Foreword                                   Jean-Yves PERROT    In 1993, France’s Ministry of Public Works and Transportati...
FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTSces (e.g. other publications, conferences, seminars, manuals)...
OutlineForeword .............................................................................................................
Introduction    Objectives of this book    As of the 16th century in France, public authorities began envisioning the useo...
FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTSconfigurations, preparation conditions, contract-award proced...
Summary                                  Gautier CHATELUS    Part I – Introduction    The first (introductory) part of thi...
FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTSbetween partners in accordance with the principle of risk ass...
Summarypartnership proves a particularly well-adapted formula. Four sectors have been ana-lyzed in-depth: roads, public tr...
FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTSvity. Use of the generic term “delegated management” for thes...
Summaryencountered in all forms of public-private partnership. Accompanying chapters pre-sent the points of view of severa...
I     PUBLIC-PRIVATE PARTNERSHIPIN THE CONSTRUCTION AND MANAGEMENT     OF MAJOR INFRASTRUCTURE        AND PUBLIC SERVICES
A. IN FAVOR OF A PRAGMATIC APPROACH TOWARDS PUBLIC-PRIVATE    PARTNERSHIPCorinne NAMBLARD1. The public-private partnership...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSimplementation however requires the full-fledged support and a...
In favor of a pragmatic approach towards public-private partnershipoffering a considerable number advantages, yet one whic...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSin comparison with a basic public procurement contract. Such a...
In favor of a pragmatic approach towards public-private partnership2.3. Economic and social benefits    Should the primary...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTS2.3.3. Access to financial markets, combined with the developm...
In favor of a pragmatic approach towards public-private partnershipadapting to the strictest of regulatory systems found t...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSon site just a minimum number of foreign office executive staf...
In favor of a pragmatic approach towards public-private partnershipfor periods exceeding the terms of elected officials. A...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSRémy Prud’homme in Chapter V-A of this book, all public action...
In favor of a pragmatic approach towards public-private partnershipphase or on a proportional basis following start-up of ...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTS(a water treatment or waste plant BOT) to the full-fledged con...
In favor of a pragmatic approach towards public-private partnershippublic-private partnership does not in any way suggest ...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSwell-founded position regarding the various points of divergen...
B. TEN YEARS OF PUBLIC UTILITY REFORMS: 7 LESSONS    (FROM PRIVATIZATION TO PUBLIC-PRIVATE PARTNERSHIP)Dominique LORRAIN  ...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSpertinent public service obligations? How can contracts be mad...
Ten years of public utility reforms: 7 lessonstion and metropolitan area governance. The scope of privatization operations...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTS            • Actors innovate with financing set-ups, combinin...
Ten years of public utility reforms: 7 lessons3. Public-private partnership as a customized solution    Out of this discus...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSstable, public-oriented rules shared by all the actors. In the...
Ten years of public utility reforms: 7 lessonsauthorities, international institutions and firms alike), they are unable to...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSmediary – the regulator – can leave the public authority and p...
Ten years of public utility reforms: 7 lessons    This means of conceiving action occurring within imperfect institutional...
FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSu A public-private partnership is meant to be long-lasting and...
IICONDITIONS FOR A SUCCESSFULPUBLIC-PRIVATE PARTNERSHIP
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Project 4

  1. 1. Foreword Jean-Yves PERROT In 1993, France’s Ministry of Public Works and Transportation, under the gui-dance of my predecessor Claude Martinand, published an initial collective work onthe French experience , already at that time deeply-rooted and widely-practiced, inthe area of private-sector financing and management of public infrastructure pro-jects. Six years ago, this first book served to ignite and spur on a debate over themethods needed to associate the private sector in performing public service assign-ments. The French experience, featuring a broad-based approach applicable to across-section of services and infrastructure, proved to be quite original (even unique),against the backdrop of a worldwide economy still heavily and at times dogmati-cally championing total privatization as the sole alternative to public-sector facilitiesmanagement. Since then, the range of public-private partnerships, in terms of both geographiclocation and service sector, has continued to spread throughout the world. A large number of diverse countries, stretching across all continents, have beenholding international calls for tender in order to build facilities and run public servi-ces within a partnership framework, especially in water/sewerage and transportation.Energy production, waste handling/treatment and, to a broader extent, the environ-ment, telecommunications and public housing have all been managed using public-private partnerships, with the legal and financial configurations of such partnershipstaking on a wide variety of forms. Reliance upon a delegated management framework (whether a concession oranother type of public-private partnership), as a means of improving the quality ofpublic services, has thereby come to the fore as one of the basic tools in economicmodernization. Moreover, this brand of partnership has helped refocus the role andresources of the public authority on its regulatory missions. During these past six years, the debate over managing public services throughdelegation (in all its international, economic and legal dimensions) has both maturedand become less vehement. No longer is it concentrated on the legitimacy of jointpublic-private intervention in satisfying public service or facility requirements, butrather on the most efficient manner in which such facilities and services can be set upand operated, via a veritable and well-balanced partnership between public authorityand private operator. In conjunction with these developments, considerable advan-1. DAEI (French Minstry of Public Works, Economic and International Affairs Division), PrivateFinancing of Public Infrastructure, supervised by Claude Martinand, Paris, 1994. 3
  2. 2. FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTSces (e.g. other publications, conferences, seminars, manuals) have allowed gaininggreater insight into the topic. French firms have participated extensively in this opening onto the world bydemonstrating their longstanding tradition of involvement in public services withinmany countries. These firms have made the most of their practical experience ofworking in partnership with France’s public administration, as well as of their tech-nological prowess, in order to develop original formulae adapted to each context andeach project. This book has been intended to draw upon the depth and richness oftheir collective experiences. By its very nature, public-private partnership cannot stem from a single contrac-tual template, but instead must be assembled using lessons gleaned from past expe-rience. As such, it is incumbent upon us to share this experience with other publicand private actors as far and wide as possible, in an effort to incite meaningful andbeneficial exchanges. From a public authority’s standpoint, this book provides:– series of recommendations, reflecting the outcome of such practices and up-to-daterealities;– the various processes during the life of a contract: preparation, award and execu-tion;– detailed descriptions of sector-specific parameters;– examples of successful partnerships conducted in various service sectors across theglobe. The Ministry’s Division of Economic and International Affairs has sought, byvirtue of this latest book (which combines a broad range of contributions from com-pany sources, consultants, public authorities and financial advisers), to extend thegeographic and sectorial scope of strategies related to public-private partnerships.This effort has also been intended to distinguish future trends shaping such par-tnerships, as regards pertinent European and French references (while highlightingsuccessful ventures encountered the world over), in the aim of offering public autho-rities if not an actual delegated-management user’s manual, at least some sound gui-delines for building sector-specific partnerships. 4
