Public-Private Partnership in Infrastructure Resource Center for Contracts, Laws and Regulations (PPPIRC)

Today I would like to feature very useful tool for anybody involved with Public Private Partnership. The World Bank site developed by legal experts providing excellent database of ppp related legislation, regulation and also contracts focused on infrastructure in following sectors:
Clean Tech : Clean energy laws and regulations, PPP toolkits, examples of PPPs for green technology, renewable energy and energy efficiency projects.

Energy and Power: Overview of countries' existing energy laws and regulations, PPP toolkits, sample laws and licenses, Power Purchase Agreements (PPAs), implementation agreements, etc.

Telecommunications/ Information & Communication Technology (ICT): Information and resources on telecom sector reform, laws by country regulations and licensing.

Transport: PPP agreements for airports, ports, roads and tolls, light rail, and other transportation infrastructure projects.

Water and Sanitation: PPP sample agreements, toolkits, and legal material for PPPs in Irrigation and Small - Rural Water Providers

Solid Waste: PPP legislation and sample contracts on waste collection, street cleaning, waste disposal, treatment and recycling.

PPP Days 2012

I wish to announce an upcoming event that will be of interest to you. It is the Business Forum which will be held on 23 February 2012, at the Palais des Nations, Geneva, Switzerland. It is held under the auspices of the PPP Days that is being co hosted by the United Nations Economic Commission for Europe, the World Bank Institute and the Asian Development Bank with the support of the IFC and the Swiss Economic Cooperation Organization( SECO).
This event will provide opportunities to:
– personally meet key government officials from countries show-casing their project pipelines at the Business Forum including the Russian Federation, India, Brazil, Kazakhstan,  Vietnam , the Philippines, Turkey, Japan and Ukraine,

– be among the first to learn about their PPP projects;

– network with public and private sector practitioners and decision makers in the PPP business world;
In addition, you may also be interested to attend the the ‘Virtual Site Visits’ (Friday, 24 February) that will present several PPP success stories from around the world such as the administrative buildings project in Berne , Manila Water, Lesotho Hospital, Romania dialysis, and the Geneva-Annecy PPP motorway.

You can find detailed information on the event at the following website http://www.unece.org/ceci/ppp.html where you can also obtain the registration form. furthermore a briefing for the business community will be held prior to the Business Forum at 4pm on Wednesday, 22 February - that will be followed by 'Swiss Night' that is kindly being hosted by the Swiss Government.

Should you have further questions, please do not hesitate to contact the UNECE Secretariat by email.

Discussing Public Private Partnership in Irrigation

Two weeks ago we did hold the eConference on Public Private Partnerships in Irrigation on the Global PPP Network, which was following the WBI organized eCourse on Irrigation PPPs. I would like to share with you couple of comments made by different discussantsw on this subject as I find it quite interesting.

“The International Food Policy Research Institute estimates that “the food gap” (the difference between consumption and production) in developing countries will grow from about 90 million tons in 1993 to about 230 million tons in 2020. The FAO estimates that 60% of future gains in food production will have to come from irrigation. Modernized, efficient, intensive irrigated agriculture, rather than an expansion of irrigated area (i.e. not in Africa – Africa’s must expand and there is huge potential for the “right irrigation”), will have to play a central role.” Commented Abdulhamid Azad (World Bank)

So it seems we do have a problem here to solve, and privately financed and operated Irrigation can be very important solution provider, or not? This was extensively discussed and especially did discussants look at cost recovery, demand side and government subsidies.

Abdulhamid Azad (World Bank) also said, that “It should not be concluded from the dismal perspective on cost recovery in irrigation financing that the huge public investments in irrigation have been a waste or that the era of irrigation is over. On the contrary, irrigation project have made a great contribution to welfare, food security, poverty alleviation and the economy. As documented in a number of World Bank review, the benefits of most irrigation investment have also directly reached the large numbers of poor farmers and poor famers or landless (such as in India: Sodic Land reclamation project) have benefited directly. Also, since irrigation increases farming intensity, it increases labor demand.

A typical example of the aggregate impact on poverty comes from India: districts with little irrigation had an incidence of poverty 2.5 times greater than in districts which had substantial irrigation. And irrigation projects -- at least those financed by the World Bank -- have substantial economic returns -- the average rate of return of World Bank-financed irrigation projects is 15%.Farmers are responsible for the costs of operating and maintaining their systems (tertiary/on-farm); in many instances they are responsible for meeting the full costs of replacement, rehabilitation and new investments. Where these changes have taken place, there have not only been sharp swings in the relative proportion of private and public spending, but there have been dramatic improvements in the efficiency of investment and operation and, in most cases, major positive environmental impacts.”

Melissa Rekas (Castalia), who did facilitate the eCourse on PPPs in irrigation did observe that ” The topics that have been discussed most are subsidies and farmers’ willingness to pay for irrigation. Participants in the course state that one of the obstacles in an irrigation PPP is the required subsidy. However participants understand that PPPs in irrigation can bring many benefits – mostly stemming from improved planning and design, operations, maintenance and management of irrigation systems. PPPs can overcome many of the weaknesses of government-provided irrigation, in which poor maintenance and unreliable service are common.”

“The major constraints in the sector are related to knowledge, governments’ interests and farmers’ willingness to pay. The concept of PPPs for irrigation is not widely known. Where it is known, there may be misconceptions. Central government ministries may not be interested in PPPs because they wish to retain control over investment decisions, and they don’t see that the private sector is not a welcome partner in agriculture. Besides the constraint of farmers’ willingness to pay, in the absence of secure land rights they may also fear losing land to the private party. Farmers opposed implementing an irrigation project in Swaziland as a PPP because farmers perceived it to be a ploy to have the private operator take over their land after they fail to pay for the water.”

