5.1 case study - highways escobedo v final

8/8/2019 5.1 Case Study - Highways Escobedo v Final

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PPPInternational Best Practice and Regional Application

Tegucigalpa, Honduras

April 23 - 25, 2008

Sponsored by the Spanish Trust Fund


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Highways

Case StudySession 5.1

Sabino Escobedo, TAG Financial Advisors


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PrivateSectorView

Session 5.1

PPP

Approach

Day 1: Session 1.1

Overview ofPPP

Day 1:Session 1.2

Challenges:LatinAmerica

Day 1:Session 1.3

ConsideringPrivate

Participation

Day 1:Session 2.1

Planning theProcess

Day 1:Session 2.3

InvolvingStakeholders

Day 1:Session 3

Case Study:Transmission

Day 2:Session 5

Case Studies:(1)Highways

(2)Water& Sanitation(3) Ports

Day 2 :Session 4.1

Standards,Tariffs, Subsidy,

Financials

Day 2 :Session 4.2

Selecting anOperator

Day 1:Session 2.2

Regulation& Institutions

UpstreamPolicy

Readinessof

Government

CapacityBuildingForPPP

Day 2 Session 6

Readiness of Government

Day 1- Session 5

Case Study:Highways


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Session 5.1PPPs in the Transport Sector

PPPs in theS

ector Case Studies


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Developing Effective PPPs in

the TransportS

ectorMain Objective:

Mobilize Private Capital andManagement into TransportInfrastructure Development


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Transport Infrastructure Investment The Economics of Transport Infrastructure Fiscal Space (Public Investment) The Real Gap : Cost Recovery and Affordability Key Drivers of our clients demands

Public Private Partnerships (PPPs) Leveraging Public Money Public Sector options for Infrastructure investment Risk Assessment and Risk Allocation

Banks response to infrastructure finance needs The shift in development burden from central to local entities Performance based subsidies Innovative risk mitigation products

Way Forward

Contents


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The Economics of Transport

Infrastructure Investments Infrastructure investments are inherently lumpy (involve huge sunk costsand create assets that are long-lived and location-specific).

Creation of Infrastructure has economics both of scale and scope (i.e.,minimum size of facilities, inelastic adjustment of capacity to demand, longterm project completion, etc.).

Infrastructure supply systems contain elements of natural monopoly

(competition). Demand is wide spread (difficult to target). Revenues are usually in local currency (mismatch if foreign debt financing). Transport services have an essentiality component that raise legitimate

public policy concerns of affordability.

However .. Sound transport infrastructure allows countries to integrate to the global

economy and increases competitiveness (transport and telecom sectorsare the highest contributors to a countrys competitiveness) impactingeconomic growth.

Transport infrastructure development has a strong impact oncompetitiveness, growth, poverty alleviation and MDGs.


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Public Investments needs are sizeable in most countries but difficult toquantify.

Countries face important trade-offs between infrastructure spending andother expenditure items (i.e., health and education).

Little empirical evidence that reductions in public investments had anadverse impact on growth.

Countries with relatively high public debt burden have a limited scope forincreasing investment via public borrowing.

Significant scope to improve the quality of infrastructure investment.

Changes in fiscal accounting cannot create room for additional spendingfor infrastructure.

Most of the public enterprises in the pilots did not meet the commerciallyrun criteria.

Effective PPPs is encourage as a way to bring in leveraging and efficiencyin infrastructure investment.

Fiscal limits to increased publicinvestments in infrastructure


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The Service Delivery Gap

There is limited affordability in theprovision of most of infrastructureservices (when including the costs of therequired infrastructure facilities), speciallywhen considering low income end-users.

Infrastructure services has strongcharacteristics as a public good andcreates major positive externalities.

Full cost recovery is only possible insome situations (i.e., air transport). Most

of the basic public services have stronglimitations to reach full cost recoveryeven in developed markets (masstransport systems).

There is a role for the provision ofsmart subsidies to make possible the

delivery of the service.

Tariffs

Time

Affordability

Cost recovery

The ServiceThe Service

Delivery GapDelivery Gap

OutputOutput

Based AidBased Aid

ApproachesApproaches


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Key Drivers for Client Demands

Change in the risk profile of our client base: 80s : developed and developing countries 2000s forward:

Middle Income Countries

Transition Economies Post Conflict Failed States

Need to fill the service delivery gap (full cost recovery not possible

at the required pace for market driven incentives to supportinvestments)

Fiscal Space for Public Investments will be limited at best (limitednew borrowing capacities to allocate to infrastructure development)


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Need to reconcile infrastructure development needs withcriteria forfiscal prudence.

