Islamic Republic of IranWorld Bank

Transport SectorJoint Workshop

Private Investment in Transport Private Investment in Transport Infrastructures and ServicesInfrastructures and Services

April 28, 2004April 28, 2004

Michel BellierMichel BellierLead Transport SpecialistLead Transport Specialist

World BankWorld Bank

Overview International Trends on Private International Trends on Private

Participation in Infrastructure and Key Participation in Infrastructure and Key IssuesIssues

Transport Sector SpecificitiesTransport Sector Specificities

PPI ModelsPPI Models Policy and Transaction Specific Policy and Transaction Specific

RecommendationsRecommendations

International Trends on Private Participation in Infrastructure

(PPI) and Key Issues

Investment in Infrastructure Projects with Private Participation

Developing countries, 1990-2002

Source: World Bank PPI Projects Database.

0

20

40

60

80

100

120

140

(2002 US$ billion)

Source: World Bank PPI Projects Database

Water and Sew erage

$44 bn.

Toll-roads$73 bn.

Railw ays$30 bn.

Seaports$21 bn.

Airports

$13 bn.

Natural Gas$44 bn.

Electricity$224 bn.

Telecom$356 bn.

Total Private Investment = $US 805 billion

(in US$ 2002 billion)

Breakdown of Investment in

Infrastructure with Private Participation Developing Countries, 1990-2002

Fiscal stresses and competition for public Fiscal stresses and competition for public resourcesresources Leading to cuts in public investment Leading to cuts in public investment

Conflicting Government policy objectivesConflicting Government policy objectives Contradictions between Government roles:Contradictions between Government roles:

Policy maker, regulator and operatorPolicy maker, regulator and operator Inefficiencies of Public sector monopoliesInefficiencies of Public sector monopolies

Restrictions on management freedom Restrictions on management freedom caused by service norms and procedurescaused by service norms and procedures

Why Is Private Participation Considered By Government ?

0

50

100

150

200

Subsidies throughmispricing

Costs of technicalinefficiency

Public investment

Public Sector Legacy : Inefficiency

$ bn annually

Source: WDR 1994

123

55

200

Benefits From Private Participation

Better technical efficiencyBetter technical efficiency Private management responsible and accountablePrivate management responsible and accountable Avoids political interferenceAvoids political interference Allows placing performance risk on private sectorAllows placing performance risk on private sector

Allocative efficiency more likely achieved by Allocative efficiency more likely achieved by competition in the market or for the market competition in the market or for the market

Better response to markets or technological changes Better response to markets or technological changes Financial markets and innovative products Financial markets and innovative products

Key Issues Learned From Past Experience

Private provision may entail new or hidden Private provision may entail new or hidden costs for governmentcosts for government Realized guarantees and liabilitiesRealized guarantees and liabilities

Major public role still required in most Major public role still required in most sectorssectors

Continued need to prioritize and accurately Continued need to prioritize and accurately account for public expenditure on account for public expenditure on infrastructureinfrastructure

Key Lessons Learned From Past Experience (2)

Unrealistic expectations (government, investors) Unrealistic expectations (government, investors) lead to failurelead to failure

Arguments over the impact on access and prices, Arguments over the impact on access and prices, particularly for the poor, but overall benefitsparticularly for the poor, but overall benefits Few arguments over technical efficiencyFew arguments over technical efficiency

Difficulties to sustain cost-covering fees is a major Difficulties to sustain cost-covering fees is a major threat to the sustainability of private operationsthreat to the sustainability of private operations

Effective regulation critical to achieve benefits Effective regulation critical to achieve benefits Shift in public opinion due to disillusionmentShift in public opinion due to disillusionment Reduced enthusiasm of many investors in Reduced enthusiasm of many investors in

developing countries infrastructuredeveloping countries infrastructure

Government Resists Private Participation When

Strategic issues are at stakeStrategic issues are at stake Ownership is believed necessary to control Ownership is believed necessary to control

social impactssocial impacts Private monopoly would exploit usersPrivate monopoly would exploit users

Private Sector Finds Entry Unattractive When

Risks are not properly allocated or the Risks are not properly allocated or the legal/regulatory framework impedes legal/regulatory framework impedes mitigation measuresmitigation measures

There is no secure revenue flowThere is no secure revenue flow There is a high probability of commercially There is a high probability of commercially

damaging government interferencedamaging government interference Sunk capital will not be recoveredSunk capital will not be recovered

Transport Sector Specificities

What is Special About Transport?

