a definition of success for a PPP program. in PPPs are increasingly coming to realize that PPPs A successful public-private portnership is one that: are useful in more limited circumstances, namely, to • Provides the services the government needs achieve net present value for money as measured against services the government could provide on its • Offers value for money (VfM) as measured own, or to achieve optimal risk allocation between against public service provision (where VfM is the public and private sector partners (rather than measured by the net present value of lifetime maximum risk transfer to the private sector). costs, including the cost of risk-bearing) • Complies with general standards of good Why Governments Create PPP Units governance and specific government policy such Specialized PPP Units are generally created in as: response to weaknesses in the existing machinery - Transparent and competitive procurement of government's ability to manage a PPP program - Being fiscally prudent effectively. It refers to these weaknesses as - Complying with a government's legal "government failures". Governments in different and regulatory regimes that apply to the countries will suffer from different institutional industry in which the PPP will exist. failures in PPP procurement. PPP Units therefore A successful PPP program is a program that need different designs in different countries, so they fosters successive PPP transactions that meet the can address the specific government weaknesses criteria above. These definitions are important for concerned. In other words, PPP units must deliver interpreting the lessons from the case studies. For the right medicine for the disease. example, while the South African PPP program Figure 2 shows the different government functions is generally regarded as successful, it has so far required to manage a successful PPP program, fallen short of the government's expectations for the government failures associated with each of the development of infrastructure PPPs. A broad these functions, and the roles PPP Units can play definition of PPPs draws out the positive lessons from in helping to correct these failures. This paper tests the South African experience, which might have the hypothesis that a PPP Unit that effectively fulfills been missed if PPPs were more narrowly defined. all of the functions will be successful. In principle, each of these functions can be performed by line Why Governments Pursue PPPs agencies or coordinating agencies (such as Cabinet Any understanding of the role of PPP Units must be Offices) or be contracted out, while there are many grounded in an understanding of the role that PPPs institutional ways to integrate them without creating play in achieving governments' policy objectives. a PPP Unit. However, if the government failures are to be addressed through the creation of a specialized Many of the governments studied initially used organization, then the organization needs to be PPPs to attract private finance when they found able to perform these functions. This means it needs their own budgets constrained. In such cases, the to be given the necessary executive authority, rather preference for the use of private finance may have than simply act as an advisory body. more to do with a government agency's desire to disguise public expenditure and to push it off- 3 Public-Private Partnership Units Figure 2 How PPP Units Address Government PPP-Reloted Failures Government Functions Government Failures Functions to Address Failure 1. Set PPP Policy & Strategy Poor Procurement Quality Control Incentives 2. Project Origination! Policy Identification Lack of Formulation and Coordination Coordination Technical Lack of Skill 3. Analysis of Assistance Individual Projects Standardization High Transaction and Costs Dissemination 4. Transaction Management Lack of Promotion! Information Marketing 5. Contract Management, Monitoring and Enforcement Assessing the Performance of Each PPP Unit Table 1 summarizes whether each case study Overall, there is a high positive correlation between provides an example of a successful PPP program, the success of a country's PPP program, and PPP Units and whether the PPP Unit contributed to that success. that perform more of the functions necessary to correct government failure. 4 Table 1 Summary of Success or Failure of PPP Jurisdiction and PPP Program PPP Unit's Objectives Met those Objectives? Set of functions necessary Unit Successful? for solving government PPP failure? - Bangladesh, IlFe Litde success. • Advise line ministries and other government No apparent effect on None to few: Haripur and agencies in identifying and prioritizing potential private participation in • Technical assistance Megnaghat show infrastructure projects for tender, assisting with infrastructure in that transparent, • Policy formulation, but evaluation, award, negotiation, and implementation Bangladesh. no authority to qualjty PPPs are of projects. implement possible, but quality has • Promote private sector participation in infrastructure worsened since. in Bangladesh by working with the private sector and serving as a clearinghouse of expertise on public private partnerships. Jamaica, NIBJ Little success, • Secure greater efficiency No, especially not the None to few. Managed given Jamaica's • Reduce fiscal drain reduction in fiscal drain. . some transactions, and high public debt. attempted coordination, but • Optimize government's management resources PPPs have generally ineffective as real worsened the • Secure enhanced access to foreign markets, power was never effectively technology, and capital situation. delegated • Broaden the base of ownership in the society Portugal, Much success. Generally, to help the government to do better job Yes Some: Parpublica PPP . Portugal has a structuring higher-quality PPPs than in the past. • Policy formulation Unit I much greater need than other • Technical assistance . EU members to • Quality control do PPPs, and has since corrected problems with its earlier program. South Africa, Much success, Filter out fiscally irresponsible PPPs while creating a Yes but with less than the Some: Treasury PPP despite some structure for PPPs that would reassure private investors expected impact on • Technical assistance Unit concerns about despite it being a fine filter. infrastructure deals • Quality control low deal flow • Policy formulation m and lack of deals which address ~ c: ~I South Africa's true infrastructure <.n continued needs. 11 0- " c 0- Table 1 continued Summary of Success or Failure of PPP Units ~ .., ~. Jurisdiction and PPPProgram PPP Unit's Objectives Met those Objectives? Set of functions necessary 10 Unit Successful? for solving government PPP d' .., failure? :; (J) Republic of Much success, • Provide technical assistance to government agencies Yes Most to all: ;:;: ::r Korea, PI MAC given Korea's and the private sector. The creation of PICKO • Technical assistance "U budgetary (PIMAC's predecessor) responded in part to a C • Quality control ::I constraints and perceived need that the government agencies were ~ infrastructure • Policy formulation lacking expertise in PPP evaluation and needs development. • Promotion/ marketing • Promote infrastructure projects and educate the private sector about PPP in Korea • Review unsolicited proposals as requested by line agencies • Review feasibility studies and bidding documents • Conduct VfM tests • Assist in proposal evaluation and negotiation of agreements • Assist in formulation of government policy on PPP. The Philippines, Some success, Technical assistance, PPP promotion/ marketing, and • Yes, but not for all Few to none: BOT Centre given the monitoring PPPs. BOT Centre was assigned country's • The BOT Centre has many functions but is really infrastructure done very little effective only in its needs, but IPPs monitoring, and on an technical assistance role of 1990s left ad hoc basis. significant contingent liabilities. UK, Partnerships Much success Generally, to improve the quality of PPPs and shift Yes Most to all: UK and Treasury focus away from financing infrastructure to VfM and • Technical assistance Taskforce ris k allocation. • Quality control • Policy formulation • Promotion/ marketing Victoria, Much success Generally, to improve the quality of PPPs in Yes. Most to all: Australia, infrastructure. Ensuring that PPPs provide for optimal • Technical assistance Partnerships risk transfer, maximize efficiency, and minimize whole Victoria • Quality control life costs. • Policy formulation • Promotion/ marketing Executive Summary Figure 3 shows the relationship between the Unit fulfilled, from the list of five functions identified in range of functions performed by the PPP Unit and the Section 4 as the right set of functions for a PPP Unit. success of the PPP programs. The vertical axis rates the success of each country's PPP program during the Lessons from the Study time in which the PPP Unit existed, as having "little The units that were least effective- in the Philippines, Success," "Some Success," or "Much Success." The Bangladesh, and Jamaica-are located in countries horizontal axis identifies how many functions the PPP where governance indicators are weak relative to the other countries in the sample 1 • This should be Figure 3 Correlation of PPP Unit Success with Functions (f) (f) CD South Korea 0 0 ::J . . South Africa • C/) *UK .r:. Victoria 0 ::J ~ E ('\j ~ O'l e a.. (f) (f) CD 0 a.. 0 a.. ::J - a.. a (f) (f) C/) CD E a C/) .The CD 0 0 ::J C/) (f) (f) CD 0 0 ::J - Jamaica C/) -CD -..:; ::J Bangladesh None to Few Functions Some Functions Most to All Functions "Right" Set of Functions for PPP Unit 1 This paper uses the metrics of government effectiveness from Kauffman, Daniel, Aarl Kraay and Massimo Maslruzzi. Governance Maners V: Aggregrate and Individual Governance Indicators for 1996·2005. World Bank. 2006. 7 Public-Private Partnership Units no surprise. In countries where most government increase the coordination problem, rather than institutions perform poorly, it is likely that any new reduce it, creating an additional hurdle that PPP government institution will perform poorly also. While transactions must clear. this may seem obvious at first glance, the significance These observations lead to several general corollary of this conclusion is that specialized PPP Units may lessons about the design of PPP Units: not be able to provide "islands of excellence" within • The authority of a PPP Unit must match what the generally poorly performing governments. It the unit is expected to achieve. If the PPP Unit also seems to indicate that relatively less effective is expected to have a quality control, or quality governments are less likely to create Units that have assurance function, for example, that unit needs the necessary functions for implementation of PPPs. some sort of authority that allows it to put a stop A more detailed consideration of the experience of the to or alter planned PPP agreements it feels are three underperforming PPP Units yields three additional not well designed lessons. PPP Units will tend to struggle when: • Because of the importance of coordination within • Top politicians do not support the PPP program. the machinery of government, and political The less successful PPP Units lacked strong support for a PPP Unit, the location of a PPP political support and the influence that comes Unit within government will be one of the most with such support. important design characteristics. We believe our • Procurement of infrastructure and capital works results suggest that, at least in a parliamentary is not transparent and competitive. If there system of government, a PPP Unit will be effective is widespread corruption in procurement of if located within a strong Ministry of Finance or infrastructure and capital works, a PPP Unit will treasury. not necessarily be able to change the situation. • In non parliamentary systems, such as the The same factors that would allow corruption to presidential system of the Philippines or many occur in other government organizations may latin American countries, the appropriate either endanger the integrity of the PPP Unit, or location and /egal form of the PPP Unit are at least ensure that decisions are routed around less clear. In a country with a strong planning the unit or policy coordination agency, that agency • The machinery of government is chronically might make a natural home for a PPP Unit uncoordinated. PPP programs are ineffective Accordingly, the first and most important questions where the PPP Unit is just one of many about PPP Units, the policy makers should ask and responsible agencies. If government functions answer before proceeding to detailed questions of are not well coordinated, a PPP Unit-even design, are whether to have a PPP Unit, and if so, one with executive powers-may not be able what will be the unit's responsibilities, authority, and to stop poor-quality PPPs because the unit may location. not receive all of the information it needs to Other, more detailed design considerations may make an informed decision, or may be unable indeed influence the success or failure of a PPP Unit, to overrule other agencies. Similarly, such a but the determinants of success or failure in our case unit may not be effective in promoting PPPs if studies were at such a high level that they obscured other agencies are not willing to cede control the advantages or disadvantages of further finetuning of 'their' projects. There is a real risk that PPP Unit design. creating a PPP Unit in these circumstances will 8 Acronyms BTL Bu ild-Transfer-lease PFI Private Finance Initiative CIDA Canadian International Development PICOM Private Infrastructure Committee Agency PICKO Private Investment Center of Korea CCPSP Coordinating Council for Private Sector PPI Private Participation in Infrastructure Participation PDF Project Development Facility CCPAP Coordinating Council of the Philippine Assistance Program PIMAC Public and Private Infrastructure Investment Management Center DRSI Data Resources Systems International PFMA Public Finance Management Act DfID Department for International Development PPIAF Public-Private Infrastructure Advisory Facility DBFO Design Build Finance Operate PPP public-private partnership EO Executive Order RA Republic Act Eols expressions of interest RfP request for proposals IPP independent power producer SoPC Standardization of PFI Contracts IDCOl Infrastructure Development Company ltd VfM value-for-money IDFC Infrastructure Development Finance Corporation IIFC Infrastructure Investment Facilitation Center ICC Investment Coordination Committee JNIC Jamaica National Investment Corporation JPS Jamaica Public Service JVA joint venture agreements KDI Korea Development Institute lGUs local Government Units MWSS Manila's Metropolitan Water Works and Sewerage System NIBJ National Investment Bank of Jamaica NWC National Water Commission NAIA Ninoy Aquino International Airport O&M Operation and Maintenance PV Partnerships Victoria PAP Philippines Assistance Program BOT Philippines Built Operate Transfer 9 Section 1 1 Introduction This paper seeks to answer the question of how and for thinking about how best to tailor institutional design under what conditions specialist PPP Units contribute to a country's needs and circumstances, backed up to the success of national PPP programs. The paper with empirical evidence from the success and failures draws on the case studies of eight PPP Units in both of PPP Units in a range of developed and developing developed and developing countries to draw broader countries. lessons for the usefulness and design of such Units. Case Study Research Context for the Study The paper draws conclusions from a qualitative The genesis of this paper is the recent enthusiasm, assessment of eight PPP Units around the world. Table among donors and governments, for establishing 1.1 shows the Un its studied in detail. Case studies PPP Units-that is, Units tasked with implementing or were selected that: advising on public-private partnerships (PPPs). Just in • Provided a sample with a reasonable the past year, Albania, Egypt, Malawi, Mozambique geographical mix (Maputo), Nigeria, Tanzania, and Turkey moved to • Provided a sample with a mix of countries at establish PPP Units. different stages of development While there may be good reasons for establishing • Represented cases that had experienced PPP Units in each of these countries, the growing significant successes or significant failures with popularity of these institutional structures is reminiscent PPPs and PPP Un its. ofa similar institutional trend in the 1990s: establishing The full case studies in are presented Appendix A. independent infrastructure regulatory agencies. Material for the case studies came from: During that decade, many policy makers, lenders, donors, and advisors sought to transplant models of • A desk review of written material available on successful independent regulation from the UK and each jurisdiction's PPP program and unit. parts of the United States to developing countries, • Telephone interviews, using a semistructured with mixed results. Advisors are now becoming questionnaire, with individuals who currently aware that good regulation is not about following a work in or who have worked in the PPP Units. one-size-fits-all"best practice" approach, but requires In several cases we also interviewed individuals painstaking institutional design, proceeding from a who were intimately familiar with the PPP Units clear understanding of a country's needs, capacity, from their work as transaction advisors or lender culture, and administrative traditions. 2 representatives supporting the creation of the The World Bank and the Public Private Infrastructure PPP Units. Advisory Facility (PPIAF) have commissioned this study because they hope to speed up the learning process for PPP implementation, particularly on the design of supporting institutions. This study aims to help developing country governments and their advisors move beyond assumptions and developed countries' models. It provides an analytic framework 11 Public-Private Partnership Units Table 1.1 PPP Units Studied in Detail Jurisdiction PPP Unit N arne Bangladesh Infrastructure Investment Facilitation Center (lIFC) Jamaica National Investment Bank of Jamaica (NIBJ) Portugal Parpublica Ministry of Finance PPP Unit South Africa National Treasury PPP Unit Republic of Korea Public and Private Infrastructure Investment Management Center (l)IMAC) The Philippines Built Operate Transfer Centre (BOT Centre) UK Treasury PPP taskforce and Partnerships UK Victoria, Australia Partnerships Victoria In addition to lessons from the countries studied in address specific government weaknesses or failures detail, general lessons from experience with PPPs and in procuring good PPPs. It is important to emphasize PPP Units in a number of other countries were also that PPP Units are just one form of institutional fix for considered in the analysis. responding to government failures. This section considers the circumstances under which a PPP unit is likely to be Overview of the Paper a more effective response to government failures than Section 2 clarifies the scope of the analysis, by the alternatives. defining the terms "PPP" and "PPP Unit." This section Section 5 tests the hypothesis that there is a relationshi p also defines what is meant by II success" when talking between the success of a country's PPP program and the about the performance of PPP programs and PPP Units. existence of a PPP Unit that directly addresses specific Section 3 considers why countries use PPPs, government failures. The evidence appears to indicate summarizing "good" and "bad" reasons for using PPPs. that there is indeed a relationship between the functions It is important first to understand the design objectives identified as critical to the success of the PPP Units and of PPP Units and their resulting functions. In general, this the success of the PPP program, suggesting that good paper expects that inappropriate objectives for PPPs will theory and good practice converge. lead to disappointing PPPs, irrespective of the quality Section 6 concludes with a set of generalized of the PPP Unit. On the other hand, successful PPP Units observations as to what works and what does not work can play an important role of sifting appropriate and in various circumstances, which should guide future inappropriate PPPs. design. Section 4 looks at the reasons why govern ments Appendix A looks more closely at each of the 8 PPP create PPP Units, and establishes a taxonomy of Units, in order to draw more specific lessons about the relevant government failures. While PPP Units may be successes of the PPP programs, the functions of the PPP established for a number of reasons, the paper identifies Units, and the role those Units played in the success or the If right" reasons: namely, performing functions that failure of PPP programs. 12 .-~.--.~---------.--~-------- Section 2 2 Definitions This section defines three terms that underpin the Definition of PPP analysis in the rest of the paper: A PPP is an agreement between a government and • The term "PPP" needs to be defined in order to set a private firm under which the private firm delivers boundaries for the responsibilities of a PPP Unit an asset, a service, or both, in return for payments. and to differentiate PPPs from other government These payments are contingent to some extent on transactions with the private sector. the long-term quality or other characteristics of outputs delivered. • The term "PPP Unit" needs to be defined to explain how organizations were selected for This paper uses a broad definition of PPP because case studies, and to provide a basis for thinking of the different goals of each country's PPP strategy. about how such Units fit within the broader Many definitions of PPP might exclude privatization, machinery of government. but some countries' programs designed to • The meaning of "success," both for a PPP program encourage private sector participation do not and for a PPP Unit, needs to be defined in order place much weight on the distinction between, for to later draw lessons about what conditions help example, divestiture and concessions. Both are to make PPP Units successful. viewed simply as different ways of introducing private sector participation, and pursued under the The goal is not to develop theoretically perfect same strategy, and by the same body. definitions, but to come up with functional definitions that can be used to analyze the cases studied. The definition of PPP must therefore be broad The definitions must be narrow enough to make enough to apply to all countries, but the sectors, size, the analysis meaningful, yet broad enough to and risk allocation of transactions it encompasses must encompass the wide variation observed between be specific to each country or state's PPP strategy. countries. To illustrate why these definitions matter, it Table 2.1 shows the range of PPPs used in some of is useful to consider the case of South Africa. The the countries we studied. In these countries, many South African Treasury PPP Unit is often described definitions of PPP have been formed for convenience as a gold standard for such organizations, and the and consistency with existing laws and other private South African PPP program is regarded as being sector participation programs, but not for theoretical successful. However, more recently, the South African precision. Distinctions are made among sectors, government itself expressed concern that there has transaction size, and degree of private sector been little investment in large-scale infrastructure participation (design, build, operate, finance, lease, PPPs, and that most PPP transactions have been small- and so forth). scale. If this paper were to define PPPs narrowly in terms of traditional infrastructure transactions, such as toll roads, the features of the South African PPP Unit would be seen to be associated with limited success. On the other hand, a broader definition of PPPs may be more relevant to assessing the design of that Unit. 13 ""tl c: 0- ~ Table 2.1 of Q' Examples of ... ""tl =::- o (if PPP Unit Definition of PPP ""tl o Partnerships • " ... applies to the provision of infrastructure and any related ancillary services which involve private investment or financing. 3: Victoria The term 'infrastructure' can extend beyond physical assets to encompass major information technology procurements". ... CD '" ::r (Australia) Examples of "related ancillary service" include building-related services such as maintenance -0 C • " ... applies to public infrastructure projects when the present value of payments to be made by the Government (and/ or by :::J consumers of a service will exceed AUS$lO million during the period of a partnership" ~ • " ... does not apply to the general procurement of services by the Government where public infrastructure is not being provided (e.g. professional consulting services and printing services)" • " .. , applies to all such projects entered into by Government departments, unless a specific Government decision advises that other provisions will apply" • In practice, excludes privatizations and service contracts Parpublica • "public private partnership shall mean the contract or contracts by which private parties ... accept the obligation and make their (Portugal) commitment to provide the public partner with efforts to satisfactorily address a collective need, and in which the funding and responsibility for the investment and undertaking are assumed, in whole or part, by the private partners" • Excludes: public works contracts rents and leases public contracts of supply any public-private partnership involving present value of public payments to the private partners of less than 10 million euros or an investment of less than 25 million euros, excluding from these sums funds obtained from European Community sources any other contract(s) for the supply of goods or services for a period of time equal to or less than three years that do(es) not involve the automatic assumption of obligations on the part of the public partner coming at the end of the contract period. • Parpublica SA does deal with privatizations, but the Finance Ministry PPP Unit within Parpublica focuses exclusively on PPPs . PPP Unit Definition of PPP BOT Centre • Projects may include "power plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation, (Philippines) telecommunications, railroads and railways, transport systems, land reclamation projects, industrial estates or townships, housing, government buildings, tourism projects, markets, slaughterhouses, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and development projects as may be authorized by the appropriate agency pursuant to this Act • Applies to the following types of contracts: Build-Operate-Transfer, Build and Transfer, Build Own Operate (but with Presidential approval only), Build-Lease-Transfer, Build-Transfer-Operate, Contract-Add-Operate, Develop-Operate-Transfer, Rehabilitate-Operate-Transfer, and Rehabilitate-Own-Operate • Smaller municipal projects (less than 200 million Philippines Pesos) do not require approval at the national level • A separate privatization office deals with divestiture (formerly the Asset Privatization Trust) National • "public-private partnership means a commercial transaction between an institution and a private party in terms of which: Treasury PPP the private party either performs an institutional function on behalf of the institution for a specified or indefinite period, or Unit (South acquires the use of state property for its own commercial purposes for a specified or indefinite period Africa) the private party receives a benefit for performing the function or by utilizing state property, either by way of: (i) compensation from a revenue fund, (li) charges or fees collected by the private party from users or customers of a service provided to them, or (iii) a combination of such compensation and such charges or fees." • In practice, the Ministry of Public Enterprises handles privatizations (has included Transnet, Eskom, Telekom, and South African Airways). • As of 2003 (Municipal Finance Management Act), Treasury PPP Unit is responsible for approvals Provincial and Municipal PPPs, not just federal. Sources: Partnerships Victoria Policy 2000 (Victoria), Decreto-Lei 86/2003 (portugal), Republic Act No. 7718 (Philippines), Treasury Regulation 16 of Public Finance Management Act. <..n a o· ::::l '" Public-Private Partnership Units What PPPs Are Not companies, employ private firms to undertake routine A PPP lies between the extremes of public and maintenance and repair of school facilities, and may private provision of goods or services. Figure 2.1 outsource cafeteria staffing to a private agency. shows a range of possible types of agreement between Private provision, moreover, is rarely driven entirely the public and private sector. These agreements differ by market signals. The government always has some primarily in terms of the degree of responsibility and role, if only tacit, in controlling the range of action risk taken by the public and private sector partners for of the private firm. The government may exercise asset design, construction, operation, management, this control through formal antitrust laws, or through and capital investment. At each extreme lies: an implicit regulatory threat that, if a firm is able to • Public provision. A government directly delivers exercise monopoly power, the government will step in an asset or service or both to the population. to curtail that power. The government is the full owner of the asset, Examples of pure private provision appear at the takes responsibility for financing the investment top of Figure 2.1. Examples of pure public provision required to build the asset, and provides the appear at the bottom. Despite the "impurities" in public people and resources necessary to manage and and private provision described above, it is possible operate the asset over time. to draw rough conceptual boundaries around PPPs. In • Private Provision. A private firm delivers an asset order to recognize these boundaries, we begin with or service or both in response to market signals. a core-the most common understanding of PFI-and The private firm is the full owner of the asset, work outward toward both extremes. takes responsibility for financing the investment required to build the asset, and provides the Core PPPs people and resources necessary to manage and The UK Private Finance Initiative [PFI) has driven operate the asset over time. The provider collects much of the world's thinking about PPPs. Many its revenue entirely from service users. countries borrowed heavily form the UK's PFI Public provision is never "purely public," nor is program in shaping their own PPP programs, and private provision "purely private." In most countries, common definitions of PPP therefore draw heaVily on even when the government wants to be sole financier, characteristics of PFI. Box 2.1 describes the scope of owner, and operator of an asset, it will hire private PPP as typically understood in the UK's PFI program. contractors to design and build the facilities. In most Under this core PPP, the private operator either: such cases, the private sector contractor assumes • Agrees to make a facility available for some some risk for delivery of the facility. If construction period of time, and to ensure that, during that is delayed by a fault of the contractor, for example, the private contractor will usually have to assume construction costs associated with those delays. Moreover, even in public provision of services, private contractors are nearly always hired to supply goods and provide services. Most U.S. public schools, for example, purchase supplies from private 16 Section 2 Figure 2.1 A Broad Definition of PPPs ''''': ,....