Need to mobilize additional private capital to match thegap if infrastructure development is to keep its pacesustaining economic growth.

Need to maximize private capital mobilization per unit ofpublic sector contribution (e.g., direct investment,subsidies, guarantees, etc.).

Need to develop PPPs approaches as a procurement tool

for better and efficient allocation of scarce public sectorresources (the concept of value for money).

Need to develop an adequate risk management frameworkto manage contingent liabilities arising for public moneysupport to PPPs development.

Leveraging Public Money


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PPPs : Spectrum of Options

Transport InfrastructureTransport InfrastructureFacilitiesFacilities

Provision of TransportProvision of TransportServicesServices


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PPPs in Transport

Pure Public Option:Pure Public Option:

Funded via ordinary revenues

Funded via earmarked taxes (i.e., gas taxes for road networkdevelopment) Funded via public debt financing (i.e., future tax payers)

Public Private Partnerships Options:Public Private Partnerships Options:

Funded via tolls or tariffs (i.e., full cost recovery basis) Funded via tolls or tariffs with initial co-investment contribution (e.g.,

Bridge Rosario-Victoria, Argentina) Funded via tolls or tariffs with minimumrevenue guarantee (e.g.,

Motorway Santiago-Valparaiso, Chile) Funded via tolls or tariffs with supplemental subsidies (e.g., BA

metro system)

Funded via shadow tolls orsubsidies (e.g., Portugal toll roads)


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Public Sector Options forInfrastructure InvestmentsSSA Toll Roads Case (1):

Parameters:

40 KM toll road linking two important urban centers (existingroad under very poor conditions)

Traffic Study : 70,000 vehicles per day

Total Investment : $ 200 million

Annual operating & maintenance costs: 5% of total investment($ 10 million)

SSA Credit Rating: B+

If private options are considered:

Debt : Equity ratio : 75%-25%

Debt services conditions: 10 year @ 10%

Equity expected rate of return: risk free rate + premium =5%+11% (16%)


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Required Annual Cash Flows (including remuneration to debt &equity)

Operating & Maintenance : $ 10 million

Debt Service : $ 24 million

Equity returns: $ 8 million

Total = $ 42.4 needed in annual revenues ($ 3.52 million permonth assuming no seasonality

Required Average tariff per vehicle

$ 3.52 million / 70,000*30 = $ 1.68 pervehicle

SSA Toll Roads Case (2):


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Scenario 2 : Willingness to pay = between zero and $ 1.68 perWillingness to pay = between zero and $ 1.68 pervehicle ($0.84 pervehicle)vehicle ($0.84 pervehicle)

(C) PPP via a collected toll fare ($0.84) plus a supplemental subsidy

($0.84).Subsidy can be paid as a shadow toll or can be structured as atraffic minimum revenue guarantee (defining a predeterminedlevel of total revenues). Performance risk is transfer to the privatesector. No initial disbursement by the public sector.

(D) PPP via a co-investment between the Public and Private sector.Size of public co-investment will be equal to the differencebetween total investment and the investment amount supportedby the existing tariff (i.e., $ 126.7). Performance risk is transfer tothe private sector. Initial disbursement by public sector.



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Scenario 3 : Willingness to pay = equivalent to required tariff ($ 1.68)Willingness to pay = equivalent to required tariff ($ 1.68)

(E) PPP via a collected toll fare ($1.68)

Depending on the robustness of the traffic studies and thewillingness to pay [affordability] analysis, government and/ordonors might need to provide some type of support to the trafficrevenue scheme. Performance risk is transfer to the private sector



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PPP : Risk Assessment

Completion Risk (engineering &construction cost / time cost control)

Operational Performance Risk(technical & operational know-how)

Environmental Risk (future liabilities,project delays, costs overruns)

Credit Risk (project leverage)

Inflation, interest rate and exchangeexchangerate fluctuationsrate fluctuations

Political Risk (expropriation, political

violence, currency convertibility &transfer)

Regulatory RisksRegulatory Risks. (Governmentsdefault on contractual obligations, i.e.,pricing formulas, right of way )

Legal Environment (rule of lawrule of law, i.e.,judicial system, regulatory proceduresand arbitration)

Project Specific RisksProject Specific Risks Country (Economy wide) RisksCountry (Economy wide) Risks

Demand (traffic) Risk

Pricing Risk (regulatedand non-regulated)

Environmental (pastliabilities) Risk


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PPP : Risk Allocation

Principle : Risk should be allocated to those best able to manage them

Allocating PPP Risk Guidelines:

Allocate to the party best able to influence the risk factor (e.g.,constructions costs completion risk).