The very same concern has been shared by Kristen Rautela (India) “in my opinion in infrastructure like water, there is hardly a demand risk (specially in developing world). Important point is the real demand backed up with willingness and capacity to pay. when that is factored in we would know the gap which government may have to find ways to fund.The other issue is to provide a better value for money solution when compared with micro solutions deployed by small farmers, like in case of some parts in India where bore wells are easy solutions. Any collective solution has to make the availability of water and cost of delivery of water attractive enough for these farmers. “
Issac Averbuch did comment on the willingness of farmers to pay “The price of the water and the willingness to pay for it depend on the price of the products which are grown by the small farmers. In developing world, normally the small farmers has a low educational level and limited skills to cultivate more sophisticated products and is not possible to pay an irrigation project with cultures like lettuce or onions or using scale of production like subsistence agriculture. Is absolutely essential to grow products with higher added value (like cotton, fruits which has international market or energy plantations). These cultures will allow the small farmers recover their money, pay for the water and have a sustainable development for their families and properties. So, provide the water is basic, but not enough. Technical and financial assistance at some level are essential. But to get the money of those more valuable products the small farmers has to be integrated in an agribusiness scheme or at least organized in cooperatives which will trade their products. I think I can summarize that a successful irrigation project is based in a tripod: water, education and high scale business.”

Alfonso Guzman (Castalia) explained demand risk in a great detail “One of the key issues with irrigation systems is demand risk - that is, the risk that not enough farmers will be willing to pay the price that is needed to cover the full cost of building and operating the irrigation system. This risk is particularly important in irrigation systems because small farmers that are used to growing subsistence crops find it very hard to reliably quantify the financial benefit that irrigation water brings to their farming business, and therefore to commit to pay a price for that irrigation water. Farmers find it particularly difficult because with irrigation they would be able to grow higher value crops which they do not know how to grow, or where to sell or what prices to expect. This issue of demand risk is of particular importance in greenfield irrigation systems - that is, where farmers are not yet consistently using irrigation. For example, this was a particularly difficult issue in Ethiopia where the Government , with the our help, was considering a PPP for a greenfield irrigation system. When we surveyed farmer willigness to pay we found that farmers were essentially not willing to pay for irrigation because they could not quantify the benefit of irrigation.There are at least three options for managing demand risk.First, is to have the the private investors bear the full demand risk. This would create strong incentives for the private investor to build the system to fit the demand and willingness to pay, or to find options for minimizing demand risk (for example, by helping farmers to learn how to grow new high value crops and providing them with access to markets). This was trialed in the proposed West Delta PPP irrigation system, but limited interest from private investors signalled that transfering all the demand risk to the private party might not be viable.Second, having the government bear all the demand risk. There are several ways in which the government can do this. One way is for the government to pay the private party for making the irrigation system available, regardless of how much water farmers use and how much they pay for this water. This method is commonly used in PPPs for hospitals, prisons, schools. This essentially means that the government is providing farmers with a subsidy to make irrigation water available to them. Providing this subsidy would only make sense if the net economic benefits that the irrigation system brings to the country are greater than the subsidy.Third, is to have the government and private party share demand risk. There are several ways in which this can be done. One way is for the government to offer a minimum demand guarantee (as well as share on the demand upside), another way is to have a PPP contract with a variable term (for example, if the demand is lower than expected the term of the contract would be extended to ensure the private party that it will receive the same present value of the revenue). This is a common demand sharing arrangement in tolls roads in Chile.”



Aldo Baietti (World Bank) did also comment extensively on this issues following” I think it is important to differentiate the "cost of water" and the "cost of the service". From my experience very few countries actually charge a water resource price. So when we are talking about cost recovery in irrigation we really mean the cost of bringing the water to the farmer (although there is no particular reason for not including a water resource fee given the effects of climate change and increasing water scarcity). But in terms of the cost of service, this would involve the cost of the infrastructure plus O&M, including a reasonable return on investment, whether it be a public or private entity. But rarely we have seen where most of these costs are factored into an irrigation service tariff that farmers would pay. This is particularly true for irrigation services that are conducted on a "utility model" whereby there is one service provider with many consumers. Certainly on private systems where the farms have developed their own water source and irrigation infrastructure, they do wind up paying for most of these costs as they are unavoidable.But going back to a utility system that serves many, it becomes more difficult to pass on all the costs to the farmers, for a number of reasons including political ones. For this reason, it is essential to carry out willingness to connect an pay studies prior to designing and building the system. what you don't want to do is to overbuild a system without fully understanding the financial commitments that must be made to support it if the farmers cant or won't pay. If you are catering to commercial farms that produce high value crops it is probably easier to pass on the full costs of service. More difficult will be to pass on these costs to subsistence farmers. So this is where you need to develop a coherent subsidy policy, where the Government may assume initially a good share of the capital as well as some of the operating costs. But ultimately and as we have seen, there is at least the need to fully cover O&M, otherwise we would jeopardize the sustainability of the system. Since subsidy programs do have a significant opportunity costs, Governments must factor these financial commitments against competing demands and if resources are scare as they are in most developing countries, they must make a careful assessment on which investments subsidized over others. “

It is clear that many do recognize PPPs in Irrigation to be an important option with demand risk/willingness of farmers to pay being absolutely key success factor. And with public sector understanding the benefits this can certainly be done in form of public support mechanisms with great benefit of major impact on productivity of farm land and reduction of hunger in regions dependent on agriculture.

Changing landscape of PPP units governance

There has been published a lot regarding PPP Units governance, role and best practices. Common exterminator has been permanent evolution of PPP Units landscape and emergence of practices, which fit the current public administration and needs in particular country, rather than development of a single best practice that would rampage across the globe.

Stanford published research paper “Public Private Partnership Agencies, A Global Perspective” defines three types of PPP agencies: (a) Review Bodies; (b) Full service Agencies and (c) Centers of Excellence. While Review Bodies do have a more of a Regulatory function, Service Agencies do have Advisory role and Centers of Excellence have Capacity building mandate. Obviously these roles tend to be more structured and mixed up in different governance structures within the global landscape.

PPP Days 2010 has featured interesting developments in this area as a result of financial crises and also perhaps a natural development of PPP markets. Some of the trends are perhaps emergence of regional PPP units covering specific well defined region, emergence of strong federal PPP Units in Brick countries looking at country, state and municipal PPPs markets and governance major shift in single country focused PPP Units.

Three countries (South Africa, United Kingdom and Russia) have been featured in this regard during PPP Days 2010 in a specific session and number of other PPP Units during the course of the event including Indian PPP system, Korean PIMAK, EU EPEC, Canadian Partnerships BC, Brazilian Federal PPP Unit etc. Interestingly there are common trends to development of PPP Units alongside PPP market development.

