0
2000
2007
2013
Future?
Mid
90s
2nd MENA Project Finance and PPP Conference,
Oct., 2013 - Bahrain
Contents 2
1
• Traditional & Hybrid PPP Models - Choosing the Right Model
2
• PPP Sectors Opportunities - Challenges and S...
Traditional & Hybrid
PPP Models - Choosing
the Right Model
PPP’s allow for greater private sector participation in the
del...
Potential Sources of
Efficiencies from PPPs
• Better Resource Allocation
• The private sector’s motivation is on the compl...
Traditional PPP Primary
Frameworks
• Lease: The government grants a private entity a leasehold
interest in an asset. The p...
Traditional PPP Models
• Build-Transfer (BT) / Design-Build (DB): The private partner designs and builds a facility in
acc...
Hybrid PPP Models
• Alliance - The public and private sectors agree to jointly design, develop, and finance the
project an...
The Right PPP Financing Model
• Key Questions Include:
• Is there an immediate need for the project?
• What is the expecte...
The Right PPP Delivery Model
• Key Questions Include:
• What is the confidence level about the type of infrastructure and ...
PPP Model Selection Decision Tree
Source: New Delivery Models for Public Infrastructure Projects, Deloitte Research
10
PPP Sectors Common Models
Sector Main PPP Models Challenges
Transport
BOT, BOOT,
Divestiture
 Demand uncertainty
 Supply...
PPP Sectors Opportunities -
Challenges and Solutions
12
The operation of a toll road is not conceptually very different
fr...
Transportation PPPs -
Mainly Core Services
Challenges
• Cost Containment - Highly important
given the high capital value o...
Water and Wastewater PPPs -
Mainly Core Services
Challenges
• Substantial Procurement Costs - High
procurement costs and h...
Education PPPs - Mainly Non Core
Challenges
• Uncertainty - The possibility of future
changes in education policy and demo...
Affordable Housing PPPs –
Core Services
Challenges
• Uncertainty Over Future Demand -
Changing demographics, people needs ...
Correction Facilities PPPs -
Both Core & Non Core Services
Challenges
• Political Sensitivity - Because the choice
of wher...
18
• Health - Non-Core Services
• Maintaining & operating
hospital building
• Clearing, catering, , security, etc.
• Hospi...
• Tourism / Heritage
PPPs
• Theme parks,
cultural centers,
golf courses,
aquamarine parks,
tourist trains, etc.)
• Usually...
Tariff and Rate Setting – A
Balancing & A Competition
Act
Private provider usually wants to maximize security of
investmen...
Infrastructure Market Structure
• Utilities Are Natural Monopolies
• Core network infrastructure are usually natural monop...
Fostering Competition in Network
Industries
*Division is arbitrary between regulated and non regulated and usually differ ...
Introducing Competition in the
Infrastructure Utility Sector
• Identify monopolies and competitive components.
• Can compe...
“Right” Tariff Level – Economic
and Welfare Trade Off
• Tariff should provide incentive for consumers to use service “opti...
Types of Tariff Regulation
• Rate of Return - Review costs projections + adjust tariff to maintain a set level of return
•...
Choosing a Form of Regulation
• Rate of Return Regulation is desirable when;
• Expected costs are difficult to predict
• P...
Private Sector
Participation in Utility
Sectors – Evolving Models
Water and wastewater management represents fast growing
...
28
WATER
ENERGY
WASTE
IMPROVE SERVICE DELIVERY
1. MAXIMISE REACH
2. REDUCE BACKLOGS
3. REDUCE LOSSES
4. INFRASTRUCTURE UPG...
Policy & Planning Issues –
Water, Energy and Environment
• Harmonize institutional policies and capacity building across s...
PSP in the Water & Energy Sectors –
Global Challenges and Opportunities
• In Most countries
• level forecasts see water an...
Important Drivers for PSP
• Large investments are needed for water and energy. New global interest in PSP
with Governments...
Growing Presence of “New” Operators
• First Tier; Already established water utilities from W. Europe, private or publicly ...
National Operators – Final Look
• National Operators Bring;
• Local Experience: Doing Business In The Country
• Knowledge ...
PPP Regulation & Policy
Harmonization – G & A
Is Key
For PPP infrastructure delivery; one that has produced
several benefi...
Harmonization! 35
Planning &
Monitoring
Service DeliveryEnforcement
Regulatory
Public Policy / Regulation is Key
• Law Making Processes; Ministerial and Officials’ decision making,
Parliamentary commit...
Governance and Accountability
• Good Governance: The extent to which governments enable citizens to fulfill
their expectat...
Designing a Regulatory System
• Communication - Information should be made available to all
stakeholders on a timely and a...
Regulator & Independence
• Institutional Independence Implies:
• Arms-length relationship with regulated firms, consumers ...
Managing Regulatory Relationships
• Regulator coercive powers (e.g. setting tariffs) are derived from statute law or
regul...
Ad-hoc Regulator’s Decisions Examples
Should A Contractual Commitment Be Broken;
• Not without good cause,
• By agreement ...
Managing & Collecting Information
• Establish links to service operators
• Exchange of staff over time to build confidence...