---. I , " A' • " ' ~-- ' , . . ~~... / -~. , . -; r : I t Privatization - Regulated Concession ""C ""C ""C ""C ""C ""C ... OJ 0 III a. 0 ... 0 ell - ell (II C ell ::::!! ::::s ~ Tram and Train Contracts (VIC) o· ::::s Jamuna Bridge (Bangladesh) Johannesburg Water (South Africa) Hotels (Jamaica) ""C ... c::: ell ""C c::: 5!:: n' 17 Public-Private Partnership Units time period the facility meets certain standards In either case, payment is contingent upon outputs, defined in the agreement, or where the output is making a facility available to a • Agrees to deliver a service over a period of given standard, or delivering a service that meets a time, and to ensure that the service meets certain given standard. Under the PFI variety of PPP, however, standards defined in the agreement. the private firm's payments do not usually depend on whether the government or consumers actually need, want, or use the facility or service. Box 2.1 Scope of PPP in the UK PFI Program The UK's PFI program primarily includes Design Build Operate Finance contracts, which typically last 20-30 years. PFI transactions typically have the following characteristics: • Government transfers responsibility and risk for asset or service to private contractor. • Private contractor takes on obligations for roughly 20-30 years. • Private contractor designs, builds, manages, maintains asset, and provides services. • lenders fund contractor on limited recourse basis. • Authority pays "Unitary Charge" for available/acceptable service. The figure below contrasts public and private responsibilities (or risk allocation) in traditional procurement, and public and private responsibilities in PFI. ..~ ..• ., Risk allocation comparison Traditional procurement Typical PPPIPFI DeSlgn & construction Design & construction Service provision Service provIsion Maintenance & renewal Maintenance & renewal Quality of service Quality of service Volume Volume Force majeure Force majeure Obsolescence Obsolescence Residual value Residual value Regulation/policy Regulation/policy Source: Presentation by Ed Farquarson of Partnerships UK, 22 Morch 2006 01 the World Bank. 18 Section 2 Moving Toward IIPurely Private" • Privatization (Continuing Interest). Some Working upward from the "core" PPP, toward pure privatizations involve industries that are not private service provision, the private firm takes on controlled by any clear or robust regulatory increasing responsibility and risk. Within this ronge, regime but that remain of "continuing interest" this study considers all of the following to be PPPs: to the government, despite the transfer • Concessions. Under a concession contract, the of ownership. A combination of factual private partner takes responsibility for operating, circumstances and local policy determines financing, and (if new, designing and building whether a government has a continuing interest the facility. The private firm also takes the risk in a privatized company. For example: that, if demand for the facility or service is not - Governments have an interest in making sure as high as forecast, revenues from user fees their people have access to sufficient food may not cover all of its costs (which include supplies. In most countries, suppliers compete to the cost of debt and equity). The government provide enough food to meet demand at prices formally retains ownership of the asset or rights the government finds reasonable. However, in to service delivery. countries at risk of famine or with high levels of • Privatization (Heavily Regulated). Moving malnutrition, the government may understandably further from the core, the government cedes its have a continuing interest in maintaining formal ownership claim to the asset and the right adequate and affordable food supply. Cape to provide service. In many cases, espeCially Verde is one country that has considered entering where the transaction involves a monopoly into PPPs for food distribution. service (for example, electricity distribution), the - Jamaica, like many other countries, has shown government maintains a firm regulatory hand continued willingness to bailout its privately to prevent the private owner from abusing that owned airline during the last decade, despite monopoly power. an abundance of competitive carriers in the Under privatization, the owner assumes the risk region. For Jamaica a flagship airline is a that the asset it has purchased will lose all of its value. continuing interest. However, the owner can also reap the full dividends Only purely private provision lies outside our of owning an asset that is successful and increases broadest definition of PPPs at this extreme. In purely in value. With heavily regulated industries, however, private provision, governments will generally be price regulation often ensures that the owner neither willing to let the market determine whether individual suffers all of the downside, nor enjoys all of the upside companies succeed or fail. of ownership. Again using the example of electricity distribution, the government cannot afford the political Moving Toward IIPurely Public" costs of letting the company go bankrupt, nor letting Working downward from the "core" PPP, toward the company reap enormous profits at the expense of pure public provision of service, the public sector customers. Some form of regulation usually ensures takes on increasing responsibility and risk. Within that prices are maintained at "reasonable" levels. this range, this study considers all of the following to be PPPs: 19 Public-Private Partnership Units • Operation and Maintenance [O&M) Contracts. management contracts, payments for service contracts Under an O&M contract, the private operator may include a performance contingency payment of takes responsibility for all aspects of operation some kind. and maintenance. The operator does not As mentioned earlier, purely private enterprises usually take any responsibility for financing any transact regularly with the private sector for supplies, capital investments, but may manage a capital maintenance, and other services. Such transactions investment fund, and decide in conjunction with are not typically viewed as PPPs, nor do we view the public owner how that fund should be used. them as such for the purpose of this study. A separate entity will have already designed Two distinctions are often made between simple and built the facility (or perhaps the same contracts for goods and services and PPP contracts: private firm, but under a separate contract). The O&M contractor usually receives a fixed annual • Under a PPP, the private contractor's payment fee and an additional fee tied to the asset's depends, at least to some extent, on whether the overall performance. With an O&M contract for contractor is able to deliver results or outputs, not provision of water and sanitation services, for simply inputs. example, the private contractor might receive a • Under a PPP, the private sector is responsible for performance bonus for reductions in nonrevenue delivering a set of guaranteed outputs over a water, increases in hours of service availability, longer period of time than in a standard service or impravements in operating profitability. The contract. What "longer" means is a matter for O&M contract may also include explicit penalties interpretation, but PriceWaterhouseCoopers for failure to meet targets has made the useful distinction that PPPs offer • Management or Service Contracts. Under a guarantees on outputs that last longer than the management or service contract, the private firm standard warranty period for the asset or service is usually given explicit responsibility for some, but that is being provided. 3 not all, aspects of operations and management. For the purposes of this paper, both of these Many management contracts, for example, distinctions must hold in order for an agreement to be limit a private contractor's ability to hire, fire, defined as a PPP. or reassign staff. Under a management contract, performance bonuses are often available, but Definition of a PPP Unit the bonuses are [or should be) tied to outputs the It is now known what is meant by "PPP." What management contractor is able to control, given then is a "PPP Unit"? The paper has adopted a its limited responsibilities. fairly inclusive definition of PPP Units, to include any The term service contract is generally reserved for organization designed to: agreements under which the private firm is asked • Promote or improve PPPs, as defined in Section to undertake one or two specific tasks only. Many 2.1. A PPP Unit may manage the number and agreements referred to as management contracts quality of PPPs by trying to attract more PPPs, are actually service contracts, because the private or trying to ensure that the PPPs meet specific contractor's responsibilities are quite limited. As with 3Delivering the PPP Promise. PriceWaterHouseCoopers. 2005. 20 Section 2 quality criteria such as affordability, value for • Provides the services the government needs money, and appropriate risk transfer. • Offers value for money as measured against • Has a lasting mandate to manage multiple public service provision (where value for money PPP transactions, often in multiple sectors. This is measured by the net present value of lifetime distinguishes the PPP Units studied from PPP teams costs, including the cost of risk bearing) working within a single ministry, or committees • Complies with general standards of good assembled only to work on specific transactions. governance and specific government policy In fact, creation of such ad hoc PPP teams is an such as: institutional alternative to permanent PPP Units. - Is procured with transparent and competitive procurement Definition of Success - Being fiscally prudent The paper defines a successful PPP Unit as "a PPP Unit that contributed to the implementation of a - Complying with the legal and regulatory successful PPP program." regimes that apply to the industry in which the PPP will exist. The definition of a successful PPP Unit therefore A successful PPP program is a program that fosters requires a definition of success for a PPP program. successive PPP transactions that meet the above This paper is not a guide to successful PPPs, but it criteria. must assume some consensus on the characteristics of a "good" PPP strategy in order to judge a Unit's It is important to recognize that success in meeting success. A successful PPP is one that: these criteria is relative. For example, implementing a successful PPP in Bangladesh is probably more difficult than implementing a successful PPP in Victoria, Australia. The assessment of success in Section 3 takes each country's circumstances into account. 21 Section 3 3 Why Governments Enter into PPPs Any understanding of the role of PPP Units must be experience in PPPs have come to recognize that the grounded in an understanding of the role that PPPs cost of PPPs must be assessed using the same standards play in achieving governments' policy objectives. A as used for other forms of government spending. For combination of political, fiscal, and developmental example, the governments of Portugal, the UK, and pressures can tempt government agencies to pursue Victoria (Australia) all started implementing PPPs in PPPs for the wrong reasons. an attempt to escape fiscal constraints, but have now Pursuing PPPs for the wrong reasons usually integrated PPPs into their overall fiscal accounting leaves the government with poor-quality PPPs, and and risk management framework. unsustainable PPP programs. The wrong reasons usually involve a desire to push major investments The Right Reasons for PPP off the balance sheet, when governments find their Governments that use PPP are increasingly coming budgets restricted. Inappropriate objectives for PPPs to realize that PPPs are useful in limited circumstances. will lead to inappropriate PPP policies and strategies, Box 3. 1 shows the reasons Partnerships Victoria (PV) which PPP Units are unlikely to transcend. However, if enters into PPPs. These are good reasons that are the government's high-level objectives with respect to consistent with what many enduring PPP programs, PPPs are appropriate, it important to consider whether Box 3.1 PPP Units may help individual government agencies Objecfives for PPPs in Vicforia, Ausfralia to avoid entering into PPPs for the wrong reasons. The paper discusses first the wrong, yet most • To maximize the level of infrastructure spending common, reasons governments enter into PPPs. through a responsible use of the resources of both the public and private sectors It then discusses the right reasons for PPPs, with a mention of several reasons for PPP that may apply • To ensure that infrastructure and related ancillary services are provided in accordance with best in developing countries, even if they do not apply in practice, and, where appropriate, to relevant developed countries. international standards • To promote growth and employment opportunities The Wrong Reasons for PPP for the whole of Victoria Many of the governments studied initially used PPPs • To deliver significantly improved services to to attract private finance when they found their own the community budgets constrained. In such cases, their preference • To encourage innovation in the provision of for using private finance may have more to do with infrastructure and related ancillary services their desire to disguise public expenditure and to • To maximize the social and economic returns push it off-budget than with any real risk transfer, from government expenditure innovation, or efficiency gain. • To pass through the benefits of Partnership The consequences of pushing commitments off- Victoria to customers, businesses, and the Victorian community budget are reduced incentives and ability to control costs, and the risk that the government will accumulate • To clearly articulate accountabilities for outcomes. more liabilities than it can manage. Governments Source: Partnerships Victoria, "The Policy." in most developed countries with longstanding 23 Public-Private Partnership Units including Victoria's, have learned through many PPP Motivations for Developing Countries years of trial and error. Developing countries may have other valid In Victoria in the 1980s, PPPs were driven by objectives in pursuing PPPs agreements. In developing a desire to move projects off balance sheet. little countries, for example, there may be more scope for risk was transferred/ and project financiers were PPPs to: guaranteed a rate of return. In the 1990s/ the focus • Provide incentives for improved efficiency and of PPPs shifted toward achieving greater growth and performance efficiency through private sector involvement. Projects • Create arms-length relationship between implemented during the 1990s generally produced governments and providers of services, thus positive economic and financial benefits/ but a focus enabling governments to enforce contracts on maximum risk transfer to the private sector put more effectively some projects into jeopardy. The objectives for PV/ • Provide access to skills and technologies that which was created in 2000/ recognize the illusive would not otherwise be available. nature of a true off-balance-sheet PPP, and avoid the Finally, it is important to recognize the possibility presumption that the private sector is necessarily more that, in countries with poor sovereign ratings and efficient in building and operating public assets. 4 high sovereign borrowing costs, well-structured PPPs PPP Units in South Africa/ Portugal, and the UK may, in time, bring the cost of private sector financing have come to similar conclusions. The consensus of below sovereign levels. This would be possible if PPP policy makers in these countries is that PPPs are revenue flows within the PPP Unit were insulated from best if they: the government's fiscal constraints, and investors • Achieve net present value for money as measured perceived little risk of government intervention to drive against services the government could provide tariffs to below cost-recovery levels. In such a case, on its own the cost of finance may reflect project risks, which • Achieve optimal risk allocation between the would be lower than sovereign risks. public and private sector partners (rather than maximum risk transfer to the private sector) • Are affordable for governments over the duration of the agreement. This consideration has driven an increased focus on whole-of-life costing analysis. 4PPPS in Australia: The Partnership Victoria PPP Framework. Presentation by Richard foster, Executive Manager of Partnerships Victoria. 2nd Annual Conference on Privatizations, PPPs, and Pfl. Kuala lumpur. June 12, 2006. 24 Section 4 4 Why Governments Create PPP Units Specialized PPP Units are generally created in Figure 4.1 shows: response to weaknesses in the existing government's -In the left-most column, the functions governments ability to manage a PPP program effectively. typically playas part of PPP development Governments in different countries will suffer from - In the middle column, failures associated with different institutional failures in PPP procurement. each of these functions PPP Units therefore need different designs in different countries, so they can address the specific government - In the right-most column, the ways in which PPP weaknesses concerned. In other words, the medicine Units can respond to government failures. must fit the disease. The items in each of these columns are discussed in the sections that follow. Figure 4.1 Government Functions, Failures, and Roles of PPP Units Government Functions Government Failures Functions to Address Failure 1. Set PPP Policy & Strategy Poor Procurement Quality Control Incentives 2, Project Originationl Policy Identification Lack of Formulation and Coordination Coordination Technical Lack of Skill 3, Analysis of Assistance Individual Projects Standardization High Transaction and Costs Dissemination Lack of Promotionl Information Marketing 5. Contract Management, Monitoring and Enforcement 25 Public-Private Partnership Units Government Functions in PPP Procurement Figure 4.2 again summarizes the main functions To understand the institutional features of various that must be performed, with additional annotations PPP Units, it is important to delineate clearly the to Figure 4.1, showing what happens at different possible functions of a Unit relative to the overall set stages of PPP procurement. of government functions and tasb that need to be performed to procure and implement PPPs. Figure 4.2 Su mmary of Governm en l Fun c lions w ilh Respecl 10 PPP 1. Set PPP Policy & Strategy [ ScMed }- 2. Project r----. Identification/Origination l Un«1llclted } - -Technically feasible? -Financially attractive for potential 3. Analysis of Individual private sector partners? Projects -Affordable for public sector? ------ -Value for money? '--------r-------'I I -Appropriate risk transfer? ..-------------:::{ I + L....--------J Review risks as '---- 4. Transaction Management I contract evolves I Ensure that both public and : =====]=====~===== private partners meet terms of • roMffict l 5. Contract Management, Monitoring and Enforcement 26 Section 4 A specialized PPP Unit may perform all or some of responsibility for feasibility studies for solicited these functions. The main functions are: proposals. The private operator typically • Step 1: Set PPP Policy &Strategy - These activities (though not always) assumes responsibility for involve setting overall policy for PPPs. This means feasibility studies for unsolicited proposals. deciding what sectors will be priorities for PPP, In many cases, the government and private and which types of agreements on Figure 2.1 partners will each do their own feasibility will be the focus of the PPP pragram. studies. • Step 2: Project Origination-The government - Governments may also, but do not always, needs to be able to identify suitable PPP evaluate whether: projects. PPP projects can originate in one of • Given other fiscal priorities, the government two general ways: has sufficient funds, or can mobilize sufficient - Solicited proposals, in which a government financing, to uphold its obligations under agency develops the idea for a specific PPP the project transaction • Whether the project offers risk-adjusted - Unsolicited proposals, in which a private "value for money" versus some counterfactual investor or operator develops the idea for (the counterfactual is referred to in the UK, a specific PPP project, and brings it to the Victoria, and South Africa as the "public government. sector comparator")5 Some governments work with a mix of solicited • Whether the appropriate risks are and unsolicited proposals; others allow for transferred to the private operator/investor development of solicited PPP proposals only. The (and away from the government), given the role of the PPP Unit in developing these proposals remuneration the private operator/investor differs considerably from one country to the next. will receive. PPP strategies in Chile, the Philippines, Republic • Step 4: Transaction Management-Transaction of Korea, and South Africa all include a mix of rna nagement encompasses the enti re procu rement solicited and unsolicited proposals. and tender process. PPP procurement can • Step 3: Analysis of Individual Projects- Having proceed in a number of different ways, but received or developed a project concept in usually involves, in the case of a competitive Step 2, the government next must analyze the tender for solicited proposals: opportunity. Such analysis usually involves: - Notice of procurement to request expressions - A prefeasibility study and feasibility study, to of interest (Eols) in the PPP opportunity determine whether the proposed project is - Issuance of prequalification documents with technically feasible and would be financially detailed criteria for prequalification attractive to a private investor or operator. Some agency of the government typically assumes 5For a discussion of whether a public sector comparator makes sense lor developing countries, see Leigland, James, and Chris Shugart. "Is the public sector comparator right for developing countries? Appraising public-private projects in infrastructure." Gridlines. Public-Private Infrastructure Advisory Facility. Note No.4. April 2006. 27 Public-Private Partnership Units - Evaluation of prequalification applications promised at the price agreed. "Enforcement" followed by a short-listing of three to six firms means applying the penalties or requiring the that meet the pre-qualification criteria remedies included in the contract when the private - Issuance of a request for proposals (RfPl with operator/investor fails to live up to its contractual procurement documents. These procurement responsibilities. Contract management may also documents usually include a draft contract include renegotiation of contract terms if either and annexes to the contract with full technical the private or public partner finds itself unable to and financial details on the opportunity meet its contractual responsibilities. - An iterative process of question and answer A government's decision about which specific between bidders and the government. This functions are allocated to the PPP Unit will depend on: iterative process may, in some cases, require • The functions allocated to other government the government to make changes to the agencies procurement documents in accordance with • The ability of the government to coordinate suggestions, or to clarify the terms of the tender. the performance of different functions by Bidders usually also take the opportunity different agencies within its overall machinery to conduct their own due diligence of the of government. opportunity at this stage Table 4.1 describes the functions of the PPP - Submission of bids by a fixed deadline Units selected for our case studies within the overall - Evaluation of bids by the government agencies government functions that need to be performed. responsible for the procurement Checks [II) are assigned where a PPP had primary - Notification of the winning bidder and final responsibility for a certain function or, even if they negotiation and signing of the PPP contract. did not have primary responsibility, that function PPPs in Banglodesh and Jamaica, for example, was formally assigned to them through a law or their were not always procured through competitive charter. Otherwise, a cross [Xl is assigned. tender but through direct negotiation or an In practice PPP Units often assume roles different ostensibly competitive process where selection from those formally prescribed, either because criteria were unclear. they are particularly ineffective in fulfilling a formal • Step 5: Contract Management, Monitoring, and function, or because they prove so effective or Enforcement-Contract management refers to influential that their involvement extends beyond their the activities required after contract signature formal mandate. Table 4.1 also notes examples of and before the end of the term of the contract. some of these nuances. Some party, often a line agency responsible for the sector in which the PPP project takes place, has responsibility for monitoring and enforcing the contract. "Monitoring," in this case, means checking to ensure that the private operator/investor fulfills its responsibilities under the contract, by delivering the services it has 28 Table 4.1 Responsibilities of PPP throughout PPP life Jurisdiction and Unit Development of PPP Project Origination Analysis of Individual Transaction Contract Monitoring Policy & Strategy Projects Management and Enforcement Bangladesh, IIFC X X ,,/ X X Executive Branch (Prime Line agencies originate Advises Private Assists line agencies as Minister) projects Infrastructure Committee requested (PICOM) in Prime Minister's office Jamaica, NIB] X ,,/ ./ ./ X Has strong influence on Private partners Though not exclusive. policy but not exclusive sometimes go direcdy to NIB] leads the cross- responsibility NIB] instead of line sectoral Enterprise Team agencies assigned to manage each transaction ----- Philippines, BOT Centre ,,/ X ,,/ X ./ line agencies and local Advises Investment Sometimes asked by Formal role includes government units Coordination Committee implementing agencies or monitoring but has, in originate. Unsolicited (ICC) and usually asked the ICC practice, done so only on proposals from private to review project an ad hoc basis. Often sector are also allowed proposals asked to assist in contract renegotiations Portugal, Parpublica PPP ./ X ./ X ./ Unit Advisory to Ministry of line agencies originate But often asked by Does some monitoring Finance projects Ministry of Finance to sit for Ministry of Finance on tender committee but not contract management. Often asked to assist in contract renegotiation South Africa, Treasury ./ X ./ X X PPP Unit Though has, in some PPP Unit is a full Do monitor performance cases, identified potential member of the steering of some contracts, and PPP opportunities for committee for have assisted in contract line transactions, and renegotiations. implementing agencies Implementing agencies know it is in their interest manage contracts to involve unit as early as possible [ o ~ continued :::J ~ -0 c;: w C- o '5- Table 4.1 continued ..., -0 of PPP Units PPP Cycle <' o CD -0 o 3- ..., CD Jurisdiction and Unit Development of PPP Project Origination Analysis of Individual Trans ction Contract Monitoring '" ::r Poll cy & Strategy Projects Mana gement and Enforcement -0 --- -----+---- C Republic of Korea, ./ X ./ X X :::l PlMAC Line agencies, local But oft en asked by line Conducts quarterly ~ governments. Unsolicited agencie s to assist surveys of PPPs, but proposals from the contract management private sector are also done bv line agencies allowed ---- United Kingdom, ./ X ./ ./ ./ Partnerships UK and But Partnerships UK Treasury has a monitoring Treasury Taskforce helps line agencies as does UK national identify suitable projects audit office --- -- Victoria, Australia ./ X ./ X X Partnerships Victoria Has helped line agencies Unea~ ;encies manage the IJne agencies responsible, identify projects in their transac tions but PV but PV provides guidance portfolio that would be appro val required at suitable several stages Section 4 Government Failure albeit in different sectors, motivated Portugal and Table 4.1 shows that none of the PPP Units surveyed South Africa to create their PPP Units. are responsible for all of the relevant functions. On the other hand, line ministries may have There is no obvious best practice with regard to insufficient incentive to enter into public private which functions are covered by the central PPP Unit. partnerships. In many cases, direct involvement in Accordingly, the actual allocation of functions in the provision of a public service provides ministry each individual case needs to be considered within officials with opportunities for influence and patronage the context of the specific government failures that the that may not be available otherwise. PPPs introduce Unit needs to address. explicit contractual arrangements and commercial The failures PPP Units are meant to address can be incentives for the service providers, and so typically classified into the following categories: reduce opportunities for patronage. This is particularly • Poor incentives for procurement of PPPs true when PPPs are competitively procured. Hence, the beneficiaries of patronage may be unwilling to • Lack of coordination within the machinery of allow PPPs to take place, even when a PPP would be government best from a public policy perspective. More generally, • Lack of necessary skill agencies may fear that PPPs will bring job losses or loss • High transaction costs of influence for certain offices or departments within the • Lack of information. government agencies responsible for procuring PPPs. These failures correspond to the boxes appearing In many governments, both incentives will likely be in the middle column of Figure 4.1. present at the same time, with the same ministry both holding back projects that should be advanced, and Poor Incentives for Procurement of PPPs promoting projects that should not proceed. The main reason government PPP programs are Some governments have tried to address the unsuccessful is that government agencies have problems these incentives create through public sector inappropriate incentives. Government agencies may management reforms. Such reforms may include have incentives to procure too many PPPs, or too few. the introduction of performance contracts for heads On the one hand, line ministries may have an of agencies, or public finance reforms, such as the incentive to enter into more PPP contracts than can be introduction of accrual accounting designed to capture managed within the government's fiscal capabilities, contingent liabilities. However, the full set of consistent if the fiscal consequences are not made clear and and coherent reforms may be difficult to implement, palpable to those agencies. As long as a ministry and may be beyond the technical capability or the believes that it can shift the costs to other sectors within political will of many governments. For example, the government, it may pursue PPP transactions in as described in Box 4.2, South Africa's PPP Unit excess of what is affordable or what represents value was created to prevent line ministries from pursuing for money. Similarly, a ministry that does not directly PPP projects that allowed them to circumvent formal bear project-related risks may not be sufficiently budgetary limits (which had been established through diligent in ensuring that the private sector bears an law by recent public finance reforms). In such cases, appropriate level of risk. As shown in Box 4. 