Download The Need for New Public Private Partnerships (2006)

The Need for New
Private-Public Partnerships
Presentation by Per Ljung
PM Global Infrastructure Inc.
Roundtable on Accelerating Implementation of
Multi-Country Infrastructure Projects and
Programs under NEPAD
Lusaka, Zambia, June 26 and 27, 2006
Outline of the Presentation
Are All Projects Created Equal?
 The Challenge of Cross-Border Projects
 The Need for Financial Engineering
 Models of Private-Public Partnerships
 How Do We Proceed with the NEPAD
Projects?

Investments in New Private
Infrastructure Projects (2000-2004)
PPI/GDP
%
PPI per capita
US$
Low Income
Sub-Saharan Africa
All Other
1.04%
0.43%
3.14
2.09
Lower Middle Income
Sub-Saharan Africa
All Other
0.55%
0.36%
12.29
4.98
All Projects Are Not Created Equal!
International Gateways
Oil & Gas Pipelines
Mobile Phones
Electricity for Industry
Electricity for Urban
Ports
Fixed Line Telephones
Urban Tool Roads
Railways
Urban Water Supply
Inter-City Roads
Rural Electrification
Rural Water Supply
Rural Roads
Commercial Viability
What is the pattern?

Ranking
1.
2.
3.
4.
5.
6.


Telecom
Gas and Oil Pipelines
Electricity
Transport
Water Supply
Sewerage
Big externalities
Industrial & commercial > residential
Urban > rural
Private Cross-Border Infrastructure Projects
(World Bank PPI Database 1984-2005)


10 Gas transmission projects
3 Electricity projects:
 2 Hydropower projects in Laos selling to Thailand
 1 Transmission line Brazil-Argentina

2 Railway projects
 Both in Sub-Saharan Africa

2 Toll Road projects
 N4-Mozambique
 Bridge between Argentina & Brazil
Not Included in PPI Database:
 Numerous oil pipelines
 E.g. 1,760 km USD 3.6 billion Baku-Tbilisi-Ceyhan pipeline

Numerous telecom projects
Global Pattern of International PPI
Bringing “cheap” energy to market
 Telecommunications
 Transport, if significant cost savings

Classical Cross-Border Transportation
Projects with Private Participation

Suez Canal







Suez company in 1858, opened 1869
Forced labor, 120,000 dead?
British sponsored insurrection
Enormous cost savings for users
Sweet while it lasted
Expropriation by Nasser, war in 1956
Channel Tunnel






Politically motivated
Original business case over-optimistic
Delays & cost overruns
Competition from ferries intense
Traffic below projections
Billions of US$ lost by investors & lenders
“Private” Cross-Border Projects in Africa
 Gas Pipelines





Algeria-Italy (Transmed)
Algeria-Spain (Medgaz)
Algeria-Morocco (Maghreb)
Mozambique-South Africa (Sasol)
West African Gas Pipeline
 Oil Pipelines
 Chad-Cameroon Oil Pipeline
 Kenya-Uganda Oil Pipeline coming soon?
 Telecommunications
 EASSy
 Railway Concessions
 Abidjan-Ouagadougou
 Dakar-Bamako
 Kenya-Uganda
 Toll Road Concessions
 N4-Mozambique
Prospects for Private Financing of CrossBorder Infrastructure Projects
 Telecommunications: Very Good
 Oil & Gas Pipelines: Good
 But depends on the amount of cost savings
 Transmission Lines:
 From “cheap” source: Good
 Grid interconnections: Poor
 Railways:
 Concessioning of existing lines: Good
 New construction: Poor
 Toll Roads
 In general: Poor
 Key segments (bridges, urban bypasses): Reasonably good
Benefits of Regional Power Grids
 Enhanced security of supply (through diversification
of energy sources);
 Enhanced reliability of supply (through purchases
from neighbors if there are domestic shortfalls);
 Sharing shortages?
 Lower combined peak demand;
 Use of cheaper energy sources in another country.
There is no cash flow from the first 3 benefits
No private interest in financing grid integration
projects
Possibility of financial engineering
Financial Engineering of Transmission Lines