Concluding Remarks
– PPPs Are Not A
Cure For All
Worldwide Trends;
• Increased Number of PPP projects in various sectors
•...
Some Causes of PPP Failures 44
• Too good to be true
• Good faith misplaced
• Poor planning
• Unclear goals and
objectives...
PPPS are Not a Cure for All
• PPPs are one tool governments have at their disposal. By
making the best use of the delivery...
New Utility Operators Enabling
Environment
• Traditional PPP (BOTs) has limited spillover on new
operators. Allow Smaller ...
Legislative Framework
Conducive to PPPs
• Authorize public entities flexibility in the types of PPP
agreements they can en...
Final Thoughts!
• Balancing among competing infrastructure objectives remains a
challenge for most countries.
• Regulation...
Loay Ghazaleh –
Advisor – Ministry of Works
BSc. Civil Eng. , MBA
49
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Facilitating Noteworthy PPP in Utility Sector - Infrastructure

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Project risk is transferred to the party best positioned to absorb it. Key factors in selecting a PPP model are the level of urgency, current availability of funds and certainty. A variety of new and innovative PPP infrastructure delivery models have been developed in recent years to increase private sector participation and induce more competition in in the utility - Infrastructure sector. A vastly improved overall regulatory investment climate for infrastructure; and economic stimulus is essential. Harmonization is about establishing the link between market structure and institutional requirements of regulatory systems, and the design of regulatory rules. This presentation is about integrating all these dimensions together to induce more competition in the utility sector.

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Transcript of "Facilitating Noteworthy PPP in Utility Sector - Infrastructure"

  1. 1. 2000 2007 2013 Future? Mid 90s 2nd MENA Project Finance and PPP Conference, Oct., 2013 - Bahrain
  2. 2. Contents 2 1 • Traditional & Hybrid PPP Models - Choosing the Right Model 2 • PPP Sectors Opportunities - Challenges and Solutions 3 • Tariff and Rate Setting – A Balancing & A Competition Act 4 • Private Sector Participation in Utility Sectors – Evolving Models 5 • PPP Regulation & Policy Harmonization – G & A 6 • Concluding Remarks – PPPs Are Not A Cure For All
  3. 3. Traditional & Hybrid PPP Models - Choosing the Right Model PPP’s allow for greater private sector participation in the delivery of public infrastructure projects. The private sector assumes planning, financing, design, construction, operation and maintenance of public facilities. Project risk is transferred to the party best positioned to absorb it. Key factors in selecting a PPP model are the level of urgency, current availability of funds and certainty. Uncertainties might be present due to project scope, policy uncertainty , service requirements changes , user demand risks, etc. 3
  4. 4. Potential Sources of Efficiencies from PPPs • Better Resource Allocation • The private sector’s motivation is on the completion of the project while the public sector will have competing interests for operating resources, which may reduce the performance of the project over its life-cycle • Efficient Delivery • The construction and operation of infrastructure may be completed in less time and / or lower overall cost by using market-tested techniques and incentives for innovation acquired by private sector years of practice delivering similar projects. • Economic and Social Benefits; • More economic benefits as more projects can be funded. • Improved quality of life resulting from increased access to infrastructure as social benefits accrue faster when infrastructure is built sooner. 4
  5. 5. Traditional PPP Primary Frameworks • Lease: The government grants a private entity a leasehold interest in an asset. The private partner operates and maintains the asset in accordance with the terms of the lease. • Concession: The government grants a private entity exclusive rights to provide, operate and maintain an asset over a long period in accordance with performance requirements set out by the government. Generally, the public sector retains ownership of the asset, but the private operator retains ownership over any improvements made during the concession period. • Divestiture / Privatization : The government transfers all or part of an asset to the private sector. Generally, the government includes certain conditions on the sale to require that the services be improved and continued. 5
  6. 6. Traditional PPP Models • Build-Transfer (BT) / Design-Build (DB): The private partner designs and builds a facility in accordance with the requirements set by the government. Upon completion, the government assumes responsibility for operating and maintaining the facility. • Build-Lease-Transfer (BLT): Similar to Build- Transfer, except that after the facility is completed it is leased to the public sector until the lease is fully paid, at which time the asset is transferred to the public sector at no additional cost. The public sector retains responsibility for operations during the lease period. • Build-Transfer-Operate (BTO) / Design-Build-Operate (DBO): The private sector designs and builds a facility. Once the facility is completed, the title for the new facility is transferred to the public sector, while the private sector operates the facility for a specified period. • Build-Operate-Transfer (BOT) / Design-Build-Operate-Maintain (DBOM): This model combines the responsibilities of Build-Transfer with those of facility operations and maintenance by a private sector partner for a specified period under concession rights. At the end of the period, the public sector assumes operating responsibility. The government has the advantage that it remains the owner of the facility / infrastructure but has less price and quality control during the concession period. • Build-Own-Operate-Transfer (BOOT): Here the government grants a private partner a concession to finance, design, build and operate a facility for a specific period of time. Ownership of the facility goes back to the public sector at the end of that period. • Build-Own-Operate (BOO): The government grants a private entity the right to finance, design, build, operate and maintain a project. Private entity retains ownership of the project. • Design-Build-Finance-Operate/Maintain (DBFO, DBFM or DBFO/M): Under this model, the private sector designs, builds, finances, operates and/or maintains a new facility under a long- term lease. At the end of the lease term, the facility is transferred to the public sector. The government has the advantage that it remains the owner of the facility / infrastructure and has the price and quality control during the lease. 6