1 and Box the creation of a specialist agency designed to offset 4.2, similar experiences with government incentives, the inappropriate incentives facing other agencies may be an appropriate institutional response. 31 Public-Private Partnership Units Box 4.1 Box 4.2 Reasons for Creatior of Parpublica's PPP Unit Reasons for Creation of South Africa's National Treasury PPP Uri! Portugal's PPP Unit was created specifically: South Africa's PPP Unit was developed to counteract • Out of a perceived need for better transfer of the risk that line ministries would use PPP to circumvent information to all branches of government on: aJ formal budgetary limits established through law by the contract design and b) procurement, because of Public Finance Management Act (PFMAJ. PPPs were, poor experience with PPP efforts in the past until creation of the PPP Unit, mostly used with this goal • To ensure better efficiency in provision of services and not just the swift, off-budget completion of in mind. Shifting risk to the private sector or achieving infrastructure projects. greater efficiency or value for money through private PPPs were initially pursued in Portugal in the early sector involvement were only secondary goals. to mid-199Ds as a way to move large infrastructure A single specific transaction provided the catalyst investments off balance sheet. PPPs were seen as for creation of the PPP Unit. The Ministry of Public particularly important at a time when, because of EU Works wanted to design a 3D-year BOT contract for membership, there was so much importance placed two prisons. Treasury found out about the transaction on Portugal's fiscal policy. and asked to review the contract. Treasury's review More recently, Portugal's PPP policy has evolved found that, whereas the prisons indeed offered as part of broader policy goals to move the value for money, they were extremely expensive to government from year-on-year budgeting toward build and therefore not affordable from an overall multiyear budgeting. There was little consideration fiscal perspective. for the intergenerational or long-term lifecycle costs of The PPP Unit was established to set clear rules for these projects. As part of the reform effort, Portugal public and private partners, while providing better rationalized the decision-making process for PPPs by: fiscal oversight. As a result of the country's early • Promoting consideration and more transparent presentation of the long-term budgetary experience with PPPs, the new regulations on PPP now implications, in order to ensure the project's require that PPPs meet three criteria: financial viability. It did this by explicitly • Affordability reviewing the long-term financing shortfall for wh ich the government would be responsible • Risk management • Requiring evaluation versus a public sector • Value for money. comparator, as a way of standardizing evaluation Treasury approval is required at four stages criteria, if not also assessing potential value-for- • Upon completion of feasibility study money and efficiency gains from PPP. • Upon completion of bid documents (including draft PPP agreement) • Upon selection of preferred bidder and preparation of value-for-money report • Upon finalization of negotiations with bidder and finalization of PPP agreement. PPPs are now used in South Africa primarily to transfer specific risks to a private sector operator who is better able than the public sector to bear such risks. 32 Section 4 Lack of Coordination within Machinery of be filled by subsidies, while the agency that makes Government decisions on government expenditure may refuse to PPP policy is typically established by a central unit provide funds for subsidies, arguing that the cost of of government, such as a Department of Finance (as in service should be met from tariffs. The result of such South Africa) or the President's or the Prime Minister's coordination failures is that the sector remains unable office (as in Jamaica). Implementing that policy to cover the costs of providing a good service, while requires the coordination of many more agencies. PPP transactions become unviable. Agencies across a number of sectors-for example In cases where policy making and implementation roads, education, health, justice, and water-need to are poorly integrated, it is tempting to create a new identify projects. These agencies need to ensure that agency to cut through the lack of integration, and the projects fit within the policy criteria. The Ministry to provide overarching guidance and control. This is of Finance should also be involved, to assess the fiscal not always the best solution. For example, an agency cost and risk of the project. Regulatory and planning charged with "making something happen" may not agencies may be involved in planning, permitting, land understand all the sectors it works in, or be sensitive acquisition, and tariff setting. Achieving coordination to broader sector objectives or good governance between such a wide array of organizations is a requirements. There are various solutions to poor struggle for most governments, particularly those in coordination between agencies. There are also several developing countries. ways to ensure that a whol&of-government approach In many governments, individual agencies to PPP transactions prevails. Creation of a central PPP operate within "silos/' with little information sharing Unit may be a solution, if other forms of coordination or cooperation with other agencies. Sometimes the are less viable or more difficult to implement. Section silos are reinforced through competition between 4.4 discusses some alternative possible solutions for political figures in charge of those agencies. The addressing the coordination problem as well as the silos may also derive from the institutional history, other government failures identified in Figure 4.1 . from inappropriate legislation, or from the tradition of secrecy within the government. Lock of Skill In a silo situation, agencies with related functions PPP procurement requires specialized skills that may not be able to coordinate their activities often are lacking in government, particularly in sufficiently to make PPPs happen. For example, a developing countries. It is common for a government complex PPP transaction in the water sector may to focus on the need for skills involved in managing require coordination between the Ministry of Finance a successful transaction. Such skills however, l (which would provide subsidies where tariffs do not can often be procured through external advisory reach cost-recovery levels) and a regulator or a line services. More important are the skills involved ministry (which would set the tariffs, coverage targets, in managing the complexity of the public-private and other policy objectives). However, in practice, interface: understanding how particular PPP projects decisions on tariffs and subsidies are often made fit within the governmenfs sector and service delivery independently of each other. In such a situation, objectives, and how the allocation of risks under any the agency in charge of tariffs can restrain tariff particular project fits into the government's overall increases, believing that the revenue shortfall should fiscal strategy. 33 Public-Private Partnership Units When PPPs turn out to be unsuccessful, their failure Box 4.3 often derives less from poor management of the How PPP Units Ensure They Have the Right Skills transaction process, but more from lack of attention being paid to the government policy reforms that may • The Philippines BOT Centre makes extensive use be required for success. Such attention would involve of long-term, local, in-house consultants. the design of explicit and sustainable subsidy schemes, • The UK Treasury PPP Task Force utilizes a mix improving the government's planning capacity, and of public sector employees and professionals ensuring that the government appropriately performs seconded from the private sector for a fixed its ongoing role within the public private partnership. number of years. For example, failures of many management contracts can be attributed to clashes between the publicly • The South Africa National Treasury PPP Unit carries out much of its own technical work in- appointed boards of government companies and the house, but hires some specialist consultants for management contractors. short-term contracts. Because so many other factors, other than skills, can affect the outcome of a PPP, it is important to be clear • IIFC in Bangladesh makes extensive use of local consultants. A small team of permanent staff about which skills the government is lacking. Training manage the team of consultants. requires time and resources, and hiring technical experts as full-time staff can be expensive. Many PPP • Australia's Partnerships Victoria engages Units address a lack of skills by outsourcing short-term contractors to do some of the policy and technical work that requires specific technical expertise, or by work (such as legal drafting). Much of the project- hiring longer-term consultants to work with full-time specific work is done internally, however, with one or two officers from Partnerships Victoria staff. Box 4.3 describes how different PPP Units have involved in each project. If consultants are hired sought to ensure they have the right skills to carry out they are typically hired as outside advisors for their responsibilities. 6-12 months, working from their own offices and not as internal staff. High Transaction Costs • Portugal's Parpublica uses outside consultants Where each PPP transaction is a bespoke deal, only when they have a specific engineering and each is considered on an ad hoc basis, the question they need to consider. transaction costs for both the private and the public sector are likely to be high. The costs of implementing • Korea's PIMAC tries to do as much of the work a PPP can be reduced through: in-house as possible, with at least three PIMAC staff assigned to each project. • Preparation of standard "off-the-shelf" legal documentsand operations ma nuals. Standardized documentation can help to limit the time that line partners will already be familiar with the basic ministries and their transaction advisors spend terms of PPP contracts from previous transactions. preparing basic documents. Continued use of lhe UK Treasury, for example, has a guide to standardized documentation can also limit the Standardization of PFI Contracts (SoPC) with the amount of time governments spend clarifying goal being to: "promote a common understanding tender documents or negotiating contracts with of the main risks which are involved in a standard private sector partners, because private sector PFI project ... to allow consistency of pricing 34 II Section 4 and approach across a range of similar projects How Government Failures Determine Unit and ... to reduce the time and costs of negotiation Functions by enabling all parties to agree to a range of PPP Units can contribute to the success of a PPP areas that can follow a standard approach without program when the PPP Unit addresses the failures extended negotiations." 6 identified in Section 4.2. This hypothesis will be • Standardization of procedures and requirements tested in Section 5, but first it is necessary to relate (such as acquiring permits) for bringing a project the failures to functions (intended to address those from inception to closure.! Such standardization failures). can reduce redundant government activity and As shown in Figure 4.1, we believe PPP Units the time required to grant approvals. contribute to the success of a PPP program if they Standardization of documentation, procedures and fulfill five functions, namely: requirements can also lower transactions costs for the • Technical assistance to the public sector, private partner. Over time, these lower transactions private sector, or both. In Bangladesh, the costs should, at least in theory, pass through to the Infrastructure Investment Facilitation Center government in the form of more competitive bids. A PPP (IIFCJ was established to address a complete program with high-quality documentation and clear lack of experience, among line ministries, in procedures can reduce the effort and risk-adjusted procurement and most forms of interaction with value of time the private partner must commit. the private sector. • Policy formulation and coordination. In some Lack of Information cases the Units are the only source of PPP policy. Finally, investors may not have adequate In Victoria, Australia, Partnerships Victoria is the information about the opportunities available in a embodiment of the government's PPP policy. particular country, or may have misperceptions about • Quality control of PPPs, throughout the life of the the risks involved. A PPP Unit could improve the flow contract, and not only prior to contract signature. of information by focusing on the need to promote In South Africa, for example, the PPP Unit was PPP opportunities in a way that no other government established to stop fiscally irresponsible PPPs agency would be able to. A PPP Unit may even from being designed to skirt new government become a recognized "brand," like Partnerships UK, budget reforms. In Victoria, Partnerships Victoria so that information from this Unit would be seen as was established to make sure the government being reliable and valuable. was getting value for money for its PPPs and By providing better information to the private sector, transferring optimal (rather then maximum) risk. PPP Units can help jumpstart the market for PPPs. In • Promotion/marketing of PPPs, possibly the UK, PFI has helped attract nearly £50 billion of extending to origination of PPPs. In Republic private sector investment in infrastructure. of Korea PICKO (PIMAC's predecessor) was established to help both the private sector and 6Standordization of PFI Contracts, Version 3. HM Treasury. April, 2004. p. 9. 7Standard requirements may include any permits [for example, construction or natural resource permitsl needed from other government agencies. 35 Public-Private Partnership Units government agencies better grasp the potential this paper does not try to construct a hypothetical benefits of PPPs. counterfactual for each of the jurisdictions being • Standardization and dissemination of information studied. Far example, it does not ask whether the about the PPP program. In nearly all the cases most likely alternative to the National Investment Bank we surveyed, the PPP Units have taken at least of Jamaica would have been a specialist Unit with the some efforts to: Prime Minister's office, or no Unit at all. Where a Unit has been identified as being relatively unsuccessful, - Standardize procurement and thereby lower the implication could be either that a Unit with the transactions costs of procuring PPPs more appropriate functions could have been more - Develop a well understood pipeline, thereby successful, or that, in the particular circumstances of increasing bidder interest. the country in question, an alternative institutional solution would have been more appropriate. Alternatives for Addressing Government Failure There are many examples around the world of successful PPPs being implemented without a central PPP Unit. The government of Victoria, for example, implemented PPPs for tram and suburban train transport in Melbourne, as well as a major toll road, before the Partnerships Victoria Unit was established. These transactions were managed by task forces reporting jointly to the Department of Treasury and Finance and the relevant sector ministry. Government failures that may justify the creation of a PPP Unit are not necessarily universal, and a PPP Unit may not be the only solution to a government failure, or may only be part of a broader set of institutional solutions. Table 4.2 lists examples of how governments may fulfill the functions of PPP procurement and implementation without (or in conjunction with) PPP Units. As stated in Executive Summary, this paper seeks to show whether PPP Units have contributed to successful PPPs and, if so, under what conditions. In each individual case, the success of the PPP unit needs to be considered against the counterfactual of the government using alternative institutional solutions to perform various functions associated with PPPs, and hence, to address possible government failures. Given the time and resource constraints for the case studies, 36 Section 4 Table 4.2 Alternatives to Addressing Government Failure Government Functions IPossible Institutional Solutions Set PPP Policy & Strategy • PPP policy and strategy determined at executive level, enshrined in a government policy statement or legislation Project Origination/Identification • Teams within implementing agencies conceive or identify their own projects • Private sponsors are allowed to propose (unsolicited) projects, with a mechanism to tender the proposals competitively while compensating the project sponsor for effort put into developing the proposal Analysis of Individual Projects • Teams within the implementing agencies undertake their own analysis, or outsource the function to private advisors, and manage the advisors Transaction Management • Teams within the implementing agencies hire transaction advisors and manage the work of the transaction advisors Contract management, monitoring, • Project officers within implementing agencies manage the and enforcement contracts • A sector regulator monitors the contract and enforces contract if there are breaches • A specialized and independent contract management unit (CMlJ) is established to manage the contract, staffed by highly competent individuals from either the public or private sector 37 Section 5 5 PPP Unit Functions as Determinants of Success It was proposed in Section 4 that PPP Units could those reasons were consistent with what have contribute to the success of PPPs jf they fulfilled been identified as the "right" reasons for PPP in specific functions designed to correct government see Section 3.2 failures. A successful PPP was defined in Section 2.3 • Considered the level of total PPP activity in as one that: a given country, using the broadest possible • Provides the services the government needs definition of PPP (spanning from management • Offers value for money as measured against contracts to divestiture) public service provision (where value for money • Considered anecdotal evidence of "bad" PPPs is measured by the net present value of lifetime that showed, for example, hidden fiscal risks or costs, including the cost of risk-bearing) poor alignment with policy • Complies with general standards of good • Considered any background factors that make governance and specific government policy each country's circumstances different enough such as: to justify an adjustment in score. A successful - Transparent and competitive procurement PPP in Bangladesh, for example, is considerably more difficult to achieve than a successful PPP - Being fiscally prudent in Victoria. - Complying with the legal and regulatory The sections that follow summarize the main regimes that apply to the industry in which the conclusions of the case studies. Each case study: PPP will exist. • looks at why each country pursued PPPs, and A successful PPP program is a program that fosters why a PPP Unit was created successive PPP transactions that meet the criteria above. • Assesses whether the PPP program was In practice, this paper measures success in a successful way slightly different from that defined above, because of the limits of available data. Cross-country • Assesses whether (and how) the PPP Unit comparisons of value for money, for example, are contributed to the success or failure of the not likely to be meaningful given the different way in PPP program. which each country calculates VfM, and the fact that Full case studies can be found in Appendix A. some countries do not formally calculate VfM at all. Anecdotes, however, are available on agreements Infrastructure Investment Facilitation Center that governments have canceled or tried to cancel (IIFC), Bangladesh because they were unsatisfactory. The Infrastructure Investment Facilitation Center Because somewhat different data are available (IIFC) was established in 1999 to promote and for each country, the approach to scoring success facilitate private sector participation in infrastructure necessarily differed somewhat from case to case. In in Bangladesh. IIFC was established to have a policy general, however it took the following steps: role and a transaction advisory role, and to advise both the public and private sectors. More specifically, • Considered whether the PPP program succeeded IIFC was intended to: in achieving the goals set for it, and whether 39 Public-Private Partnership Units • Assist line ministries and other government The record on the quality of transactions has agencies in identifying and prioritizing potential been mixed. Procurement in the power sector, which infrastructure projects for tender, and assist with represents most of the value of PPI completed since project evaluation, award, negotiation, and 2000, offers examples of both quite good and implementation quite bad projects. Independent power producers • Promote private sector participation in (IPPsJ represent roughly 25 percent of Bangladesh's infrastructure in Bangladesh by working with the generation capacity. The Haripur and Megnaghat private sector and serving as a clearinghouse of projects, two large IPP projects completed in expertise on public private partnerships. Bangladesh in 2001, are regarded internationally as successful examples of competitive procurement that Another institution, the Infrastructure Development have continued to yield value for Bangladesh in terms Company Ltd (IDCOlL was established concurrently of power reliability at reasonable cost. with IIFC to provide government debt financing for infrastructure projects. IIFC and IDCOl are More recent IPPs, however, have not been of government-owned, limited liability companies. They comparable quality. Government has shown a were established with financial support from The tendency to interfere in the procurement process. World Bank and other donors. IIFC, in particular, This interference has affected the ability of received support in the form of consulting services Bangladesh to install much-needed capacity.9 Some sponsored by the Canadian International Development of the newer IPPs have shown reliability problems, Agency (CIDA), and the Department for International resulting from a combination of poor technology Development [DFIDL UK. The World Bank continues to choice, improper design, and faulty operation and finance 50 percent of liFe's operoting budget. maintenance practices. IIFC has emphasized that its role is not to encroach IIFC has worked on roughly 25 projects. It has on the technical and contracting functions of the assisted in the award of seven-eight licenses to fixed agencies, but to provide technical assistance when line telephone companies, and six land ports at required. line ministries are not required to seek liFe's the country's border points (the latter are worth an assistance or to follow any of liFe's guidelines. estimated US$3 million each). A seaport, a fiberoptic power transmission project, five remote area power Track Record of PPP in Bangladesh supply systems, and an IPP are also currently in Despite massive investment needs, Bangladesh different stages of development. has seen extremely low levels of PPP and Private Participation in Infrastructure (PPI). Average annual liFe's Role PPI has represented 0.45 percent of average GDP In terms of expertise, IIFC rates quite well. IIFC since 1990. Bangladesh ranks 103rd out of 124 has much more experience dealing with the private (developing world) countries for this investment ratio, sector, and with procurement, than do staff in the line and 6th out of 6 countries in the region. a ministries. As a result, line ministries do rely on liFe's llCalculated with data on PPI from the World Bank PPI Database (ppLwaridbank.org), and IMF World Economic Outlook Database, September 2006 (http://www.imf.org/external/pubs/ft/weo/2006/02/data/index.aspxl. The Appendix has comparable figures and rankings for other of the developing countries included in the case studies. 9The World Bank. Bangladesh Country Assistance Strategy. April 12, 2006. Box 2. 40 Section 5 services to some extent. liFe's success in building considerably, as has the average value of each such expertise is due in part to its ability to offer project, from roughly US$250 million to US$90 higher compensation than that offered elsewhere in million. 1o This is not likely a result of liFe's activities, the public sector. however. IIFC appears to have had only limited, IIFC does less well in its other functions. This is or at best inconsistent, involvement with the PPP because of: transactions closed in Bangladesh since 2000. Individuals familiar with liFe's activities note that it • A lack of any clear formal or informal power. has succeeded in accumulating more knowledge of IIFC provides technical assistance to a Private PPPs than other government agencies, and may have Infrastructure Committee (PICOM) that sits in the succeeded in helping to keep the PPI agenda alive in Prime Minister's office, but in practice IIFC has Bangladesh. Ultimately, however, liFe's overall effect not been influential. In 2004 IIFC developed a on PPI has been limited because government agencies set of Private Sector Infrastructure Guidelines for have no obligation to use liFe's services or follow any PICOM (with a similar goal as the PPP Manual guidelines it may establish. in South Africa). These guidelines are fairly comprehensive and include, among other things, the requirement for a least-cost competitive Nationallnveshnent Bank of Jamaica (NIBJ) tender for PPI projects. Experience has shown, The National Investment Bank of Jamaica (NIBJ) however, that line ministries are not required to has had primary responsibility for implementing PPP follow the gUidelines. arrangements in Jamaica since 1984, succeeding the Jamaica National Investment Corporation UNIC).11 • lhe fact that many parallel agencies have Widespread dissatisfaction with the operating responsibility for procurement of PPPs. efficiency of government-owned enterprises, and Procurement in the power sector, for example, their drag on the government's budget, provided has been undertaken by a range of entities. the impetus for introducing greater private sector IDCOL was involved in the procurement of participation in these enterprises. the Meghnaghat IPP. Power Cell, a division of the Ministry of Power, Energy & Mineral Many government officials viewed NIBJ as relatively Resources, is now formally responsible ineffective during the 1980s, and little different from for IPP procurement, but recent IPPs have its predecessor. The government therefore sought to apparently been negotiated without Power give new life to the privatization program in 1991 Cell's involvement. Some individuals familiar with Ministry Paper No. 34, which contained the first with IIFC in Bangladesh suspect that the line official government policy statement on privatization ministries may be asking IIFC to handle only and formalized NIBJ's responsibility for implementing the less attractive, unviable projects. the privatization program. 12 Since IIFC was established, the average value of each PPI transaction appears to have decreased IOThe average PPI project size and annual average value of PPI are the same because the number of projects and number of years used as the denominator are identical (in other words, Bangladesh closed one PPI project per year belween 1990 and 1999, and closed one PPI per year belween 2000 and 2005. 11 By order of Ministry Paper No. 24 of 1984 12We use the term 'privatization" throughout this discussion of Jamaica, but PPP arrangements under NIBJ included performance-based management contracts, BOOs, BOTs, concessions, and leases, in addition to full divestiture. 41 Public-Private Partnership Units The privatization process was meant to: • Most PPPs failed to improve operating efficiency • Secure greater efficiency and shift appropriate risks to the private sector. • Reduce fiscal drain from government-owned • Several large PPPs have required government enterprises bailouts of the privatized enterprise. • Optimize the government's management • Patronage and secrecy in the political process resources has called into question the fairness of some privatizations and compromised transparency in • Secure enhanced access to foreign markets, some tenders. 14 technology and capital • Transactions took longer than expected. • Broaden the base of ownership in the society. Jamaica's PPP program appears to have failed in Other goals included streamlining the public reaching the goals that were set for it, one of them sector, improving openness and transparency in the being the reduction of fiscal drain. The fiscal burden privatization process, removing excessive bureaucratic of PPPs has persisted, largely because the government intervention in the marketplace, and broadening the has intervened to bailout several failed transactions , base of ownership and competition in the economy. including Air Jamaica. This is something the country can ill afford, since Jamaica's public debt stands at Track Record of PPP in Jamaica 128 percent of its GDP. Jamaica ranks 5th in the Jamaica completed roughly 45 PPPs between 1989 world in its debt to GDP ratio. 15 and 2003. Twelve of these were in infrastructure, the others in competitive sectors. The PPPs consisted of NIBJ's Role a mix of performance-based management contracts, As the principal driver of Jamaica's privatization Build Operate Own, Built Operate Transfer, program, NIBJ's objectives were synonymous with the concessions, and leases, in addition to full divestiture program's objectives. However, NIBJ failed to meet of existing assets. most of those objectives, for two main reasons: Average annual PPI in Jamaica has represented • The objectives focused more on the outputs roughly 2.25 percent of average GDP since the late of PPP, with little clear definition of what was 1980s. Jamaica ranks 39th out of 124 (developing needed to be done to get there, and how NIBJ world) countries for this ratio, and 9th out of 21 in the could help. In other words, there appeared to Latin America and Caribbean Region. 