Financial crises and South Africa PPP Unit: the demerger of regulatory and advisory roles, greater independence on Treasury. This was presented at PPP Days by the Head of PPP Unit at Treasury, William Dachs. SA context of financial crises did bring major change of government and while presidential support to PPPs remained strong, the government and line ministerial leadership in this field was very weak. Financial crises initiated some progress in terms of IPPs to respond to energy crises, set up of a hospital PPP program and strong support still for the transport related PPPs. Key driver at SA PPP governance is at the moment the separation of Advisory from Regulatory function when driving the deal flow. PPP Unit will move away from Treasury in to a new Government Component under the brand name of Partnerships SA, will be 100% government owned and will have mainly project development function. The regulatory function will be exercised by Director General NT.

Financial Crises and PPP governance in UK is taking opposite root that the one in SA. As presented by Director of PUK Eduard Farquaharson there are two important policy measures stipulated by financial crises: recent establishment of TIFU and planned set up of Infrastructure UK within UK Treasury, which will consolidate regulatory and policy team, TIFU and PUK and exercise clear responsibility from developing and supporting delivery of an infrastructure strategy for the UK. TIFU standing for “The Infrastructure Finance Unit” has been lunched as a “funding mechanism” to ensure successful financial close of UK PPP projects. While it did only support Great Manchester Waste deal with TIFU loan, it is deemed to have much bigger impact just by being available for financing of PPPs.

Very substantial impact had financial crises on Russia and its impact on PPP perception in Russia. Russian federal PPP Unit is located within Russian Development Bank the “Vnesheconombank” and led by Alexandr Bazhenov. Alexander explained during PPP days that the situation in Russia has changed dramatically. While prior financial crises Russia did look at PPPs as an important, but not essential tool, given rich surpluses in budgets, this has changed with financial crises and PPPs are now considered essential for the development. This is reflecting on status and role of PPP Centre within “Vnesheconombank”, giving the PPP unit mandates in capacity building, advisory of choice, and financing of PPPs.

Looking at the developments showcased on Russia, UK and SA makes one wonder, how often and how quickly are some countries able to reflect the governance of the PPP units to current market needs and how slow are some other countries in making small changes to support proper role of PPP units in terms of governance, policy, staffing and financing.

World Bank PPP Network

We are launching a new collaborative space for PPPs, it is now up and running in a bare-bones form and we will be launching it at PPP Days in Manila in March.

The site is:
www.pppnetwork.info
(if that doesn't work, this one should http://pppnetwork.ning.com/ )

The idea of this is that it provides a set of communities - one overall one and then sub-communities - that can form the platform for a broad range of knowledge management activities. We hope develop this into a platform where we post learning tools and products as well as stream web conferences and seminars. We are hoping to "scoop up" people from the various forums we have (both those who attended and invited) which will form a good base for all of our work on PPPs.

Of course we are also keen to develop this with everyone's feedback.
We do expact large number of around 600 public sector offcials (who are in our database) working in PPP related areas in developing countries to join the platform.

We are also looking for experts to play a more significant role in management of this platform, let me know if you are interested in this.

Despite crisis, positive outlook for PPPs in Russia by Natalia Reznicenko and Filip Drapak

Many countries are experiencing a big infrastructure gap, and Russia is no exception. The Russian government is well aware of the problem, and it has announced that it will invest about US$1 trillion over the next 10 years in improving infrastructure. But how can the government raise that kind of capital? The expectation is that the private sector will contribute most of the financing though a Public Private Partnership (PPP).
While Russia does have some experience with PPPs, the track record so far has been spotty. We might mention in this regard one project that is sometimes considered to be the first PPP in Russia—the South-West Wastewater Treatment plant of St. Petersburg. The project was agreed upon by the Russian, Finnish and Swedish governments all the way back in 1986, but due to a lack of public financing the project was stopped. It was resurrected as a PPP in 2002 and formally procured as a 12-year BLT (Build-Lease-Transfer) contract.

The financial crisis has also thrown a wrench in the works. St. Petersburg has taken a lead in developing PPPs in Russia, but shaky credit markets have meant many projects have been put on hold.

The first PPP project launched by the government of St. Petersburg was a toll road called the Western High Speed Diameter (WHSD). The WHSD was enacted under the Federal Law on Concession agreements, which has been in force since 2005. Since the city government didn’t have the experience and proper skills to procure PPP projects, the WHSD met a lot of difficulties, including legal problems and issues with a feasibility study. In 2006 new regional legislation on PPPs was introduced in St. Petersburg that allowed the government to attract private sector interest and prompt PPP development. The value of the WHSD project is estimated at US$5-6 billion, which makes it difficult to procure in the current circumstances due to the high costs of capital and limited available funding. (Not to mention that the overall downturn of the economy has affected traffic forecasts.) Although a tender has passed and a bidder was chosen, the instability in financial markets has meant that the project had to be rescheduled. Investors need more time to redesign their financial models to meet the challenges of the financial crisis.


Read more here.

Is public guarantee for private debt solving the problem on PPP market?

Financial crises and following credit crunch have substantially reduced options of governments in using PPPs. The reason is very simple; there is no longer enough money available for long term private infrastructure investment. However this situation is temporary as fundamentals of PPPs and reasons for PPPs remain stronger than ever.

Governments in many countries are in the process of procurement of large PPPs and therefore in need to solve this problem. More and more, the solution is, to deliver the public sector guarantee to private sector loans on the PPP projects. The question is: is this solving the problem? There are voices that say this is no longer rational, why does public sector guarantee a loan in private sector? Is not the rational for PPPs to actually let private sector provide the financing?

Actually, and for many people surprisingly, it is rational and it makes sense. First of all public sector is not doing PPPs primarily to secure financing. If public sector is doing PPPs for the right reason than it is for the expertise, innovation and motivation that private sector can deliver. Private financing is never cheaper and was never source of the value in PPP projects.

But than when we talk about moving some key risks to private sector do we cheat? Are no risks are being moved to private sector? How will private sector pay for the failure? The answer is "priovate sector invests equity, which is at stake, private sector is always risking just equity and the debt is the risk of banks, which finance the project.