  7. 7. Hybrid PPP Models • Alliance - The public and private sectors agree to jointly design, develop, and finance the project and in some cases they build, maintain and operate the facility. • Bundling - This entails contracting with one partner to provide several small-scale PPP projects to reduce the length of the procurement process and transaction costs. • Competitive Partnership - Several private partners are selected, in competition with each other, to deliver different aspects of a project. The contract allows the public sector to reallocate projects among partners at a later date, depending upon performance. The public partner can also use the cost and quality of other partners’ outputs as a benchmark. • Incremental Partnership - The public sector contracts with a private partner, in which certain elements of the work can be called off. The public sector can commission work incrementally, and can use alternative partners if needed. • Integrator - The public sector appoints a private sector partner, the integrator, to manage the project development. The integrator arranges the necessary delivery functions and is rewarded according to overall project outcomes, with penalties for delays, cost overruns and poor quality. The integrator has a less direct role in service provision or in direct delivery of subsequent project phases. • Joint Venture - A joint venture company is set up, a majority of which is owned by a private sector partner through a competitive process to carry out the first phase of work. The typical contract is for 20 years. Subsequent phases are commissioned by the public sector partner using the first phase as a benchmark to determine the appropriateness of future costs. A variant of this model is used sometimes for hospital PPPs. 7
  8. 8. The Right PPP Financing Model • Key Questions Include: • Is there an immediate need for the project? • What is the expected useful life of the project? • What is the current availability of funds relative to the project size? • Are there multiple projects that need to be completed simultaneously? • Is inflation expected to increase? • Is the borrowing rate expected to increase? Financing Method Pros Cons Pay-as-you-go (or PAYGO) – Public Funding • Future funds are not tied up in servicing debt payments • Interest savings can be put toward other projects • Greater budget transparency • Avoid risk of default • Long wait time for new infrastructure • Large projects can exhaust capital projects entire budget • Inflation risk Debt financing (or public bonding) • Infrastructure is delivered when needed • Spreads cost over useful life of the asset • Increases capacity to invest • Projects are paid for by the beneficiaries of the capital investment • Potentially high borrowing rate • Debt payments limit future budget flexibility • Diminishes the choices of future generations due to already committed debt. 8
  9. 9. The Right PPP Delivery Model • Key Questions Include: • What is the confidence level about the type of infrastructure and services that are needed over the next 15 or 20 years? • How likely is it that the needs of citizens in the project area will not change? • How likely is significant policy change in the sector? • How easy is it to specify what will be needed? • What confidence is there in the service provider and how much control need to be retained? • Can risks be transferred or would better outcomes be achieved through risk sharing? • Level of Certainty Continuum: • Low - The public sector is unsure about the infrastructure it needs, when or how it wishes to have it delivered. The alliance or incremental partnership models would be more appropriate when a low level of certainty exists. • Medium - The public sector knows the kind of infrastructure it needs, but is less certain about the timing and exact extent of work. The integrator, joint venture, or competitive partnership models can be considered. • High - The public sector knows with confidence either the condition of the assets and/or the future asset and service requirements at a detailed level. A high level of certainty suggests that the government can shift substantial control and risk to the private sector. The best options are Private Developer Scheme, Design-Build- Finance-Operate/Maintain, or Conventional Procurement. 9
  10. 10. PPP Model Selection Decision Tree Source: New Delivery Models for Public Infrastructure Projects, Deloitte Research 10
  11. 11. PPP Sectors Common Models Sector Main PPP Models Challenges Transport BOT, BOOT, Divestiture  Demand uncertainty  Supply market constraints  Opposition to tolls  Competing transportation network impacts Water, Wastewater, and Waste BT, BTO, BOOT, Divestiture  Upgrading costs and flexibility  Uncertainty about technology and need for innovation  High procurement costs for small-scale projects  Political sensitivity around privatizations Education BT, BTO, BOT, BOOT, DBFO/M, Integrator  Uncertainty about alternative revenue streams  High procurement costs for small projects  Uncertainty about future demographic or policy changes Affordable Housing DBOM, BOO, BOOT, Alliance, Joint Venture  Uncertainty about future housing needs, living standards  High upfront costs in small-scale projects  Securing value for money in noncompetitive situations Correction Facilities BT, BTO, BOO, Management Contract  Political sensitivity  Specifying outcomes  Monitoring issues 11
  12. 12. PPP Sectors Opportunities - Challenges and Solutions 12 The operation of a toll road is not conceptually very different from operating a railway, a hospital or a correction facility; all must provide specified services to a guaranteed and measurable standard  PPP Suits All Sectors Sectors, and projects within sectors, will have different characteristics, and for some the PPP model will bring large efficiency gains and for others the approach may be potentially harmful  PPP Does Not Suit All Sectors
  13. 13. Transportation PPPs - Mainly Core Services Challenges • Cost Containment - Highly important given the high capital value of transport PPPs. • Competitive Markets - The range of complex financial arrangements required for transport PPPs and the relative lack of expertise in developing markets narrows the scope of potential partners. • Demand Forecasting - Accurate traffic forecasting can be tricky for new transport projects, complicating financing arrangements that are often predicated on a certain level of toll revenues. Demand is often seen related to economic growth under Government control. Solutions • Because the transportation sector is the most advanced in the use of PPPs, several solutions have already been tested to sidestep tolls political concern and revenue stability. • “Shadow Tolling” and “Availability- Based Payments” have been used in situations to encourage users to use the road and also where there is demand uncertainty about use. • In shadow payments, tolls can be collected indirectly like gasoline surcharge, container and sea passenger fees, fare tax in railway, airports ticket tax ,etc. 13