13 be little thought upfront about what makes for Despite the volume of PPP activity in Jamaica, "good" PPPs, and how to implement them. For however, many transactions have seen problems example, NIBJ had attorneys and bankers, but in that: not economists, on its staff. Evaluation of PPP options and specific transactions never involved 13Calculated wi.th data on PPI from the World Bank PPI Database (ppi.worldbank.org), and IMF World Economic Outlook Database, September 2006 (http://www.lmf.org/external/pubs/ft/weo/2006/02/data/index.aspx) I"Data Resource Systems International {DRSI} ltd. Privatisation Impact Assessment Study, May, 1995. Privatisation Impact Assessment St d M 1995 _DRSllimited. u y, ay, 15CIA World Factbook 2006 (https://www.da.gov/cia/publications/factbook/geos/jm.html). 16DRSlltd. 42 Section 5 any economic analysis of whether the transaction of airline carrier competition in the Caribbean would be good for Jamaica. Careful analysis of makes such a move questionable from an risk allocation and efficiency gains were similarly economic standpoint. absent. One report found that " .. .the Jamaican - An abandoned effort to privatize the electricity approach has often been described as involving company Jamaica Public Service (JPS) in mainly ownership transfer with little or no focus 1996 left government management in place on the efficiency of operotions."16 until another privatization attempt in 2001. The tradition unfortunately continues. Jamaican During those five years, because of poor officials who have seen the terms of the concession government management, capacity margins for Jamaica Highway 2000, the country's first fell to 9 percent, from 26 percent, service and so far only toll road, report that most of the quality deteriorated, and JPS' cash surpluses operational risks remain with the government, dwindled. The government sold 80 percent not the private sector operator. ihe details of the of the utility for roughly US$200 million, contract remain confidential. The primary goal but effectively earned no proceeds because appears to have been to build a road off the of the sale agreement that was negotiated, balance sheet, with debt that is largely or entirely which provided for the government to govern ment-guaranteed. absorb the approximately US$$200 million • Jamaica's PPP strategy ultimately proved to in accumulated sector debt, largely to be inconsistent with the country's political multilateral financial institutions, that was left preferences for greater government control of on JPS' books. state-owned enterprises, and those political NIBJ was responsible for most of the PPP transactions preferences were inconsistent with the country's undertaken in Jamaica, and was designated, from its needs. The government proved unwilling to follow creation in 1984, to drive the privatization program. through on its privatization efforts, reversing NIBJ has originated most of the PPPs, and leads the those efforts, or backing out of plans in several interagency Enterprise Teams that manage each instances, at high cost. For example: transaction. This is not to say that Jamaica's failed - In 1994, the government sold a 78 percent PPPs are all the "Fault" of NIBJ. As the conclusions stake in Air Jamaica to AJAG group, a suggest in Section 6, NIBJ is, to some extent, a victim consortium owned in part by Sandals Resorts of the legacy of poor institutional design and lack of owner Gordon "Butch" Stewart. AJAG group high-level political support for clear policy decisions is credited as rehabilitating the airline's image and clear transaction processes. and increasing market share, but at significant expense to the government. AJAG continually Philippines Built Operate Transfer (BOT) Center sought and secured the government's The government of the Republic of the Philippines' agreement to cover the airline's losses. After efforts to attract private sector participation in state- restructuring debt to cover these loans, the owned industries dates to 1987 with President government eventually found itself with a Corazon Aquino's issuance of Executive Order (EOl controlling share, and again took complete 215. EO 215 sought to avoid an imminent power control of the airline in 2005. The abundance crisis by allowing IPPs to build and sell generation 16DRSlltd. 43 Public-Private Partnership Units capacity to the state-owned power network on a take- of the national infrastructure development plan." IS Its or-pay basis. functions include, primarily: The Coordinating Council of the Philippine • Project development, through technical and Assistance Program ICCPAP) had been created in financial assistance to line agencies and Local 1989 primarily to mobilize overseas development Government Units (LGUs) assistance funds. The Philippines Assistance Program • Promotion of the PPP Program and marketing (PAP) overseen by CPAP had been established by the projects to potential investors and project U.S. Congress to support economic growth in the stakeholders newly restored democracy of the Philippines. PAP was • Policy review and formulation to create a policy designed to foster private sector involvement, which framework for PPPs that responds to private was seen as a primary driver of economic growth. sector concerns while protecting the interests of In 1993, the CCPAP Chairman was designated the Philippines Presidential Action Officer for the promotion of BOT, • Assisting line agencies and LGUs in monitoring and the CCPAP-BOT Centre was created. CCPAP existing contracts. was effectively an autonomous Unit, attached to the In 2002, Executive Order (EO) 144 reorganized President's Office. The 1994 revision to the BOT law and converted the CCPSP and its Technical Secretariat (RA No. 7718) formally gave CPAP responsibility for to the BOT Centre, and transferred CCSP's attachment coordinating and monitoring BOT-type projects and from the Office of the President to the Department of for taking a more pra-active approach to attrocting Trade and Industry. private investment. In 1999, CCPAP was reorganized into the Track Record of the PPP Program Caordinating Council for Private Sector Participation Average annual PPI has represented roughly 3 (CCPSP), and its authority expanded to cover a wider percent of average GDP since 1990. The Philippines range of PSP, including joint venture agreements ranks 26th out of 124 (developing world) countries for UVA), concession arrangements, service and this ratio, and 7th out of 16 countries in the region. 19 management contracts, and other forms of public PPP activity has been robust in the Philippines, private partnership.17 but the quality of the contracts has been variable. CCPSP has stated its mission as "effective, The many IPP agreements Signed during the 1990s efficient, and sustainable infrastructure systems and succeeded in attracting roughly 4000 MW of new services to meet the basic needs of every Filipino and capacity-but at substantial cost to state-controlled spur economic development. Its mission: to actively energy companies. The power purchase agreements promote public private partnership as a cornerstone ended up providing more capacity than the country needed [but had agreed to pay for nevertheless), l'rhe BOT Centre is not responsible for privatization. A separate gavernment agency, the Privatization Office, is responsible for divestiture. With the change in law, BOO do fall under the purview of the BOT Centre but any BOO requires presidential opproval. lBFrom CCSP: Championing the Philippines BOT law [www.ip3.org/pub/publication014.htm). 19Calculated with dota on privatization proceeds from the World Bank Privatization Database (http://rru.worldbank.org/privatization/L ~ata on PPI from the World Bank PPI Database [ppi.worldbank.org), and IMF World Economic Outlook Database, September 2006 (http://www.lmf.org/ external! pubs/ft/weo/2006/02/data/index.aspxl. 44 Section 5 and included fuel cost guarantees that limited the some guidance on procurement rules, but the private sector's exposure to demand and fuel input BOT Centre has produced a project development cost risk far beyond the risk protection offered in IPPs manual and draft contracts to further assist other in other countries. government agencies. The BOT Centre has also PPP activity in the Philippines has also seen some been involved in some successful transactions well known failures, including the world's largest managed by other agencies, including the 1996 water sector PPP, the Maynilad Water concession, and MWSS Manila Water concession. 2o a concession agreement with the Piatco consortium to The BOT Centre's role has focused much more on build and operate Terminal 3 in the Ninoy Aquino technical assistance with project development than International Airport (NAIA). on its other formally defined roles. The BOT Centre has no formal mandate to approve or deny a line Role of the BOT Centre agency or LGU's ability to pursue a PPP transaction. The intended scope of the BOT Centre's activities As one former BOT Centre official commented, is quite broad, but it has not played as far-reaching a the Centre cannot even compel line agencies to role in PPP as its responsibilities might imply. submit status reports on project development or As of September 2005, the BOT Centre had assisted contract performance. in bringing 60 transactions, worth roughly US$18 The BOT Centre formally serves as advisor to billion, to financial closure. Power sector transactions the Investment Coordination Committee (ICCl, represented roughly 40 percent of the total value of an interministerial committee that evaluates the transactions, and the US$7 billion privatization of fiscal implication of major projects and makes Manila's Metropolitan Water Works and Sewerage recommendations to the President. 21 Transactions can System [MWSS) represented another 40 percent. The happen without the BOT Centre's involvement and remaining 20 percent oftotal transaction value is made some do [especially local government transactions). up of several smaller transactions in the transport, However if a project reaches the ICC, the ICC often t information technology, property development, and recommends that the line agency seek assistance of health sectors. the BOT Centre. In addition to transaction management, the The BOT Centre (unlike most PPP Units we BOT Centre has provided technical assistance on surveyed) does have a formal monitoring role. In project development. Philippines line agencies and practice, however, its has been less effective in its role LGUs generally have limited understanding of how as contract monitor, because its monitoring function to determine whether a project is worth pursing, vis-a-vis the implementing agencies has never been and how to procure it. The BOT Law provides clearly defined. The BOT Centre therefore monitors 2°The privatization of MWSS in 1997, the largest woter privatization in the developing world, has resulted in two drastically different outcomes. One concessionaire, MWCI, performed satisfactorily and became profitable, whereas the other, MWSI, incurred huge losses, defaulted on the concession fee, and declared the suspension of its concession contract. Despite the severe financial problems of one of the two concessionaires, water supply service levels improved in both zones from the preconcession period. Between 1997 and 2002, the total population receiving water services increased by about 1.7 million. Total combined water sales increased by 28% while almost 200,000 new water connections were added. 21lCC members include the Secretary of Finance as chairman, the National Economic and Development Authority Director-General as ccrchairman, and the Executive Secretary, the Secretaries of Agriculture, Trade and Industry, Budget and Management and the Governor of the Central Bank of the Philippines. 45 Public-Private Partnership Units contracts on an ad hoc basis only. The BOT Centre to the European Central Bank, Portugal was left only has no leverage to change contracts but has often with fiscal tools for macraeconomic management. been asked to advise implementing agencies when By 2001, Portugal's economy had large amounts contracts ran into trouble. of external debt, with significant current and capital Like IIFC in Bangladesh, the effectiveness of the account deficits. Portugal became the first of the BOT Centre appears to be limited by a lack of formal members of the Monetary Union to breach the control over PPP procurement, or in the absence of Eurozone's Stability and Growth Pact budget deficit formal control, informal influence. Former BOT Centre target of 3 percent. staff have observed that the informal influence of the The government responded by launching a BOT Centre peaked under President Ramos in the comprehensive program of fiscal reform with the late 1990s, and has declined since the Centre was 2001 Budget Framework Law. This law moved the subsumed to the Department of Trade and Industry government away from year-on-year budgeting in 2002. toward multiyear budgeting, planned a transition toward activity-based budgeting, and set out common Parpublica PPP Unit, Portugal principles for government accounts, budget planning, Portugal pursued its first PPPs in the mid-1990s, and auditing. 23 The law also includes two provisions primarily as a way to have new infrastructure built specifically relevant to PPPs, namely that: quickly in a way that would rely on private sector, • Government agencies are to make explicit rather than fiscal resources. Most of these early PPPs appropriations far PPPs, and to explicitly show the were in the transport sector, as shadow toll agreements long-term fiscal consequences of such agreements with private operators to build highways and bridges. • As part of the assessment of any PPP, a These early PPPs proved problematic in that they: counterfactual similar to the public sector • Failed to consider the long-term affordability comparator used in the UK and Victoria, of PPPs Australia, must be used. • Suffered from delays and cost overruns, caused, In 2003, the government passed Decree Law at least in part by: No. 86/2003, which provides for lithe definition of - Insufficient risk transfer to the private sector general rules related to Government intervention in the - Rigidities in the procurement process design, conception, preparation, tender, adjudication, • Suffered from a lack of public sector capacity modification, auditing and global surveying of public- for evaluating and managing such partnership private partnerships." The law also sets minimum agreements. 22 requirements for PPPs, which seek to avoid problems experienced with past agreements. Portugal's accession to European Monetary Union in 1999 called attention to the importance offiscal policy, Parpublica SA, a company owned entirely because of the stringent requirements of monetary by the treasury, was subsequently given formal union and because, having ceded monetary policy responsibility for enforcing Decreto Lei No. 86/2003 by Despacho Normativo 35/2003. 24 The PPP Unit 22Monteiro, Rui Sousa. public-Private Partnerships: Some Lessons from Portuguese Experience. January 20, 2005. 23Lei de Enquadramento Or<;amental, Lei 91/2001, changed and republished by Lei Orgonica 2/2002 and by Lei 48/2004. 24A group within Parpublica had been advising Portugal's Department of Treasury on PPPs since 2000. 46 " Section 5 carries out a separate technical assessment of each Portugal's PPP program therefore appears to PPP project [including an assessment of the tender have been successful in improving the affordability documentation) before the procurement phase and and risk transfer of PPPs in recent years. It has also provides its recommendation to the Ministry of maintained the flow of deals-essential in a country Finance. The Unit also provides technical assistance with relatively heavy reliance on PPP to build and to line ministries at various stages of PPP procurement operate its infrastructure. and management. Role of Parpublica PPP Unit Track Record of PPP in Portugal There are clear signs that Parpublica has played PPP activity in Portugal has been concentrated in an important role in helping the government -think its the transport sector but has also included significant approach to PPP. For example, since establishing the activity in the water and wastewater sector, and PPP Unit, the government has sought to change its increasing activity in the healthcare sector. approach to PPPs, in order to address some of the Portugal's earlier PPPs succeeded in building new fiscal problems created by earlier PPPs. One of the infrastructure, but imposed a significant longer-term government's responses has been to change the nature fiscal burden. In a spring 2003 audit of existing PPPs, of PPP arrangements it considers. In 2004, Portugal's Portugal found that its PPP-related liabilities amounted shadow toll obligations stood at roughly €700, to 10 percent of GDP. The legacy of Portugal's large representing 0.5 percent of GDP. The government transport PPPs in the 1990s continues to be felt as consequently decided to replace shadow tolls with a drain on government finances. Portugal met the real tolls in highway concessions. Eurazone's Stability and Growth Pact targets in 2002 The PPP Unit has, moreover, attempted to rationalize through 2004, but the deficit reached 6 percent of risk allocation in PPP arrangements by encouraging GDP in 2005 and was 4.6 percent in 2006. line agencies to break single PPP projects into multiple The budgetary reform laws do not appear to have projects that better align risks, responsibilities, and slowed PPP activity, but recent PPPs have been better payments to the actual risks of the PPP. For example, deSigned. PriceWaterHouseCoopers has estimated for rail transport PPPs, the service of the infrastructure that Portugal closed roughly US$l 0-$1 2 billion in and the rolling stock are subject to availability risk, PPPs during 2004-05, representing 10 percent of but transport services are subject to demand (traffic) all deals closed in Europe. 25 Of its European peers, risk. The contracting period for transport services can Portugal has had, by far, the highest PPP activity when therefore be shorter than the contract for making the measured as a percentage of GDP in Europe. 26 The network and trains available. Parpublica envisions a total value of PPP project investment since 1994 is similar model for hospital services, where a shorter worth more 120 percent of the country's current GDP, contract is more appropriate for clinical services than twice the level of the country with the next highest for the management of hospital buildings. 27 ratio (the UK). 25Delivering the PPP Promise. PriceWaterHouseCoopers. 2005. 26PPP activity is measured in terms of average investment value during 2000-2005. 27Monteiro, Rui Sousa. Public-Private Partnerships: Some lessons from Portugal. EIB Papers. Volume 10, No.2, 2005. 47 Public-Private Partnership Units South Africa Treasury PPP Unit Track Record of PPP in South Africa Regulation 16 of the Public Finance Management South Africa's PPP program has seen 13 deals Act [PFMA) established South Africa's National closed since its establishment. Seven of these projects Treasury PPP Unit in 2000 as a filter to exclude fiscally are worth a net present value of US$220 million irresponsible PPP transactions. The PFMA defined a in annual payments from the public to the private broad program of fiscal reform, begun in 1997 with partner for services provided ("unitary charges"]. The greater decentralization of government budgeting other five have a net present value of US$80 million and the requirements that government agencies in cash, capital works, and operations. 28 These deals prepare three-year rolling spending plans and seven- included services in the transport, healthcare, IT, and year forecasts. During this time, some government government housing sectors. The PPP Unit closed its agencies began using PPPs as a way to circumvent most recent transaction in April 2004 [A Social Grant PFMA's formal budgetary limits. Payment System for Orange Free State). Eight PPP The PPP Unit's creation was driven primarily by deals were closed before the PPP Unit was created. treasury concerns over a specific PPP transaction These projects included two toll road projects, two proposed by the Min istry of Public Works. The Ministry prisons, and four national parks. Most recently, of Public Works intended to procure a 3Q..year Build in February 2007, the PPP Unit saw the successful Operate Transfer contract for two prisons. Treasury closure of the Guatrain project, under which a private found out about the contrad, and asked to review firm will build and operate an underground train it. Treasury's analysis found that the prisons indeed between Pretoria and Johannesburg, and from the offered value for money [in the sense of being better Johannesburg airport to the city center. value than a public sector alternative), but would A considerable amount of private sector investment be extremely expensive to build, and would likely in state enterprise has taken place without the PPP require resources the Ministry of Public Works did not Unit. The South African Roads Agency signed some of necessarily have. the country's first toll road concessions in 1997, and Treasury stopped the prison BOT, but feared the success of these PPPs helped, in part, to inspire that doing so could signal to private investors a the creation of the PPP Unit. Other large private sector precedent for arbitrary intervention in PPPs. Treasury investments have involved ownership tronsfer, and sought to establish a clear a set of rules for PPPs have been dominated, in terms of value, by several in an effort to prevent fiscally irresponsible PPPs large transactions in the mobile telecommunications while also seeking to maintain investor confidence sector. Annual PPI in South Africa has averaged that a clear set of rules existed for private sector roughly 0.44 percent of GDP since 1984. South involvement in state enterprises. Africa ranks 111 th out of 124 (developing world) countries for this ratio, and 34th out of 42 countries in the region. 29 1SThese figures exclude the US$3 billion Gautrain project, of which the private developer's participation is worth roughly US$500 million. 29Colculated with data on privatization proceeds From the World Bonk Privatization Database (http://rru.worldbonk.org/privotization), data on PPI From the World Bank PPI Database (ppLwarldbank.arg], and IMF World Economic Outlook Database, September 2006 [http://www.imf.org/external/ pu bs/ft/weo/2006/02/data/index.aspx). 48 Section 5 Role of Treasury PPP Unit Partnerships UK and Treasury Taskforce, United The objectives of South Africa's PPP Unit are Kingdom perhaps more limited than that of PPP Units elsewhere. The government of the United Kingdom has been These objectives were, primarily, to prevent poorly running an active PPP program since 1996. The designed PPPs, and not necessarily to promote PPPs. Private Finance Initiative [PFI) is used in a variety The PPP Unit does appear to have succeeded in of infrastructure sectors including accommodation, ensuring that those PPPs transactions that proceed are education, environment, defense, equipment, health well designed and fiscally responsible. service, housing, and transport. The projects are The PPP Unit's success is owed, at least in part, to the procured using regulated Design Build Finance environment that existed to support it, specifically: Operate (DBFO) bids. • The PPP Unit was launched as part of a package The PFI was originally seen as a "financial of fiscal reforms that made explicit the treasury's force multiplier." Under John Major's Conservative role in approving government agencies' budget government it was a way to control the government decisions on PPPs. Legally, municipal and federal debt by keeping liabilities off the government agencies can launch feasibility studies and begin balance sheet. soliciting investor interest without consulting the Tony Blair's New Labour government changed PPP Unit. In practice, however, most agencies the focus from off-balance sheet financing to seek the Unit's advice at the inception of a PPP value for money through private sector innovation idea, and investors will pay an idea little attention and efficiency. It also rebranded the progrom as unless they know the PPP Unit is involved. "Partnerships UK," though the term PFI is still used. • The PPP Unit was located within the treasury. The All proposals ore compared to a "public sector PPP Unit's formal role is advisory only. However, comparator," which estimates the total risk-adjusted in practice, the Unit has tremendous influence and cost of carrying out the project in the public sector. credibility, and therefore effectively has the last Only those that can be done more cheaply in the word on PPP projects. The Unit's location within private sector are implemented. the treasury also means that it has had access, The UK has separate PPP policy and project from its inception, to a set of skills well suited to development agencies. The project development evaluating the long-term fiscal consequences of agency, Partnerships UK, advises government PPPs and procuring private partners. agencies on PPP projects and finances itself by The treasury PPP Unit has been criticized by some charging fees to the public sector. The policy observers for being too restrictive, either directly taskforce sits within treasury and sets guidance or tacitly preventing good PPPs. A related criticism on procurement, deal structuring, and evaluation. is that the PPP program has focused only on the Individual line ministries also typically have their "easy" PPPs, implementing what amount to glorified own project development teams. service contracts that are not as ambitious as they All PFI transactions must be given treasury approval could be in terms of transferring responsibilities to at several stages before final contract signature. Both the private sector, nor in addressing South Africa's Partnerships UK and The treasury have responsibility most dire infrastructure needs, many of which are for national and local PFI. in the municipalities. 49 I' Public-Private Partnership Units Track Record of PPP in the UK The UK's PFI activity during the period Roughly 700 projects have reached financial close 1994-2005 represents roughly two-thirds of all since 1996, worth US$80 billion in capital. This total activity in Europe. 30 is equivalent to roughly US$8 billion per year in new PFI projects are also more efficiently implemented projects, or roughly 0.4 percent of the UK's average than publicly procured projects. An average of 80 GDP during the same time period. The PFI program percent of PFI projects were delivered on time and contributed 10 percent of total UK investment in public on budget compared to average of 30 percent for services in 2004. publicly procured projects. The PFI system has also been successful in providing value for money insofar as each PFI Figure 5.1 Signed Deals and Capital Value by Financial Year Signed Deals and Capital Value by 100 4000 +--.~~.--.-~.~-.--~.-.- ..- ...--..- -...-~/- E 3500 J!l u ~ 80 CD +--.. -.-~. - .--.....~-. .-.--.. -..-.--/.---..-.-. .[ - CD 3000 ::::I Q. ~ 2500 j 2000 +--..~~. .- -..- -.. ~~.~--.f-~ +----...~--. --~.-. ---....~__/~---. - 60 . 0 CD os. 40 ..0 E (J 1500 -I-------..--.~-..- . - J L - ::::I Z 1000 20 500 o 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Presentation by Ed Farquarson of Partnerships UK, 22 March 2006 at the World Bonk. 30 Delivering the PPP Promise. PriceWaterHouseCoopers. 2005. 50 Section 5 project must compare favorably against a public the private sector, and reducing costs to government. sector comparator. The successful Citylink toll road was implemented The primary criticisms raised about the UK's PFI under the Kennet government. program in general are: In 1999 labour was returned to power in Victoria, • The time to close contracts can be lengthy under Premier Steve Bracks. The Bracks government (the average time to close deals is slower in followed the lead of New labour in the UK, introducing the UK than in PortugalL and the negotiation "Partnerships Victoria," an adaptation and expansion process costly. of the previous PPP pragram. The focus is on optimal risk transfer, maximizing efficiency, and minimizing • Deal flow has slowed recently, but many whole-life costs. recognize this is the result of a maturing market for PPPs. A team within Victoria's treasury is responsible for implementing the policy. Despite these criticisms, the program indeed appears to have been successful in increasing the volume of high quality transactions that, by nature of Track Record of PPPs in Victoria the selection process, provide value for money and A recent speech by Victoria's treasurer claimed, appropriate risk transfer. "Australia is now the second most developed PPP market in the world" after the UK.31 Role of Partnerships UK and the Treasury Taskforce Partnerships Victoria (PV) projects include a Figure 5.1 offers a clear picture of how PPP major new toll road, the redevelopment of Spencer activity has increased since the beginning of the Street Station in Melbourne, redevelopment of the UK's PFI program in 1996 and the creation of Melbourne Showgrounds, a new convention center, Partnerships UK. a major new court building, and a number of water treatment works and accommodation projects. Partnerships UK and the treasury taskforce are been central to the program and can therefore be PPPs average roughly 10 percent of Victoria's credited with its success. annual capital asset investment, ranging from 5 percent to 20 percent in any particular year. Partnerships Victoria, Australia A 2003 review of PV projects found that PV- The government of the State of Victoria in Australia pracured projects were of higher quality than projects has had a PPP program since the 1980s. Victoria procured through traditional means, specifically: is Australia's second largest state by population and • Average savings to Victoria through private size of its economy. sector infrastructure delivery were 9 percent As in the UK and Portugal, early PPPs were when compared to public sector delivery. intended to push government expenditure off the • Seventy-three percent of line agency construction books. Under the Kennet government in the 1990s projects had run over budget. Only 22 percent the focus moved toward transferring maximal risk to of PPPs had run over budget. 32 31"A national approach to PPPs. The importance of creating a 'single markel' appearance to gain global aftention: Australia's experience." PPP 2005 Conference. Monday 28 November 2005. Toronto, Ontario, Canada. 