Well, during financial crises, these banks do not want to do this at all, or they require additional security in form of guarantees of their loans. The only party, which can provide such guarantee on the market today is government or credit enhancement institution. And credit enhancement institutions are no longer available as their ratings have dropped due to financial crises.

To face all these issues French government has been “allowed to guarantee loans on priority projects implemented through PPPs entered into before 31 December 2010, up to a global ceiling of €10bn.”

UK, which is the largest PPP markets so far, has decided to establish Treasury Infrastructure Finance Unit (TIFU) to lend to PFI /PPP projects to “ensure that infrastructure projects go forward as planned despite financial markets conditions and thereby support jobs and economy”. This scheme found first project to bail out in April 2009, when “TIFU completed its first loan facility on 8 April 2009, providing a £120 million loan for the Greater Manchester Waste Disposal Authority’s PFI project alongside the European Investment Bank and a syndicate of commercial banks “.

Spanish ministry of infrastructure initiated special financial guarantees for PPP projects (mainly for high speed train) for an estimated amount of 15.000 M€ In Australia, the main problem is the unavailability of long tenor debt, with recent projects being financed using 5-year mini-perm structures. Governments have proved willing to share in the refinancing risk at the maturity of these financings. The State Government of Victoria has underwritten the senior debt syndication of its A$5 billion desalination project, in the expectation, that the bank club supporting the winning bidder will be able to sell down to members of the bank club that supported the losing bidder.

Portuguese government is reportedly providing Euro 800 mil. guarantee to Litoral Centro highway concession and will also guarantee Pinhol Interior concession project.

Kazakhstan had used debt instruments guaranteed by government to finance PPPs already prior financial cruises for the reasons to “encourage participation of pension funds in the system”. Currently the law enables the government to provide to the concessionaire guarantees for infrastructural bonds within the limits of concession agreements, guarantees for loans attracted to finance concession projects; the transfer of exclusive rights related to running a concession object; and the provision of grants in kind in line with Republic of Kazakhstan legislation. According to the professionals participating in the PPP process, they mentioned that the government’s accounting process in the fiscal budget will include subsidies or co-funding as state investments, whereas the guarantee will be considered as public debt.

There has also been a lot of countries having or considering Guarantee funds to support PPPs. The most successful has been Korea. Korea lunched Infrastructure Credit Guarantee Fund (KICGF) to facilitate private participation in infrastructure in 1994. In response to Asian financial crises in 1998 Korea supported even further the PPP policy and one of world largest and quite successful PPP programs has been lunched as result.

According to IMF “Korean government announced a fiscal stimulus package in response to the financial crisis with more than 15 percent of the envisaged investment to be carried out through PPPs. The package is accompanied by measures to reduce financial burdens on PPPs, smooth interest rate changes, and shorten project implementation. The measures introduce: (i) lower equity capital requirements on concessionaires (5–10 percent); (ii) for large-scale projects, higher ceilings on guarantees provided by the Infrastructure Credit Guarantee Fund (50 percent); (iii) help in changing equity investors for some projects; (iv) compensation for the preparation of proposals to encourage more vigorous competition during bidding; (v) sharing of interest rate risks with concessionaires; (vi) compensation for the excess changes in base interest rates through grading of risks at the time of the concession agreement; and (vi) shorter periods for readjusting benchmark bond yields.”

As it seems Korea has been quite happy about using this type of instrument in the financially critical times.

Is your lunch delivering the Value for Money?

Value for Money (VfM) is a concept much older than PPP. You might find yourself, asking this very question, after an expensive lunch “was this value for money?”. Indeed if you can buy the same quality lunch for half of price, you can easily conclude, that this lunch was not value for your money. However the question also is; did you consider the risks? The risks you undertake in perhaps less reputable restaurant or risks related to commuting to a cheaper place or less convenient venue. Did you think about the risk that you shall not get served quickly enough and that you shall find yourself ill with food poisoning? Yeas all these factors have to be considered. On the other hand you can have the same risks in a very expensive restaurant as well –, but perhaps with a different probability.

As you can see, in order to evaluate Value for Money, you have to consider all risks and also the probability related to them. You have to consider the price and compare the quality and find some formula of how to evaluate this. Value for Money measurement in PPPs is no different. UK government started to use as a method to measure Value for Money a reference “lunch”. Reference lunch in this case is a project which delivers public infrastructure or service. This project is examined if being delivered traditionally by public sector and used as a reference. Than the reference project is being compared to options in using different forms of PPP and in the end of the day, comparing the private sector bids. UK Treasury Guidance on VfM has defined VfM “as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirement”.

The concept had some pedigree and good rational and so number of other countries has adopted Public Sector Comparator (PSC) as a way to ensure Value for Money in all procured PPP projects. One of such countries has been Australia. According to the Technical note of Partnerships Victoria “ The PSC estimates the hypothetical risk-adjusted cost if a project were to be financed, owned and implemented by government. The PSC is developed in accordance with the required output specification; the proposed risk allocation reflected in the contract released with the Project Brief, and is based on the most efficient form and means of government delivery.”

However to compare one lunch with another is rather easy – you can actually get both and taste, but with infrastructure projects you can only build the project once, and sometimes you can only procure the project once so all your comparisons are theoretical and leave an open space for questions. Number of issues in PSC has been reported by UK National Audit office and the issues around PSC have been extensively discussed since. PPIAF have discussed this and the relevance of PSC for the developing countries in the article “Is the public sector comparator right for developing countries?”. The conclusion that “the PSC method, particularly as used in some industrial countries, may not be the best way to do all this in developing countries…”

Dutch way of looking at this was a little bit different. Dutch did realize, that there is need, to asses if private sector can actually deliver value, before going in to procurement and focused on cost benefit analyses of the options that are really available prior the procurement and the Public Private Comparator (PPC) has been born. Actually two of them have been born; one focusing of financial aspect and impact to government and the second one focusing on broader economic aspects and impact. For example building the bridge has financial cost to government and financial benefit is the toll charged on the bridge. But the economic impact of the traffic, shorter commuting way or establishment of connection to a remote location is not captured in financial PPC but in the economical PPC. Many critics do find however PPC even more tricky and see PPC even less reliable than PSC (Kramer). Dutch did therefore added also reference lunch for the private sector option and do use PPC early in the process and PSC in the procurement phase to compare public reference with private bids. National Treasury of South Africa in its PPP manual also describes how PSC model and PPP model are to be developed, so that VfM assumption can be made regarding the project. Capital Assets management Framework of British Columbia also in its guidance state that “Agencies should develop and use a Public Sector Comparator (PSC) to assess the financial aspects of value for money – and as a benchmark against which to measure the net value of alternative procurement options.”