  14. 14. Water and Wastewater PPPs - Mainly Core Services Challenges • Substantial Procurement Costs - High procurement costs and high uncertainty about efficient technology require a contractual framework with shorter procurement cycle that fosters innovation. • Assets Uncertainty - The condition of assets in existing facilities may result in an increase in project costs or contract re-negotiations. • Scale - The size of the project may not allow for efficient use of private finance. • Politics - Water and wastewater are often seen as falling under the public sector domain. Public employees may have concerns for their welfare under new private management. Solutions • Governments can reduce the length of the procurement process and attract companies with stronger financial and operational capacity by using a bundling approach. This saves procurement time and effort as the public sector is no longer required to contract with different private partners. • A key challenge in this sector is that the consumer is generally not exposed to the full cost of water or sanitary services. Moving to full cost pricing before moving to a PPP approach can help to avoid rate shocks. • Availability-Based Payments” have been used in treatment facilities (STP’s) in many countries. 14
  15. 15. Education PPPs - Mainly Non Core Challenges • Uncertainty - The possibility of future changes in education policy and demographic shifts introduces uncertainty into the procurement process. • Alternate School Use Policies - Depending on the contract, private partners may use the buildings and facilities for other purposes outside of school hours to generate extra income. The Government may see uncertain revenues translated into a higher price and must also be careful to grant rights to after- school facility use. • High Transaction Costs - For small-scale projects, transaction costs can be high. The capital value of individual schools may not attract sufficient sector interest. • Service - the private sector often provides related noncore services (school transport, food services, cleaning and so on) under contract, while the government provide core services, namely, teaching. Solutions • Bundling can be used for small-scale projects with high transaction costs. PPP contractual terms should be made flexible for the possibility that the school may need to be enlarged. • The incremental model, in which different elements of the work can be called off on an ad hoc basis, is one option to allow for some flexibility to meet demographic or policy changes. The public sector would retain the option to contract with other partners without incurring financial penalties. • Sale-leaseback and lease-leaseback arrangements represent two other common PPP models used for schools. The school district typically either sells or leases land to a developer who builds a school on the land and leases it back to the school district on favorable terms. 15
  16. 16. Affordable Housing PPPs – Core Services Challenges • Uncertainty Over Future Demand - Changing demographics, people needs and way of life may be subject to factors not totally in government control which make specifying long-term requirements difficult. • Affordability - Rising urban land values and infrastructure prohibitive costs to remote areas make negotiating contract provisions with the required value proposition difficult. • High Upfront Costs - Traditional PPP models can be unsuitable for small affordable housing projects unless the contract lasts long enough to achieve value for the money needed to initiate the project or a multistage approach is agreed upon upfront. • Traditional Master Planning & Designs - Innovative and value for money designs are often challenged; establishing enhanced community use and multi-use facilities is often as issue. Solutions • Alliance and incremental partnership models work well when demand is uncertain or in the case of small consecutive projects provided the public sector is able to retain the significant project risks and has the requisite negotiation and project management experience. • In huge affordable housing projects, the integrator model could also be used. The private sector partner has responsibility for project development and takes significant project risk but has less direct role in subsequent construction and facility management phases. • A “buy-back” model can also be used. The government purchases the housing units from the private developer once it has been completed and then contracts back for maintenance services. • Sometimes a form of subsidy is used like allowing the developer to develop commercial units for his own benefit. 16
  17. 17. Correction Facilities PPPs - Both Core & Non Core Services Challenges • Political Sensitivity - Because the choice of where to site a correction facility can be politically sensitive, correction facility PPPs typically require considerable reconciliatory work between government institutions, like interior and finance ministries , justice bodies and zoning authorities. • Setting Performance Standards - Designing outcome based performance requirements is particularly complicated for correction facility's due to the risk of unintended consequences. One example: tough financial penalties for escapes unintentionally might cause a climate in which maltreatment increases. Solutions • Government officials must pay close attention during each phase of the PPP life cycle to the core public values they must protect and to how they can maintain the integrity of these values in a partnership. Well-written performance standards that reward the private partner for providing the kind of care required are critical. • Among the items that should be specified are minimum levels of health, food, and other necessities; the number of government employee monitors who will always be on site; what they will inspect and when. 17
  18. 18. 18 • Health - Non-Core Services • Maintaining & operating hospital building • Clearing, catering, , security, etc. • Hospital staff accommodation • Health – Core-Services • Emergency Medical Response • Ambulance Services (Transport) • Government Dispensaries • Clinical services • Diagnostic Services • Clinical support services (e.g. laboratory) • General Hospitals • Specialty Hospitals • Nursing Homes Health Sector PPP’s PPP Agreements include; • Service definition • Minimum manpower / equipment • Minimum services & standards • Beneficiaries / annual demand • What services will be purchased and at what Price • Performance / outcomes • Step in rights • Monitoring & Evaluation - collecting information, reports • Operators reimbursements and incentives
  19. 19. • Tourism / Heritage PPPs • Theme parks, cultural centers, golf courses, aquamarine parks, tourist trains, etc.) • Usually specify Minimum Development Obligation 19Other Sectors PPP’s – SA Manual!
