TOOLKIT FOR PUBLIC-PRIVATE PARTNERSHIPS IN HIGHWAYS
A brief summary
Introduction
The Toolkit provides hands- on advice for creating an analytical framework that would support local policymakers in assessing different contracting, regulatory, and funding options for engaging the private sector in road development, operation, and maintenance.
Financing Institution: Public-Private Infrastructure Advisory Facility (PPIAF)
Executing Agency: The World Bank
Consultants: Groupe Egis () in association with Coudert Brothers ((
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Module 1. Overview & Diagnosis
1.1Why embark on PPP?
This section provides a background into the key issues surrounding public-private partnerships and the expected benefits.
Context and Key Issues
The importance of the road sector for economic development:Road networks in developing and transition economies carry 60 to 80 percent of all passenger and freight transport. This section explains how quality insurance and development of road assets constitutes as such a key element of economic development.
New challenges faced by the transport agenda:Globalization of production and trade calls for reliable transport facilities capable of supporting "just-in-time" operations for reduction of stocks and costs. New services such as intelligent systems for traffic management are required to prevent adverse effects of rapid motorization on congestion and safety. Pressure to address environmental and social concerns is increasing and imposes necessary constraints on the road sector development.
Expected Benefits from PPP
Increasing efficiency in the execution of projects: Road maintenance workforces directly employed by government departments (known as force accounts) are less efficient than competitive private sector contractors.
Enhancing implementation capacity: By giving more flexibility in the mobilization of resources both in nature and planning, contracting out allows the delivery of more and more responsive services. Particularly in countries facing pressure to reduce the size of the public sector, the issue is critical.
Reducing risk for the public sector:Transfer of part of the project risks to private partners is one of the key incentives generated by public private partnerships and directly results in a better control by the public sector of the overall project cost, delivery time frame and quality of outputs.
Mobilizing financial resources: Private financing in infrastructure is often quoted as a "new" source of financing. There should be no confusion however between the financial source of investment that could come from the private sector in the form of debt or (to a lesser extent) equity and the source of revenue that will eventually pay back the investment and must come from the taxpayer or the beneficiaries of the road There are no "free lunches". However, private financing for road construction or rehabilitation allows to mobilize the resources and execute the relevant investments more rapidly because of the incentive the private sector has to maximize the return on the investment.
Freeing scarce public funds for other uses: PPPs financed by the private sectors allow the spreading of the project cost for the public over a longer period of time, in line with the expected benefits (savings on vehicle operating cost, on travel time, on accidents). Public funds are thus freed up for investments in sectors were private investment is impossible or inappropriate (social services).
Why (and where) is the Private Sector more efficient than the Public Sector?
Typical reasons for a greater efficiency of the private firms over public agencies are to be found in:
A system of incentives and sanctions: Motivation at company level such as fear of bankruptcy and hope for results are passed on to individuals in the form of wage increases, promotion of productive ones and dismissal of inefficient ones.
Flexibility: the private sector has greater flexibility in adjusting its resources (personnel, equipment and materials) to a constantly changing situation.
Comprehensive approach: when entrusted with a long-term contract and a wider scope of work, private firms can balance expenditure over the project life and make effective trade-offs between investment, maintenance and operation costs subject to environmental, social and economic considerations.
Access to technology: large firms are massively investing in research and development and constantly improving the quality and efficiency of construction techniques, processes and equipment.
The main necessary conditions for efficiency gains to materialize and benefit the community:
A suitable environment institutional and legal framework, a steady economic growth and an entrepreneurial private sector
A firm and steady commitment from the government at policy and project level and the acceptance of risk-sharing between private and public sectors.
Adequacy of the private partners' capacity for the project. Not every private firm has the appropriate managerial skills, size and expertise to perform more efficiently than public entities. Selection processes and contract award procedures allow a precise and reliable assessment of their capacity to be made.
Competition is a necessary condition to stimulate private entities in the optimization of their services. It is also a good way for the community to benefit from the efficiency gains made by the private sector by paying the optimum price. Competition is the primary factor motivating managers to cut waste, improve operational performance and allocate resources efficiently. Furthermore, since many road projects involve the utilization of public property, it must be allocated competitively in order to obtain its maximum value and hence protect the interests of the Community.