Value for Money, PSC and PPC are a way to quantify the potential benefits when considering your options in infrastructure. But in the end of the day, despite all the analyses, it is up people responsible for individual project, to consider all the modalities and make the decision. And concerning the lunch – my advice is; whatever the value for money is, don’t forget to enjoy it.

PPPs endorsed on banks of Victoria Lake

There is a place, where Nile is born and local people can show you exactly where it is. It is such a privilege to see that place, which was searched for, by generations of explorers in Africa. Yeas I am talking about the place on the banks of Victoria Lake. Another perhaps important birth is taking place here at Munyonyo on the Ugandan Banks of Victoria Lake just now.

Ugandan president Museveni is hosting in this luxury resort over 1000 delegates from number of African countries including 4 other presidents to discuss how to go forward in transformation of Africa and the first day of dialogue kicked off with strong call for public private partnerships. When I was in Munyonyo last year, to hold a Regional PPP Forum for Anglophone Africa, we did have no idea, that just a year later will our efforts to push PPPs in Africa be endorsed by the most needed element in PPPs – which is broad political support from the top of the public sector pyramid. This clearly happened in Munyonyo this year and it is not just political endorsement of one country or one president, this is endorsement and consensus of Africa.

PPPs are taking nowadays strong roots in Africa. I remember couple of years ago, African PPPs were about South Africa, which first pioneered PPPs on the African continent, in modern times, establishing strong PPP Unit at the Ministry of Finance. And then I have heard very mixed news regarding PPPs coming over last years from the region. Number of countries transformed their privatization capacity in to a public private partnership capacity, building new institutions and new policies and often needed to adopt a new legislation. South Africa has been followed by Mauritius, setting up its PPP Unit and establishing PPP Policy in 2003. In the meantime number of other African countries got involved in PPPs on the project by project basis. I have to mention Maputo Port concession in Mozambique of 2003, Songas Processing Plant in Tanzania of 2004, Skikda Desalination Plant in Algeria of 2005 and Lesotho National Hospital in 2007 and most recent Ugandan Power PPP project at Bujagali. When you look at the map of PPP in Africa today , you can clearly see that PPPs have taken strong roots here and with the sort of political support that the 19th Global Smart Partnership Dialogue provided in Munyonyo this year, I do expect Africa to become regular player on the PPP global market.

'Let's not go out and throw the word privatization around…

...the way Joe McCarthy used to throw the word communism around.'—Coun. Justin Swandel

Privatization has been once magical word. I remember that, if something did not work in public sector utilities, companies or services, it was quite popular by politicians to call upon invisible hand of market and all powerful capabilities of private sector. And the magical word politicians used was privatization.

After 1980 the popularity of privatization has been decreasing steadily and PPP came in as more popular solution to problems in public services and infrastructure. Number of people is making the same mistake and PPP is becoming “magical word” of the begging of this century.

But there is no magic. There are many issues which can be solved by privatization, which PPPs can’t solve, there are projects, which are ideal for PPPs and there are some, which can’t be PPPs and should not be privatized. We have to evaluate all pros and cons rather than using magical words.

Sometimes people even define PPP as privatization like Kieran Lynch, who in his case study on London Underground defines PPP as “a variation of privatization in which elements of a service previously run solely by the public sector are provided for through a partnership between the government and one or more private sector companies. “ Obviously this kind of definitions is not helping to make substance of PPP clear to public.

As result of confusing PPP and privatization a lot of people in many countries have to explain the difference. Mr. Mitra in India recently commented "Let me make it clear, the Public-Private-Partnership model of financing projects is not privatization ... Besides building the world-class facilities, generating revenue for the Railways would also be the key consideration of the innovating business ideas," John Prescott, former UK Deputy Prime Minister, wrote in a letter to The Guardian “The PPP is not privatization…” and European Parliament explains that PPP is not even “ the first step towards privatization, because it's a contract with an end. “

Wikipedia defines privatization as the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.

Wiki definition is correct, while privatization transfers ownership, PPP does transfer risks. While in privatization public sector delivers assets and gets paid, in PPPs private sector delivers assets and gets paid. I am really surprised people can get this wrong.

We will not be silenced

This is the main message I remember from reading about the PPP regeneration project in Dublin, which has acquired great interest of citizens. They went out to the streets and demonstrated. They demonstrated surprisingly in support of the regeneration deal saying” They hope we will go away and stay in our long forgotten ghettos across Dublin City. We will return to our homes not to forget our dreams of a decent place to live but to organise our fight against Dublin City Council. We are asking people to come out and support us, to wear black and bring pots and pans to make plenty of noise. We will not be silenced. We want our 14 acres site developed as agreed.” This shows unprecedented support the community of citizens provided for the redevelopment of brownfield ghettos. This kind of PPP is much closer to hearths of all citizens living in a city under regeneration and every success as well as failure is immediately recognized.

Ireland had its own troubles with regeneration PPPs as well as other courtiers pioneering regeneration projects experienced, and this negative experience has turned some professionals against this concept. Regeneration projects are indeed quite complex going across state and municipal budgets, across number of financial public facilities and government departments. Complexity is also multiplied by large number of stakeholders with often contradictory interest. Stakeholder’s consultations regarding urban regeneration are therefore difficult and lengthy. But this industry has also a lot of successes in for example in US, Canada, Germany and UK.

UK has established special agency English Partnerships (EP) to deal with brownfield regeneration and in 2008 merged EP with Academy for Sustainable Communities creating “The Homes and Comunities Agency (HCA)”. HCA has become the largest regeneration Agency in Europe with annual investment budget over £5 billion.