  3. 3. OutlineForeword ........................................................................................................................................................................................................ 3Outline ............................................................................................................................................................................................................ 5Introduction .............................................................................................................................................................................................. 7Summary ....................................................................................................................................................................................................... 9 I. PUBLIC-PRIVATE PARTNERSHIP IN THE CONSTRUCTION AND MANAGEMENT OF MAJOR INFRASTUCTURE AND PUBLIC SERVICEA. In favor of a pragmatic approach towards public-private partnership ....................... 17B. Ten years of public utility reforms: 7 lessons (from privatization to public-private partnership) ............................................................................ 31 II. CONDITIONS FOR A SUCCESSFUL PUBLIC-PRIVATE PARTNERSHIPA. The concessionary contract: a framework, a process, a contract ...................................... 43B. Risk analysis and sharing: the key to a successful public-private partnership ....................................................................................................................................................................................... 57C. The contract’s life cycle .................................................................................................................................................... 81D. The legal framework ........................................................................................................................................................... 91E. The financial approach .................................................................................................................................................. 103 III. CONCESSIONS IN THE FIELD OF TRANSPORTATIONA. Roads and road-related infrastructure ......................................................................................................... 125B. Public transit systems ...................................................................................................................................................... 169C. Ports .................................................................................................................................................................................................... 201D. Airports .......................................................................................................................................................................................... 219 IV. DELEGATED MANAGEMENT OF MUNICIPAL SERVICESA. Municipal services: the stakes involved in delegation ............................................................... 245B. Water and sanitation services ................................................................................................................................. 277C. Waste management ........................................................................................................................................................... 309 V. CLOSE UP: THEORETICAL FRAMEWORK AND PERSPECTIVE OF MULTILATERAL ORGANIZATIONSA. A draft typology of public-private partnerships ............................................................................... 333B. The European Commission’s point of view: Mobilising partners for networks of tomorrow ................................................................................ 349C. Public-private partnership financing for European infrastructure: The role of the European Investment Bank ......................................................................................... 355D. The World Bank’s point of view ....................................................................................................................... 363LISTE OF CONTRIBUTING AUTHORS ............................................................................................................................... 377TABLE OF CONTENTS ................................................................................................................................................................... 383 5
  4. 4. Introduction Objectives of this book As of the 16th century in France, public authorities began envisioning the useof private entities to perform, on behalf of and under the control of the authorityitself, an economic activity aimed at public service provision or a contribution tothe overall economy. The nation’s very first concession was granted to Adam deCraponne in 1554 for the construction of a canal. These partnerships between public sector and private sector began to take onprominence in France towards the beginning of the 19th century, with the appearanceof new public services, especially in the area of water supply. Private companieshave been commissioned to treat and distribute water to the population as aneconomic undertaking on behalf of and under the control of appropriate public-sector authorities. The same would go on to happen in other public service areas,such as public transit. Since the beginning of the 1990’s, the principle of public-private partnershiphas enjoyed, the world over, renewed success. A host of factors explain this regainedinterest, with the most predominant being: the heightened need for public services,in a context of limiting public-sector outlays, and a sharper analysis of the divisionof roles between public entity and private operators. In this vein, a pragmaticapproach has taken shape, enabling greater overlap of both parties’ objectives for themodernization and improvement of public services, while transferring a portion ofthe taxpayer’s financial burden onto users. The advent of public-private partnership can also be legitimized by the respectiveroles played by the public authority and the private operator. The former is responsiblefor ensuring the provision of services essential to the population’s economic and socialwell-being, in accordance with society’s expressed needs; while the latter seeks to carryout assigned missions in optimizing the cost-benefit ratio. The use of public-privatepartnership thus enables reconciling these two positions. Nonetheless, considerableinsight into the process is a basic prerequisite; prior to calling upon a public-privatepartnership, the public authority must have a solid grasp of the potential advantagesand inherent risks, and fully comprehend the process for enhancing a partnership’ssuccess. Public-private partnership has thus become a key issue for the beginning ofthe new millennium in the field of public-sector management worldwide. Itsimplementation necessitates in-depth preparation in order to develop a truly globalapproach. This book aims at underscoring the main characteristics associatedwith delegated management and concessions, as well as displaying their economic 7
  5. 5. FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTSconfigurations, preparation conditions, contract-award procedures and execution.The presentation format includes both the general theoretical standpoint and asector-by-sector analysis; each chapter closes with a series of recommendationsaddressed to public authorities interested in pursuing this mode of contracting. Contents of the book We have produced a book intended for several types of readers. As for content,background material critical to the success of partnerships, in terms of economic,legal and financial principles, has been raised in Part II. Parts III and IV examinethese conditions for success in a pragmatic fashion, by economic sector, for thevarious modes of transportation and types of urban public services. Part V is aimed atsharpening some of the theoretical angles and gleaning the perception of multilateralorganizations involved in such projects. As for presentation, this book has been designed to accommodate a variety ofreading approaches: from a quick skim to a more thorough perusal. Each chapteris led off by a brief abstract which provides an overview of its contents. A sectionhas been included at the end to highlight the set of recommendations addressed topublic authorities seeking to enter into partnerships with private operators. Chaptersare also accompanied, whenever necessary, by tables or summary diagrams of the keypoints discussed. In a number of cases, inserts allow grasping a particular subject ingreater detail; in the sector-specific chapters, descriptions of example set-ups helpillustrate the material presented. 8