  20. 20. Tariff and Rate Setting – A Balancing & A Competition Act Private provider usually wants to maximize security of investment and profits while Government usually wants to maximize welfare by providing affordable services, yet full costs recovery is necessary for long-term sustainable service provisions. A variety of new and innovative PPP infrastructure delivery models have been developed in recent years to increase private sector participation and induce more competition in specific situations and specific sectors. 20
  21. 21. Infrastructure Market Structure • Utilities Are Natural Monopolies • Core network infrastructure are usually natural monopolies - e.g. Airports, Seaports, Railroads Tracks; Telecommunication Networks; Gas & Water / Sanitary Pipelines; Electricity Transmission Grids. • Services around core infrastructure can be competitive - e.g. generation companies • The Rest Are Oligopolies With Imperfect Competition • Large investment requirements in both upstream and down stream are needed to participation in infrastructure; Entry barriers • Most vertically integrated infrastructure monopolies can separated into upstream - supply (production) and down stream - distribution (networks) e.g. Electricity sector • Vertical: One / Many Transmission Companies • Horizontal: One / Many generators • Introducing competition in separated entities can improve overall performance and reduce need for regulation • Access pricing and interconnection of both production and distribution are key to market competition 21
  22. 22. Fostering Competition in Network Industries *Division is arbitrary between regulated and non regulated and usually differ by country ** Ex. : During 1990-97, five international operators concentrated 53% of world water PPP projects awarded - Suez, Veolia, Thames, Agbar, Saur. In 2002-2005: their share dropped to 23% . Industry Activities that are usually not competitive - (Regulated)* Activities that can be competitive – (Not Regulated)* Electricity High-voltage transmission and local distribution Generation and retail supply to final customers Oil & Gas High-pressure transmission and local distribution Production, supply to final customers, and storage Telecommunications Local telephony or legacy systems Long-distance, mobile, and value added services Railways Track and signaling infrastructure Train operations, consolidation depots and track maintenance facilities Water & Wastewater** Bulk water supply, local distribution and local wastewater collection Long-distance transportation, purification, sewage treatment, bottled water Air services , Airport facilities, runways, Air traffic control Airline land transport services, maintenance facilities, and commercial airline activities 22
  23. 23. Introducing Competition in the Infrastructure Utility Sector • Identify monopolies and competitive components. • Can competitive pressure be introduced to unbundle monopolies horizontally? • What to do with the CORE network? • Assess the relative size of vertically unbundled components • Is security of supply an issue? • Can corporatizing or privatizing public entities take place? • Establish Regulation Strategy in long and short term. • Is there a wholesale market? • Can we give consumers a choice? • Establish Role ; Main tasks of industry regulator in competitive markets: • Regulation should be minimal to let competitive forces work • Moderate behavior of dominant or monopoly elements • Deal with access issues e.g. to monopoly network • Manage explicit subsidy regimes • Provide monitoring and evaluation regime of market 23
  24. 24. “Right” Tariff Level – Economic and Welfare Trade Off • Tariff should provide incentive for consumers to use service “optimally” especially as resources becomes more scarce. For the poor, connection fees can become greater obstacle than tariffs. • Tariffs should provide incentive for service provide to invest for high quality services over the long run • When low tariffs do not recover full costs , quality is affected. Operators Cost savings with quality • Improvement  Financially profitable and socially beneficial • Reduction Financially profitable but socially harmful • Tariff Structures • Two Part Tariff → Fixed - access component to cover fixed costs → Variable - consumption-based to cover operating and variable costs • Single Part Tariff • Rising / Decreasing Block Tariffs 24
  25. 25. Types of Tariff Regulation • Rate of Return - Review costs projections + adjust tariff to maintain a set level of return • Prices reflect investment & return; revenue stability for provider • Information intensive • Setting rate too low may lead to under-investment or “gold-plating” • Limited performance incentives • Consumer bear risks • Price Cap - Tariffs set at cost-recovery level, then allowed to rise in line with inflation less an offset • Gives provider incentive to improve efficiency • Provider risk: earning instability • Cost reductions may cause decrease in service quality • Poor demand estimates also affect provider profits • Revenue Cap - Revenue set at cost-recovery level, then allowed to rise in line with inflation less an offset • Tariff reflects level of demand • Gives provider incentive to improve efficiency • Cost reductions may cause decrease in service quality • Benchmarking Regulation – One operator compared to another operator, with penalties/awards given for worse/better performance • Provides incentives to lower costs • Difficult to find similar comparator or decide on categories for comparison • High information requirements 25
  26. 26. Choosing a Form of Regulation • Rate of Return Regulation is desirable when; • Expected costs are difficult to predict • Provider needs stable revenue • Provider currently operating efficiently • Tariff Cap Regulation is desirable when: • Need stable and certain tariff levels • Provider revenue stability not essential • Regulatory proceedings are costly • Provider not operating efficiently • Could use hybrid approach, with targeted incentives • Benchmarking Regulation is least desirable as its very difficult to draw comparisons, but can be used as a crude measure. 26