It is great when you have funds, strategy and institution to deal with brownfield regeneration – this makes much easier dealing with large municipal areas of development and regeneration. It also helps to solve slams and ghettos providing friendly living environment, jobs and housing rather as opposed to poisonous, crime concentrating brownfields on the borders of large industrial cities.

This has also been recently strategy of government in Thailand supporting the bailout of ghettos, which often are located on a valuable development sites and then use the money to pay for the new housing development for the people from ghetto. Example of this is Bang Bua Canal in Bangkok, which has been redeveloped based on 30 years land lease, developing great network out of communities alongside the canal, which in past have been just slumps. Thai PPPs delivering public transport do also help in fighting poverty and regeneration of urban areas. If this becomes government strategy and as such it is successfully applied, people will not have to go to streets and shout “we will not be silenced”.

Honduras a dónde vas?

The president of Honduras Manuel Zelaya was kidnapped by the Army on June 28, 2009 and expatriated to Costa Rica. What a great political problem this is for Honduras and Latin America as well. Why do I discuss this on Public Private Partnership blog? Well the reason is very clear – there is a connection between political stability and PPP in particular and foreign direct investment in general. This is also reason why World Bank has set up MIGA to insure this kind of political risks to investors. The Honduras already weak rating S&P long-term debt B+ is the fourth-lowest non-investment grade and can be further downgraded on the basis of political risk, which would make almost impossible for Honduras to refinance its debt and also can have major implications for infrastructure development and certainly will discourage foreign investors from investing in Honduras PPPs.

Honduras has been in past years very interested in developing PPPs. I remember last year, when World Bank Institute hold a capacity building event in Tegucigalpa, how well attended this is event was by the political leaders and personally by president Manuel Zelaya. Manuel Zelaya has participated on the top government “only” seminar and during the lunch he did sit with us and discussed his visions for the Honduras infrastructure development using PPPs. His minister of finance Rebeca Santos has participated for most of the time during whole event and did speak about PPPs with great interest and insight. While the government was at the seminar, they were already working on the action plan, defining next steps to implement PPPs. Rarely seen commitment at the highest political level was very encouraging and at the time I had no doubt, that this government is able to make substantial and quick steps to develop Honduras. Every PPP professional will confirm that political support is a first essential condition to build PPP market and the case of Honduras is teaching us about the second essential condition – and this condition is political stability.

I can hardly judge what is best for the people of Honduras, but I would say that military regime is the worst option and should this situation continue for years to come, one thing is clear as well, nobody will invest a dollar in Honduras, for a very long time.

Nigeria has set up a PPP focused association

I did suspect Nigeria is to become leader in African PPPs for some time already. Several projects have been announced, serious government interest demonstrated by discussion on policy, legislation and deal flow. Global Legal Group provided excellent insight to this in their 2007 Guide to PPP/PFI projects. Surprisingly quickly have Nigeria been able to sign a 25-year concession agreement with Bi-Courtney Consortium, concessionaires of the Lagos-Ibadan Motorway (reportedly 27 months). The other areas besides roads in which Nigeria is involving PPP are ports, tourism, healthcare and housing.

Therefore, I was very happy, to hear earlier this year from Saidu Njidda, that he succeeded in forming Foundation for Public Private Partnerships of Nigeria ( FPPPN), to support and advocate PPP development of Nigeria. Personally, I see PPP associations, as an important and integral part of any PPP market. Public sector should be able to consult private sector prior approval of a policy or legislation and also to hear somewhat united voice of private sector in the country. FPPPN as proponents of the concept of PPP's in Nigeria conducts research, publishes findings, facilitates forums for discussion and sponsors seminars/ on topics related to PPP's in Nigeria.

This practice of private sector organizing platform for private and often public entities as well, to promote, discuss and work together is quite well recognized in number of well developed PPP markets.

One of the oldest examples is certainly NCPPP of US (National PPP Council), mission is to advocate and facilitate the formation of public-private partnerships at the federal, state and local levels, where appropriate, and to raise the awareness of governments and businesses of the means by which their cooperation can cost effectively provide the public with quality goods, services and facilities. Canada has developed very large and well functioning Canadian Council for Public-Private Partnerships (CCPPP): the objective of CCPPP is to foster innovative forms of cooperation between the public sector - at the municipal, regional, provincial and federal levels - and the private sector, for the benefit of all Canadians.

UK, the leader in PPP, has IFSL (International Financial Services of London): established to promote the UK-based financial services industry throughout the world. In Czech republic, private sector set up APPP (Asociace PPP): for support and development of public investment and services using the PPP form in the Czech Republic. Australia has IPA (Infrastructure Partnerships Australia): established to brink together the public and private sectors to promote partnerships in infrastructure and provide cross-industry leadership in Australia.

And this is only small example of the world of PPP Associations, PPP market has grown indeed in couple of years and still is growing, let’s hope that the good practice in PPP will also take deep roots in Nigeria and the rest of Africa.

Privately financed infrastructure from Pension funds: the missing link in development?

What would you like to finance form your pension fund? Would you rather like to finance debts of corporations, emerging capital markets, public debts or public infrastructure privately financed and operated? Of course, it depends on risks and returns, and also opportunity costs. Given the choice, I would certainly go for infrastructure.

This also has been quite a trend in recent years. “Over the past decade, pension funds … have moved significantly into infrastructure, as part of their "alternative investment" category. Long-lived assets such as toll roads, airports, and electric utilities are a good match for the investment needs of such funds: long-term, steady growth in revenues based on providing an essential public service.” This has been pioneering by pension funds from Australia, Canada and UK. Pension funds investments have focused on publicly traded infrastructure funds, but not exclusively. Some pension funds found event courage to invest directly in to PPP/infrastructure projects. Examples include Ontario Teachers Pension Plan purchasing in to the Birmingham Airport or Canada Pension Plan Investment Board investing in to New Zealand International Airport in Auckland. Telegraph has reported on this “In the past two years, a fledgling market has sprung up. Pension funds have put aside £2billion for PFI investments, with groups such as the Secondary Market Infrastructure Fund, Barclays' I2, Henderson, 3i and the Prudential managing the proceeds.”

