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Public-private-partnerships and Investment in Infrastructure: Lessons from OECD countries -  June 2014 meeting of the Working Party 2 of the Competition Committee
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Public-private-partnerships and Investment in Infrastructure: Lessons from OECD countries - June 2014 meeting of the Working Party 2 of the Competition Committee

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This presentation by Sonia Araujo from the OECD Economics department was made during a session on Competition in Public-Private Partnerships held at the 57th meeting of the Working Party 2 of the …

This presentation by Sonia Araujo from the OECD Economics department was made during a session on Competition in Public-Private Partnerships held at the 57th meeting of the Working Party 2 of the Competition Committee on 16 June 2014. Find out more at http://www.oecd.org/daf/competition/competition-public-private-partnerships.htm

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  • 1. PUBLIC-PRIVATE-PARTNERSHIPS AND INVESTMENT IN INFRASTRUCTURE: LESSONS FROM OECD COUNTRIES Sónia Araújo and Douglas Sutherland OECD Economics Department June 16, 2014 OECD Working Party No. 2 on Competition and Regulation
  • 2. PPPs and Investment in Infrastructure  2008 WP1 project on “Infrastructure Investment: Links to Growth and the Role of Public Policies”  Infrastructure: - Energy: electricity and gas - Water - Transport: rail, road, air, water - Telecommunications  Information sources: - Dealogic Projectware database - Literature - OECD Questionnaire - Dedicated websites 2
  • 3. Motivations for private sector participation  Financial expertise  Risk sharing  Innovative solutions  Increasing cost effectiveness  Managerial abilities to coordinate several stages  Introduction of competitive pressures  Budgetary pressures 3
  • 4. Specific Features of PPPs  Decision making framework  Minimising the costs of PPPs  Tendering  Contract design  Risk allocation  Ensuring investment and quality 4
  • 5. Decision Making Framework  Bundling construction and operation phases  Robust methodology for deciding whether PPPs are the appropriate investment structure - Most OECD countries compare PPPs vs traditional procurement - Net benefits calculated using a whole-life cycle approach - Consult an independent body and ex post evaluation  Fiscal implications of PPPs accounted as contingent liabilities in government accounts - Only in 9 out of 19 OECD countries 5
  • 6. Minimising the costs of PPPs  PPPs entail higher transaction costs independent of project size - PPPs are inappropriate for low-value projects  Solutions: - Set minimum project value requirements (AUT, BEL, IRL, PRT, GBR) - Allow bundling of small projects (AUT, BEL) - Obtain planning permissions and environmental approvals prior to tendering (8 and 10 OECD countries out of 19, respectively) 6
  • 7. Tendering  Higher complexity of PPPs limits competition – Collusion a likelier outcome  Solutions: - Allowing international competition (only 2 OECD impose restrictions) - Transparency in awarding criteria - Allow the decision to be challenged in court - PPPs units as vehicles of information dissemination and provision of expertise  Caution when quality is poorly observable but a key determinant of cost 7
  • 8. Issues in Contract Design (1)  Focus on output specifications – 12 OECD countries set input specifications – 16 OECD countries set output specifications  Contract length - PPPs are less suitable in sectors where technology and demand conditions change fast - Higher where demand risk is low (water sector) - Lower in sectors where demand conditions can be hard to forecast (transport sector) - “Typical” contract length of 30 years but there is great variability across countries within sectors 8
  • 9. Issues in Contract Design (2)  Managing a long-term relationship: - Opportunistic behaviour of the contract winner - Regulatory uncertainty or opportunism: PPPs call for a stable institutional environment - Capture 9
  • 10. Risk Sharing  General rule: government should hold the risks that the private sector cannot control or affect - Demand risk is ultimately borne by the government - Design, construction, availability risks should be borne by the private sector  Specify the events that may justify a revision of contractual clauses - 11 (out of 16) countries it is possible to review PPP contracts before established deadline for renegotiation/end of the contract - In only 8 countries do contracts contain clauses specifying the conditions under which they can be reviewed  Specify clauses related to risks - Most countries contracts impose limits on private sector debt - In 9 countries PPP contracts contain revenue sharing clauses - In 7 countries PPP contracts specify minimum revenue from sales 10
  • 11. Ensuring Investment and Quality in Infrastructure Services (1)  Extend contracts for a long period  Set no-compete clauses (8/20 countries)  Set geographical exclusivity rights (18/20) - More pervasive in electricity and water sectors  Pricing policies - Compensate the private operator without incentivising overinvestment  Monitoring performance - Quality standards, performance indicators, benchmark competition, bonuses and penalties 11
  • 12. Ensuring Investment and Quality in Infrastructure Services (2)  Under-investment when contract is approaching renewal – Bias renewal in favour of the incumbent – Compensate the private sector for the residual value of the asset (only in 1/3 of countries that transfer assets to the public sector) – Profit reinvestment requirements (2 out of OECD countries) 12
  • 13. Thank you! sonia.araujo@oecd.org 13

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