32lbid. 51 Public-Private Partnership Units Role of Partnerships Victoria but did not allow private firms to operate or manage The PV policy has succeeded in fostering successful the infrastructure. PPPs. Because the policy, and the team that implements In 1994, PPP was first introduced in Korea with the the policy, are effectively one and the same, the "Promotion of Private Capital into Social Overhead treasury team has undoubtedly been responsible Capital Investment Act." The Act sought to establish for this success. In general, the State of Victoria has clear policies and procedures for PPI in all sectors, and a highly effective government, and the marginal extended the possible role of the private sector to one that contribution of PV, compared to the alternative of included operation and management of infrastructure. acting within a formally constituted Unit, has probably Under the new Act, 21 national projects and been quite small. The formal creation of the Unit 13 local government infrastructure projects were has allowed PPP rules to be systematized, and has launched. Some observers have noted that progress created a permanent institutional champion for PPPs in developing some of these proiects proved slower within the government. In effect, this has helped to than expected. The slow progress of PPI during those somewhat depoliticize the PPP process. years has been attributed to a lack of transparency, The PPP Unit has identified some areas where work excessively complicated procedures, insufficient is needed. The current work program includes: incentives for the private sector, and unattractive risk • An effort to reduce bid costs [by ensuring there is sharing arrangements. 33 enough competition) The 1997 East Asian Financial Crisis lowered the • An effort [by looking studying PFI in the UK) private sector's appetite for PPI in Korea, and made to achieve better financing outcomes for the it increasingly difficult for government agencies govern mentJ to pay for infrastructure from their own budgets. • Looking at payment arrangements and output The government therefore tried to accelerate PPI in specifications, especially the issue of abatement December 1998 with the Act on Private Participation for nonperformance. in Infrastructure. Changes implemented by the new Act included: 34 Finally, it has been noted that the treasury has a great deal of knowledge and experience in upfront • Expansion of the types of PPI allowed. The 1994 design of contracts but less knowledge and experience Act had allowed for Build-Transfer-Operate and managing contracts. Build-Own-Operate only. The 1999 Act allowed for BOT contracts, and allawed the government to consider unsolicited proposals as well as those Public and Private Infrastructure Investment projects the government had already planned. Management Center (PIMAC)1 Republic of Korea Private companies have been investing in transport • Creation of the Private Infrastructure Investment infrastructure in Korea since the late 1990s. Since Center of Korea [PICKO) to: the late 1960s, the government relied on private - Provide technical assistance to government investment to build and expand some expressways, agencies and the private sector. The creation of 3JHahm, Junglim. "Private Participation in the Infrastructure Program of the Republic of Korea". Transport and Communications Bulletin for Asia and the Pacific. No. 72, 2003. pp. 57-75. 34for other changes imposed by the Act, readers should see Appendix A, Section A.B. 52 Section 5 PICKO responded in part to a perceived need The multiple roles now played by PIMAC can be that the government agencies were lacking classified into three categories: expertise in PPI evaluation and development • Researcher: PIMAC formulates the annual PPI - Promote infrastructure projects and educate plans and conducts both theoretical and practical the private sector about PPI in Korea studies on PPI. - Review unsolicited proposals as requested by • Policy Advisor and Project Manager: PIMAC line agencies develops PPI projects, reviews and executes - Review feasibility studies and bidding feasibility studies of PPI projects, executes VfM documents tests, supports formulation of RfPs, and assists in - Conduct VfM tests tendering and negotiation. - Assist in proposal evaluation and negotiation • PIMAC consults with foreign investors and helps of agreements attract foreign capital to the Korean PPI market. PIMAC also develops and promotes education - Assist in formulation of government policy programs on PPls. on PPI. PICKO was a member of the Private Investment Track Record of PPP in Republic of Korea Project Committee under the Ministry of Planning and Korea's PPI program was introduced in August Budget. The committee also includes members from 1994, but hit its stride in January 1999. As of August the line agency for the sector in which the PPI will 2006, 154 projects had been carried out under BTO, take place. The committee has primary responsibility BOT, or BOO schemes. Of those projects, 64 are for selecting projects, evaluating proposals, and under operation r 50 are under construction, 18 are negotiating agreements. The committee is also preparing for construction, 15 are under negotiation r responsible for drafting the Annual Plan for PPI, which and 7 are under review. One hundred thirty-one BTO establishes the country's infrastructure priorities. projects have been awarded concession agreements. A 2005 amendment to the Act on the Private These projects have total investment costs amounting to Participation in Infrastructure further broadened the roughly US$41 .4 billion. Also r 106 BTL schemes r first scope of Korea's program to include Build-Transfer- introduced in 2005 r are in the pipeline as of August lease (BTl) schemes and introduced VfM tests. 2006. These projects are worth roughly US$6 billion. The Public and Private Infrastructure Investment Private sector investment in infrastructure has Management Center (PIMAe) was established as risen considerably since 1998, from roughly a merger of the Private Investment Center of Korea US$500 million to US$2.8 billion in 2005. As [PICKO} and the Public Investment Management the governmenfs expenditure on infrastructure has Center (PIMAe) by the amendment of the Act on PPI increased during this period r the government's share in January 2005. The PIMAC is an affiliated body of total infrastructure investment has decreased from of the Korea Development Institute (KDIL which is a 95 percent to 86 percent. 36 leading government research institute. 35 35PlMAC was founded under KDI in January 2000, to focus on research and management of public investment proiects. 36"Korea's PPI System and Key Policy Issues". Presentation by Dr. Young-Geun lee, Director General for PPI, Ministry of Planning and Budget, Republic of Korea. 2006. 53 Public-Private Partnership Units The government appears to have successfully impact, and using those lessons to drive further understood the shortcomings of the PPI program changes in the PPI strategy. between 1994 and 1999, and tried to address It remains to be seen how PIMAC will fare in its new those problems. location under the Korean Development Institute, but initial assessments by those familiar with PIMAC feel Role of PIMAC the change has given the PPP Unit more independence As described above, PPI activity in Korea has from the line agency proponents of PPI projects. picked up considerably since the government created PICKO, PI MAC's predecessor, in 1999. PIMAC Conclusions from the Case Studies appears to have met the objectives established for As defined in Section 2.3, a successful PPP Unit it. Through its role in the Private Investment Project is one that contributed to the implementation of a Committee, PIMAC has proven an essential player successful PPP program. in the evaluation of feasibility studies and bids. Line The PPP Units surveyed were all established with agencies rely on it for assistance in tender preparation, the aim of correcting at least two of the government evaluation, and negotiation of contracts. In only one failures identified in Section 4.2. Not all of the instances (a politically motivated bridge project) has Units surveyed achieved the objectives they set for a project gone ahead despite PIMAC's objection. themselves, nor were their objectives always clear Documentation of the PPP program and tender from the outset. Table 5.1 shows whether the PPP process, much of which has been prepared by PIMAC, Units fulfilled all of the functions intended for them to receives high marks from public finance experts. correct government failures. Fitch Ratings said in a recent report, "The level of Table 5.2 summarizes whether, and for what documentation at the concession agreement level is reasons each country's PPP program was determined sophisticated by global standards. More impressively, to be a success, and whether the PPP Unit fulfilled the level of recognition and cross-reference between all of the functions we think necessary to correct concession and financing documents is very strong."37 government failures. There are also signs that Korea has been attentive to the quality, and not just quantity of PPI agreements. The 2005 revisions to the PPI Act scaled back minimum revenue guarantees that had been offered for many projects, and abolished such guarantees completely for unsolicited projects, and made clearer the currency risk sharing arrangements. 38 The Ministry of Planning & Budget has said it intends to place increased emphasis on monitoring the performance of existing PPI projects for their macro- and microeconomic 37"Korea's Infrastructure Finance Program: Partnerships at Work". Fitch Ratings Project Finance Special Report. November 1 2005. 38Since January 2006, MRGs are applicable only to solicited projects. For the first 5 years, 75 percent of revenues are guaranteed and for another 5 years, 67% are guaranteed. For unsolicited projects or projects that earn less than 50 percent of projected revenue, MRGs are no longer applicable. 54 Section 5 Table 5.1 Did PPP Units Achieve their Objectives Function Policy Quality Technical Promote/ Standardization formulation control assistance market PPPs and and dissemination Jurisdiction coordination Bangladesh X - ./ X - Jamaica X ./ - Portugal ./ ./ ./ - - South Africa ./ ./ ./ - ./ Republic of ./ 0 ./ ./ ./ Korea The Philippines X X ./ 0 X UK ./ ./ ./ ./ ./ Victoria ./ ./ ./ ./ ./ Key: ./ = intended function, and effective; X= intended function, but ineffective; 0= intended function, but effectiveness unclear; = not an intended function 55 \:l C tTl r::r (). 9- \:l .... Table 5.2 ~. Summary of Success or Failure of it \:l a ::l- :::J (j) ~ Jurisdiction and PPP PPP Program PPP Unit's Objectives Met those Objectives? Any functions necessary ::r Unit Program Successful in for s olving government -0' C Successful? Country PPP failure? :::J Context? ~ ~ ~- Bangladesh, IIFe little success. Litde success. • Advise line ministries and other government Little apparent effect on NOI e to few: Far fewer, Haripur and agencies in identifying and prioritizing potential private participation in • 'echnical assistance r and lower Megnaghat infrastructure projects for tender, assisting with infrastructure in • J olicy formulation, but quality PPPs show that evaluation, award, negotiation, and implementation Bangladesh I o authority to than needed transparent, of projects implcment quality PPPs • Promote private sector participation in arc possible, infrastructure in Bangladesh by working with the but quality has private sector and serving as a clearinghouse of worsened since expertise on public private partnerships ~- -~ Jamaica, NIBJ Little success. Litde success, • Secure greater efficiency No, especially not the No e to few. Managed Lots ofPPP given jamaica's • Reduce fiscal drain reduction in fiscal drain son transactions, and activity but high public • Optimize government's management resources atte mpted coordination, low quality debt. PPPs but renerally ineffective as have worsened • Secure enhanced access to foreign markets, real ower was never technology and capital the situation efEe tively delegated • Broaden the base of ownership in the society. Portugal, Some Much success. Generally, to help the government to do better job Yes Sot e: Parpublica PPP success. Portugal has a structuring higher-quality PPPs than in the past • olicy formulation Unit There is still a much greater • 'echnical assistance large debt need than other overhang EU members • Quality control from to do PPPs, expensive and has since PPPs done in corrected the 19905 problems with its earlier program ~-~ South Africa, Much success Much success, Filter out fiscally irresponsible PPPs while creating a Yes but with less than Som e: continued Treasury PPP despite some structure for PPPs that would re-assure private the expected impact • Technical assistance Unit concerns about investors despite it being a fIne fIlter on infrastructure deals • Quality control low deal flow • Policy formulation and lack of deals which address South Africa's true infrastructure needs --- Republic of Much success Much success, • Provide technical assistance to government Yes Most to all: Korea, PIMAC given Korea's agencies and the private sector. The creation of • Technical assistance budgetary PICKO (PIMAC's predecessor) responded in part • Quality control constraints and to a perceived need that the government agencies infrastructure were lacking expertise in PPI evaluation and • Policy formulation needs development • Promotion/ marketing • Promote infrastructure projects and educate the private sector about PPI in Korea • Review unsolicited proposals as requested by line agencies • Review feasibility studies and bidding documents • Conduct Value for Money tests • Assist in proposal evaluation and negotiation of agreements • Assist in formulation of government policy on PPI. The Some Some success, Technical assistance, PPP promotion/marketing, and • Yes, but not for all Few to none: Philippines,BOT success. given the monitoring PPPs. BOT Centre was assigned Centre Considerable country's • The BOT Centre has many functions but really volume but infrastructure only done very little only effective in its inconsistent needs. monitoring, and on technical assistance role quality of an ad hoc basis. continued (/) tI1 a o· '-l ::J 1I1 -0 (.J1 C CI CP ~ ~. Table 5.2 continued of Success or PPP Units (j) CP .., :;- Jurisdiction and PPP PPP Program PPP Unit's Objectives Met those Objectives? I Any functions necessary (1) v: Unit Program Successful in for solving government ::. -c Successful? Country PPP failure? C Context? ::I ~ PPPs.IPPs, in particular, left significant contingent liabilities -- UK, Partnerships Much success Much success Gen eraliy, to improve the quality of PPPs and shift I Yes Most to all: UK and Treasury fOCD s away from financing infrastructure to VfM and • Technical assistance Taskforce risk allocation • Quality control • Policy formulation • Promotion/marketing -----.....,\f-- Victoria, Much Much success Gel emIly, to improve the quality of PPPs in I Yes Most to all: Australia, success. The infr astructure. Ensuring that PPPs provide for • Technical assistance Partnerships quality of opt mal risk transfer, maximizing efficiency, and • Quality control Victoria PPPs has improved mlll mizing whole life costs • Policy formulation since the new • Promotion/marketing PV policy has come into existence. Section 5 The results from Table 5.2 are used to plot Figure five functions identified in Section 4 as the right set of 5.2. The figure shows a positive correlation between functions for a PPP Unit. the success of a PPP program, and the functions a The assessment of each PPP Unit's placement on first principles-based analysis suggests a PPP Unit either axis is necessarily qualitative. Figure 5.2 is should undertake. not meant to be precise, but is meant to guide the Figure 5.2 shows how the functions identified discussion of the differences between PPP Units and correlate with the success of PPP programs. The PPP programs. vertical axis rates the success of each country's Correlation does not, of course, mean causation, but PPP program during the time in which the PPP Unit the case studies provide at least anecdotal support for existed, as having "Little Success," "Some Success," the effect each PPP Unit had on the PPP program within or "Much Success." The horizontal axis identifies how its jurisdiction. To summarize from the case studies: many functions the PPP Unit fulfilled, from the list of Figure 5.2 Correlation of Success with Functions fIl fIl (l) C) C) ::J CJ) ..c: C) ::J :! Portugal .. . South Africa South Korea *UK Victoria E ~ C) ... 0 a. fIl fIl (l) The Philippines C) • a. C) a.. ::J a.. CJ) "t- (l) 0 fIl E fIl 0 (l) CJ) C) C) ::J CJ) fIl fIl (l) C) C) ::J CJ) (l) :;::; - Jamaica Bangladesh +-' ::; None to Few Functions Some Functions Most to All Functions "Right" Set of Functions for PPP Unit 59 Public-Private Partnership Units Section 5 • Much PPP activity in Bangladesh has happened PPP Unit has been criticized as too restrictive l without life's involvementl suggesting that IIfC it was created with the inherently restrictive has not had much impact on the overall level or goal to ensure that PPPs happen l but not as a quality of PPPs in that country. way of avoiding budgetary constraints. The PPP • NIBJ was the principal driver of Jamaica/s Unifs regulations l PPP manuat and many of its privatization program and therefore had completed transaction l are referenced as good considerable influence over Jamaica/s PPP practice examples outside of South Africa. programl though it ultimately answered to the • Partnerships UK and Partnerships Victoria are Cabinetl a political body. central to the PPP programs in the UK and • like IIFC in Bangladeshi significant PPPs in the Victoria l two of the largest markets for PPPs in Philippines have happened without the BOT the world. Centre/s involvement in recent years. The power • PIMAC is an essential player in the evaluation of sector PPPs in which the BOT Centre was directly feasibility studies and bids. PPI activity in Korea involved in the 1990s were of variable quality has picked up considerably since the government and have left the Philippines with significant PPP- created PICKO (rIMAe's predecessor) in 1999. related liabilities. Section 6 explores some of the reasons for the • The Parpublica PPP Unit is the principal driver of positive correlation observed in Figure 5.21 and draw PPP policYI and has close links to the treasurYI general lessons about PPP Unit design from the case which has driven the fiscal reform process in studies. As the discussion in Section 6 will showl the Portugal since 1999. Parpublica has had much success of a PPP Unit in advancing a PPP program to do with improving the affordability and value depends heavily on the broader conditions of political for money in PortugaVs PPPs while allowing the support and government effectiveness present in the deal flow to remain relatively high. PPP UnWs jurisdiction. • The treasury PPP Unit is central to the PPP development process in South Africa. The PPP development process requires extensive PPP Unit involvementl including treasury approvals at four stages before to contract signature. Though the 60 Section 6 6 Generalizing the Lessons Learned This section explores some of the reasons for the and would a PPP Unit be likely to solve those positive correlation observed in Figure 5.2, and what problems? those reasons tell us about PPP Unit design. It is important to first look at how a government When PPP Units May Be Ineffective could decide whether or not a PPP Unit would be Figure 5.2 showed that three countries-Jamaica, effective. In some cases, governments may have Bangladesh, and the Philippines-had PPP Units problems that PPP Units cannot solve. Section 1.1 whose performance fell far short of their objectives. mentioned the possible similarities between lessons This is an important observation. There should be no about PPP Unit design and the design of regulatory assumption that a PPP Unit will perform welt simply regimes for infrastructure. Continuing with that because it is created with good intentions. What comparison, it makes little sense to think about how lessons can we learn from these poorly performing to staff a regulatory office, before first asking whether Units? independent regulation is truly the best approach. In The first observation is that the Units that were least the same way, the first questions to ask in designing a effective are located in countries whose governments PPP Unit are: what are the problems the government are judged less effective, compared to the other would currently face in implementing a PPP program, countries in the sample, as Figure 6.1 illustrates. 39 Figure 6.1 World Bank Government Effectiveness Indicator 3 Government Effectiveness- 2005 (Chosen comparator also shown for selected countries) HIGH ~2 ~ Ul ~1 i...io E . E I ~ ! <3 ! "O~1 _l .~ ~ Slue dots represent estimates for the 2005 govemance mdicators. The thIn iii / eJ o :. vertical lines repnl'sent standard errors around these estimates for each country in world-wide sarnpfe. Black dot Z.2 J represents the chosen year comparator rI (if any). To add or delete countries from the chart, click on the "Country Selection" tab below. I 209 Countries .3 -' LOW Source: "Governance Matters V: Governance Indicators for 199{)..2oo5" by Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi. Disclaimer: The governance indicators presented here reflect the statistical compilation of responses on the quality of governance given by a large number of enterprise, citizen and expert survey respondents in indus!nal and developing countries, as reported by a number of survey institutes, think tanks, non- governmental organizations, and international organizations. The aggregate indicators in no way reflect the official position of the VVorld Bank, its ExecutIVe Directors, or the countries they represent As discussed in detail in the accompanying papers, countries' relative positions on these ifldicatofs are subject to margins of error that are clearly indicated. Consequently. precise country rankings should not be inferred from this data. Source: World Bonk 39Data from Kauffman, Kraay and Mostruzzi 2006. 61 Public-Private Partnership Units This should be no surprise. In countries where most • NIBJ lacked political support for its efforts to government institutions perform poorly, it is likely that introduce PPP. Where PPPs were introduced the any new government institution will perform poorly government was determined to retain political also. However obvious, the conclusion provides control of the process by putting it under the charge a useful reminder of what policy makers should of competent, trusted, senior party loyalists. Cabinet consider first when deciding whether or not to create a ministers-many of whom had been members of PPP Unit. Michael Manley's socialist-leaning government Often advisors and governments, frustrated with in the 1970s-were inherently suspicious of the the underperformance of existing institutions, create private sector, and predisposed to economic new institutions that they hope will perform better. It is nationalist strategies. NIBJ staff efforts were often tempting to overlook the fact that the very reasons that undermined by political vacillations, and detailed made the existing institutions underperform may well ministerial and party control of the process. undermine the new institutions also. If a government • The Philippines BOT Centre was at its most wants to develop a PPP program and finds that its effective when it was part of a president's existing institutions do not seem up to the job, it should initiative to solve a specific problem in the power consciously and realistically weigh whether a new sector by attracting IPPs. The Unit's effectiveness institution is likely to do any better. There is always has declined considerably, despite a broader the alternative of trying to fix existing institutions, or set of responsibilities under the BOT law, since expanding the mandate of any institution in which the the urgency of the power crisis has passed and government already has confidence. the Unit has been moved from a position directly In addition to the general point about the difficulty under the President's Office to the Department of creating effective Units within relatively ineffective of Trade and Industry. In essence, the Philippines governments, a more detailed consideration of the government has 0 PPP Unit, but it has no PPP experience of the three underperforming PPP Units strategy. yields three general lessons. PPP Units will tend to • IIFC in Bangladesh has only token influence at the struggle when: executive level. IIFC provides technical assistance • Top politicians do not support the PPP program to a Private Infrastructure Committee (PICOM), which sits in the Prime Minister's office, through • Procurement of infrastructure and capital works representation in a relatively weak government is not transparent and competitive board. Private sector investment In • The machinery of government is chronically infrastructuremostly goes on around it. uncoordinated. In contrast, Partnerships Victoria and Partnerships Each circumstance is discussed below. UK have worked well because they had high level political support. Both Partnerships Victoria and Lack of High-Level Commihnent to Quality PPP Partnerships UK were created in their current forms Program by labor governments elected in reaction to right- PPP Units in the Philippines, Bangladesh, of-center governments that had pursued aggressive and Jamaica all suffered from a lack of political privatization campaigns. Factions in the Labor commitment. Specifically: cabinets opposed further private participation, but other, centrist factions, including senior ministers, 62 Section 6 supported the concept of public privote portnerships. opening was followed by 10 months of discussion These PPP Units were created because of this political with the two bidders in which elements other than backing, and in turn strengthened the hand of the price were considered. Finally, when it appeared that centrist factions by delivering results, because of their discussions had been completed and a firm selected ... competence, and ability to coordinate. These Units word leaked out that the lower-price bidder was being would not have been able to aHract competent staff recommended as the winner. This resulted in an outcry and coordinate other agencies, had they not enjoyed from the political opposition and the press ... "40 JPS political support. was left in the hands of government managers, and finally privatized in 2001. During those five yeors, Lack of Transparency and Competition in lorgely because of poor government management, Procurement of Capital Works capacity margins fell to 9 percent, from 26 percent, Bangladesh and Jamaica have seen their PPP service quality deteriorated, and JPS' cash surpluses programs suffer from lack of transparency in dwindled. The government sold 80 percent of the utility procurement. for roughly US$200 million, but effectively earned no The aHempted privatization in 1996 of Jamaica proceeds because of the sale agreement that was Public Service, the state-owned electricity company, negotiated which provided for government to absorb was similarly protracted, yet nontransporent. Two the approximately US$200 million in accumulated bids were received, and as a World Bank report sector debt lorgely to multilateral financial institutions, Implementation Completion Report describes, "Bid that was left on JPS' books. Figure 6.2 World Bank Control of Corruption Indicators 3 Control of Corruption - 2005 (Chosen comparator also shown for selected countries) HIGH 2 .. )( 'e .E c: .21 a 2 (; (.) ~o - I: 1: (3 'e .;1 OJ Note: Blue dots represent estimates for E 0 the 2005 governance indicators. The thin Z vertical lines represent standard errors around these estimates for each country ·2 in wor1d~Wlde sample. Black dot represents the chosen year comparator (if any) To add or delele counlrie. from the chart, Click on the "Country Selection" 204 Countries tab below. -3 LOW Source' "Governance Matters V: Governance Indicators for 1996·2005" by Daniel Kaufmann, Aart Kraay and MaSSimo Mastruzzi Disclaimer: The governance indicators presented here reflect the statistical compilation of responses on the quality or govemance given by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries, as reported by a number of sUNey institutes, think tanks, non- governmental organizations, and intemational organizations. The aggregate indicators in no way reflect the official position of the World Bank, its Executive Directors, or the countries they represent. As discussed in detail in the accompanying paper'!>, countries' rela1ive positions on these indicators are subject to margins of error that are clearly lndicated. Consequently. precise country rankings should not be inferred from this data. Source: World Bank 2006 Governance and Anti-Corruption Indicators 63 Public-Private Partnership Units A lack of transparency in procurement, or a lack at the end. The BOT Centre reviewed the projects, of competition in procurement do not necessarily creating delay and risk without adding much value. signal corruption, but can, in general, raise public It was certainly not able to win support from other suspicions of corruption. At the very least, competitive government agencies involved, seeing its role more as and transparent procurement generally make corrupt a gatekeeper than anything else. Similarly, the BOT practices more difficult. Centre has the formal role of monitor ongoing PPP Figure 6.2 shows the World Bank's ranking of contracts, but that monitoring function is poorly defined control of corruption for the countries in which the vis-a-vis the implementing agencies. The BOT Centre sample PPP Units are located. 