In US is the situation completely different. Despite the fact that US pension plans have over USD 15 trillion (2007) value representing over 60% of pension funds globally, connecting pension funds and PPPs have not been successful so far in US. The main reason for this is simply lack of PPP projects available for pension funds investment, given US public sector ownership and even operation of infrastructure. The discussion on the link between pension funds and PPPs has been ongoing for some time especially in California and Texas. Last week there has been Stanford organized Executive Roundtable to discuss these issues supported by very good paper by Stanford Managing Director Ryan Orr. His paper not only looks at California, it looks at the possible impact of US pension funds on infrastructure investment globally in the comment saying:

“In 2007, U.S pensions were valued at just over $15 trillion (109% of GDP) and represented 60% of pension capital held globally.35 If 5-10% of this amount were invested in infrastructure, this would equate to $750 billion–$1.5 trillion. Levered conservatively at 60% debt to equity, this would amount to $1.9 – $3.8 trillion of overall investment for infrastructure projects.

OECD and World Bank research shows that most developed countries invest in infrastructure at the rate of 3.5% of GDP, which for the U.S. in 2007 amounted to $490 billion. Assuming that 15% of infrastructure transactions ($73 bn per annum) could be delivered via the public-private partnership format (which is what the UK and Canada have concluded to be the appropriate mix of conventional and P3 delivery), then the $1.9–3.8 trillion that is available could provide for a staggering 26-51 years of public-private partnership investment needs, assuming zero growth of the pension capital stock.”

This can also have tremendous impact on developing countries, should the US pension funds have the expertise and being able to invest in developing countries, this could provide additional enormous capital flows to finance the infrastructure in developing countries. How can we help to mobilize this opportunity?

Is bail out of privately financed infrastructure projects good idea?

When I have first heard about PPPs, the most significant accent was on PPPs being privately financed with private money at stake. Now I hear news about need to bail out PPP projects, with taxpayer money and I wonder; is this good idea?

Financial recession and credit crunch did bring new concerns to very large PPP markets. This concern is how does the financial crises hit PPP projects and how do we rescue projects, which are not going to make it? We have to look first, if the reasons for failure are on the side of mismanagement of the project by private partner, or on the side of macroeconomic impact, which could not have been mitigated and foreseen by neither procuring authority nor private partner. And in the case that it is macroeconomic impact, there is very good rational for public sector bail out. In the case that this infrastructure would be public, the same problem would escalate and therefore as long as if private sector partner is performing well, under given circumstances, it can only be recommended to public sector to consider playing properly its partnership role. And this means to find solutions for the project to survive and deliver expected results.

UK, which is the largest PPP markets so far, have decided to establish Treasury Infrastructure Finance Unit (TIFU) to lend to PFI /PPP projects to “ensure that infrastructure projects go forward as planned despite financial markets conditions and thereby support jobs and economy”. Generally good idea, but at first, it seemed almost, as it will not be needed and used. Banks in the end always formed a club or EIB supported the project. However margins went further up and banks could deliver only short maturities in form of mini-perms. Bank clubs are much larger with single banks holding smaller share that it would 2 years ago and this has also impact on competition as it is hard to form several bank clubs to support number of bidders.

Bond market and credit insurance is dead for the time being and so finally the good idea found first project to bail out in April 2009, when “TIFU completed its first loan facility on 8 April 2009, providing a £120 million loan for the Greater Manchester Waste Disposal Authority’s PFI project alongside the European Investment Bank and a syndicate of commercial banks “.

Second project, to be bailed out, was considered in May for the waste treatment Wakefield project. Finally two years after selection of proffered bidder, the financing of £700 million has been preliminary secured in June, without TIFU assistance and is expected to financially close within several weeks. Bailing out PPPs might be controversial for taxpayers but remain the only practical option for public sector. Hopefully financial crises will be over soon and financial markets will come back to traditionally aggressive and long term lending to PPPs.

PFI is mysterious acronym

In many countries PFI (meaning Private Finance Initiative) acronym is used as synonymous for PPP (Public Private Partnership). While it originated in UK, it is not a synonymous expression in UK with PPP; PFI being more specific relating to special government policy clearly defining what is and what is not PFI.

While Wikipedia defines PFI as a “method to provide financial support to PPPs”, which certainly is not correct, “as part of a wider program for privatization and deregulation” which is incorrect either, as PFI is a form of PPP and it is not mechanism for privatization or deregulation. Saying this, I have to add, that privatization or deregulation can be one of characteristics of a specific PFI project. Investopedia on the other hand defines PFI as a “method of providing funds for major capital investments, where private firms are contracted to complete and manage the project”, which is not complete definition but it is at least correct feature of PFI.

These were just two examples of PFI definition, and indeed when I look on the expression Private Finance Initiative I can assume that (a) this is initiated by private sector; and (b) it is about financing; which is not the case. In reality PFIs are initiated by public sector and financing part is important, but not essential feature of PFI. Many PFIs were financed directly from public budgets even at the investment phase. So the expression indeed is confusing.

In United States expression PFI did not take very deep roots, however Millennium Challenge Corporation under the State Department defines interestingly PFI in the Private Sector Initiative Toolkit as a “Private Financing of Infrastructure” and PFI is a form of the Private Sector Initiative (PSI) among Output Based Aid and Outsourced Management.

I would like to know would you define PFI.

How far can we go? … in public scrutiny of a PPP projects

Taxpayers, citizens or call them just simply public, they are the reason why PPPs are being done, they are the users, ultimate financiers, whether by paying taxes or tolls, and they want to have bigger role in decisions about what infrastructure shall be build and how. It is no surprise that public opinion is the ultimate judge of the success of PPP project.

And this ultimate judge is not always just; it does not always have proper information and certainty in public sector transparency and reporting. It is up to public sector officials to ensure proper information and reporting is available to public and proper stakeholder consultations take place prior key decision regarding the project. Interestingly a lot of government officials believe that the huge public interest in PPP projects is dangerous and they rather use traditional procurement under the legal procedures, which they know so well and build upon old customs, providing therefore safe haven for themselves. It is perhaps safe heaven, but development is about trying new things, it is about experimenting with innovations, new ways to achieve efficiencies and also about taking risks.