Varied products and marketsVaried products and markets Two components: infrastructure and servicesTwo components: infrastructure and services

Transport services serving customersTransport services serving customers Transport infrastructure Transport infrastructure

Integrated with service provision, or Integrated with service provision, or Commonly owned but separately operated by several providers, orCommonly owned but separately operated by several providers, or Separately operatedSeparately operated

Significant externalities (environment, safety)Significant externalities (environment, safety) Prominence of social and strategic considerationsProminence of social and strategic considerations

The Case for PPI in the Transport Sector

Large benefits for services activitiesLarge benefits for services activities Less arguments for infrastructure Less arguments for infrastructure

Natural monopoly (road networks)Natural monopoly (road networks) Significant market power (ports/airports)Significant market power (ports/airports) Difficulty to recover infrastructure costsDifficulty to recover infrastructure costs Requires a dedicated source of income Requires a dedicated source of income

When integration extends a natural monopoly, separate When integration extends a natural monopoly, separate provision of services may be consideredprovision of services may be considered Market monopoly and not technical monopolyMarket monopoly and not technical monopoly Mixed results in rail sectorMixed results in rail sector

Cost Reductions From Private Sector Supply

in the Transport Sector

Road maintenance: 50% in ColombiaRoad maintenance: 50% in Colombia Rail labor costs: 50% in ArgentinaRail labor costs: 50% in Argentina Bus operations: 40% in UKBus operations: 40% in UK Shipping costs: 30% in VenezuelaShipping costs: 30% in Venezuela Ports: 30% in BrazilPorts: 30% in Brazil

Scope for Private Sector in Transport (1)

  INFRASTRUCTURE SERVICES

Urban Road Usually public construction and management

Access expressways and bridges can be tolled

Free entry and competitive franchises in the bus market, Reduce barriers to entry of the informal sector

Interurban road

Independent public road agencies may be commercializedConstruction and maintenance contracted out to private sector.Concession of high traffic volume toll roads

Private freight services in competitive markets

Competitive or periodically contestable private operations for passenger services

Scope for Private Sector in Transport (2)

  INFRASTRUCTURE SERVICES

Urban rail Success of concessionary systems yet to be proved.LRT are potential cases (concession or affermage)

 

Performance based management contracts (social objectives should be embodied)

Interurban rail

Separation of infrastructure from services to encourage competition, but long-term efficiency yet to be proven.Vertically integrated concession (freight, passengers to lesser extent)  PPP of greenfield projects 

Partial concession or franchising of specialized services (multiple operators)

Outsourcing of support activities 

Scope for Private Sector in Transport (3)

  INFRASTRUCTURE SERVICES

Ports Public corporatised and commercially run landlord functions may remain for strategic planning purposes. Concessionning or privatization of ports or terminals

Private provision of   Channeling and dredging   Tug services   Stevedoring     Landside. Portside       

Airports Airports: . corporatised landlord model . passenger and freight terminals can provide good opportunities for privatization or concession

Airlines

Airports: specific services by private sector   Airside   Landside

PPI Models

The Spectrum of Choices

Public supply and operation Public supply and operation Corporatization and performance agreements Corporatization and performance agreements

Management contractsManagement contracts Leasing (Affermage)Leasing (Affermage)

Franchise Franchise Concession (BOT)Concession (BOT)

Build-Own-Operate (BOO) Build-Own-Operate (BOO) Divestiture by license Divestiture by license

Divestiture by saleDivestiture by sale Private supply and operationPrivate supply and operation

((Ranked by increasing risk transfer Ranked by increasing risk transfer to private sector)to private sector)

Difference Between Options

Risk allocationRisk allocation IncentivesIncentives Operational requirementsOperational requirements Regulatory requirementsRegulatory requirements In all models, a contract defines In all models, a contract defines

objectives, duties and rights of partiesobjectives, duties and rights of parties

Put relationship between government and supplier Put relationship between government and supplier on a formal basison a formal basis

Are best seen as eitherAre best seen as either Appropriate for a government agencyAppropriate for a government agency An interim stage to concessioningAn interim stage to concessioning

ButBut Tend to be badly enforcedTend to be badly enforced Have only weak incentives to efficiencyHave only weak incentives to efficiency

