public-private partnerships (ppp) in...

Public-Private Partnerships (PPP) in Highways

International Experience and Lessons for Success

Transport Forum, March 29, 2006Jose Luis Irigoyen

Sector Manager LCSFT

P P P s in R o a d s W o r ld w id e P r o je c t N u m b e r a n d In v e s t m e n t 1 9 9 5 - 2 0 0 4 ( C u m u la t iv e s in c e 1 9 8 5 )

0

1 0 0

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4 0 0

5 0 0

6 0 0

7 0 0

1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4

Y e a r s

Num

ber

of P

roje

cts

5 0 , 0 0 0

1 0 0 , 0 0 0

1 5 0 , 0 0 0

2 0 0 , 0 0 0

2 5 0 , 0 0 0

3 0 0 , 0 0 0

3 5 0 , 0 0 0

Cur

rent

US$

mill

ion

N u m b e r o f P r o p o s e d P r o je c ts N u m b e r o f F u n d e d / C o m p le te d P r o je c tsE s t i m a te d I n v e s tm e n t f o r P r o p o s e d P r o je c ts E s t i m a te d I n v e s tm e n t f o r F u n d e d / C o m p le te d P r o je c ts

Source: Public Works Financing-Major Project Survey 1995-2004

PPPs becoming a global business across developed & emerging markets

Only 55% of proposed projects reached financing

… yet anchored in selected group of OECD and developing countries…

Source: PWF Major Project Survey – October, 2004

Top Countries: PPPs in Highways Top Countries: PPPs in Highways Cumulative sum of # projects & estimated costs since 1985 Cumulative sum of # projects & estimated costs since 1985

Country Number of Projects Project Cost (US$ billion)

United States 74 42.7United Kingdom 37 30.5China 53 21.6Spain 47 21.1Mexico 78 20.4Italy 3 18.5Germany 34 17.1Republic of Korea 18 16.2Japan 1 14.4Greece 11 11.8Brazil 44 11.4France 8 10.2Portugal 15 9.8Australia 12 8.6Malaysia 18 7.8Canada 22 7.7Russia 2 6.6Chile 24 6.3Argentina 20 3.7Ireland 14 3.0Denmark 1 2.7South Africa 6 2.3Czech Republic 2 2.2Indonesia 6 2.1Thailand 3 2.1

0

50

100

150

200

250

300

350

DevelopedWorld

LatinAmericaand the

Caribbean

East Asiaand

Pacific

Europeand

CentralAsia

SouthAsia

Sub-SaharanAfrica

MiddleEast and

NorthAfrica

Number of ProjectsProject Cost ($bn)

Num

ber o

f Pro

ject

s –

Proj

ect C

ost (

US

$ bi

llion)

Regional distributionRegional distribution

… and highly influenced by few global concessionaires or sponsors

PPP Projects under

contract

Awarded

ACS Dragados 45 18MIG / Macquarie Bank 23 4Laing / Equion 21 1Ferrovial / Cintra 20 14Sacyr Vallehermoso 19 13Albertis / La Caixa 19 2FCC 17 8

OHL 17 1Cheung Kong Infrastructure 16 22Vinci / Cofiroute 15 19

Top 10 Transportation Top 10 Transportation Developers 2004Developers 2004

Active ownership role in Active ownership role in PPPsPPPs 19851985--20042004

Source: PWF Major Project Survey – October, 2004

14%

16%

18%

20%

22%

24%

26%

28%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Years

Per

cent

age

Concentration of Projects in Top 10 Transport Sponsors 1994-2004

Proposed and Underway

Rise & fall in developing countries shows vulnerability in era of financial shocks

Total Investment in Road Projects with Private Sector Participation 1988-2003

Total Investment Number of ProjectsSource: PPI Database

2

4

6

8

10

12

14

88 89 1990 91 92 93 94 95 96

2003

US$

billi

on

-

10

20

30

40

50

60

70

Num

ber

0097 98 99 2000 01 02 03

Mexican Crisis

Asian Crisis

Argentinean Crisis

…but also reflects impact of project activity within key countries…

YearsRest of the World China Mexico Brazil Malasya Chile Argentina

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

2003

US$

mill

ion

Total Investment in Road Projects with Private Participation. Source: PPI Database