Real benefits occur to the national grid
companies/system operators
Only fixed costs
Agreement to pay a fixed capacity charge
Bidding based on lowest offered charge
Payment formula (for national utilities)
Payment risk (weak finances)
Utility: limited off-setting revenues
IFI guarantee a possibility
Will not overcome cash flow problem
Governance Problems in Public Toll Roads
 Construction
 Bidder collusion
 Bribes for contract award
 Cheating on specifications
 Operation & Maintenance





Bidder collusion in maintenance contracts
Bribes for maintenance contract awards
Cheating on specifications
Diversion of O&M budget
Non-collection of tolls
 Main Effects
 Rapid deterioration, reduced quality of road
 Increased road user/transportation costs
 Reduced trade & economic development
 Private Sector Participation Can Help
 Problems Facing Private Road Developer:
 High risk: traffic projections uncertain
 No business case: Tolls will not be enough
Public-Private Partnership Models
Option
Ownership
O&M
Investments
Risk
Service contract
Public
Pub&Pri
Public
Public
Management contract
Public
Private
Public
Public
Affermage
Public
Private
Public
Shared
Lease
Public
Private
Public
Shared
Design-build-operate DBO
Public
Private
Public
Shared
Concession
Public
Private
Private
Private
Build-operate-transfer BOT
Private
Private
Private
Private
Divestiture
Private
Private
Private
Private
As Samra Sewerage Treatment Plant
Estimated cost USD 150 million
Large externalities, limited ability to pay
Modified Build-Operate-Transfer (BOT) approach
Private sector built, owns, operates it, but only partly
financed it
 Financing:




 50% of construction cost but max USD 75 million grant from
USAID to Government of Jordan => interest free loan to
project company
 20% equity
 30% commercial bank loans
 Bidding:
 Two stage process
 Technical (prel. design, performance) specs & key
agreements
 Evaluation & selection
 Technical proposal (30% weight)
 Price per cubic meter of treated water (70% weight)
 Consumers get the benefit of the capital subsidy
Gaza Desalination Plant—”Typical BOT”
1.00
0.90
0.80
Cost per cum
0.70
0.60
Annual Capital Costs
Max Affordability?
0.50
0.40
0.30
0.20
O&M Costs
0.10
0.00
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Year of Operation
16
17
18
19
20
21
22
23
24
25
Design-Build-Operate Proposal for Gaza Desal Plant







100% grant financing from donor
Clear accountability during operations stage
Incentives to minimize lifecycle costs in design
Evaluation criteria:
Construction cost plus net present value of O&M
More complicated contractual structure than EPC
(turnkey) contract plus management contract
Care needed to get the incentive structure right
Risk: Biased Bid (too high construction, too low O&M,
walk away with nice profit after construction)
 Large penalties if operator leaves before end of contract period
Requires large performance bond for O&M period
 Hold back X% of construction cost and disburse together with
O&M fee on an annual basis
If government finances are strained, this requires escrow
account (or international guarantee)
More of the Same?
 Priority for multilateral and bilateral donors
 12 Project preparation facilities
 Major new donor financing for infrastructure
 Infrastructure Consortium for Africa
 EU Trust Fund for Infrastructure
 Existing and new private financing sources
 Pan-African Infrastructure Fund
 Special donor initiatives for private infrastructure:




Emerging Africa Infrastructure Fund
GuarantCo
InfraCo
DevCo
 Not enough good projects
 Infrastructure investments need to more than double
Thinking “Out-of-the-Box”
 New forms of public-private partnerships
 Disaggregate projects
 “What can pay for itself”
 New ways of “incentivize” private sector
 Output based aid
 Engage donors and donor facilities
 Get rid of public sector bias
 There is a need to review their policies and procedures
 New ways of working with private infrastructure developers
 Get them involved at the pre- and feasibility stages
 Work with them to identify risks, fine-tune cash flows
 NEPAD Infrastructure Investment Facility
 Only PPF run by the private sector, supporting private infrastructure