  6. 6. Summary Gautier CHATELUS Part I – Introduction The first (introductory) part of this book is aimed at discerning the key stakesinvolved in public-private partnerships. The first chapter (I-A) portrays the poten-tial advantages generated by these partnerships, while cautioning against an overly-idealistic vision and stressing that their success depends, above all else, on both thedegree of partner involvement and the project’s intrinsic quality. Chapter I-B presents 7 general conclusions which can be drawn from experiencewith public-private partnerships over the past ten years. These conclusions encom-pass: heightened pressures to justify increased reliance on public-private partnerships;the growing emphasis placed on pragmatic approaches as opposed to public-privatepartnership “models”; the importance of an ad hoc approach to public-private par-tnership able to respond to narrowly-defined problems; the institutional environ-ment’s fundamental role; the life cycle of public-private partnerships projects; thenecessity of a contract regulator; and the need to take contractual procedures throughto the stage of implementation quickly. Part II – Conditions for a successful public-private partnership This part is devoted to a cross-sector analysis of the basic conditions necessaryfor a partnership to succeed. The introductory chapter (II-A) presents the contrac-ting process and the features of the contract itself. The contracting process mustbegin by defining a host framework for the public-private partnerships and thendeveloping the specific contract. It is essential to distinguish between the concessio-nary contract containing a public service-delegation component and a conventionalpublic procurement contract. The contracting process must be laid out clearly, yetincorporate performance objectives. The chapter then turns to the nature of the con-tract, which must be firmly tied to: a detailed description of the works program,the operating conditions stipulated for the public service, and the terms governingcontract termination. The guiding principles always focus on the contractual equili-brium between partners and the guarantee of public service provision. The second chapter (II-B) goes right to the heart of project analysis, which entailsthe evaluation of risks, their limitation and the breakdown of those risks impos-sible to contain. This exercise, valid for all public-private partnership projects andapplicable over the long run, is fundamental to the project’s overall configuration.Many risks can be mitigated thanks to effective measures on the institutional andregulatory environment and a solid project organization. Others need to be split 9
  7. 7. FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTSbetween partners in accordance with the principle of risk assignment to the partymost capable of bearing the risk, depending both on the benefit derived from theproject and on the notion of contractual equilibrium. Chapter II-C focuses on the primary parameter influencing a partnership: thecontract’s life cycle. As opposed to the classical public procurement contract, a par-tnership is entered into for the long haul and engenders relations between publicauthority and private operator that last a good number of years, and in most casesspan decades. Such a contract therefore must be set up to adapt to the inevitablechanges affecting its domain of application. This chapter highlights the characteris-tics of the contract life cycle and their ultimate impact on both the preparation of theeconomic and institutional framework up front and the options available followingthe award procedure. Chapter II-D helps clarify the project’s legal-related concerns and describes theset of legal clauses essential to the preparation of a regulatory and institutional envi-ronment for awarding contracts and ensuring successful partnerships. It also goesinto detail on the basic clauses not to be overlooked during the drafting of a contract.The chapter’s underlying notion is the lack of a single universal public-private par-tnerships model; the ensuing partnership and clauses may be applied within differenttypes of national legal systems, while maintaining the potential to adapt the contractto a particular context. To close this Part, Chapter II-E is aimed at presenting the appropriate financialapproach to public-private partnerships. This approach cannot be merely based onconventional banking tools due to the level of risk involved from the banks’ stand-point and the length of contractual periods. The financial organizations working inthis field have thus devised a new set of sophisticated tools. Yet, even the most favo-rable financing set-up can only function successfully for projects with solid economicjustification. Part III – Concessions in the field of transportation Parts III and IV lay out a sector-by-sector approach organized around two majorthemes: transportation and municipal services. Public-private partnerships do notentail use of a single “recipe”, but rather must be applied on a case-by-case basis.Individual sectors display their own set of specificities, and the experience acquiredin each allows identifying how best to integrate the general principles described inPart I. Part III addresses the broad domain of transportation, which must be conside-red both as an economic activity in and of itself and as a support service for theeconomy. Consequently, owing to the magnitude of capital investments involved aswell as to the fact that users can be required to pay for services, the public-private 10
  8. 8. Summarypartnership proves a particularly well-adapted formula. Four sectors have been ana-lyzed in-depth: roads, public transit, airports and ports. Chapter III-A discusses roads and road-related infrastructure. This sector pre-sents contrasting aspects: simple in the approach (the primary objective of a public-private partnership in this sector is to finance infrastructure), yet difficult due tovery sizable investment outlays coupled with highly-uncertain and imprecise revenueprojections. Public-sector subsidies are often justified and essential. A key to tollroad, bridge and tunnel projects, especially in urban settings, concerns the socialacceptability of paying tolls. Chapter III-B discusses public transit systems. In this case, the partnership maybe focused not only on the infrastructure component, but on service operations aswell. Such services often exhibit low profitability levels, yet remain essential to urbancohesion (at least as far as urban public transit is concerned). Concessionary con-tracts can thereby incorporate a variety of elements. Rail operating franchises enableoptimizing the use of infrastructure. New high-speed train networks have to be desi-gned from an overall standpoint, so as to enhance compatibility between infrastruc-ture, rolling stock and operations; such projects, however, necessitate considerablesubsidization up front. Tramway or metro systems can be handled using differenttypes of project set-ups, with varying doses of management delegation. Chapter III-C takes a close look at port systems. Their complexity lies in themultiplicity of agreements relative to two functions: port authority (regulatory) andoperator (industrial and commercial). Ports can be divided into three main catego-ries, depending on the level of delegation exercised: operator port, tool port and lan-dlord port. The selected model must be well-adapted to local conditions regardingcompetition, traffic volumes handled, etc. Chapter III-D presents the characteristics of airport systems. This category oftransportation infrastructure has undoubtedly come to represent the most profitableand the most straightforward to implement as concessions. The concessionaire isentrusted with the status of airport authority and must coordinate operations withfour types of entities: airline companies, passengers (and their accompanying par-ties), non-aeronautical commercial activities, and the host of regulatory public ser-vices (airport security, customs, air traffic control, etc.). This assemblage requires atruly multi-faceted partnership established over the long term. Part IV – Delegated management of municipal services Part IV describes public-private partnerships principles pertaining to municipalservices. Though the nature of such public-oriented services remains heavily underthe responsibility of the competent local public authority, the economic activitiesthey engender may be delegated. Quite often, these services associate a local facilitywith a specific service provision, which in general comprises the very core of the acti- 11