Allocate to the party that can best anticipate orrespond to the riskfactor --influence impact or sensitivity of risk factor on project value(e.g., adapting size of the facility to demand fluctuations)

Allocate to the party best able to absorb the risk

Natural hedges (correlation between risk factors and stakeholderassets and liabilities)

Access to markets offering derivatives and insurance

Access to specialized financial institutions (IFIs, MLAs, Donors, etc.)

Ability to spread the risk among other risk bearers (shareholders andtaxpayers)

Risk Aversion


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Toll Road Finance: Risk MitigationNon-Sovereign Sovereign

Completion

Risk

Performance

Risk

Environment

al Risk

Demand Risk Political Risk Regulatory

Risk (inc.

Land

Acquisition

Risk)

Macroecono

mic Risk

Cost overruns

and delays.

Revenue

generation and

operationalcosts increase

Hidden

liabilities

Revenue

generation

Expropriation,

transfer,

convertibilityCease of

revenue

generation

Revenue

generation.

TariffAdjustment;

Right of Way,

Termination

payment

Revenue

generation.

Devaluation /inflation

impact of

cash flows

High Low Low High Low High High

EPCContract

and

performance

bonds

Performance

based

contracts

Environmental

Assessment

Traffic

Minimum

Revenue

Guarantees /

VPN

Concession

Partial Credit

Guarantees

Political Risk

Insurance

Concession

Contract

Partial Risk

Guarantees

Local

currency

financing

Private Private Private Private/

Public

Private/

Public

Public TBD

Risks

Cash

Floweffect

Impact

RiskMitigation

Instrument

Provider


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Developing Local CapitalMarkets : Chile

By the early 1990s, a sizable infrastructure gap had emerged in Chile, and significantinvestment was needed to prevent transportation and other bottlenecks from becoming a majorobstacle to future growth

A challenge for the government was to close this gap while maintaining fiscal disciplinethat had placed public debt on a rapidly declining path. The solution lay in promotingprivate sector involvement in the provision of public infrastructure through public-privatepartnerships (PPPs). Chile thus embarked on an ambitious concessions program in 1994,centered around a number of projects to develop the highway network.

The concessions program in Chile covers 44 contracted projects with a total value ofUS$5.7 billion (about 6 percent of 2004 GDP). These include: 8 projects to rehabilitate andupgrade the Route 5 highway which runs the length of Chile, with financing from tolls (US$2billion); 11 other highway projects for connecting roads to Route 5 (US$1.3 billion); 10 airport

projects (US

$240 million); 6 urban road projects (US

$1.8 billion); and 9 other projects (includingprisons, public buildings, a reservoir, for US$360 million). Approximately 75% was funded inthe local capital markets via local currency infrastructure bonds.

The government provides guarantees to concession operators. A minimum revenueguarantee is provided for highway and airport concessions, under which concession firms arecompensated when traffic or traffic revenue falls below an annual threshold. In return for theminimum revenue guarantee, the concession firm enters into a revenue sharing agreement in

which it shares a percentage of revenue with the government once a threshold is exceeded.


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PPP and Risk ManagementFramework

Ministry of

Public Works

Ministry of

Energy

Ministry of

Communication

Ministry of

Transport

Ministry of

SOEs

Local

Governments

Other Public

Institutions

PPP

Projects

Water

Roads

Electricity

Gas

Airport

Ports

Railways

Sanitation

Telecom

MOFRisk Management

Selection Criteria

Risk Exposure

Pricing

Monitoring

Documentation

Central PPP Unit

Coordinating Role

Procurement Rules

Screening

Monitoring

Communication

Coordinating Entity

(MinisterorCouncilofMinisters)

PPP SectorTeams

Public Sector Support for PPP

(guarantees, subsidies, etc.)


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Banks response to client demands(PPPs support)

Shift in development burden from central to local entities :the challenge of financing sub-national entities (IFCMunicipalFund, WBG scale up currently under

consideration)

Use of performance based subsidies (OBA approaches)

Innovative Risk Mitigation Products (new applicationspartial risk guarantees)

Public Financial Support for PPPs development (riskmanagement framework)

Infrastructure Finance Vehicles (guarantee funds)


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Infrastructure:Developing Local Capital Markets

There is no best substitute for foreign exchange risk mitigation than matching thecurrency revenue generation with the currency of debt payment services (matching assetsand liabilities).