Source: PPI Database

T o t a l I n v e s t m e n t i n P P P P r o j e c t s i n R o a d s b y I n c o m e L e v e l s

-

2 , 0 0 0

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1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3

Y e a r s

2003

US$

mill

ion

L o w I n c o m e L o w e r M id d le I n c o m e U p p e r M id d le I n c o m e

… with most of the investment going to Middle Income Countries

Upper middle income countries made up for most of recovery in 2000-2002

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

2003

US$

mill

ion

Mexico Brazil ChileTotal Investment in Road Projects with Private Participation. Source: PPI Database

MexicoMexicoBrazilBrazilChileChile

Insights on performance of few programs

PPP projects in highways have suffered from optimism bias

Forecasting errors from inability to obtain good data or incorrect assumptions in models

price elasticity of traffic to tolls;substitute services/intensified competition;

Political commitment at too early a stagebefore appraisal at sufficient depth to allow graceful exit project timelines inconsistent w/sound bidding practices

Downplaying vulnerability of PPP projects to changing political, financial, economic context

failure to identify/value political and social costs (eg., toll increases)

PPP projects are becoming smaller reflecting financial constraints

-

100

200

300

400

500

600

700

800

900

1,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Years

2003

US$

milli

on

Average Project Size

… and also that bigger projects already done in more active countries

Source: PPI Database

Structured project finance has come a long way, but not yet for all ...

Fashioning the finance to specific project needs --with risks and returns borne not by sponsor alone but by different types of investors-- is buzzword

mezzanine finance; monoline insurance broadens access to capital marketsinterest rate and foreign exchange hedging increasingly critical as projects become more finely balanced

but available only for certain projects/countriesmostly projects with investment grade credit rating;no realistic opportunities for hedging in many countries;contractual complexity/financial rigidity not always favored by sponsors/allowed by project economics

12

In a global business, financial crises led to:increase in cost of capital, sovereign risks/spreadsreduction in projects IRRincrease in uncertainty with regards to both

... exposing weaknesses in both project finance structures and regulatory frameworks:

high tariffs attract political interventionism drop in demand increases pressure for renegotiationmismatch between risks and returns exacerbated by currency volatility and reliance on hard currency debtgovernments left with costly contingent liabilities they can’t honor on time

Financing tights suddenly in emerging markets due to crises

Source: Gray, P. & Irwin, T., Exchange Rate Risk

Currency devaluation in 5 countries with the most PPPI, 1985-2001

Distressing results of crises:• Governments breach contracts, affecting access to capital markets.

• Users must cope with steep increases in tolls eroding long-term support for PPPs.

Currency depreciation against the US Dollar in 174 countries

(1976-2001)

Current average

depreciation rate (%)

Volatilit(%)1

All Developimg Countries 16 22 East Asia and Pacific 10 20 Europe and Central Asia 23 31 Latin America and the Caribbean 23 33 Miiddle East and North Africa 6 14 South Asia 8 13 Sub-saharan Africa 16 27 OECD 2 11

Measured as the Standard deviation of current depreciation

“pass through” formulas that transfer exchange risk to users fail in midst of abrupt devaluations --and turn exchange risk into political or regulatory risk

Worsening of regulatory environment during crises erodes support for PPPs

Min

Poin

t

Max

Min

Poin

t

Max

Min

Poin

t

Max

Subsidy / payment

Toll

Contract Lenght

Profits / IRR

TRIGGER VARIABLE

CO

MPE

NSA

TIO

N

RISK SHARING APPROACH

Annual Traffic or Revenues

Accumulative Traffic or Revenues

Approach 2: Minimum Income Guarantee CHILE

Approach 3:1) Severn Bridge2) LPVR CHILE3) PORTUGAL

Approach 1:Highway

concessions in FRANCE and SPAIN

Approaches to traffic risk mitigation --no conclusive evidence of what’s best

Source: Jose Vasallo, 2005 “Traffic Risk Mitigation in highway concession projects: the experience of Chile”