  9. 9. FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTSvity. Use of the generic term “delegated management” for these service partnershipsis definitely most appropriate. Chapter IV-A discusses the entire array of municipal services. As a result of thediversity encountered among these services, it would have been difficult to devote aseparate chapter to each. Four major categories have nonetheless been assembled:– environmental protection services (water and waste, which are developed in thisbook in two distinct subsequent chapters);– economic services, both basic (energy, telecommunications) and specific (publicfairs, tourism, slaughterhouses, etc.), and all services related to streets and publicspace (street lighting, public amenities, etc.);– construction and maintenance of public buildings;– recreational services (athletic, cultural, etc.). An insert included in this chapter provides a closer glimpse at electricity supplyand telecommunications services. Chapter IV-B focuses more specifically on municipal water services (production,distribution and sewerage). This sector illustrates to a great extent the multitude ofissues arising in service-oriented public-private partnership projects. Though a pro-duction function is very often present (e.g. water treatment plant), the critical featureherein revolves around the provision of an absolutely vital service (water supply),with its array of issues pertaining to user relations, the social acceptability of waterservice rates, quality of service, etc. On the other hand, this sector includes servicesintended for the locality as a whole, such as sewerage. A wide variety of delegated-management approaches are available, extending from a simple Build, Operate andTransfer “BOT” contract (for a treatment plant) or a service management contract(for overseeing distribution) all the way to the overarching system concession (withvarying levels of investment exposure). This part closes with Chapter IV-C, which examines the environmental services,and more precisely those services related to the entire waste sector. This sector iscurrently undergoing tremendous growth and features an emphasis on innovationand heavy capital investment. Service is provided to the local population, but oftenindirectly through a local authority (as opposed to water, whereby the user is serveddirectly). As is the case with water, a combination of pure service activities (wastecollection) and more industrial activities (treatment) typifies this sector. Moreover,these industrial activities involve a strong degree of product reuse and may combineprovision of services for both public and private clients. Part V – Close-up The final part of the book serves to gain a more in-depth perspective on the sub-ject. To lead off, a more theoretical chapter allows insisting upon the rationale andneed for making use of a panoply of public-private partnership models, adapted tospecific economic and political contexts and stressing certain invariant parameters 12
  10. 10. Summaryencountered in all forms of public-private partnership. Accompanying chapters pre-sent the points of view of several eminent international organizations. The opinionsexpressed by the World Bank, the European Investment Bank and the EuropeanCommission have all been assembled here. 13
  11. 11. I PUBLIC-PRIVATE PARTNERSHIPIN THE CONSTRUCTION AND MANAGEMENT OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICES
  12. 12. A. IN FAVOR OF A PRAGMATIC APPROACH TOWARDS PUBLIC-PRIVATE PARTNERSHIPCorinne NAMBLARD1. The public-private partnership: seeking an equilibrium forgenerating mutual benefits Partnership, or partner: this term refers first to the person chosen to share adance, then to an ally in a game and finally to a teammate in bringing a project tofruition. The definition provided in one of the most reputed dictionaries is a ratherinteresting one in both its scope and evolution. As the saying goes: “It takes two to tango” In the book produced in 1993 by the International and Economic Affairs Divi-sion of the Ministry of Public Works, Transport and Housing (under the supervisionof Claude Martinand), the comparison was drawn between public-private partner-ship and a marriage. Etymologically speaking, it can also be compared to a dance,like the tango. Such partnerships, of immense utility in modernizing a country’spublic services and offering a whole host of advantages for both public authority andprivate company alike, should however not be presented as a risk-free panacea. The first utopia would be to presume that a public-private partnership features a“perfect equilibrium” in the harmony achieved between two parties. Like in dance,beyond the visual impression of harmony, the two partners are not altogether equal:there is always a leader, the one who “energizes”, sets the tempo, leads. The second utopia lies in believing or inciting the belief that a public-privatepartnership yields a “state of grace” (objective) which all project actors, whetherpublic or private, would have reached through steadfast determination and expe-rience. Such a view is to be completely avoided: the historical assessment provided inthis book is a cruel reminder for all those who champion public-private partnershipsthat this “newfangled” approach is merely a rehash of the same tried and true for-mula. These two preliminary remarks are not intended to rebuke public authorities forutilizing such public-private partnership formulae, but rather to highlight the factthat each application of public-private partnership must be designed and perceivedas one of the most effective solutions to a multi-faceted problem (building a pieceof infrastructure or setting up a public service) involving financial constraints. Its 17
  13. 13. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSimplementation however requires the full-fledged support and a sizable and lastinginvestment on the part of both partners. “A new name, but the same old game”: PPP (Public-Private Partnership), a new acronym? Regardless of the titles and formulae chosen, the objectives have never reallychanged. Even the term Public-Private Partnership (or PPP for short) is just anotherrecent buzzword for encompassing a broad array of tools that enable associating pri-vate firms and public authorities in the completion of public service assignments.Included herein would be the various infrastructure concession systems introducedin France during the 16th century or the delegated management of France’s urbanservices, which began to thrive towards the end of the 19th century, along with thepanoply of formulae developed throughout the world over this last part of the 20thcentury in response to changes in local contexts (with, on occasion, preference beinggiven to the extreme option of total privatization). The second section of this article will thus be devoted to the benefits provided bypublic-private partnerships in this quest to satisfy the same basic set of objectives. Yet, as stressed above, all temptation to idealize such approaches must be resisted.As such, an effort to demystify this notion would be most opportune in order tohone a pragmatic approach focused on identifying a tangible basis for advancingand executing these desperately-required projects (regardless of their size and level ofsophistication, in both industrialized and developing countries). The third section ofthis chapter will undertake an assessment along these lines. In sum, it is unavoidable to focus on the existence and evolution of public-privatepartnership models and to examine how the “French model” is positioned (and evol-ves) either in France or internationally, albeit the term “model” has been inappro-priately used here to merely reflect a solid and conclusive experience stemming fromlongstanding tradition. The last section reviews these notions and proposes severalorientations for future initiatives, including potential courses of action.2. The primary advantages from the public authority’s standpointof utilizing public-private partnership formulae2.1 A Partnership that provides services of the highest quality at the lowestcost to the public At the outset, it is fundamental to observe that reliance upon public-private par-tnership for the provision of public services and infrastructure represents a solution 18