  27. 27. Private Sector Participation in Utility Sectors – Evolving Models Water and wastewater management represents fast growing areas for PPPs. Helping to meet the huge and rising needs for new and refurbished facilities and networks could very well be the biggest potential prospect of PPPs. Traditional Operators are more selective in market choice considering political connections, cultural proximity, access to local finance and lower risk. New local operators with evolving models are on the rise. 27
  28. 28. 28 WATER ENERGY WASTE IMPROVE SERVICE DELIVERY 1. MAXIMISE REACH 2. REDUCE BACKLOGS 3. REDUCE LOSSES 4. INFRASTRUCTURE UPGRADE 1. MAXIMISE REACH 2. REDUCE BACKLOGS 3. REDUCE LOSSES 4. INFRASTRUCTURE UPGRADE 5. REDUCE OUTAGES 1. CLEAN CITY 24/7 2. IMPROVE OPERATIONAL EFFICIENCIES 3. MINIMISE WASTE TO LANDFILLS Governments Infrastructure Objectives
  29. 29. Policy & Planning Issues – Water, Energy and Environment • Harmonize institutional policies and capacity building across sectors and across regions. • Adopt integrated approach to cross-border expansion of utility networks and resulting gains in efficiency, reliability, and supply security while monitoring cross-border pollution, downstream health and environmental impacts, hazards, etc. • Improve poor production prospects, weak demand management / projections, low penetration rates for alternative energy sources. • Watch for water, energy disruptions arising out of emergency or supply shocks as most productions rely on oil supply. • Formulate least-cost strategies and involvement of the private sector due to limited availability of Public funding. • Integrate environmental concerns at planning stage, e.g. urban transport and air pollution as a result of energy use pattern • Focus on technology , resource options and their techno-economic performance profiles - emissions ,waste streams and resource and Land use. 29
  30. 30. PSP in the Water & Energy Sectors – Global Challenges and Opportunities • In Most countries • level forecasts see water and energy demand growth varying from 5% to 10%. Quality, reliability, and security are important challenges. • Large investments are needed, but estimates vary enormously depending on population growth and asset conditions assumptions. Water and energy demand has to be met to ensure adequate energy at reasonable price is not a constraint to economic growth. • There is growing competition for public resources and a legacy of underinvestment in water / sanitary and energy sectors. Uneven access across and within countries at affordable prices needs attention. • Environmental concerns are key : climate change, water scarcity, pollution. • New technologies have a role from low-energy, low-technology systems to small-scale conventional plants; • Range of systems vary - scales range from regional to point-of-use to closed-loop systems. • On site systems in both water & energy are increasingly sought in remote underserved areas in many emerging economies. • In energy, it’s more attractive to harness private sector investments through regional approach ( when internal demand levels do not allow for the development of large-scale energy generation projects) and thus obtaining energy at competitive prices through cross-border energy trading will be possible. • In water, because its a public as well as an economic good, private water ownership, equitable access to water services for all, needs to be balanced. 30
  31. 31. Important Drivers for PSP • Large investments are needed for water and energy. New global interest in PSP with Governments providing guarantees for private investment. • Access to more local financing and small scale financing for local and community projects is needed. • Different accountability relationships between public and private providers exist. • High capital costs necessitate full-cost pricing and better demand management . • Need to reduce regulatory risk to encourage private sector investment – certainty and predictability. • Scope of regulation decreases with increasing competition as market forces and cost recovery ensure more efficient outcomes. • Utility Private Models (Evolving) • Move towards leases, O&M contracts; Away from concessions. • Move toward wastewater; away from water supply. • Move toward Energy production and renewables. • Bundling PPP impacts; • Life-cycle costing can be expensive • Limited spillover effect on PSP • Possibility of ‘negative’ synergy ; operating costs up • Bundling can be an entry barrier for small utility operators 31
  32. 32. Growing Presence of “New” Operators • First Tier; Already established water utilities from W. Europe, private or publicly owned: • Germany (e.g. Gelsenwasser), Italy (e.g. Acea, Amga), Netherland (e.g. Vitens), Portugal (Aguas de Portugal), Sweden (e.g. Stockholm) • Typically little interest in private investment • Target - Management Contracts, leases/ affermages, or new innovative approaches • Second Tier; New operators from developing countries; coming from a wide diversity of backgrounds .Most new entrants acquire expertise by doing and partnerships. • Examples Of Acquiring Expertise • Diversification of industrial conglomerates: access to finance, credibility and political connections • Vertical integration by companies involved in water sector through civil works / construction (can be large firms), manufacturing or consulting/engineering • Takeover (Exit) from foreign operators (Latin America - Argentina ) • Well performing public utilities going regional • Joint ventures: China, Philippines, Malaysia • Buying existing companies (Chile) • Hiring water experts (Columbia) • Successes - Philippines: Manila water more than doubling the number of connections to the poor. including the and engineering in utility sector under PSP. 32