Examples: Urban rail, airport terminalExamples: Urban rail, airport terminal

Management Contracts

Leasing (Affermage) Responsibilities of public sector Responsibilities of public sector

Defines enterprise objectivesDefines enterprise objectives Finances infrastructure and equipment and Finances infrastructure and equipment and

retains ownership of assetsretains ownership of assets Responsibilities of the operator (Lessee) Responsibilities of the operator (Lessee)

Deploys operating resourcesDeploys operating resources Takes some commercial risks, and makes most Takes some commercial risks, and makes most

marketing decisionsmarketing decisions Payment of lessee from users charges and partly Payment of lessee from users charges and partly

related to resultsrelated to results Examples: LRTExamples: LRT

Franchise

Delegation of operating rights to a private Delegation of operating rights to a private providerprovider Services defined in the contractServices defined in the contract

Infrastructure financed by governmentInfrastructure financed by government Operating equipment generally financed by Operating equipment generally financed by

private sectorprivate sector User chargeUser charge Revenue risk born by the franchiseeRevenue risk born by the franchisee Examples: urban bus servicesExamples: urban bus services

Concessions General Characteristics

Specific exploitation rights awarded to a Specific exploitation rights awarded to a private companyprivate company Financing, construction and operationsFinancing, construction and operations Usually long term contractUsually long term contract

Incentive to generate and secure revenueIncentive to generate and secure revenue Consistent with public ownership of assetsConsistent with public ownership of assets Consistent with quality regulation by public Consistent with quality regulation by public

sectorsector Examples: toll roads, airport terminals, portsExamples: toll roads, airport terminals, ports

Concessions Regulation

Regulation critical when natural monopoly or Regulation critical when natural monopoly or market power, or PPP agreement rely on market power, or PPP agreement rely on regulatory interpretationregulatory interpretation

Regulation by the contract or a regulatorRegulation by the contract or a regulator Independent regulation recommendedIndependent regulation recommended

Monitoring fulfillment of contract conditionsMonitoring fulfillment of contract conditions Technical regulationTechnical regulation Economic regulationEconomic regulation

Ensuring users protectionEnsuring users protection

Concession Requirements

Economically justified projects Economically justified projects Financial return meeting investors thresholdsFinancial return meeting investors thresholds Acceptable outcome (user access/affordability)Acceptable outcome (user access/affordability) Properly structured contracts to deliver risk Properly structured contracts to deliver risk

transfer and efficiency benefitstransfer and efficiency benefits Sophisticated legal enabling and enforcement Sophisticated legal enabling and enforcement

environmentenvironment Expert concession design team (legal, financial)Expert concession design team (legal, financial) Competitive procurementCompetitive procurement

Key Recommendations

Policy Recommendations

Government role: policy maker, investment decision, Government role: policy maker, investment decision, regulator of infrastructure servicesregulator of infrastructure services Not a provider of services, determines outputsNot a provider of services, determines outputs Promoting ministries should have strong capacityPromoting ministries should have strong capacity

Enabling legal and compliance environmentEnabling legal and compliance environment Effective regulationEffective regulation

Expectation of continuing public commitment Expectation of continuing public commitment throughout the duration of the PPI contractthroughout the duration of the PPI contract

Competitive procurement where possibleCompetitive procurement where possible Competition for the market when monopolyCompetition for the market when monopoly

Transaction Recommendations Project has to be economically viable Project has to be economically viable

Government point of viewGovernment point of view Acceptable impact on the access and affordability Acceptable impact on the access and affordability

of services to users of services to users Project has to be financially viableProject has to be financially viable

Private sector point of viewPrivate sector point of view Possibly with public financial or risk mitigation Possibly with public financial or risk mitigation

supportsupport Arms length contractual relationship between Arms length contractual relationship between

government and private providergovernment and private provider

References

Guides on the design of PPP and procurement of private Guides on the design of PPP and procurement of private participationparticipation Concessions for InfrastructureConcessions for Infrastructure Hiring AdvisorsHiring Advisors

Toolkits (Toolkits (http://rru.worldbank.org/Toolkits/index.ht)http://rru.worldbank.org/Toolkits/index.ht)

Port Reform Port Reform Public Private Partnerships in HighwaysPublic Private Partnerships in Highways

Private Participation in Infrastructure Advisory Services (PPIAF)Private Participation in Infrastructure Advisory Services (PPIAF)

Thank You For Your Attention