Overview of PPP experience
After World War I, infrastructure was mainly designed, constructed and financed from public funds and prior to 1982 there was virtually no private financing of transport infrastructure in developing or transition countries. The trend towards the liberalization and privatization of infrastructure activities that began in a few countries in the 1970s and 1980s turned into a wave in the 1990s. Developing countries have been on the crest of this wave, pioneering better approaches to providing infrastructure services. Market leaders among emerging economies such as Argentina, Chile, and Hungary-have gone further in privatizing infrastructure than all but a few industrial countries. Simultaneously, initiatives aiming at outsourcing maintenance activities to private firms are being implemented in Africa, Asia and to a larger extent in Latin America.
PPI project data base
The Private Participation in Infrastructure (PPI) project data base tracks infrastructure projects newly owned or managed by private companies that achieved financial closure in 1990-99 in energy (electricity and natural gas transmission and distribution), telecommunications, transport, and water. In the case of toll roads, the database covers only privately-managed toll roads. Long-term maintenance contracts for non-tolled roadways or turnkey contracts are not included.
1.2Choosing the right option
Outlines a number of different approaches that can be taken to engage with the private sector and discusses how these different options can be evaluated in order to determine an appropriate long-term strategy. Key options are outlined, ranging from low to high private sector involvement (including works & services contracts, management & maintenance contracts, build operate and transfer (BOT) contracts and full privatization) and a method for performing a sector diagnostic is proposed.
Forms of PPP
Maintenance and management contracts:
Quantity-based maintenance contracts have been implemented in many countries with good records of success and are often seen as a first step towards PPP. The current trend is to include a whole set of maintenance activities required by a road segment or portion of the network in the contract to facilitate administration and achieve economies of scale.
Performance-based maintenance contracts are derived from the previous type of arrangement by shifting the focus from administration (maintenance activities and resources) to certain performance conditions valued by the users. They typically leave contractors with more autonomy in the design and organization of the works.
Management contracts: A management contract is an arrangement by which a private company is entrusted with various types of tasks usually performed by the public authority, relating to the organization of road maintenance operations. Management contracts can also (or only) focus on operation management.
Concessions: A road concession is an arrangement under which a public entity, owner of the road, delegates to a private entity (concessionaire) the responsibility for providing and maintaining a specified level of service to road users in exchange for the right to collect revenue from those users. Concessions may take various forms:
- Operation and maintenance concessions
- BOT-type of concessions
- Toll Road Corporations
Making the diagnosis
This section introduces the steps of the diagnosis required, on the basis of which the road policy can be refined to introduce Public Private Partnership in a sound and efficient manner. Policy makers should conduct the various steps of the diagnosis, keeping in mind the benefits that can be expected from introducing or enhancing private sector in the sector and the conditions required for such improvement, as identified in the previous sections.
Step 1: Identify strengths and weaknesses in road sector performance
Step 2: Assess the capacity of the private sector
Step 3: Assess the country framework / Attractiveness for the private sector
Step 4: Political room for maneuver / Scope for decision making
PPP policy and strategy
The road policy can be refined in the view of rationalization of the system. The agenda will consists of:
- designing and conducting reform of the road agency towards a commercial management of the road assets (assign responsibilities of each part of the network, involve users to gain support and psychological ownership, secure and stabilize flow of resources, introduce commercial management practices);
- designing and conducting a set of long term reforms of the country framework to prepare the ground for PPP project implementation;
- selecting PPP options most suitable to address the specific objectives set up for each part of the network;
Remove constraints with long-term reform
In short, in the development of PPP projects, five types of constraints must often be overcome:
- Political and bureaucratic constraints, which must be tackled with the aim of developing and establishing clear and sustainable rules and agreements between the relevant public authorities, between these authorities and the affected users, and between the authorities and the private sector
- Legal and Regulatory constraints, that must be overcome to provide transparent procedures to delineate market competition and tariff-setting in relation to project construction and operation, ensure contract enforcement and secure private ownership.
- Financial constraints, which largely stem from public budgetary limits and hesitant user charge policies. They must be addressed to achieve a sound financial structure for all project phases;
- Methodological constraints, which stem from frequently limited knowledge of inter-related variables and which prevent a clear definition of performance indicators or the estimation of key values which are crucial for project economic and risk evaluation (Module 3 - Economic evaluation).
- Implementation constraints, typically the capacity of the private sector to respond to the needs of the transport sector and to bring efficiency gains.
Adjust ambitions in project planning
Policy makers should be reasonable in the selection and design of PPP projects and take into account the limitations imposed by country constraints. A modest but successful project is more beneficial than an ambitious project ending in failure.