  33. 33. National Operators – Final Look • National Operators Bring; • Local Experience: Doing Business In The Country • Knowledge of political environment • Adapting to customer’s needs & social conditions • Money For Investment : Potentially: • Cash and access to local financial market • Can take position in local currency exposure • Long term portfolio view • More Competition : Working In Difficult Countries • More pressure on cost efficiency • Sustainability over long term • Governments Support To National Operators; • Adopt clear Pre-qualification criteria • Foster partnerships with foreign operators in tenders • Tailor project design to the new operators by understanding; • The Risks & responsibilities they are willing to take • The Contract types , scopes and sizes they can execute 33
  34. 34. PPP Regulation & Policy Harmonization – G & A Is Key For PPP infrastructure delivery; one that has produced several benefits: faster construction; reduced life-cycle costs; better value for money; a vastly improved overall regulatory investment climate for infrastructure; and economic stimulus is essential. Harmonization is about Establishing the link between market structure and institutional requirements of regulatory systems, and the design of regulatory rules 34
  35. 35. Harmonization! 35 Planning & Monitoring Service DeliveryEnforcement Regulatory
  36. 36. Public Policy / Regulation is Key • Law Making Processes; Ministerial and Officials’ decision making, Parliamentary committees , Regulatory Bodies and Courts. • Transparency of public policy does matter to sectors performance. Regulator’s independence in the law is a key component. • Governance & Accountability (G&A) is a critical ingredient of private sector involvement in infrastructure investment, development and operation. Good management of relationships makes G&A work. • Utility decentralization and corporatization increased the need for G&A. • Investor’s Engagement Depends On: • Predictability of governmental decision making processes • Integrity of the processes . • Sanctity of contract, enforceable in independent courts • Clear accountability of the regulator and the regulated • Public policy should be an open process of change, however, arbitrary decisions are fatal to investment and growth. 36
  37. 37. Governance and Accountability • Good Governance: The extent to which governments enable citizens to fulfill their expectations and potential under the protection of the rule of law backed up by an independent judiciary. • Accountability: The extent to, and manner in, which the institutions and processes of government using the coercive powers are held accountable to the citizens who enjoy or suffer the decisions made. Governance Accountability  Clear regulatory system laws  Reporting on decisions with reasons to stakeholders  Transparent Government directions  Consult stakeholders  Independence from political interference  Challengeable decisions in courts  Quality regulators  Predictable and open processes for stakeholders  Transparent decision making and contracting  Credibility built on integrity of process as well as decisions 37
  38. 38. Designing a Regulatory System • Communication - Information should be made available to all stakeholders on a timely and accessible basis • Consultation - Participation of stakeholder in meetings promotes the exchange of information and education of those affected by regulatory decisions • Consistency - The logic, data sources, and legal basis for decisions should be consistent across market participants and over time. • Predictability - A reputation for predictable decisions facilities planning by suppliers and customers, and reduces risk as perceived by the investment community • Flexibility - The regulator should recognize and respond to changing conditions, balancing regulatory discretion against the costs associated with creating uncertainty • Independence - Autonomy implies freedom from undue stakeholder influence, and promotes public confidence in the regulatory system • Effectiveness and Efficiency - Cost effectiveness process should be implemented by the regulator while it is expected of those being regulated. • Transparency - The openness of the process to stakeholders promotes legitimacy and regulatory sustainability 38
  39. 39. Regulator & Independence • Institutional Independence Implies: • Arms-length relationship with regulated firms, consumers and other private interests • Arms-length relationship with political authorities • Organizational autonomy • Getting The Proper Balance Between Accountability And Independence Needs: • Rigorous transparency • Providing effective appeal arrangements with courts review • Subjecting the regulator to scrutiny by external auditors • Eliminating Regulator Conflicts of Interest Like Being; • A shareholder in infrastructure provider • A monopoly provider and a shareholder in a competitive provider 39
  40. 40. Managing Regulatory Relationships • Regulator coercive powers (e.g. setting tariffs) are derived from statute law or regulation interpretation of powers. • Regulator is subject to legal process, all decisions are – or should be – subject to appeal. “Natural justice” applied in against “arbitrary use”. • The Regulator - Substituting for Competitive Markets • The Regulator is a referee on market players and should be the impartial enforcer • Engaging the trust and respect of stakeholders. Consumers have the weakest power • As much as possible, use coercive powers to influence behavior by agreement • Establish internal appeal with different adjudicators • Transparent Rule Book - With open consultation with key stakeholders • Establish Legal Processes - To “regulate” relationships with penalties for breach • Establish Integrity - By each action, permeate integrity in the regulatory body • Manage Public Communication & Perception • “Open door” policy to the media. Use available outlets extensively; i.e. press releases, media interviews, internet, newsletters • Encourage public hearings when formulating decisions • Attend Parliamentary processes of accountability • Consider “road show” approach to informing stakeholders 40