  14. 14. In favor of a pragmatic approach towards public-private partnershipoffering a considerable number advantages, yet one which remains difficult to imple-ment and fully accompany throughout its duration. Public-private partnership set-ups are, by their very nature, partnerships builtbetween public authorities and private-sector firms/investors in the overall aim ofdesigning, planning, financing, building and operating infrastructure projects, whichare usually developed through more conventional market mechanisms, such as publicprocurement procedures. Public-private partnership does not only signify reliance upon the private sectorfor financing capital investment projects on the basis of revenue streams to be gener-ated by the future facility, but also incorporates the use of private-sector skill andmanagerial expertise in building and operating public service projects more effi-ciently throughout the project life cycle. In this respect, the core of a public-privatepartnership encompasses more the notion of service provision than simply infra-structure financing and construction. This observation leads to describing the basic advantages associated with theintroduction of a public-private partnership approach, along with the implicationsof such an approach in terms of the public authority’s role.2.2. Financial and budgetary benefits for the State2.2.1. Easing budgetary constraints By making it possible to employ private-sector financing, public-private partner-ship enables developing some projects at little or even no expense on the part of thepublic authority (albeit with the need in most instances for a certain level of projectsubsidization). The cost of service provision can often be transferred onto users (e.g.road tolls, water bills) by charging rates close to real costs, provided an adequateuser acceptance campaign has been conducted beforehand – a task expected of thepublic authority. Some financially-profitable projects serve to generate new resourcesby means of sharing profits between operator and public authority (e.g. tolls, taxes,etc.). Projects can thereby be developed without increasing debt exposure or overex-tending the national budget. Public resources are then available for meeting otherpolicy objectives, such as education or health. As a result, a country’s image – oreven its financial rating – gets upgraded, which in turn makes capital markets lessexpensive to access and foreign investment easier to attract.2.2.2. “Value for money” issues In addition to easing budgetary constraints, the use of effective public-privatepartnership set-ups – provided they have been applied to well-suited projects – allowsoptimizing project impacts while raising profitability for a given level of investment, 19
  15. 15. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSin comparison with a basic public procurement contract. Such advantages are mani-fested in the following aspects:– better coordination and greater synergy between the phases of design, constructionand operations, under the condition that a sole tender be held for all three phasestogether;– an innovative design, the application of reengineering principles and efficient man-agement techniques;– emphasis placed on the quality of service offered to the user-customer;– an approach aimed at minimizing total project costs throughout the entire projectlife cycle (capital investment + maintenance + operations);– a more effective use of capital, coupled with the generation of complementaryrevenue.2.2.3. Optimal allocation and transfer of part of the risks onto the privatesector Public-private partnershi-type projects almost always comprise a high level ofrisk, due to: the magnitude of the financial stakes involved, uncertainties over con-struction and operating costs, and revenue-related uncertainties. A partnership-basedproject organization relies upon a balanced allocation of these risks (once they havebeen properly identified) and enables transferring a certain portion of them onto theprivate operator when said operator is better able to shoulder them than the publicauthority. In return, the public authority can significantly reduce its risk exposure(even though certain risks must remain on the authority’s side), while overseeingproject optimization efforts. The analysis, mitigation and allocation of a project’srisks will be discussed in Chapter II-B further on.2.2.4. A realistic evaluation and control of costs A public-private partnership set-up enables public authorities to better evaluatea project’s actual cost. A precise and realistic assessment of costs is of fundamentalimportance to project sponsors with respect to attracting financing, both on theequity and borrowing side. Public-private partnership also enables preventing againstmost types of cost overruns encountered all too often in major infrastructure projects.Indeed, by conferring a broad range of responsibilities upon the private public-pri-vate partnership partner, it becomes possible to avoid underestimating actual project-related costs early on in the process and, at the same time, to tighten cost (andschedule) controls by virtue of the bond developed between project builder, financialsponsor and operator. This actual cost then serves as a benchmark for all subsequentimprovements to the quality and efficiency of other public services. 20
  16. 16. In favor of a pragmatic approach towards public-private partnership2.3. Economic and social benefits Should the primary concern of actors appear exclusively oriented towards “finan-cial” considerations, the momentum of a public-private partnership project mayeventually stall. Of critical importance herein is for the economic and social benefitsto remain at the core of the project’s rationale, first and foremost because the project(to be financed in large part from operating revenue) must be designed from thestandpoint of obtaining the best service at the most competitive price in meeting theneeds of the largest customer base. A public-private partnership’s underlying principle stems from the fact that thepublic authority remains responsible for service provided to the public, without nec-essarily being responsible for the corresponding investment. By means of the public-private partnership set-up, the public authority is therefore relieved of all investment-related obligations and able to concentrate on service quality control, while the pri-vate operator seeks to optimize its capital outlay in its provision of service at thisspecified level of quality. Furthermore, by extension the user becomes a customer,and the operator is thus in a situation of having to optimize the quality of serviceoffered.2.3.1. A streamlined construction schedule and reliable project implementationable to enhance economic development Whenever a project is deemed beneficial to society, a public-private partnershipset-up allows speeding up both implementation and construction. In this respect,it depends to a much lesser extent on budgetary resources, a condition which oftenleads to project postponement; it then incorporates a more political dimension. Thisaccelerated construction schedule, in turn, makes it possible to realize benefits morequickly for both the private company and the politicians backing such projects. Thisperspective remains valid regardless of the level of development of the countrieswhich implement public-private partnership projects.2.3.2. Modernization of the economy and indirect benefits By accelerating project implementation, these types of project set-ups help stim-ulate economic modernization as well: infrastructure gets built and new technolo-gies introduced more quickly. Given their service quality-oriented implementation,projects (construction + operations) are better able to respond to demand and adaptfast to changes in demand, thereby giving rise to a more dynamic modernization ofthe economy. Sizable indirect benefits for the country’s overall economic develop-ment are engendered as a result. 21