One of these risks is a cost of procurement of PPP projects. In my experience some of the costs that would be capital costs under the traditional public provision are transferred in to the procurement and advisory costs in developing PPP project. This is quite a risk for public officials, but it is risk well justified, by the quality of preparation and unprecedented learning process for both public and private sides to the PPP agreement. Partnerships of British Columbia in their recent Value for Money (VfM) report regarding Surrey Outpatient Hospital published that the costs of public sector procurement in PPP was 9.7$ compared to PSC 4.7$ (Public Sector Comparator is a measurement of public sector costs if the project would not be done as a PPP); therefore PPP procurement costs is about a double hit to public budget. And it is not just public officials who take this risk; private sector side is also making significant investment in developing proposals which can go as far as several percent of the project capital costs.

The above mentioned Surrey Hospital seems to deliver Value for Money (8.8% on overall costs) and not only number of reports have been published including Fairness Advisor Report, but also cameras have been installed directly on the construction site and webcam enables direct online supervision of the public of how the construction of their hospital is going on. Excellent idea, is it not?

See here the snapshot of the webcam

EPEC – the best example so far …. of the regional PPP knowledge centre

Yeas, regional cooperation is not only possible but certainly desirable. EU has made its big jump on September 16th 2008 and established EPEC on the meeting in Paris.

What does EPEC stands for; it is European PPP Expertise Centre established under the hosting wings of EIB (European Investment Bank) and therefore located in Luxembourg.

“In the general aims of EPEC are providing support to, and assisting its Members in the development of the skills and capacity required within the Public Sector to define, manage and/or implement their PPP policies and programmes in accordance with market best practice. Moreover, based on the Members’ experience, the expertise center will provide its Members with guidelines, papers and comments on relevant issues concerning the structuring of effective and efficient PPP projects.”

What does EPEC do?

- Policy and program support
- Helpdesk to EPEC members
- Collaborative network activities, which include:
(a) Value for Money- assessing the wider benefits of PPPs; (b) Value for Money- reviews of independent reports; (c) Applying Eurostat guidance to PPPs; (d) Operating Competitive Dialogue procedures; (e) Credit Crisis

EPEC’s main task is to help the public sector to overcome shortfalls in PPP expertise across EU and especially in new EU members. EPEC is in operation more than 9 months, and during this whole time we can hear very unfavorable news from the world of PPP. All conditions have changed in financing PPPs. EIB is now playing even more prominent role in financing PPPs as bank clubs are not able to raise enough of money with reasonable long term conditions.

Nicolas Jennet of EPEC suggested some of the solutions to the current market situation in his presentation in Warsaw (May 2009), however in EU has not been still able to find any solution on how to replace wrapped bonds ,which are not longer option in Europe.

Who is who in PPP; Sir Malcolm Bates

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Sir Malcolm Bates has died less than a week ago, on second week of June 2009. He has been icon of PFI development in the UK recommending establishment of a PFI Taskforce, which latter has evolved in to PUK, making several key recommendations in his two reviews of PFI for UK Treasury. His two reports become cornerstones of PFI development in UK and further behind the borders of UK.

Sir Malcolm Bates had been a non-executive director of London Transport, a non-executive director of BICC (the holding company for Balfour Beatty). Before that he was deputy managing director at GEC, now known as Alstom. Sir Malcol Bates served as Chairman of HHG PLC (which includes Pearl Assurance plc, National Provident Life Limited and NPI Limited). He also helped to make the General Electric Company (GEC) one of Britain's most successful and most profitable industrial companies.

This is a quote from UK Treasury report on PPP (2000) documenting impact of Bates Report of 1997

"In addition, the Government asked Sir Malcolm Bates, Chairman of the Pearl Group, to carry out a review of the PFI. His main recommendations in June 1997 were:

• to create a Taskforce within the Treasury. The first appointments to the Taskforce were made in September 1997. Members with project management and financial skills and experience were recruited from the private sector on fixed term contracts. The Taskforce was charged with supporting departments to deliver good quality transactions, in particular by helping them test significant projects before procurement commenced. This was to include: checking that they were affordable for the public sector; that the output requirements were appropriately specified; that risk was allocated to the party best able to manage it; and that funding was likely to be forthcoming from the private sector. The Taskforce was also to advise on draft contractual terms and conditions, project resources and on whether proposed timetables were realistic, as well as then monitoring the progress of projects.

• to establish standard contract conditions. It was recognised that standardisation of tender documents would sharply reduce legal fees and other costs, and the time required for negotiation with tenderers and financiers. The Taskforce standard terms were published in July 1999;

• to prioritise projects better. Bates proposed that effort in the Treasury and elsewhere in the public sector should be focused on establishing quality transactions which would then become the basis for other deals. For local government projects, a project review group was set up to prioritise projects and agree to them proceeding to procurement.

• to learn lessons. Although it was accepted that public sector experience of PFI was growing, those with that experience needed to be encouraged to make available their expertise for the benefit of future projects.”

Corporate Governance key for PPP projects?

There is a lot of evidence that Governance of PPP projects is essential for public sector to succeed in PPP, but not very much attention has been given to Corporate Governance of SPV. And indeed the philosophy of PPP is that private sector knows what it is doing and gets things right, or at least better than public sector. And this is correct – as long as public sector does its job in supervising and managing the overall project and behavior of private partner in particular.

As I see it, Corporate Governance is a bit forsaken subject, when establishing PPPs. Governments should not only get familiar with corporate structure of SPV, but also should be fully familiar with all contractual relationships within the PPP structure and perhaps should be represented on the Board of the SPV (certainly not being responsible for its decisions) or in its controlling governance structure.

Recent Report of UK National Audit Office (published 5 June 2009) clearly states responsibility of the poor Corporate Governance for the failure of this very important PPP project.

"The main cause of Metronet’s failure was its poor corporate governance and leadership. Many decisions had to be agreed unanimously by five shareholders, which all acted as Metronet’s suppliers and had different motivations depending on their roles. The executive management changed frequently and was unable to manage the work of its shareholder-dominated supply chain effectively. These suppliers had power over some of the scope of work, expected to be paid for extra work undertaken and had better access to cost information than the management. The poor quality of information available to management, particularly on the unit costs of the station and track programmes, meant that Metronet was unable to monitor costs and could not obtain adequate evidence to support claims to have performed work economically and efficiently."