Financing transport facilities and services (local currency based) in the foreign debt marketsadds substantial risk to the structuring of adequate PPPs creating the need for additional

public money support.

Local institutional investors (I.e., pension funds, insurance companies, life annuities, etc.)have a natural demand for long-term local currency debt instruments to match their liabilities.

In most cases, local capital markets initiate their development via the creation of asovereign bond market (long-term yield curve). After the establishment of such market,investors develop a need to diversify the risk profile of their investments and the return mix,providing the incentives for the development of a private bond market, creating theopportunity for the introduction ofinfrastructure orutilities bonds (long-term annuities).

It is in the governments best interest to stimulate, via adequate securities regulation andinstitutional investors overseeing, the development of local capital markets as a source of

long-term local currency funding for needed PPPs infrastructure projects.


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Innovative Risk Mitigation Products

Local Currency Debt Instruments

Development of Local Capital Markets (e.g., Chile and Korea)

IBRD (on-lending to private sector)

Currency conversion option in fixed spread loans (FSL)

Currency swap

Rolling forward/1

IFC Local Currency

Loans and Hedging Products

Partial Credit Guarantees (asset backed securities)

Regulatory risk support

Partial Risk GuaranteePartial Risk Guarantee supporting transaction related regulatory framework Privatization of electricity utilities in Romania.

Guarantee Facility for Peru PPPs infrastructure development (15 projects,wholesaling PRGs)

Nam Theun 2, PRG supporting LAOs government commitments (IDA andMIGA guarantees).

Tariff Indexation Risk Transfer (supplemental subsidies)


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Internalize externalities (e.g., sanitation) Redistributing resources (e.g., subsidize access to

services)

Mitigate political and regulatory risks

Closing the gap between cost recovery andaffordability

Market failure in financial markets (e.g., lack ofdepth for local currency funding)

When should governments offersupport topublic private partnerships:

Public Financial Support forInfrastructure Development


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Public Financial Support forInfrastructure Development (2)

Need to reconcile infrastructure investments needs with fiscal prudence.

Ring-fenced government sponsored vehicles to limit amount of

contingent liabilities arising from public support to public-private partnershipsprojects (i.e., co-investment, guarantees, subsidies, off-take contracts, etc.)and assist to improve governance and transparency of the allocation ofgovernment contribution (risk management).

Funded by governments contribution (tax payers) and donors-multilateralinterventions.

Limited experience with government sponsored vehicles (I.e., infrastructurefunds, guarantee funds, etc. )

Relatively unsuccessful experiences with state-owned developmentbanks in the 80s and 90s

Keen interest by some of our larger clients (e.g., Russia, India,Indonesia, etc..)

Financing vehicles:


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Way Forward

Rebuild and adapt the PPI Model of the 90s on the basis of the lessons and experiences of therecent years and the immediate needs to reach MDGs by 2015. Private sectorstill is a key driverto sustain infrastructure development and economic growth.

Broader use ofPPP schemes as a way to maximize public money leveraging for infrastructuredevelopment. Need to develop adequate risk mitigation instruments to support public

contribution to infrastructure projects. Options other than private ownership of infrastructure assetsare also effective to mobilize private capital and management into infrastructure development.

MLAs and Donors direct engagement with sub-national entities (well run public utilities) withoutcentral government support to assist them accessing private financial markets. Need to improveaccountability and use of performance based incentives (commercially run entities).

Development of local capital markets (local currency debt instruments) as a mechanism forimproving effective access to infrastructure financing by PPPs.

Increasing use ofoutput based subsidies as a way to utilize better private sector resources viaeffective allocation of performance risks (PPPs to deliver services to poorer communities).

Build solid institutional capacities in the public sector to improve good infrastructure PPPs as

well as the risk management of contingent liabilities arising from PPP support .D

evelopment ofspecialized financing vehicles (public sector driven).


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Highways



THANK YOU!


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Contacts

Forcomments or furtherdetails contact:

Junglim Hahm [email protected]

Richard Cabello [email protected]

Sabino Escobedo [email protected]

David Stiggers [email protected]


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Highways



THANK YOU!

5.1 case study - highways escobedo v final

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