41 This index does not monitors ongoing PPP agreements on an ad hoc basis relate specifically to procurement of capital works, but only, unsure of what role the implementing agencies is nevertheless useful in understanding the challenges play. The end result is relatively weak PPP contract PPP Units in some countries face. monitoring within the Philippines government. If there is widespread corruption in procurement of If nothing else, having multiple agencies with infrastructure and capital works, a PPP Unit will not parallel responsibilities raises transactions costs necessarily be able to change the situation. The same because it proves confusing for investors, can create factors that corrupt other government organizations cost redundancies within government, and may mean may either corrupt the PPP Unit, or at least ensure that government agencies are working at odds to one decisions are routed around the Unit. another. Lack of Coordination in the Machinery Can PPP Units Work Even with These Problems? of Government It might be tempting to think that with good design PPP programs are ineffective where the PPP Unit is a PPP Unit would work even without political support, just one of many responsible agencies. If government or within a poorly coordinated government. However, functions are not well coordinated, a PPP Unit-even efforts to "work around" the endemic problems one with executive powers-may not be able to stop described above would likely fail. For example: poor quality PPPs because the Unit may not receive • Where a PPP Unit lacks firm political commitment, all of the information it needs to make an informed it could conceivably be given executive powers decision, or may be unable to overrule other agencies. that prevent other agencies from overruling it, Similarly, such a Unit may not be effective in promoting but who would be willing or able to grant these PPPs, if other agencies are not willing to cede control powers? Alternatively, a PPP Unit without strong of "their" projects. There is a real risk that creating political backing might also try to prevail through a PPP Unit in these circumstances will increase the force of analysis and persuasion, but what are coordination problem, rather than reduce it, creating the chances of it being able to recruit the top an additional hurdle that PPP transactions must clear. analysts, or get access to the right decision In several recent transactions in the Philippines makers, when senior politicians do not support the BOT Centre was not involved in promoting or it? PPP Units in the Philippines and Bangladesh structuring the project, but its approval was required are recognized as centers of technical expertise, 41We also acknowledge that the quality of governance in Victoria may indeed be somewhat different from the quality of governance in Australia as a whole 64 Section 6 but this expertise has not been enough to but because the Units were designed with those consistently bring the line ministries to seek the objectives in mind, were backed by political support, PPP Unit's involvement. Where line ministries and were placed within a system with adequate have the option, they may only involve the PPP coordination mechanisms, enforcement power, and Unit when they want to unload a PPP in which clear decision-making processes, they worked well. they have little interest (as some observers have To continue with the metaphor from Section 4, suggested has been the case in Bangladesh), or policy makers need first to diagnose the disease when the contracts fail (as has been the case in and, having done that, ask whether a PPP Unit will the Philippines). be an effective medicine. This means avoiding the • Where corruption is a problem in a country, the temptation to devote resources to a "miracle pill" Unit can be isolated, to some extent, from the when more difficult, longer-term therapy may be pressures of corruption, but doing so risks make really be necessary. the Unit irrelevant, as implementing agencies Once policy makers have defined their PPP-related will try to find ways to avoid working with the problems, and determined that a PPP Unit may indeed PPP Unit. be a good solution to those problems, they should • If a government has not been able to coordinate begin thinking about the context for the PPP Unit, its its policies and agencies to date, it will most roles and responsibilities. Thinking about roles and likely not be able to arrange itself in such as way responsibilities begins with the following questions: as to give a new Unit a rational, coordinating • Why the government wants to do PPPs, and role. what it expects from those PPPs Of the three points, the most fundamental seems • What functions the government thinks are to be political support. With genuine support from necessary to ach ieve these goals leading members of the political executive, it is • What existing capacity the government has to possible that a PPP Unit could work well, procure fulfill these functions and whether, in particular, PPPs competitively and transparently, and achieve existing entities can fulfill some of the roles coordination of the PPP program even in unfavorable themselves circumstances. Butwithoutsuch supporta PPP Unit will likely fail, and even with such support, it is not a given • How an additional institution like a PPP Unit that it can succeed in making a corrupt administration could be most useful and what weaknesses in clean, or coordinating an uncoordinated one. existing capacity the institution would need to address in order to meet the government's PPP objectives. The assessment of wea knesses- what Lessons from Theory and Practice for PPP Unit Design we have called government failures-should PPP Units have tended to work well where a drive thinking about what the PPP Units will do. government has identified a specific problem or After this diagnostic phase, three of the most objective, and had political willingness to back it. PPP important design questions will be: Units in Portugal, South Africa, the UK, and Victoria • The PPP Unit's responsibilities were created this way. All had different objectives, 65 Public-Private Partnership Units • Its level of decision-making power should also be driven by an assessment of whether • Its appropriate location within government. the provinces and municipalities suffer from similar or different weaknesses than in national government. Responsibilities of the PPP Unit South Africa learned over time that municipal PPPs Despite the fact that the PPP Units we found to were also in need of quality assurance, and municipal be most successful were those that fulfilled the most officials in need of technical assistance. The treasury functions, we do not believe that all functions related PPP Unit's responsibilities were therefore extended to to PPP procurement need reside within a single PPP the municipal level in 2003. Unit. In the UK, there is now a separate PPP taskforce If the central government is funding most of state as part ofTreasury, and a technical assistance/project and municipal budgets (as is the case in South Africa), development body, Partnerships UK. Some of the it makes sense for the PPP Unit to have a quality individual line ministries in the UK also have their own control and technical assistance functions in relation project development teams. When responsibilities are to subsovereign PPP transactions, unless states and divided amongst agencies, it is most important that municipalities are known to have institutions that serve the lines of responsibility are formalized and clear to this purpose. There will be, of course, a tradeoff in public and private partners alike. terms of administrative costs. More responsibility for A PPP Unit's responsibilities should be determined state and municipal PPPs means the PPP Unit will need by the government failures identified in each country. If more resources to do more work. For this reason, no existing government agency is well suited to correct PPP Units with subsovereign responsibilities, such as those failures, responsibility for correcting them should those in Republic of Korea and the Philippines, will fall to the PPP Unit. In Republic of Korea, for example, consider PPPs with values above a certain threshold. the slow progress of PPI between 1994 and 1998 In the Philippines, for example, municipal projects was attributed to a lack of transparency, insufficient worth less than 200 million Philippines Pesos do not line agency expertise in PPP procurement and require approval at the national level. development, excessively complicated procedures, and insufficient incentives for the private sector. Authority of PPP Units PICKO was created specifically to address those This paper recommends that designers of PPP Units problems by prOViding technical support, assisting in should think hard about what sort of authority the PPP proposal evaluation and negotiation, promoting and Unit will need in order to complete its objectives. The educating the private sector about PPP in Korea, and authority must match what the PPP Unit is expected to standardizing procedures and guidelines for PPPs. achieve. If the PPP Unit is expected to have a quality control or quality assurance function, for example, In thinking aboutthe responsibilities of PPP Units, the that Unit needs some sort of authority that allows it to questions introduced at the beginning of Section 6.2 put a stop to, or alter, planned PPP agreements it feels should also be used in thinking about the geographical are not well designed. scope for the PPP Unit's responsibilities. The decision for whether to give the PPP Unit responsibility for Often, the easiest way to grant authority to a PPP provincial and municipal PPPs will be driven in part Unit is by association, by attach ing the Unit directly to by a country's laws and form of government, but an existing government body that has the authority to 66 Section 6 stop or alter planned PPP agreements. South Africa, and the Philippines, for example, operated as quasi- Victoria, and the UK have done this. Section 6.2.3 independent Units. The South African and Victorian discusses considerations about PPP Unit location. PPP PPP Units were located within the countries' respective Units in the Philippines and Bangladesh, in contrast, treasury departments (in other words, the ministries have been created as quasi-independent PPP bodies. of finance). Partnerships UK, while not located within the treasury, was created out of the treasury, and has Locating PPP Units treasury representatives on its board as nonexecutive Section 6.1 highlighted the importance of directors. Moreover, the UK treasury has its own PPP coordination within the machinery of government, taskforce, ensuring that the quality control function and political support for a PPP Unit's objectives. remains within the treasury. Because of the importance of these factors, the In Republic of Korea and Jamaica, the units advised location of a PPP Unit is one of the most important a Ministry of Finance, but only to the extent that they design characteristics. may have sat on intergovernmental committees with Differences in PPP Unit location explain much them. Portugal's PPP Unit reflects a different variation. about the differences between the successes of PPP Parpublica is a separate body from the ministry, but programs in these countries. PPP Units in Bangladesh Figure 6.3 Location of PPP Units within Government !Il !Il Portugal South Africa (1) 0 0 ::J • "UK --- --- ----t ----___ (f) .r. South Korea f' . "us , ' V ' tona (Ai, tra I'la ) : IC 0 ::J ! , , 1 E :E 11! .... 0) i---~-~ J B 11. !Il !Il • 11. (1) 11. I 11. 1:5 "- ::J (f) I 0 !Il (1) , The Philippines i I !Il E (1) 1:5 0 (f) : I I ' i--------,---~,-,---~---~--~~-.---,.. ___t--.---~--.~.-~---~----..~-, ::J (f) , : I !Il !Il (1) ~angladeshl I 0 0 ::J (f) i (1) Jamaica I E I :.::J L Not Located in Treasury Outside of But Directly Located in Treasury Advisory to Treasury 67 Public-Private Partnership Units some of Parpublica's employees have been hired put under the Prime Minister precisely because the directly by the Ministry of Finance to advise on PPPs. government wanted to have the flexibility to pursue The results suggest a PPP Unit will be effective if PPPs that were driven more by political than fiscal located within a strong ministry of finance or treasury. priorities. In South Africa, the UK, and Victoria, the Treasury In nonparliamentary systems, such as the presidential Departments are powerful because they control system of the Philippines and many Latin American scarce government resources. Treasury therefore countries, the appropriate location and legal form of has important enforcement power in these countries, the PPP Unit are less clear. In a country with a strong through both: planning or policy coordination agency, that agency • Direct power, because treasury must approve a might make a natural home for a PPP Unit. fiscal commitment to a PPP project before it can In countries where legislative acts that control or happen direct executive functions are common or effective, • Indirect power, because agencies and ministers passing a law to empower the PPP Unit and define may fear future budget cuts in retaliation for its responsibilities may be effective. For example, the behavior with which Treasury disagrees but Philippines highly legalistic culture makes the decision cannot stop. to create the BOT Centre by statute understandable. The treasury also generally attracts higher-caliber Finally, it is useful to consider the lessons from this staff than other government agencies because of its section in conjunction with the lessons from Section relative power and importance, and has credibility 6.1 .1 on the importance of high-level political with other ministers. commitment. The most successful of the PPP units surveyed have benefited from a combination of high- Moreover, location of a PPP Unit within the treasury level political support, and close association with a is consistent with making sure that PPP programs Ministry of Finance or Treasury. have the "right" goals, as we have defined them. Line agencies have incentives to enter into PPPs that provide infrastructure or services. They may Where PPP Units Are Often Effective not always, however, have as strong incentives as As shown in Table 5.1, the PPP Units surveyed treasury to make sure PPPs are affordable for the nearly all provided vital technical assistance to government as a whole, or offer the best value for implementing agencies. Bangladesh's IIFC and the money. A treasury department naturally has such Philippines BOT Centre have both seen considerable quality control incentives. demand for technical assistance, despite the fact that implementing agencies are not required to seek such In a parliamentary system, we do not believe a assistance. body created through statute would be better suited than a treasury department to fulfill the quality control As further proof of the value of PPP Units' expertise, function. In Jamaica (also under a parliamentary nearly all of the PPP Units surveyed were called on system), we speculate that NIBJ would be effective to help when contracts fell into dispute, regardless under the Ministry of Finance, and would likely have of whether they had helped in contract preparation, struck higher-quality PPPs, more consistent with the tender, and evaluation. NIBJ's goal of reducing fiscal drain. Instead, NIBJ was 68 Section 6 These facts point to the scarce, highly specialized, before proceeding to detailed questions of deSign, and multidisciplinary set of skills required for PPP are whether to have a PPP Unit, and if so, what will development and management:12 As the continued be the unit's responsibilities, authority, and location. existence of Partnerships UK indicates, these skills are Other, more detailed design considerations may scarce in developed as well as developing countries. indeed influence the success or failure of a PPP Unit, The question for PPP Unit designers is how to make but the determinants of success or failure in our case sure implementing agencies use a PPP Unit's services studies were at such a high level that they obscured more consistently and less selectively. Options seen the advantages or disadvantages of further finetuning from the case studies are: PPP Unit design. • To require the PPP Unit's approval at various While the importance of secondary design features stages, as in South Africa did not feature prominently in our findings, the work • To keep separate the II quality control" and done does allow us to make some observations on "project origination/promotion II functions into the following points: two institutions. As discussed in Section 4.2.1, • Integration of various kinds of PSP. Should implementing agencies do not always have the a single Unit deal with all types of private incentives to strike affordable PPPs which offer participation, for example both greenfield and value for money and optimal risk transfer. If brownfield developments, both infrastructure consultation with the PPP Unit is optional, yet the and non infrastructure, both privatization and PPP Unit also ostensibly fulfills a quality control more limited risk sharing with private sector? The function for another branch of government, definitions in Table 2.1 demonstrate the significant implementing agencies may be hesitant to seek variation in the scope of responsibilities PPP Units assistance for fear of interference in their project. may have. There is no evidence that the sectors or This may explain the recent experience of the BOT types of private sector participation determined Centre in the Philippines, where the BOT Centre success or failure. The more successful cases, the provides technical support, but also advises the UK, Victoria, South Africa, for example, have Investment Coordination Committee. fairly restrictive definitions of PPP, but so also In countries with limited PPP experience, the does the Philippines. What many of the more first option has shown to be the most effective. The successful countries share (which, for example, eventual separation of the project development and Bangladesh and Jamaica lack) is a very clear quality control roles may be appropriate for more statement of what are considered to be PPPs mature PPP markets. Partnerships UK emerged as a • Handling subsovereign transactions. Should a separate, successor body from the project arm of the national PPP Unit deal with state or municipal treasury taskforce only in 2000, well into the UK's PPPs? As mentioned ear/ier, in deciding the PPP program. scope for a PPP Unit's responsibilities, it is important to assess not just the failures of central Other Design Considerations government, but also of provincial and municipal The most important questions about PPP Units, governments. This analysis can help drive thinking and the first policy makers should ask and answer, about whether a PPP Unit's responsibilities 42AII of the units surveyed had multidisciplinary teams usually consisting of a mix of lawyers, project finance experts, economists, and engineers, either as part of their permanent staff or subcontracted as consultants. 69 Public-Private Partnership Units should extend to lower levels of government. • Ability to offer proiect development This paper cannot offer any useful observations funding. Few of the PPP Units directly oversaw on the track record of PPP Units in facilitating or funds that they could make available to project preventing subsovereign PPPs, though this is an developers. IIFC in Bangladesh initially had important topic. South Africa appears to have some funds available for prefeasibility studies. been fairly restrictive of municipal PPPs since it The Philippines PPP Unit oversees a Project took responsibility for them in 2003. In Korea, Development Facility that can make funding on the other hand, municipal PPPs outpaced available for prefeasibility and feasibility national-level PPPs for many years, albeit prior studies. NIBJ managed the government's to the creation of PICKO (PIMAe's predecessor) Capital Development Fund, which provides some funding for feasibility studies. Evidence Consistent with the earlier recommendations from these case studies does not show that the about the importance of integration with ability to offer project development funding fiscal policy, the only suggestion is that the helps determine whether a PPP Unit is effective responsibilities of the PPP Unit should correlate with the state or municipalities' dependence on On the other hand, there are examples of PPP federal funding. If most funding comes from the Units structured as financial institutions and federal level, then it makes the most sense for the accompanied by a strong policy advisory group federal government to want to control what PPP which itself is a PPP. Such a structure enables the activity is undertaken with those funds Unit, to create a policy environment for PPPs and • Standardized procedures and templates. then promote these partnerships with debt and Nearly all of the PPP Units we surveyed had equity support. The Infrastructure Development taken at least some steps to standardize Finance Corporation (IDFC) in India is a good documentation and procedures, and make example of such an approach those standardized documents available. South • How the Units were staffed. There was wide Africa's documentation is extensive and of high variation in the way Units were staffed. Box quality, as is the documentation in Victoria, the 4.3 has already described some of this variety. UK, and Republic of Korea. There appears to Offering higher salaries does not appear to have be less standardized documentation in Jamaica, been a clear determinant in success, as one might the Philippines, and Bangladesh. We believe expect. In Bangladesh, for example, IIFC offers this is a symptom, rather than a cause, of failure private sector salaries but some perceive the risk however. These Units have been less effective in that, in trying to cover those salaries, it has become developing good documentation because when somewhat mercenary in trying to sell its services they do, line agencies and private partners have to the public sector as well as the private sector. no obligation, and often no interest to use it. The countries with the best documentation also have IIFCandthePhilippinesBOTCentremadeextensive the highest levels of authority to make sure that use of long-term consultants, whereas most of the documentation is used other PPP Units had small multidisciplinary teams 70 Section 6 that made use of consultants less frequently, and • In parliamentary systems, effective PPP Units have generally for specific technical advice tended to be attached to treasury departments No firm conclusions can be drawn on any of these (ministries of financel. This reflects the natural design considerations. The main determinants of role of the treasury in coordinating government success and failure, in the PPP Units we surveyed, policies and expenditure, its mandate to manage were at a much higher level. As described earlier fiscal risk, and the power treasuries derives from in this section, high level design considerations are holding the purse strings of government. In a paramount, and still at risk of being overlooked in nonparliamentary system a PPP Unit may do best PPP Unit design. if attached to a powerful coordinating agency • PPP Units with executive power tend to be more Conclusion effective than those that are purely adVisory. It is In closing, the key points are: important, however that the power be coupled • PPP Units are not a miracle cure. less effective with a mandate to promote and facilitate good governments tend to have ineffective PPP Units. PPPs, or the Unit may simply wield a veto without Where government agencies are corrupt and adding value. uncoordinated it will be difficult for a PPP Unit to escape the same fate • Without high-level political support for the PPP Program, a PPP Unit will most likely fail. • Well-designed PPP Units have been developed in response to a clear need, and a clear understanding of how existing government institutions fail to meet that need. 71 Appendix: Case Studies sector, improve openness and transparency of the 1 Jamaica: Nal'ional Investment Bank privatization process, remove excessive bureaucratic of Jamaica intervention in the marketplace, and broaden the The National Investment Bank of Jamaica (NIBJ) base of ownership and competition in the economy. has had primary responsibility for implementing PPP arrangements in Jamaica since 1984, succeeding Justification for the privatization program was the Jamaica National Investment Corporation ~Nlq.43 based on the need to: Widespread dissatisfaction with the operating • Secure greater efficiency efficiency of government-owned enterprises, and • Reduce fiscal drains their drag on the government's budget, provided • Optimize the government's management resources the impetus for introducing greater private sector • Secure enhanced access to foreign markets, participation in these enterprises. technology, and capital Many government officials viewed NIBJ as relatively • Broaden the base of ownership in the society. ineffective during the 1980s, and little different from its predecessor. The government therefore sought to What has NIBJ achieved? give new life to the privatization program in 1991 NIBJ completed 47 privatizations between with Ministry Paper No. 34, which contained the first 1988 and 2003. Twelve of these projects were official government policy statement on privatization in infrastructure sectors, the others in competitive and formalized NIBJ's responsibility for implementing sectors. Table A. 1 provides detail on the infrastructure the privatization program. 44 projects. Ministry Paper No. 34 envisages privatization as /I ••• a fundamental strategy of the government to achieve growth and development within the context of a market economy./I The public sector was to be /I ••• largely confined to providing the appropriate policy framework and infrastructure necessary to support the productive sectors." Other aims of privatization cited by Ministry Paper No. 34 were to streamline the public 43By order of Ministry Paper No. 24 of 1984. 44We use the term "privatization" throughout this discussion of Jamaica, but PPP arrangements under NIBJ included performance·based management contracts, BOOs, BOTs, concessions, and leases, in addition to full divestiture. 73 TableA.l ;;: in Financial Project Name Primary Sector Segment Type ofPPI Subtype of PPI Investment Total45 -0 Closure Year Years o ""I 3' (J) 1989 Cable and Telecom Fixed access, Divestiture Full 1990-2004 462 Vl Wireless mobile access, :!.' '"0 Jamaica and long C ::J distance ~. 1994 Jamaica Private Energy Electricity Greenfield Build, own, and 1994-1994 144 Power Corp. generation project operate (Rockfort) 1994 Jamaica Energy Energy Electricity Greenfield Build, own, and 1994-1994 102 Partners (Old generation project operate Harbour) 1994 Kingston Transport Terminal Concession Rehabilitate, 1994-1994 30 Container operate, and Terminal transfer 1995 Montego Bay Energy Electricity Greenfield Build, own, and 1995-1995 43 Oil-Fired Power generation project operate Plant 1999 Jamaica Rail Transport Fixed assets and Divestiture Partial 1999-1999 Service intercity passenger 1999 Cellular One Telecom Mobile access Greenfield Build, own, and 1999-1999 45 Caribbean project operate 2001 Digicel Jamaica Telecom Mobile access Greenfield Build, own, and 2001-2003 424 project operate 2001 Jamaica Public Energy Elcctricity Divestiture Partial 2001-2001 201 Service Co. distribution, generation, and transmission 2001 Oceanic Digital Telecom Mobile access Greenfield Build, own, and 2001-2003 175 Jamaica project operate 2002 Highway 2000 Transport Highway Greenfield Build, own, and 2002-2002 390 Infrastructure project transfer Project Source: World Bank PPI Database. 451ndudes investment in government ossets (proceeds) ond investment in focilities. Appendix Table A.2 summarizes the number and value of Analysis: Jamaica's Record in Context public-private sector transactions Jamaica has closed, Jamaica has had some relatively successful in infrastructure as well as competitive sectors. The privatization transactions, including roughly 175 MW table also indicates average annual privatization of new generation procured through three separate proceeds and PPI value as a percentage of average IPPs. The total investment in private generating plants nominal GDP during the same time period. These under these contracts now amounts to more than ratios are then used to rank Jamaica versus other US$250 million. The figures in Table A. 1 and Table countries in the world, and in the Latin America and A.2, however, belie some of the difficulties the country Caribbean Region. has experienced in implementing PPP. Jamaica's In addition to the data presented above, Jamaica's apparent success at attracting private investment must privatization program isgenerallyknown, anecdotally, be considered in light of the following factors: to have been one of the largest in the developing • Many of Jamaica's early privatizations were world in terms of the number of enterprises affected. "easy" in that they focused more on relieving Table A.2 Summary of PPP Activity in Jamaica Privatization proceeds (All , Private sector purchase of, or Sectors) 46 investment in public ! infrastructure47 ! Total Number I (USS millions) Total Value 763 2190 Average per Project 54 182 Annual Average 16 146 As percentage of average .09 percent 2.28 percent GOP during same time frame th Ranking versus other 40 out of 105 countries (World) th th Ranking versus other 13 out of 25 9 out of21 countries (Region) Source: Calculated with data on privatization procee ds from the World Bank Privatization Database (http://rru.worldbank.org/privatizationl), data on PPI from the World Bank PPI Database (ppLworldbank.org), and IMF World Economic Outlook Database, September 2006 (http://www.imf.org/externallpubs/ft/weo/2006/02/datalindex.aspx). 46 1988-2001 time period 47 1989-2003 time period 75 Public-Private Partnership Units the government of bankrupt enterprises than guaranteed. The contract was also awarded encouraging efficiency or transferring risk to without competition. the private sector. A Data Resources Systems • Implementation of transactions without adequate International (DRSI) report to NIBJ found, "Early transparency has been a concern. Despite the privatizations ... were generally of small, fully or fact that improved transparency was a goal of partially bankrupt firms, making them politically Ministry Paper No. 34, as the DRS I report found, the least troublesome."48 "several obstacles therefore appeared to confront • Major transactions failed to meet the goals effective implementation of such a process that PPP improve operating efficiency of public [privatization) agenda. One is the dominance enterprises and shift risk to the private sector. As of patronage-type relationships and apparent the DRSI report noted, " ... the Jamaican approach secrecy in the political process. This condition has often been described as involving mainly has encouraged doubts about fair allocations ownership transfer with little or no focus on the in the sale of public assets and enterprises. efficiency of operations." Examples include the It has tended to repress transparency in some following: significant official transactions. Overall, it has -In 1994, the government sold a 78 percent encouraged a tendency to politicize many issues stake in Air Jamaica to AJAG group, a and processes relating to public policy." consortium owned in part by Sandals Resorts • Implementing the transactions took longer than owner Gordon "Butch" Stewart. AJAG group is expected. In any country's privatization program, credited as rehabilitating the airline's image and policy makers may reasonably sacrifice some increasing market share, but at Significant openness and transparency in the name of expense to the government. AJAG continually expediency. Tradeoffs clearly exist between sought and secured the government's agreement transparency and quick closure of a good to cover the airline's losses. After restructuring deal. In Jamaica, however, the opacity of PPP debt to cover these loans, the government procurement does not appear to have allowed eventually found itself with a controlling share, for expediency. and again took complete control of the airline • The award of the Sangster airport concession, in 2005. for example, is regarded as having taken far -Jamaican officials who have seen the terms of longer than expected while also lacking in the concession for Jamaica Highway 2000, transparency. The attempted privatization in the country's first and so far only toll road, report 1996 of Jamaica Public Service, the state-owned that most of the operational risks remain with the electricity company, was similarly protracted, yet government, not the private sector operator. The nontransparent. Two bids were received, and as details of the contract remain confidential. The a World Bank report Implementation Completion primary goal appears to have been to build a Report describes, "Bid opening was followed by road off balance sheet. We understand that the 10 months of discussion with the two bidders in debt is largely or entirely government which elements other than price were considered. 