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Module 2. Project characteristics
2.1Tailoring appropriate PPP
Following on from the choice of the most appropriate option, this section looks in more detail at the key parameters of public private partnerships - e.g. scope of work, risk allocation and project financing. Designing a PPP should start with the identification of the main project fundamentals and in particular the nature of the project, the objectives of the decision maker, the project investment cost, the sources of benefits and potential revenue, the socio-economic features of the project area, the function of the project in the road network and the transportation system:
A continuum of alternatives
The section indicates that there is no ready-made solution to identify which function could be entrusted to the private sector and which types of PPP solution could be implemented. Any PPP solution is too complex and too unique to be characterized in one word or acronym. To define clear-cut categories would always result in projects falling between two categories as their characteristics apply to several categories. In other words, there is an almost infinite number of solutions that are better described by a continuum than by categories.
Although it will not be possible to apply universal rules and recommendations, defining a PPP solution still requires answering the following six fundamental questions:
Which tasks (design, build, maintenance, operation, financing, etc.) are delegated to the private sector?
What is the level of autonomy left to the private sector and how is it controlled?
Will the project be implemented as a single link or as part of the network within a pooling system (geographical area, types of roads)?
How are the project risks allocated between the public and private sectors and how do they evolve during construction and operation?
What type of cost recovery system (tax payer or direct and/or indirect user, specific taxes, dedicated resources, private sector remuneration linked (or not) to recovered costs, external costs, etc.)?
Which methods of financing (Government budget through taxes and loans, national savings or international funding, private financing with or without support from Government or International Funding Institutions (IFIs) are possible and suitable?
Comparing PPP with music
The Project Designer is like a Sound Engineer who needs to adjust the sound quality for a concert with an equalizer.
Like the sound engineer whose:
-constraints are the type of instruments being played, the acoustics of the concert room and the sensitivity of the musicians, the project designer deals with project fundamentals, country constraints, the legal and economic framework and the sensitivity of the various actors (Module 1).
-objective is to produce a sound that will suit the audience, the project engineer must ensure that the project meets the community's expectations.
2.2Equalizer
The equalizer is an interactive graphic that illustrates the key parameters of a public private partnership, such as the scope, degree of autonomy or risk-sharing and allows the user to get a good grasp of the possible variations on each of these parameters for designing private sector participation arrangements in the highway sector.
Scope of work representing the tasks assigned to the private sector.
Autonomy representing the initiative left to the private actors to operate .
Pooling or the number and type of roads concerned by the project.
Risk explains how risks should be shared among the actors.
Cost recovery system used to pay back the investment.
Financing scheme for the project.
Principles and warnings
Since the proposed equalizer approach is imperfect and may be considered as an oversimplification, it should be stressed that the important issues should be kept in mind during the design and implementation of a PPP project:
No two projects are identical and a solution, even with proven efficiency, cannot be replicated mechanically;
It is the public sector's responsibility to set up the core features of the project and adjust the positions of the levers;
For any given environment, there is no single solution but a range of possibilities from among which the decision-maker has to choose.
Each project characteristic is interdependent on the others. The position of each lever cannot be chosen separately. An iterative process is recommended to obtain a global, coherent package.
Experience is a key factor of success in such a delicate fine-tuning exercise. Advisory support is recommended.
Pushing the equalizer levers to extreme positions is not the objective and leads to distortions. The movement of each lever is therefore limited.
Red zones of the equalizer levers
Constraints imposed on the project can be:
- Objective ones from the project background and project characteristics (Module1), the available legal framework (Module 4) or the possible implementation process (Module 5) or,
- Subjective constraints from choices, objectives, political and social acceptance of private participation or enforcement capacity of the Government (Modules 3, 4 and 5).
Such constraints can be represented as Red Zones into which the Equalizer levers should not be pushed if the project is not to be jeopardized. The area of the possible solutions is between the upper and lower red zones. Long-term reform aiming at removing those constraints will help in reducing the Red Zones, opening the field to a wider range of possibilities.
2.3Examples of well-known PPP
A wide range of highway private participation case studies from a number of countries is presented. The variations between the different case studies are illustrated using the equalizer tool and each case study is presented in a uniform way, with a project overview and detailed description. An analysis of the contracts is also included, with extracts from the contracts themselves in some cases.
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Module 3. Public sector functions
3.1Failure is our teacher
This introductory section examines a range of public private partnerships where difficulties have been encountered and assesses the reasons for such difficulties to have occurred.