  41. 41. Ad-hoc Regulator’s Decisions Examples Should A Contractual Commitment Be Broken; • Not without good cause, • By agreement with counter-party Imposing ad-hoc rules in favor of Government and consumers will break the trust / understanding of providers, threaten their sustainability, and increase investment risks. EXAMPLES; • Regulator cut consumer penalties for the late payments  consumers didn’t pay bills  Service provider lost money • Regulatory body imposed new tax on provider’s  legal appeal  Borderline legal case • Government reversed a promised increase in energy prices  operator withdrew from market  Serious future risk for government • Government refused to allow Regulator’s tariff increases  operator sued Government  clash between regulator and the government 41
  42. 42. Managing & Collecting Information • Establish links to service operators • Exchange of staff over time to build confidence • Cooperation rather than coercion gets better results • Cooperation best done by agreement, but can use public exposure to influence behavior. • Know what information is needed and how to use it. • Establish standard measures of performance over time. Use other regulators’ experience • Publish key , but aggregate data, for stakeholders. Protecting commercially sensitive information, publish • Hire staff with skills and integrity 42
  43. 43. Concluding Remarks – PPPs Are Not A Cure For All Worldwide Trends; • Increased Number of PPP projects in various sectors • Smaller Average Sizes of PPP Projects, Innovative Approaches • Geographical PPP Concentrations w/ Enabling Environment • More Competition in Natural Utility Monopolies • Many More New Operators in the Utility Sector, 43
  44. 44. Some Causes of PPP Failures 44 • Too good to be true • Good faith misplaced • Poor planning • Unclear goals and objectives • Misunderstood roles • Uncharted territory • Taxpayers misled • Complicated financing • Indistinguishable partnership • High complexity • Poor oversight • No timetables • Rate / tariff unaffordable • Project generated controversy • Project needs questioned • High political opposition • Cost of construction changed • Operator takes all commercial risks • Operator took all operations risks • Billing and collection risk was not manageable • No ability to regularize illegal connections • Significant exposure to technology
  45. 45. PPPS are Not a Cure for All • PPPs are one tool governments have at their disposal. By making the best use of the delivery models and by continuing to innovate, the public sector can confront the infrastructure challenges ahead. • The length of PPP contracts , high transaction costs and relative uncertainty about costs mean a contract should survive in the long-term. Changing service requirements at a later stage often comes with a significant price tag. • The public sector needs to be certain about the infrastructure and service requirements. If the public sector is not certain, then achieving a fair contract price and ensuring the infrastructure meets the future demand might be difficult. • For projects that are vulnerable to uncertainties, many new hybrid PPP models are available with increased flexibility and shorter contract periods that can improve the likelihood of achieving public policy objectives for infrastructure development. 45
  46. 46. New Utility Operators Enabling Environment • Traditional PPP (BOTs) has limited spillover on new operators. Allow Smaller size contracts are more suitable. • Allow enabling environment with good policy, legal climate and transparency • Encourage New Operators temporary or long term partner alliances in tenders. • Tapping local finance sources is a problem for some • International private equity & infrastructure funds dried in the water, sanitation, and wastewater treatment sectors (except may be for pension funds). local currency long term finance on affordable terms is needed. IFI water lending is hard work (forex risk, due diligence) • Facilitation to project bonds , well-run water sector can attract this type of finance 46
  47. 47. Legislative Framework Conducive to PPPs • Authorize public entities flexibility in the types of PPP agreements they can enter into and the specific procurement process. • Allow contracts to be awarded according to best value, not lowest price. • Allow a mix of public and private money’s in PPP projects. • Allow “mixed concessions” (construction / expansion and long- term operation). • Allow long-term leases of existing government assets as many projects do not generate enough value except in the long term. • Authorize procedures to receive and consider unsolicited PPP proposals. • Avoid provisions that would require further legislative acts for a project to be authorized or financed, franchise agreement executed or toll rates changed. 47
  48. 48. Final Thoughts! • Balancing among competing infrastructure objectives remains a challenge for most countries. • Regulation and Public oversight remain two key factors for success in PPP. • Public education, public involvement, and transparency are essential in PPP. • There are opportunities for numerous PPP models and financing mechanisms to succeed, however, PPP models do not always work well in: • Sectors subject to rapid technological change • Public sector not well-suited for profit maximization. • Projects that are too complex to allow for private sector innovation 48
  49. 49. Loay Ghazaleh – Advisor – Ministry of Works BSc. Civil Eng. , MBA 49
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