  17. 17. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTS2.3.3. Access to financial markets, combined with the development of localfinancial markets Reliance upon private-sector financing also displays a decisively beneficial impactfrom a macroeconomic standpoint for developing countries. Such initiatives allowimproving access to international financial markets, by means of: attracting interna-tional capital; strengthening the country’s image in the capital markets, and utilizingwell-renowned operators enjoying special access to these markets. In the long run, this reliance also enables developing a local financial market.Complex project configurations imply a number of financing sources and often actto catalyze the local market, which is then led to modernize (or evolve) and adapt.2.3.4. Social benefits: improvements in services to local residents By refocusing the role of the public authority, in enabling it to better identifyits expenses and in scaling back budget allocations, major public-private partnershipprojects allow better earmarking resources for financing the unprofitable portion ofa project’s public service provision. Yet, for the most part, financial resources arefreed up for other public services not compatible with the public-private partnershipframework (health, education, social welfare, etc.). As such, local public agencies areable to channel resources and energy into their social service missions. Furthermore, some of the case studies developed in Parts III and IV of this bookreveal that public-private partnership set-ups can provide highly-innovative solutionsfor accommodating the less well-off population segments (e.g. water supply in LaPaz or Manila, waste services in Caracas).2.3.5. Sights set on sustainable and environmentally-compatible development As opposed to a commonly-held misconception, involvement of the private sector(within the scope of a public-private partnership) may actually enhance the environ-mental aspects associated with a development project, from two vantage points. Firstof all, the creation and expansion of environmental services (primarily sewerage andwaste removal/treatment) has become a fundamental component of any sustainabledevelopment program. The infrastructure needed to operate such services requiressizable capital investment, and collection functions (as regards waste) must be rununder flexible conditions. In this vein, a public-private partnershipapproach allowscreating these services more quickly and efficiently at a considerably lower cost forpublic-sector budgets. The second positive environmental impact of public-private partnershippertainsto the involvement, across the entire range of public services, of major internationalcorporations with access to the most up-to-date and “environment-friendly” tech-nologies. These corporate groups are increasingly cognizant of environment-relatedneeds (noise control, air pollution mitigation) and have considerable experiencing 22
  18. 18. In favor of a pragmatic approach towards public-private partnershipadapting to the strictest of regulatory systems found throughout the world. Moreo-ver, they are capable of innovating and tailoring their service provision to changesin environmental demands. Building a partnership between public authority andprivate operators enables designing solutions better adapted to reconciling servicequality demands, the economic profiles of both users and the public authority, andenvironmental imperatives.2.3.6. Refocusing the role of the State on its regulatory functions By relieving the public authority of its role of service operator, the public-pri-vate partnershipgives the authority the opportunity to pursue its regulatory missionexclusively, which may consist of more accurately identifying public service demandsand their corresponding costs. In this manner, the authority is in a position to effec-tively assess the optimal level of service provision desired by the society, along withthe associated cost, in order to reach an appropriate tradeoff between economic andsocial efficiency. Public-private partnershipset-ups also make it possible to determineusers’ «ability to pay» threshold as well as the amount of subsidies necessary to main-tain unprofitable services deemed of public interest: the aim herein is to optimizefinancing of such services or at least to initiate a critical examination of this topic.2.3.7. Technological benefits Public-private project partnerships serve to attract high-level experts who havealready acquired broad international experience: builders, operators, along with spe-cialists and consultants in the engineering, finance and legal fields. While this high-level expertise is naturally exhibited by the private partner, it must also be accessiblefor the public authority, either in-house or through retained advisers. The resultanttransfer in technology or know-how turns out to be significant from several pointsof view:– construction and operating systems (the most modern techniques can be proposedin a way that has been adapted to meet local conditions);– project and operations management;– financial engineering;– institutional engineering;– etc. This transfer in technology and know-how exerts an impact not only on localfirms, whether directly involved in the project or not (by means of benchmarkingfor industry-wide standards), but also on the administrative agencies responsible formonitoring the project, local financial institutions and other context-specific actors.Another important factor pertains to the training of local personnel. Within a part-nership involving an international consortium, foreign firms will first seek to relyupon local personnel which it can train at the outset of the project, therefore leaving 23
  19. 19. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSon site just a minimum number of foreign office executive staff beyond the transitionphase.2.4. The political benefits2.4.1. A new role for the public authority The political benefits also prove to be significant. By refocusing public authorityaction on its regulatory missions, a public-private partnership strategy transformsthe authority’s role from a service owner/operator into a regulator and controller.This newfound role then provides the opportunity for promoting efficient demand-oriented services of social benefit. The public authority comes out a winner by virtueof providing a better quality of service, while concentrating its resources on socialwelfare issues. In addition, the introduction of a public-private partnershipallowsrethinking the breakdown of public vs. private roles outside the confines of a purelydualistic mindset. This political advantage, however, may backfire if the public-private partnershipis not applied under adequate conditions and if the State has not procured the meansfor: establishing its objectives realistically, preparing its agencies and institutions forthe successful implementation of public-private partnership formulae, and in par-ticular conducting effective regulatory action.2.4.2. Allocation and not “abdication” Although the term privatization sometimes gets abusively used in public-privatepartnership cases, keep in mind that a public-private partnership is not a privatiza-tion program. Rather, it serves to attract private investors without abdicating publicservice missions to the benefit of private concerns. In sum, the public-private par-tnership can be defined as the delegation of a public service provision to a privateoperator for a given period of time. In no way does it alter the public sector’s owner-ship rights to the service infrastructure (as those facilities existing prior to the conces-sionary contract as well as those built during the concession return under publicauthority possession upon contract expiration). The authority maintains both itsrole of shaping public service missions and its regulatory oversight. Moreover, thisprocess is indeed reversible, either at the end of the stipulated contract period or(in exceptional cases of serious conflict) during the contract’s execution. The public-private partnership approach thereby allows retaining the “public” essence of theseservices while steadfastly refuting all accusations of “selling off ” national public assets(or service activities) to foreign interests or third parties.2.4.3. Project stability The social and economic advantages described above exert obvious impacts ona country’s economic, hence political, stability. For one thing, contracts are signed 24
  20. 20. In favor of a pragmatic approach towards public-private partnershipfor periods exceeding the terms of elected officials. As a result, the public servicesconsidered tend to be less sensitive to both direct and indirect “electoral” effects. Theparameters of maintenance and quality of service are less likely to be subjected touncertainty, and projects will be required to display a tangible socioeconomic valuein order to be selected. Secondly, by enhancing the quality of public services without drastically increas-ing fiscal pressures, public-private partnership projects are able to instill economicwell-being in addition to social stability. Here again, any hasty introduction of apublic-private partnership-type partnership must be avoided: taking the time neces-sary to prepare both the population and local administration and to plan out thetransition periods is crucial to ensure not only acceptance of the notion that oneshould pay for service (at least in part), but also an appropriate regulatory frameworkto prevent against abusive practices.3. A therapeutic infusion of reality3.1. No miracle solution exists. It should start to become clear by now: public-private partnership can providea number of benefits in the domain of public interest projects. This type of set-upoften represents a more efficient alternative to the conventional public procurementcontract formulae for projects featuring a sizable “service” component. But be advisedof the dangers in simply jumping on the bandwagon or blindly believing in the exist-ence of a new miracle solution which – on its own – enables localities or the State torealize all their projects without investing any effort, time or money. The public-private partnership tool remains complex to implement and by itselfcannot take any project and turn it profitable. The bottom line is to recognize that apublic service or infrastructure project devoid of any real socioeconomic value cannotbe taken to fruition by virtue of merely introducing a public-private partnershipstructure. In order to be deemed viable, a public-private partnership project mustabove all fulfill the prerequisite (yet not entirely sufficient) condition of presentingan adequate level of socioeconomic profitability, i.e. combining utility for societywith economic feasibility.3.2. A contract between a public administrative entity and a private operator3.2.1. Instituting a basic contractual relationship between public authority andprivate firm Once these preliminary remarks have been fully incorporated, the public-privatepartnership constitutes in the end the formalization of a relationship, via a con-tract, between a public authority and a private builder/operator. As highlighted by 25