Economic & Financial Equilibrium Clauses:•asymmetric information; •poor control of costs (“goldplating”);•unclear renegotiation if procedure to restore equilibrium not defined

Min

Poin

t

Max

Min

Poin

t

Max

Min

Poin

t

Max

Subsidy / payment

Toll

Contract Lenght

Profits / IRR

TRIGGER VARIABLE

CO

MPE

NSA

TIO

N






Approach 1:Highway




$

Year

Construction

Expected Revenues

Bottom Band

Top Band

Real Traffic

Subsidy

Minimum Income Guarantee Approach

Min

Poin

t

Max

Min

Poin

t

Max

Min

Poin

t

Max

Subsidy / payment

Toll

Contract Lenght

Profits / IRR

TRIGGER VARIABLE

CO

MPE

NSA

TIO

N






Approach 1:Highway




$

Years

Construction Discounted Revenues

T0

A

Expected Traffic

Low Traffic

High Traffic

T1

Maximum length

MoMm

Mm-Mo

Original function

Mitigated Function

Project IRR

Pro

babi

lity

dens

ity

Risk profile mitigation with LPVR

duration

Stronger alignment between PPP objective & compensation mechanism

New thinking about the transfer of volume risk and whether the premium paid outweighs benefits

UK – from shadow tolls to payments based on combination of service availability and performance

availability payment, 2000; active management payment, 2002NAO critical of shadow tolls given operator is unable to influence demand

Focus of compensation mechanism on establishing necessary degree of risk allocation in project to induce appropriate performance by private sector

However, some new schemes based on government payments scheduled along operational period becoming increasingly common where tolling and up-front public financing not feasible

A mix of foreign and local sponsors compete aggressively to win contracts

P r i v a t e I n v e s t m e n t b y T y p e o f I n v e s t o r T r a n s p o r t S e c t o r 1 9 9 8 - 2 0 0 3

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8 , 0 0 0

1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3Y e a r s

2003

US$

mill

ion

D e v e lo p e d D e v e lo p in g L o c a l D e v e lo p in g F o r e ig n

S h a r e o f P r i v a t e I n v e s t m e n t b y T y p e o f I n v e s t o rT r a n s p o r t S e c t o r 1 9 9 8 - 2 0 0 3

0 %1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %8 0 %9 0 %

1 0 0 %

1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 T O TY e a r

A LPe

rcen

tage

D e v e lo p e d D e v e lo p in g L o c a l D e v e lo p in g F o r e ig n

Source: Developing Country Investors and Operators in Infrastructure –Phase 1 Report, PPIAF, 2005

often overly aggressive concessionaires bid too low with expectation to renegotiate contract conditions as soon as possible

Number of Projects 1990Number of Projects 1990--20032003Source: PPI Database

Concluded7%

Distressed2%

Operational80%

Construction3%

Cancelled8%

Bottom line, few cancellations but opportunistic renegotiations the rule…

Statistics mask high incidence of renegotiations

Country Total Investment 2003 US$ million

Mexico 11,003 China 1,538 Thailand 890 Indonesia 653 Hungary 471 Argentina 181 Lao PDR 115 Grand Total 14,851

Cancelled Projects 1984Cancelled Projects 1984--20032003

Despite slowdown, PPPs remain an attractive option for many governments

tools to bring legitimacy to PPP approaches and project selection and make informed decisions about risk allocation at both policy and project levelimpact of PPP programs on road sector fundingproper accounting, management and funding of contingent liabilities to effectively address public riskpragmatic approaches to building institutional and regulatory capacity to better deliver on “third P”instruments to address financial market constraints (w/ due attention to two sides of “creative financing” coin)

Some key areas for WB attention:

Many [email protected]

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