48DRSlltd. Privatisation Impact Assessment Study, May, 1995. Unpublished Report - Privatisation Impact Assesment Study, May, 1995 - DRSllimifed 76 Appendix Finally, when it appeared that discussions had NIBJ appears to have failed in reaching the been completed and a firm selected ... word primary objectives set for it. The fiscal burden of PPPs leaked out that the lower-price bidder was being has persisted, with Jamaica famously intervening to recommended as the winner. This resulted in bailout several failed agreements. Partly as a result, an outcry from the political opposition and the Jamaica's public debt stands at 128 percent of its press .. ."49 JPS was left in the hands of government GDP. Jamaica ranks 5th in the world in its debt to managers, and finally privatized in 2001. GDP ratio. During those five years, largely because of poor Service quality and efficiency has deteriorated in a government management, capacity margins fell number of sectors where PPP was possible, considered to 9 percent, from 26 percent, service quality by NIBJ and then botched. A management contract deteriorated, and JPS' cash surpluses dwindled. for JPS between 1996 and 2001 brought the sector to The government sold 80 percent of the utility for a crisis where privatization became the only option. roughly US$200 million, but effectively earned Water service has similarly deteriorated amidst plans no proceeds because of the sale agreement that to introduce PPP but lack of action. was negotiated which provided for government Moreover, NIBJ appears to have failed in following to absorb the approximately US$200 million in the transparent process envisioned for the privatization accumulated sector debt, largely to multilateral program. financial institutions, that was left on JPS' books. The fact that NIBJ has had nearly exclusive • Much more could have reasonably been done. It responsibility for PPP since the early 1980s, suggests is difficult to justify that the government provides that NIBJ bears much of the responsibility for the any net public benefit from its involvement in, for shortcomings of Jamaica's PPP efforts. The failure example, tourism [where several management of NIBJ, however, goes beyond NIBJ itself, to a contracts have been let at government-owned problem of conceptualization and design. Political properties) or air travel. But even in infrastructure ambivalence on PPP has caused many of Jamaica's sectors where arguments can be made about the PPP deals to founder [or never emerge). We perceive need for government involvement in provision of that this ambivalence has been driven by: public services, the opportunity for some sort of PPP has been overlooked at significant social cost. • A lack of transparency in implementation of PPP A 1999 study by Jamaica's Investment Facilitation transactions, which allows the Government to Council and National Water Commission (NWC) strike bad deals without scrutiny or, once the found that investments worth US$500 million deals have been struck behind closed doors, were delayed in other sectors because of a lack invites political backlash that threatens the deals of delivered water. Jamaica's primary problem themselves and more generally, future efforts to is unaccounted-for-water, a problem that even introduce PPPs limited risk-sharing PPP arrangements can be • The historically socialist leaning of Jamaican effective in solving. politics. Despite the government knowing it needs 491mplementation Completion Report for the Energy Sector Deregulation and Privatization Project, IBRD, June, 2000. 77 Public-Private Partnership Units to bring in private owners and operators, the sought to establish a set of clear rules for PPPs, in an government continues to step in when it perceives effort to prevent fiscally irresponsible PPPs while also crisis in a particular sector [for example, to bail seeking to maintain investor confidence that a clear out a loss-making airline) set of rules existed for private sector involvement in More generally, the ambivalence of the government state enterprises. on PPP, and its failure to create a PPP Unit isolated from PFMA Regulation 16 requires that every PPP this political ambivalence, runs counter to Jamaica's agreement: needs as one of the world's most heavily indebted • Be affordable for the government nations. • Show value for money • Transfer substantial technical, operational and 2 South Africa: National Treasury financial risk to the private partner. PPP Unit The regulation requires formal treasury approval Regulation 16 of the Public Finance Management for each PPP at four stages: Act (PFMA) established South Africa's National Treasury PPP Unit in 2000 as a filter to exclude fiscally • Upon completion of feasibility study. The role of irresponsible PPP transactions. The PFMA defined a the PPP Unit at this approval stage is to make broad program of fiscal reform, begun in 1997 with sure the costs of a PPP are affordable, in other greater decentralization of government budgeting words, that those costs are consistent with the and the requirements that government agencies implementing agency's forward budget prepare three-year rolling spending plans and seven- • Upon completion of bid documents [including the year forecasts. During this time, some government draft PPP agreement) agencies began using PPPs as a way to circumvent • Upon selection of preferred bidder and PFMA's formal budgetary limits. preparation of value for money report The genesis of the PPP Unit was driven by treasury • Upon finalization of negotiations with bidder concerns over a specific PPP transaction proposed by and finalization of PPP agreement. the Ministry of Public Works. The Ministry of Public In 2003, A Municipal Finance Management Act Works intended to procure a 30-year Build Operate extended the PPP Unit's responsibilities to include Transfer contract for two prisons. Treasury found out oversight of municipal PPPs. about the contract, and asked to review it. Treasury's The design of South Africa's PPP Unit was influenced analysis found that the prisons indeed offered value by the treasury PPP Unit in the UK. for money (in the sense of being better value than a public sector alternative), but would be extremely expensive to build, and would likely require resources What Has South Africa's PPP Unit Achieved? The Treasury PPP Unit has closed 13 deals since its the Ministry of Public Works did not necessarily establishment. Seven of these projects are worth a net have. present value of US$220 million in annual payments Treasury stopped the prison BOT but feared that from the public to the private partner for services doing so could signal to private investors a precedent provided [so called unitary charges. The other five for arbitrary intervention in PPPs. Treasury therefore are worth a net present value of US$80 million in 5QThese figures exclude the US$3 billion Gautrain project, of which the private developer's participation is worth roughly US$500 miillion. 78 Appendix cash, capital warks, and operations. 5o These deals Johannesburg, and from the Johannesburg airport to included services in the transport, healthcare, IT, and the city center. government housing sectors. The PPP Unit closed its Table A.3 summarizes the number and value most recent transaction in April 2004 (A Social Grant of public-private sector transactions South Africa Payment System for Free State]. Eight PPP deals were has closed, in infrastructure as well as competitive closed before the PPP Unitwas created. These projects sectors. The table includes transactions after 2000 in included two toll roads projects, two prisons, and four which the PPP Unit would not have been involved, national parks. Most recently, in February 2007, the for example, the construction of the Mozambique- PPP Unit saw the successful closure of the Gautrain South Africa Gas pipeline in 2003. A considerable project, under which a private firm will build and amount of private sector investment in state enterprise operate an underground train between Pretoria and has taken place without the PPP Unit, but these have involved ownership transfer, and are dominated, in Table A.3 Summary of PPP Activity in South Africa Privatization proceeds (All Private sector purchase of, or Sectors) 52 investment in public infrastructure 53 Total Number 25 12 (USS millions) - Total Value 25 33 Average per Project 197 371 Annual Average 329 557 As percent of average GDP 0.25 percent O.44percen t during same time frame Ranking versus other 76th out of 105 111 th outof124 countries with 15-25 years' data (World) Ranking versus other 20tn out of 32 34 tn out of 42 countries with 15-25 years' data (Region) Source: Calculated with data on privatization proceeds from the World Bank Privatization Database (http://rru.worldbank.org/privatization/), data on PPI from the World Bank PPI Database (ppLworldbank.org), and IMF World Economic Outlook Database, September 2006 (http://www.imf.org/externallpubs/ft/weo/2006/02/data/index. aspx). 51 PFMA Regulation 16 defines a PPP as Ra commercial transaction belween an institution and a private party in terms of which oj the private party either performs an institutional function on behalf of the institution for a specified or indefinite period; or acquires the use of state property for its own commercial purposes for a specified or indefinite period; and bl the private party receives a benefit for performing the function or by utilizing state property, either by way of (i] compensation from a revenue fund, (ii] charges or fees collected by the private party from users or customers of a R service provided to them, or (iii) a combination of such compensation and such charges or fees. In practice, this definition generally excludes divestiture or any arrangement where the operator ends up owning formerly state-owned assets. 52 1989-20003 time period 53 1990-2005 time period 79 Public-Private Partnership Units terms of value, by several large transactions in the environment for private investment. The trend of mobile telecommunications sector. 51 Two private more, yet smaller projects is not inconsistent with such participation projects have been canceled while a goal. in progress in South Africa: A partial divestiture of Airports Company ltd in 1998, and a 1995 Analysis: South Africa's Record in Context management contract for Water and Sanitation The objectives of South Africa's PPP Unit are perhaps Services in Fort Beaufort. more limited than that of PPP Units elsewhere. The In addition to presenting number and value of treasury PPP Unit was initially established to prevent transactions, Table A3 indicates average annual poorly designed PPPs, not necessarily to promote PPP privatization proceeds and PPI value as a percentage ideas. Its objectives are first for all PPPs to meet the of average nominal GDP during the same time period. criteria of affordability, VfM, and appropriate risk These ratios are then used to rank South Africa versus transfer, and to establish a framework for PPP projects other countries, in the world, and in Sub-Saharan that protects the government against PPPs that are Africa. likely to fail. This role has ultimately also served to attract private partners to South Africa and not merely An analysis of the data from which Table A3 was prevent bad partnerships. created shows that the average value of transactions (both annual average and project average) has The objectives of the South African PPP Unit decreased since the PPP Unit was created in 2000, recognize what the somewhat more mature PPP but the average number of transactions per year has programs in the UK, Australia, and Portugal have increased. The average transaction value for projects learned. The primary benefits of PPP are risk transfer, closed after 1999 is a small fraction (roughly 20 and then to a lesser extent, VfM. Using PPP to move percent according to the World Bank privatization investments off balance sheet has proven illusory for database) of those implemented during the late most countries. PPPs are now used in South Africa 1980's and 1990s. Average annual transaction primarily to transfer specific risks to a private sector value as a percentage of average GDP after 2000 is operator who is better able than the public sector to roughly half what it was prior to 2000. bear such risks. The data also show, however, that more, albeit The PPP Unit's success is owed, at least in part, to the smaller, projects are being implemented. South Africa environment that existed to support it, specifically: has done two-three projects per year since 2000, • The PPP Unit was launched as part of a package and an average of only one project per year before of fiscal reforms that made explicit the treasury's 2000. role in approving PPP-related budget decisions The creation of the PPP Unit cannot have been of government agencies. legally, municipal and entirely responsible for the trend we observed in Federal agencies can launch Feasibility studies this section, because not all of these projects would and begin soliciting investor interest without necessarily have fallen under the purview of the PPP consulting the PPP Unit. In practice, however, Unit. However, the objective of the PPP Unit was to most agencies seek the Unit's advice at the prevent PPPs that favor the private partner at expense inception of a PPP idea, and investors will pay of the public, while maintaining a welcoming an idea little attention unless they know the PPP Unit is involved. 80 Appendix • The PPP Unit was located within the treasury. The • Suffered from delays and cost overruns, caused, PPP Unit's formal role is advisory only. However, at least in part by: in practice, the Unit has tremendous credibility -Insufficient risk transfer to the private sector. The and therefore effectively has the last word on PPP governmentof Portugal often ended up effectively projects. The Unit's location within treasury also absorbing more risk than defined in the contract. meant that it had access, from its inception, to For example, several PPP agreements allocated a set of skills well suited to evaluating the long- design and construction risks to the term fiscal consequences of PPPs and procuring concessionaire, but left the public partner private partners. responsible for any delays in land The treasury PPP Unit in South Africa has indeed expropriations, environmental permitting and been successful at achieving its objectives. The Unit's other public sector decisions. The government success stems, at least in part, from the fact that often set too strict a timeline for many of these its objectives were clear from the beginning, and approvals. Concessionaires, for their part, had responded to specific needs of the treasury. These no incentive to make sure government approval objectives, and the PPP Unit's functions, were wrapped deadlines were met because such delays left it into a comprehensive set of fiscal reforms and defined able to shift cost overruns to the public sector. in law. Moreover, because the Unit was located within -Rigidities in the procurement process that, in the treasury, its role and authority relative to other some cases, discouraged competition in bidding government agencies were strong relative to other for PPP contracts. The government found that government agencies from the outset. many PPPs had higher construction and financing costs than expected from a competitive 3 Portugal: Parpublica PPP Unit tender. Portugal pursued its first PPPs in the mid 1990s, • Suffered from a lack of public sector capacity primarily as a way to have new infrastructure built for evaluating and managing such partnership quickly in a way that would rely on private sector, agreements. This lack of capacity was rather than fiscal resources. Most of these early PPPs exacerbated, to some extent, by a trend of public were in the transport sector, as agreements with sector employees leaving to take jobs with the private operators to build highways and bridges. private partner in a PPP.54 These early PPPs proved problematic in that they: Portugal's accession to European Monetary Union • Failed to consider the long-term affordability of in 1999 called attention to the importance of fiscal PPPs. Portugal's early PPPs succeeded in bUilding policy, both because of the stringent requirements of new infrastructure, but imposed a significant monetary union and because, having ceded monetary longer-term fiscal burden. In a spring 2003 audit policy to the European Central Bank, Portugal of existing PPPs, Portugal found that its PPP-related was left only with fiscal tools for macroeconomic liabilities amounted to 10 percent of GDP. management. 5AMonteiro, Rui Sousa. Public Private Partnerships: Some Lessons from Portuguese Experience. January 20,2005. 81 Public-Private Partnership Units By 2001, Portugal's economy had large amounts requirements seek to avoid problems experienced of external debt, with significant current and capital with past agreements, and stipulate that PPPs must: account deficits. Portugal became the first of the • Comply with the multi-annual budgeting and members of the Monetary Union to breach the appropriation process stipulated by the Budget Eurozone's Stability and Growth Pact budget deficit Framework Law target of 3 percent. • Clearly stipulate goals and outputs of the works The government responded by launching a and services to be provided by the private sector comprehensive program of fiscal reform with the (rather than input specifications) 2001 Budget Framework Law. This law moved the • Make use of a public sector comparator government away from year-on-year budgeting • Be designed so that the private partner can obta in toward a multiyear budgeting, planned a transition all governmental approvals before finalizing the toward activity-based budgeting, and set out common agreements principles for government accounts, budget planning, and auditing. 55 The law also includes two provisions • Transfer substantial risk to the private partner specifically relevant to PPPs, namely that: and clearly identify which risks are transferred to the private partner and which are assumed by • Government agencies to make explicit the public partner. appropriations for PPPs, and to explicitly show the long-term fiscal consequences of such Parpublica SA, a company owned entirely agreements by the treasury, was subsequently given formal responsibility for enforcing Decreto Lei No. 86/2003 • As part of the assessment of any PPP, the use by Despacho Normativo 35/2003. 56 The PPP Unit of a counterfactual similar to the public sector carries out a separate technical assessment of each comparator used in the UK and Victoria, PPP project (including an assessment of the tender Australia. The public benefit must be measured documentation) before the procurement phase and in terms of: provides its recommendation to Ministry of Finance. - Increased efficiency in the allocation of The Unit also provides technical assistance to line public resources ministries at various stages of PPP procurement and - Qualitative and quantitative improvements management. in the service provided In 2003, the government passed Decree Law What Has Parpublica Achieved? No. 86/2003 that provides for lithe definition of PriceWaterHouseCoopers has estimated that general rules related to government intervention Portugal closed roughly US$l 0-$12 billion in PPPs in the design, conception, preparation, tender, during 2004-2005, representing 10 percent of all adjudication, modification, auditing, and global deals closed in Europe. 57 Of its European peers, surveying of public-private partnerships". The Decree Portugal has had, by far, the highest PPP activity when Law also sets minimum requirements for PPPs. These measured as a percentage of GDP in Europe. 58 The 56A group within Parpublica had been advisiing Portugal's Department of Treasury on PPPs since 2000. 57 Delivering the PPP Promise. PriceWaterhouseCoopers. 2005. 58PPP Activity is measured in terms of average investment value during 2000-05. 82 Appendix total value of PPP project investment since 1994 is There are signs that, with the establishment of worth more 120 percent of the country's current GDP, the PPP Unit, the government has sought to change twice the level of the country with the next highest its approach to PPPs to address some of its fiscal ratio (the UK). problems. One of the government's responses has PPP activity in Portugal has been concentrated in been to change the nature of PPP arrangements it the transport sector but has also included significant considers. Portugal's shadow toll obligations now activity in the water and wastewater sector, and stand at roughly €700 million, representing 0.5 increasing activity in the healthcare sector. percent of GDP. The government consequently decided in 2004 to replace shadow tolls with real Analysis: Parpublica's Record in Context tolls in highway concessions. The data above suggest that Portugal's PPP Unit has The PPP Unit has, moreover, attempted to rationalize succeeded in maintaining sufficient deal flow. Other, risk allocation in PPP arrangements by encouraging anecdotal evidence suggests that it has been able line agencies to break single PPP projects into multiple to do so while also correcting some of the problems projects that better align risks, responsibilities and experienced with PPPs in the 1990s. payments to the actual risks of the PPP. Hospital and The PPP Unit was designed, in part, to fill a gap in transport PPPs, in particular, are targeted for such an the government's ability to assess whether PPPs were approach by striking: of good quality. There is at least anecdotal evidence • A longer-term contract to manage hospital that the Unit has achieved this, namely: buildings and a separate, shorter-term contract • The PPP Unit's formal role is limited to assessing to provide clinical services PPPs in the pretender process, but in practice, • A longer-term contract to provide the infrastructure PPP Unit staff are frequently sought to serve and rolling stock, and a shorter-term contract on tender selection committees that evaluate to provide transport services. As Rui Sousa proposals. The PPP Unit's expertise has also been Monteiro, head of Portugal's PPP Unit explained sought to renegotiate contract terms in active PPP in a recent paper, "the service of the infrastructure contracts. and the rolling stock is subject to availability risk, • The PPP Unit's advice is increasingly sought on whereas transport services are subject to traffic broader matters of government procurement. risk. The contract period for transport services is usually shorter than that for providing the network • The govern ment has proposed changes to Law and trains available; this is because the public 86/2003 that would extend the PPP Unit's sector cannot commit itself for a long period responsibility to municipal PPPs. on some factors that affect traffic risk, such as The legacy of affordability problems remain from maximum ticket rates, new transport systems, or Portugal's early PPPs, as do the government's fiscal urban parking rules."59 problems. Portugal's budgetary problems have The PPP Unit therefore appears to have been persisted since the creation of the PPP Unit. Portugal successful in improving affordability and risk transfer met the Eurozone's Stability and Growth Pact targets of PPPs, while maintaining deal flow in a country that in 2002 through 2004, but the deficit reached 6 has had relatively heavy reliance on PPP to build and percent of GDP in 2005 and was 4.6 percent in operate its infrastructure. 2006. 59Sousa Monteiro, Rui. "Public Private Partnerships: Some Lessons fram Portugal". EIB Papers. Volume 10 No.2. 2005. 83 Public-Private Partnership Units 4 Infrastructure Investment Another institution, the Infrastructure Development Company ltd [IDCOl) was established concurrently Facilitation Center, Bangladesh with IIFC to provide government debt financing The Infrastructure Investment Facilitation Center for infrastructure projects. IIFC and IDCOl are (IIFC) was established in 1999 to promote ond government-owned, limited liability companies. They facilitate private sector participation in infrastructure were establ ished with fi nanc ia I support from The World in Bangladesh. IIFC was established to have a policy Bank, and other donors. IIFC, in particular, received role and a transaction adVisory role, and to advise support in the form of consulting services sponsored both the public and private sectors. More specifically, by the Canadian International Development Agency IIFC was intended to: (CIDAL and Department for International Development • Advise line ministries and other government (DFIDL UK support. The World Bank continues to agencies in identifying and prioritizing potential finance 50 percent of liFe's operating budget. inFrastructure projects for tender, assisting IIFC has emphasized that its role is not to encroach with evaluation, award, negotiation, and on the technical and contracting functions of the implementation of projects agencies, but to provide technical assistance when • Promote private sector participation in required. line ministries are not required to seek liFe's infrastructure in Bangladesh by working with the assistance nor follow any of liFe's guidelines. private sector and serving as a clearinghouse of expertise on public-private partnersh ips. TableA.4 Summary of PPP Activity in Bangladesh Privatization proceeds (A II Private sector purchase of, or Sectors) 60 investment in public infrastructu re b1 Total Number 36 16 (USS millions) Total Value 73 3,138 Average per Project 2 196 Annual Average 6 196 As percent of average GDP .02 percent .45 percent during same time frame rd th Ranking versus other 103 out of 105 108 out of 124 countries with 15-25 years' data (World) th th Ranking versus other 5 out of 5 6 out of 6 countries with 15-25 years' data (Region) Source Calculated with data on privatization proceeds from the World Bank Privatization Database (http://rru.worldbank.org/privatization/ ), data on PPI from the World Bank PPI Database (ppLworldbank.org), and IMF World Economic Outlook Database, September 2006 (http://www.imf.org/externallpubs/ft/weo/2006/02/data/index.aspx). 6Q1 989·2000 time period. 61 1990-2005 time period. B4 Appendix What Has liFe Achieved? design, and faulty operation and maintenance Table A.4 summarizes the number and value of practices. public-private sector transactions Bangladesh has IIFC has worked on roughly 25 projects. It has closed, in infrastructure as well as competitive sectors. Most of the privatization proceeds have come from assisted in the award of seven-eight licenses to fixed full or partial divestiture of manufacturing enterprises. line telephone companies, and six land ports at Investments in infrastructure have primarily been Build the country's border points (the latter are worth an Own Operate contracts in the telecom and energy estimated US$3 million each). A seaport, a fiberoptic sectors (six and seven proiects, respectively), with power transmission proiect, five remote area power three management contracts in the transport sector. supply systems, and an IPP are also currently in In addition to presenting number and value of different stages of development. transactions, Table A.4 indicates average annual privatization proceeds and PPI value as a percentage Analysis: IIFC's Record in Context of average nominal GDP during the same time period. IIFC has succeeded in accumulating more knowledge These ratios are then used to rank Bangladesh versus of PPPs than other government agencies, but its effect other countries, in the world, and in South Asia. on ppj has been limited because government agencies have no obligation to use IIFC's services or follow any The record on the overall quality of PPI transactions guidelines it may establish. in Bangladesh is mixed. Procurement in the power sector, which represents most of the value of PPI This stems primarily from: completed since 2000, offers examples of both quite • A lack of any clear formal or informal power. good and quite bad projects. IPPs represent roughly IIFC provides technical assistance to a Private 25 percent of Bangladesh's generation capacity. Infrastructure Committee (PICOM) that sits in the Prime Minister's office, but in practice IIFC The Haripur and Megnaghat projects, two large has not proven to be influential. IIFC developed independent power producer [IPP) projects completed in 2004 a set of Private Sector Infrastructure in Bangladesh in 2001, are regarded internationally Guidelines for PICOM (with a similar goal as the as successful examples of competitive procurement PPP Manual in South Africa). These guidelines that have continued to yield value for Bangladesh in are fairly comprehensive and include, among terms of power reliability at reasonable cost. other things, the requirement for a least cost competitive tender for PPI projects. Experience More recent IPPs, however, have not been of has shown, however, that line ministries are not comparable quality. Government has shown a required to follow the guidelines. tendency to interfere in the procurement process .. This • The fact that many parallel agencies have interference has affected the ability of Bangladesh to responsibility for procurement of PPPs. install much-needed capacity.62 Some of the newer Procurement in the power sector, for example, IPPs have shown reliability problems, resulting from has been undertaken by a range of entities. IDCOl was involved in the procurement of the a combination of poor technology choice, improper Meghnaghat IPP. Power Cell, a division of the 62The World Bank. Bangladesh Country Assistance Strategy. April 12, 2006. Box 2, 85 Public-Private Partnership Units Ministry of Power, Energy & Mineral Resources, supplier credits and provided generation facilities is now formally responsible for IPP procurement, with very poor reliability. but recent IPPs have apparently been negotiated Default risk is particularly important to investors without Power Cell's involvement. Some individuals familiar with IIFC in Bangladesh looking at Bangladesh, given that government suspect that the line ministries may be asking companies and agencies make up so many links in IIFC to handle only the less attractive, unviable the value chain in so many of Bangladesh's industries. projects. The Haripur IPp, for example, protected the private IIFC does indeed have much more experience sector partner (AES of the United States) through a dealing with the private sector, and with procurement, take-or-pay arrangement and a World Bank Partial than do staff in the line ministries. liFe's success in Risk Guarantee. building such expertise is due in part to its ability Bilateral and multilateral lenders, like World Bank to offer compensation better that that offered in the and ADB, for their part, are wary of extending more public sector. loans to Bangladesh because of concerns about Consistent with its higher salaries and presence noncompetitive procurement practices. of staff with private sector experience, IIFC is Since IIFC was established, the average value commercially oriented. Some observers fear there is a of each PPI transaction appears to have decreased risk that liFe's orientation has leaned from commercial considerably, as has the average value of each to mercenary. IIFC seems to have become conscious project, from roughly US$250 million to US$90 of the need to justify its salaries and therefore has million. 