  21. 21. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSRémy Prud’homme in Chapter V-A of this book, all public action implies privately-generated material supplies in one way or another (with the minimum consisting ofoutright public-sector procurement). As with any contract between a public entity and a private firm, both partnersare seeking to gain from the relationship. The public authority is looking to maxi-mize the socioeconomic profitability of public-sector investment (i.e. optimizing thecost-to-benefit ratio from society’s standpoint). The private operator, on the otherhand, is looking to maximize its financial profit (i.e. increasing the return on capitaloutlay). These objectives overlap to some degree (seeing the project succeed) while divergeotherwise (how to share project-induced benefits): a discussion is thereby held bothto determine how best to achieve overlapping objectives and to strike a balance(through vying for leverage) in dividing project benefits. In conventional public pro-curement contracts, this bipolar confrontation is simplified within the scope of thetender procedure and competitive bidding process: the public authority establishesboth the project’s objectives and set of specifications, while the bids received fromcandidate firms serve to determine the price level, hence the breakdown, of benefits.3.2.2. Who actually leads this public-private dance? The public-private partnership approach is a complex one, by virtue of sharedrisks and benefits against the backdrop of an evolving long-term relationship. None-theless, this “tango” gets choreographed as a real tug of war as regards the divergingobjectives. Two overlapping and interrelated factors (yet subject to widely-varyinginterpretations) set this dance’s tempo: time and money. For the public authority, the chosen form of public-private partnership must allowdeveloping and implementing the necessary infrastructure without excess budgetpressures and in a timely manner. For the private operator/builder, the key is to beable to perform its activity at an acceptable level of remuneration. If the user is solventand if his propensity to pay for service enables covering production costs, it may beenvisaged to pass on the entire cost to users. This situation reflects a profitable publicservice and the critical issue then turns to ascertaining whether a potential revenuestream should be tapped and split between operator and delegating authority. Suchis typically the case with airports and certain kinds of water distribution services.This dance-tug of war thereby focuses both partners on the amount to be paid forsupplying and operating the service. On the other hand, both parties share the sameimpetus to accelerate the start-up of service operations as much as possible. In other cases, the service proves to be of intrinsic value for society (socioeco-nomically, but not financially, profitable), i.e. users alone are not able (or willing)to cover production costs. Such is the case with a number of toll roads (not all),urban transit systems and rail services. In these instances, it becomes necessary forthe public authority to award a subsidy, either at the beginning of the construction 26
  22. 22. In favor of a pragmatic approach towards public-private partnershipphase or on a proportional basis following start-up of operations. When a subsidyis involved, the financial discussion is centered on the amount to be offered (and,in direct correlation, on the partners’ respective risk-bearing thresholds). However, asecond element then comes into play: time. In most cases, the private sector infusescapital investment at the outset and thus prefers operations to start up as quickly aspossible once construction has gotten underway. In particular, the private partnerwill be incited to complete project construction ahead of schedule whenever feasible.Similarly, once the tender procedure has been held, the private builder/operator hasevery interest in seeing the process advance without delay. In contrast, this issue is much less straightforward from the standpoint of thepublic authority. For a combination of socioeconomic and political reasons, theauthority would prefer the project to be built quickly, or at least to be able toannounce a timely construction schedule. This impetus often gives rise to projectsbeing announced and tender procedures held before the “maturation period” hasbeen completed. Consequently, the tender process runs the risk of getting boggeddown due to the project’s poor technical preparation and the public authority’s inca-pacity to set the course right. Moreover, from a budgetary standpoint, the authoritywould be better served by putting off the tender to enable spreading public spendingover a longer period and, to a certain extent, reducing the subsidy amount (since, inmost cases, demand increases over time with respect to both service volumes and usersolvency). The authority is thereby tempted to procrastinate either during the tenderprocess (which sometimes gets launched prematurely, again for political reasons) orthrough obstructing a speedy project implementation (e.g. by holding up certainvital administrative procedures). This conflict over timing and schedules can adversely impact the project in thatit engenders heavy surcharges which get passed on not only to the operator, but alsoto the users and the authority either directly or indirectly. Such surcharges are to beavoided by effectively preparing the project and its financing plan ahead of time.3.3. The sharing of risks: reality or illusion? Time and money therefore serve to drive the decisions and negotiations involvedin building Partnerships. The discussions held at this stage get reflected in theproject’s organization, which is based on the notion of “risk sharing”. Chapter II-Bprovides an in-depth examination of this notion’s application. At this point, only the importance of this principle really needs to be stressed,along with its limitations. The breakdown of risks is after all what distinguishes apublic-private partnership from a conventional public procurement contract: theserisks may take on a wide variety of forms, anywhere from the basic construction risk 27
  23. 23. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTS(a water treatment or waste plant BOT) to the full-fledged construction/commercialoperations risk (State Highway 91 in California). In basic terms, the project itself must dictate how risks are to be divided to bestensure maintaining overall equilibrium. It must be kept in mind that any assump-tion of risk necessitates some type of payment. The sharing of risks is not to beconsidered like a transfer of risk free of charge from the authority to the privatepartner, but rather a more optimal allocation of risks among partners based on theirrespective risk-bearing capacities. This feature also signifies that the cost associatedwith a given level of risk assumption is sometimes the factor being minimized in apublic-private partnership set-up. As an example, the construction/operations riskmay be controlled to a large extent by the private partner, hence the private partner’sperceived low cost for providing protection against this risk (implicitly included inthe construction price). On the other hand, the commercial risk is often quite sig-nificant and the cost of its assumption by the private partner may prove to be ratherhigh (which would engender a high contract price and an even higher subsidy shouldthe project happen to be unprofitable). If the authority were to absorb this risk, itmight wind up having to pay out compensation in the event of inaccurate traffic oruse forecasts. Yet, justification could be found for a project carrying with it strongsocioeconomic