63 This is not likely a result of liFe's activities, discussed the possibility of charging line ministries however. IIFC appears to have had only limited, user fees for its services and also offering its services or at best inconsistent, involvement with the PPP to the private sector. Given that the government of transactions closed in Bangladesh since 2000. Bangladesh and World Bank provide liFe's budget, Individuals familiar with liFe's activities note that it such practices may not be in the best interest of the has succeeded in accumulating more knowledge of country as a whole. PPPs than other government agencies, and may have Overall, liFe's limited role stems from its design succeeded in helping to keep the PPI agenda alive in or lack of design. liFe's role does little to address Bangladesh. Ultimately, however, its overall effect on the fundamental problem affecting PPI in Bangladesh PPI has been limited because government agencies namely, investor perception of risk. Good PPI have no obligation to use liFe's services or follow any agreements cannot be closed because investors guidelines it may establish. perceive too much risk, including default risk by payees, political risk, regulatory risk, and currency 5 UK Treasury PPP Unit and risk. Without much local investment capital and Partnerships UK limited fiscal resources, the government can sign only Volumes have been written about the UK's PFI low-quality deals, like the recent IPPs that, like similar program and Partnerships UK, and many of the PPP transactions in Indonesia, were financed through Units surveyed as part of this study draw heavily on 63The average PPI project size and annual average value of PPI are the same because the number of projects and number of years used as the denominator are identical (in other words, Bangladesh closed one PPI project per year between 1990 and 1999, and closed one PPI per year between 2000 and 2005). 86 Appendix the Partnerships UK model. This paper will therefore to the public sector. The policy taskforce sits within not repeat more description and analysis here. In the the treasury and sets guidance on procurement, deal sections that follow it is briefly limited to: structuring, and evaluation. Individual line ministries • Describing the UK's PFI program and the role of also typically have their own project development the entities involves teams. • Describe the PFI program's record since its All PFI transactions must be given treasury approval inception at several stages prior to final contract signature. Both • Assessing the role of the entities involved. Partnerships UK and the treasury have responsibility The government of the United Kingdom has for national and local PFI been running an active PPP program since 1996. This system, the Private Finance Initiative [PFI) is What has Partnerships UK Achieved used in a variety of infrastructure sectors including Roughly 700 projects have reached financial accommodation, education, environment, defense, close since 1996, worth US$80 billion in capital, equipment, health service, housing and transport. or roughly US$8 billion per year in new projects, or The projects are procured using regulated Design roughly 0.4 percent of average GDP during the same Build Finance Operate IDBFO} bids. time period. The PFI program contributed 10 percent The PFI system was originally seen as a "financial of total investment in public services in 2004. force multiplier". Under John Major's Conservative The UK's PFI activity during the period 1994- government it was a way to control the government 2005 represents roughly two-thirds of all activity in debt by keeping liabilities off the government balance Europe. 64 sheet. PFI projects are also more efficiently implemented Tony Blair's New labour government changed the than publicly procured projects. An average of 80 focus from off-balance-sheet financing to value for percent of PFI projects were delivered on time and money through private sector innovation and efficiency. on budget compared to average of 30 percent for It also re-branded the program as 'Partnerships UK', publicly procured projects. though the term PFI is still used. All proposals are The PFI system has also been successful in compared to a "public sector comparator," which providing value for money insofar as each PFI project estimates the total risk-odjusted cost of carrying must compare favorably against a public sector out the project in the public sector. Only those that comparator. can be done more cheaply in the private sector are implemented. Analysis: Partnerships UK's Record in Context The UK has separate PPP policy and project Figure A. 1 offers a clear picture of how PPP activity development agencies. The project development has increased since the beginning of the UK's PFI agency, Pa rtnersh i ps UK, advises government agenc ies program in 1996. on PPP prajects and finances itself by charging fees 64Delivering the PPP Promise. PriceWolerHouseCoopers. 2005. 87 Public-Private Partnership Units Figure A.l Signed PPP Deals and Capitol Value by Financial in the UK Signed Deals and Capital Value by 5000 -- -~.~-------- 4500 100 4000 E 3500 J!l u ~ 80 Ql Ql 3000 ... '0 :. iii 2500 > '3 2000 60 - a. ... 0 Ql .Q 'a 40 E 0 (!J 1500 :. Z 20 500 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 _ Capital Value (£m) __ No. of deals -----"~,. Source: Presentation by Ed Farquarson of Partnerships UK, 22 March 2006 at the World Bonk. The primary criticisms raised about the UK's PFI are been central to the program and can therefore be program in general are: credited with its success, • The time to close contracts can be lengthy (the As noted above, the government's reason for average time to close deals is slower in the UK launching the PFI program differs somewhat from the than in Portugal), and the negotiation process' present reasons for PFI. The UK has learned that most costly, of the value of PFI comes not in the ability to circumvent • Deal flow has slowed recently, but many government's self-imposed restrictions on borrowing, recognize this is to the result of a maturing market for PPPs, but to achieve better value and allocation of risk than • The success of the system has led to a shortage of in a purely public project. private consortia able to implement the projects. Despite these criticisms, the program indeed appears 6 Partnerships Victoria, Australia to have been successful in increasing the volume of The government of the State of Victoria in Australia high-quality transactions that, by nature of the selection has had a PPP program since the 1980s, Victoria is process, provide value for money and appropriate risk Australia's second largest by population and size of transfer. Partnerships UK and the treasury taskforce its economy, 88 Appendix As in the UK and Portugat early deals were • Average savings to Victoria through private intended to push government expenditure off the sector infrastructure delivery were 9 percent books. Under the Kennet government in the 1990s when compared to public sector delivery. the focus moved toward transferring maximal risk to • Seventy-three percent of line agency construction projects had run over budget. Only 22 percent the private sector, and reducing costs to government. of PPPs had run over budget. The successful Citylink toll road was implemented under the Kennet government. The PPP Unit has identified some areas where work is needed. The current work program includes: In 1999 Labour was returned to power in Victoria, • An effort to reduce bid costs (by ensuring there is under Premier Steve Bracks. The Bracks government enough competition) followed the lead of New labour in the UK, introducing • An effort (by looking studying PFI in the UK) Partnerships Victoria, an adaptation and expansion to achieve better financing outcomes for the of the previous PPP program. The focus is on optimal government) risk transfer, maximizing efficiency and minimizing • looking at payment arrangements and output whole-life costs. specifications, especially the issue of abatement A team within Victoriafs treasury is responsible for for nonperformance. implementing the policy. The PPP Unit has identified some areas where work is needed. The current work program includes: What Has Partnerships Victoria Achieved? Finally, it has been noted that treasury has a great A recent speech by Victoria's treasurer claimed, deal of knowledge and experience in upfront design Australia is now the second most developed PPP 1/ of contracts but less knowledge and experience market in the world" after the UK.65 managing contracts. Partnerships Victoria projects include a major new toll road, the redevelopment of Spencer Street Station Analysis: Partnerships Victoria's Record in Context in Melbourne, redevelopment of the Melbourne The Partnerships Victoria policy appears to have Showgrounds, a new convention center, a major succeeded in fostering successful PPPs. Because the new court building, and a number of water treatment policy, and the team that implements the policy are works and accommodation projects. one and the same, the treasury team has undoubtedly PPPs average roughly 10 percent of Victoria's been responsible for this success. annual capital asset investment, but ranging from 5 percent to 20 percent in any particular year. 7 The Philippines BOT Centre A 2003 review of Partnerships Victoria projects PPPs were first pursued in the late 1980s as a way found that PV-procured projects were of higher quality to solve a looming power crisis. Early efforts focused than project-procured through traditional means, on the liquidation of select government assets and the specifica lIy: reprivatization of certain state-owned corporation. The 1990s saw an explosion of electricity BOT agreements aimed at building badly needed generation capacity 65"A national approach to PPPs. The imporlance of creating a 'single market' appearance 10 gain global attention: Australia's experience," PPP 2005 Conference. Monday 28 November 2005. Toronto, Ontario, Canada. 89 - - - - - - - - - - - - _... __ _ - - - - _ . _ - - - - - - - - - - - - - - - - - - - - - - - ... Public-Private Partnership Units the government could not afford to build itself. The assistance funds. The Philippines Assistance Program late 1990s brought a wider variety of PPP structures (PAP) overseen by CPAP had been established by (no longer BOTs only), and in a wider range of the U.S. Congress to support economic growth in industries. the newly-restored democracy of the Philippines. PAP was designed to foster private sector involvement was PPP program seen as a primary drive of economic growth. The government of the Republic of the Philippines' In 1993, the CCPAP Chairman was deSignated efforts to attract private sector participation in state- Presidential Action Officer for the promotion of BOT, owned industries dates to 1987 with President and the CCPAP-BOT Centre was created. CCPAP Corazon Aquino's issuance of Executive Order (EO) was effectively an autonomous Unit, attached to the 215. EO 215 sought to avoid an imminent power President's Office. The 1994 revision to the BOT law crisis by allowing independent power producers (RA No. 7718) formally gave CPAP responsibility for [IPPs) to build and sell generation capacity to the coordinating and monitoring BOT-type projects and state-owned power network on a take-or-pay basis. for taking a more proactive approach to attracting Republic Act (RA) No. 6957, also known as the private investment. Build-Operate-Transfer [BOT) law was enacted in In 1999, CCPAP was reorganized into the 1991, and amended in 1994 as RA No. 7718, to Coordinating Council for Private Sector Participation provide a framework for private sector investment in (CCPSPJ, and its authority expanded to cover a wider infrastructure that the state was unable to afford itself. range of PSP, including joint venture agreements The BOT law states as its objective: lito recognize the ~VAJ, concession arrangements, service and indispensable role of the private sector as the main management contracts, and other forms of public- engine for national growth and development. .. for private partnership.67 the purpose of financing the construction, operation CCPSP has stated its mission as "effective, and maintenance of infrastructure and development efficient, and sustainable infrastructure systems and projects normally financed and undertaken by the services to meet the basic needs of every Filipino and Government." The BOT law governs national and spur economic development. Its mission: to actively local government PPP, and covers a wide range of promote public-private partnership as a cornerstone sectors. 66 of the national infrastructure development plan." 68 Its functions include, primarily: PPP institutions • Project development, through technical and The Coordinating Council of the Philippine financial assistance to line agencies and Local Assistance Program [CCPAP) had been created in Government Units (LGUs). 1989 primarily to mobilize overseas development 66According to the law, BOT projects may include "power plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation, telecommunications, railroads and railways, tronsport systems, land reclamation projects, industrial estates or townships, hOUSing, government buildings, tourism projects, markets, slaughterhouses, warehouses, solid waste managment, informotion technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and development projects as may be authorized by the appropriate agency pursuant to this Act." 67The BOT Centre is not responsible for privatization. A separate government agency, the Privatization Office, is responsible for divestiture. With the change in law, BOO do fall under the purview of the BOT Centre but any BOO requires presidential approval. 68From CCSP: Championing the Philippines BOT law (www.jp3.org/pub/publication014.htm). 90 Appendix - In their technical assistance role, they fram the Office of the President to the Department of prescreen for technical and financial Trade and Industry. feasibility. The BOT Centre also helps to train line agencies and lGUs in What Has the BOT Cenlre Achieved? project origination and project development. As of September 2005, the BOT Centre had assisted bringing 60 transactions, worth roughly US$18 - Financial assistance for prefeasibility or billion, to financial closure. Power sector transactions feasibility studies may be provided through represented raughly 40 percent of the total value of a Project Development Facility (PDF). The transactions, and the US$7 billion privatization of PDF is a revolving fund. If the PDF funds a Manila's Metropolitan Water Works and Sewerage study and the study results in a project that System (MWSS) represented another 40 percent. The reaches successful financial close, the remaining 20 percent of total transaction value is made winning bidder reimburses the PDF. up of several smaller transactions in the transport, In 2002, Executive Order (EO) 144 reorganized information technology, property development, and and converted the CCPSP and its Technical Secretariat health sectors. to the BOT Centre, and transferred CCSP's attachment Table A.5 the total number and value of privatization, PPP, and PPP transactions completed Table A.S Summary of PPP Activity in the Philippines Privatization proceeds (All Private sector purchase of, or Sectors) 69 investment in public infrastructure 70 Total Number 101 80 (US$ millions) Total Value 4,257 36,877 Average per Project 42 460 Annual Average 327 2,169 As percent of average GDP 0.51 percent 3.30 percent during same time frame th Ranking versus other 51 stout of 105 26 out of 124 countries with 15-25 years' data (World) rd th Ranking versus other 3 outof8 7 out of 16 countries with 15-25 years' data (Region) Source Calculated with data on privatization proceeds from the World Bank Privatization Database (http://rru.worldbank.org/privatizationl),dataon PPI from the World Bank PPI Database (ppi.worldbank.org), and IMF World Economic Outlook Database, September 2006 (http://www.imf.org/external/pubs/ft/weo/2006/02/data/index .aspx). 09 1989.2001 time period 70 1988.2004 time period 91 Public-Private Partnership Units in the Philippines. Table A5 also indicates average when the government had the concession contract annual privatization proceeds and PPI value as a declared null and void. The government found the percentqge of average nominal GDP during the same contract to be unfavorable to the government, given time period. These ratios are then used to rank the the strategic nature of the investment. Philippines versus other countries, in the world, and in the East Asia and Pacific Region. Analysis: the BOT Centre's Role in Context PPP activity has been robust in the Philippines, but The Philippines PPP program originated, primarily, the quality of the contracts has been variable. out of an immediate need to find funds for power sector investment in the late 1980s/early 1990s. As The many IPP agreements signed during the 1990s the need for power sector and other infrastructure succeeded in attracting roughly 4,000 MW of new investment persisted, the government broadened capacity but at substantial cost to state-controlled and accelerated the PPP program, and enjoyed energy companies because of take-or-pay clauses considerable success in attracting investment. and fuel cost guarantees that limited the private Unfortunately, however, for all of its strengths, the sector's exposure to demand and fuel input cost risk BOT Centre's role in promoting quality PPPs remains far beyond IPPs offered in other countries. in question. As the previous section shows, the BOT PPP activity in the Philippines has also seen some Centre has been involved in only some of the PPI well known failures, including the world's largest activity in the Philippines. water sector PPP, the Maynilad Water concession. The BOT Centre was created with a number of Suez subsidiary Ondeo won the concession in 1997, objectives that should have improved the quality of just before the East Asian financial crisis caused a PPP arrangements, and probably did. Line agencies massive depreciation of the Philippine Peso. Suez do indeed look to the BOT Centre for its expertise in sought and was granted multiple tariff increases but project development and, to some extent on contract Maynilad's financial problems, and severe service negotiation and when necessary, renegotiation. quality problems, persisted. Maynilad stopped paying the government its concession fees in 2001 The BOT Centre has no formal mandate to approve and in 2003 Suez sought to terminate the contract or deny a line agency or lGU's ability to pursue a in 2003. A court of arbitration eventually ruled that PPP transaction. As one former BOT Centre official Maynilad indeed owed its concession fee, but the commented, the BOT Centre cannot even compel line company could not pay. The government converted agencies to submit reports. The informal influence the debt from the unpaid concession fees into equity, of the BOT Centre peaked under President Ramos and now owns most of Maynilad. and has declined since it has been subsumed to the Department of Trade and Industry. Another failed PPP is the concession agreement with the Piatco consortium pO percent owned by Fraport The BOT Centre formally serves as advisor to AG of Germany) to build and operate Terminal 3 the Investment Coordination Committee (ICq, in the Ninoy Aquino International Airport (NAIA). an interministerial committee that evaluates the Construction of NAIA Terminal 3 was nearly complete fiscal implication of major projects and makes recommendations to the President. 71 Transactions can 92 Appendix happen without the BOT Centre's involvement and 1999 as part of an effort to improve the results of some do (especially local government transactions), its existing PPP program, and provide badly needed however, if a project reaches the ICC, the ICC often resources for infrastructure investment in the wake of recommends that the line agency seek assistance from the East Asian Financial Crisis. the BOT Centre. Private companies have been investing in transport The BOT Centre's role has focused much more infrastructure in Korea since the late 1990s. Since on technical assistance with project development the late 1960s, the government relied on private than on its other formally defined roles. In practice, investment to build and expand some expressways, its has been less effective in its role as contract but did not allow private firms to operate or manage monitor, because its monitoring function vis-a-vis the infrastructu re. the implementing agencies has never been clearly In 1994, PPP was first introduced in Korea with the defined. The BOT Centre therefore monitors contracts "Promotion of Private Capital into Social Overhead on an ad hoc basis only. The BOT Centre has no Capital Investment Act". The Act sought to establish leverage to change contracts but has often been asked clear policies and procedures for PPI in all sectors, to advise implementing agencies when contracts ran and extended the possible role of the private sector into trouble. to one that included operation and management of The BOT Centre does appear to have been infrastructure. successful in providing technical assistance on project Under the new Act, 21 national projects and development. Philippines line agencies and lGUs have 13 local government infrastructure projects were much less knowledge of how to determine whether a launched. Some observers have noted that progress project is worth pursing, and how to procure it. The in developing some of these projects proved slower BOT law does proVide some guidance on procurement than expected. By 1998, 31 of the local government rules, and the BOT Centre did produce a project projects were under construction, but only 5 of the development manual and draft contracts. central government projects had made it that far. Much less certain is whether, given the quality Concessionaries had been designated for only of PPP contracts signed in the Philippines, the BOT nine projects. The slow progress of PPI during those Centre's advice has been good enough, and whether years has been attributed to a lack of transparency, the implementing agencies have put the BOT Centre's excessively complicated procedures, insufficient expertise to best use. incentives for the private sector, and unattractive risk sharing arrangements. 72 8 Public and Private Infrastructure The 1997 East Asian Financial Crisis lowered the Investment Management Center private sector's appetite for PPI in Korea, and made (PIMAC), Republic of Korea it increasingly difficult for the government agencies The government of Korea created the Private to pay for infrastructure from their own budgets. Infrastructure Investment Center of Korea (PICKO) in The government therefore tried to accelerate PPI in 711CC members include the Secretary of Finance as chairman, the National Economic and Development Authority Director-General as co-chairman, and the Executive Secretary, the Secretaries of Agriculture, Trade and Industry, Budget and Management and the Governor of the Central Bank of the Philippines. 72Hahm, Junglim. "Private Participation in the Infrastructure Program of the Republic of Korea" Transport and Communications Bulletin for Asia and the Pacific. No.72, 2003. pp. 57-75. 93 Public-Private Partnership Units December 1998 with the Act on Private Participation of PICKO responded in part to a perceived in Infrastructure. The new Act: need that the government agencies were • Expanded the types of PPI allowed. The 1994 lacking expertise in PPI evaluation and Act had allowed far Build-Transfer-Operate (BTO) development and Build-Own-Operate (BOO) only. The 1999 - Promote infrastructure projects and educate the Act allowed for Build-Operate-Transfer contracts, private sector about PPI in Korea and allowed the government to consider - Review unsolicited proposals as requested by unsolicited proposals as well as those projects line agencies the government had already planned. - Review feasibility studies and bidding • Made mandatory the completion offeasibility documents studies - Assist in proposal evaluation and negotiation • Defined several incentives for which private of agreements sector developer could be eligible, including: - Assist in formulation of government policy on PPI - A system of project evaluation that PICKO was a member of the Private Investment awards extra points to project developers Project Committee under the Ministry of Planning and who submitted an unsolicited proposal for Budget. The committee also includes members from a project on which they later competed to win the line agency for the sector in which the PPI will - Minimum revenue guarantees [MRGsJ that take place. The committee has primary responsibility guarantee the privote partner a minimum level for selecting projects, evaluating proposals, and of operating revenue negotiating agreements. The committee is also - A foreign exchange risk guarantee that caps responsible for drafting the Annual Plan for PPI, which a private partner's foreign exchange risk by establishes the country's infrastructure priorities. allowing for tariff increases or government A 2005 amendment to the Act on the Private subsidies for an adverse currency fluctuation of Participation in Infrastructure further broadened the more than 20 percent scope of Korea's program to include Build-Transfer- - A number of tax exemptions or partial lease (BTl) schemes and introduced VfM tests. exemptions The Public and Private Infrastructure Investment - A provision that allows the public partner Management Center (PIMAe) was established as to buyout the private partner in the case of a merger of the Private Investment Center of Korea force maieure. (PICKO) and the Public Investment Management Center (PI MAe) by the amendment of the Act on PPI • Created an infrastructure fund for the purpose of in January 2005. The PIMAC is an affiliated body investing in projects of the Korea Development Institute (KDII, which is a • Created PICKO to: leading government research institute. 73 - Provide technical assistance to government agencies and the private sector. The creation 73PIMAC was founded under KDI in January 2000, to focus on research and managment of public investment projects 94 Appendix PIMAC consists of three divisions: the Public awarded concession agreements. These projects Investment Evaluation Division, the Private have total investment costs amounting to roughly Participation in Infrastructure (PPI) Division, and the US$41.4 billion. Also, 106 BTL schemes, first Program Evaluation Division. There are three teams in introduced in 2005, are in the pipeline as of each of the PPI divisions: BTO, BTL, and PPI Promotion August 2006. These projects are worth roughly teams. US$6 billion. The multiple roles played by PIMAC can be Private sector investment in infrastructure has classified into three categories: risen considerably since 1998, from roughly • Researcher: PIMAC formulates the annual PPI US$500 million, to US$2.8 billion in 2005. As plans and conducts both theoretical and practical the government's expenditure on infrastructure has studies on PPI increased during th is period, the government's share of total infrastructure investment has decreased from 95 percent to 86 percent. 74 • Policy Advisor and Project Manager: PIMAC develops PPI projects, reviews and executes Analysis: PIMAC's Record in Context feasibility studies of PPI projects, executes VfM As discussed in the previous section, PPI activity tests, supports formulation of RfPs, and assists in in Korea has picked up considerably since the tendering and negotiation government created PICKO (PIMAC's predecessor) • PIMAC consults foreign investors and helps in 1999. The government appears to have attract foreign capital to the Korean PPI market. successfully understood the shortcomings of the PPI PIMAC also develops and promotes education program between 1994 and 1999, and tried to programs on PPls, and manages a PPI database address those problems. for the country. PIMAC appears to have met the objectives established for it. Through its role in the Private What Has PIMAC Achieved? Investment Project Committee, PIMAC has proven Korea's PPI program was introduced in August an essential player in the evaluation of feasibility 1994, but hit its stride in January 1999. As of studies and bids. Line agencies rely on it for August 2006, 154 projects had been carried assistance in tender preparation, evaluation and out under BTO, BOT, or BOO schemes. Of those negotiation of contracts. In only rare instances (a projects, 64 are under operation, 50 are under politically motivated bridge project, in particular) construction, 18 are preparing for construction, 15 have projects gone ahead without PIMAC's are under negotiation, and 7 are under review. approval. One hundred thirty-one BTO projects have been 74"Korea's PPI System and Key Policy Issues". Presentation by Dr. Young-Geun lee, Director General for PPI, Ministry of Planning and Budget, Republic of Korea. 2006. 95 ------------------------ --------_._------- Public-Private Partnership Units Documentation of the PPP program and tender There are also signs that Korea has been attentive to process, much of wh ich has been prepared by the quality, and not just quantity of PPI agreements. PIMAC, receives high marks from public finance The 2005 revisions to the PPI Act scaled back MRGs, experts. Fitch Ratings said in a recent report, ""rhe and abolished MRGs completely for unsolicited level of documentation at the concession agreement projects, and made clearer the currency risk sharing level is sophisticated by global standards. More arrangements. 76 The Ministry of Planning & Budget impressively, the level of recognition and cross- has said it intends to place increased emphasis on reference between concession and financing monitoring the performance of existing PPI projects documents is very strong."75 for their macro- and micro-economic impact, and Korea has continued to finetune the incentives using those lessons to drive further changes in the offered to private partners in 1999, as the PPI strategy. country's financial conditions have changed. Korea It remains to be seen how PIMAC, will fare in continues to have infrastructure needs of roughly its new location under the Korean Development US$15 billion per year, but the government's fiscal Institute, but initial assessments by those familiar priorities have increasingly shifted toward health with PIMAC feel the change has given the PPP and welfare expenditure. The private sector has Unit more independence from the line agency gradually filled a larger and larger portion of the proponents of PPI projects. needed investment in infrastructure. PIMAC has so far proven to be a central player in Korea's relatively successful PPP program. 75"Koreo's Infrostructure Finonce Program: Portnerships ot Work". fitch Ratings Project finance Special Report. November 1 2005. 76Since January 2006, MRGs ore opplicable only to solicited projects. For the first 5 years, 75 percent of revenues are guaranteed and for another 5 years, 67 percent ore guaranteed. For unsolicited proiects or projects that earn less than 50 percent of projected revenue, MRGs ore no longer applicable. 96