advantages. In the end, the sharing of risks is not a miracle solution, but instead a meansfor optimizing a project with respect not only to the technical and service qualityoptions, but to the cost of protecting against inherent risks as well. In this vein, theapproach recommended via the English PFI (Private Finance Initiative) framework,despite other rather severe limitations, seems most worthwhile. Furthermore, it is quite comforting to recognize that the most dynamic privatefirms on the international scene are now capable of citing the various public-privatepartnership “approaches” as references of their past successes. This continual enrich-ment and overlapping of experience are of great benefit by providing real-life casestudies for assessing the breakdown of risks/costs, the cornerstone of all public-pri-vate partnershipprojects.4. Public-private partnership projects cannot be integrated intoa strictly-deterministic model, but instead must be adaptedto the local context and allowed to evolve over time. As indicated above, France’s experience with various forms of public-private part-nership is indeed longstanding. As recalled in the Ministry of Public Works, Trans-port and Housing’s publication produced under the guidance of Claude Martinand,this manifold experience has often been channeled into the notion of a “Frenchmodel”. The term model is most certainly a misnomer since the very nature of 28
  24. 24. In favor of a pragmatic approach towards public-private partnershippublic-private partnership does not in any way suggest the application of a model.A public-private partnership’s emphasis lies in an experience requiring adaptation tothe individual project and its unique context: as opposed to a basic public procure-ment contract, the public-private partnership cannot be easily standardized accord-ing to a strict set of criteria. This statement should not be construed as license to do anything and everything.This book has been intended to demonstrate that it is possible and even necessary todevelop strict approaches, yet adapted to each individual case, on the basis of a set ofeconomic, legal, ethical, administrative and financial principles. In France, the strong tradition of relying upon concessions has led to setting upan efficient overall system, some elements of which however have been progressivelycriticized within the scope of European integration. Nonetheless, the pertinence ofneither concessions nor the concept of delegated management has been challenged;rather, implementation practices were deemed not entirely adapted to the evolutionin the economic and institutional context. It has thus been necessary to modernizethe system in the aim of ensuring consistency: the corresponding steps are currentlyunderway in France. This process has been facilitated by the fact that the most active French compa-nies in the domain of concessions have built up their operations abroad and, as such,have been able to tailor public-private partnership implementation practices to sat-isfy a wide array of institutional frameworks. Regular and ongoing adaptation of experience gained in the area of public-pri-vate partnerships is thereby necessary, while not overlooking the founding principleswhich remain unchanged from one project to the next.5. A few recommendations for ensuring effective partnerships In the book’s following chapters, the various aspects of public-private partner-ships will be discussed and a series of pertinent recommendations will be derived. Wewill focus herein on the general approach to be employed for ensuring a successfulpublic-private partnership. First of all, it is essential to reinstate the good name of the term partner. Eachmember of a partnership is obviously promoting an agenda which cannot (and mustnot) totally overlap. Nonetheless, the common objective of all partners is to con-struct in the most efficient manner and at the lowest cost a piece of public infra-structure, and then to provide service operations under the most optimal conditions.Common interest therefore dictates that all public service projects be completed andoperate in accordance with contractual specifications. As such, an approach must be adopted which accommodates the interests of eachparty to the greatest extent possible by means of drawing commonalities from thesediverse interests. At the same time, each actor must be able to defend a clear and 29
  25. 25. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSwell-founded position regarding the various points of divergence, so as to stream-line negotiations in the aim of reaching the fairest and most judicious compromisesbetween potential economic gain, incumbent costs and assigned risks. To be avoided therefore are: the fruitless meetings where one partner is playedagainst the other; overly drawn-out negotiations in which the objectives and goals ofboth parties are not clearly expressed; position changes during the course of bilateraldiscussions, etc. The financial stakes involved, coupled with the efficient allocationof time, money and resources, incites a more streamlined process. One of the recent advances within the scope of economic internationalization is without a doubt the growing necessity of tightening the respective obligationscontained in written contracts. The commitments undertaken by project actorscan no longer simply be based on moral grounds, but instead must be expressedin written, tangible terms. The outcome of negotiations leading to the final mode ofcontractual relationship must be recorded in the contract. Furthermore, all contractsmust stipulate arbitration or discussion clauses to handle situations in which thepublic-private partnership’s initial hypotheses prove invalid. Every potential scenariocannot be anticipated ahead of time (as the Anglo-Saxon legal tradition calls for);however, it can very well be anticipated that changes to the project’s context willrequire adaptations, hence the need to outline discussion conditions (so-called land-scaping amenity clauses). The body of jurisprudence is continually evolving and con-tracts should reflect this evolution. It is still necessary for each partner to uphold its commitments as well. The riskexists for partners with greater leverage in the contractual relationship to elect towaive their commitments and change the terms of the contract unilaterally. Suchmight be the case for the operator if it happens to possess considerably greater exper-tise than the public authority. Then again, such could also pertain to the authority,which alters its commitments either directly by invoking the «Imperial fiat» or moreindirectly by failing to execute the planned complementary projects or modifyingthe legal and regulatory framework. Recording the application of public-private partnership formulae in a “formalregister of concessions/public-private partnership”, along the lines of State-backedfinancial guarantees (which are entered into Central Bank accounts), could be rec-ommended as a measure to avoid such temptations and to firmly cement each party’scommitments, especially political commitments. 30
  26. 26. B. TEN YEARS OF PUBLIC UTILITY REFORMS: 7 LESSONS (FROM PRIVATIZATION TO PUBLIC-PRIVATE PARTNERSHIP)Dominique LORRAIN Against a backdrop of public monopolies, both national and sector-specific, theprivatization movement of the 1980’s was interpreted as a strong statement. It rep-resented the tearing down of conceptions built between the Great Depression andthe post-War era which were inspired by planned-economy and Keynesian notions,whereby public intervention provides the efficient means for correcting market fail-ures. Moreover, during this period, natural monopolies were considered as signs ofmarket dysfunction. Spurred by the winds of political change sweeping in from the United States,Great Britain, Australia and New Zealand, the telecommunications sector was dereg-ulated, followed by the electricity sector and ultimately urban utilities (mainly water).These reforms took place at just the right time to bolster a French tradition, stem-ming from a longstanding (not well known) history of conferring public servicemanagement upon private firms. For many, the French “experience” in this fieldremained the domain of major nationalized companies, which was not at all thecase. This initial period of reform was characterized by strong political input andenthusiasm, along with the excesses such input engenders. The ideas championedby these reformers often got mistaken for reality. As is the case with any new phe-nomenon on the verge of taking off, backers were pressed to justify, defend and winacceptance of their actions. This period brought with it a flurry of intellectual activ-ity, thanks to the attention given by the disciplines of economics, political scienceand law (Law and social sciences) (Demsetz, 1968; Stigler, 1971; Kay et al., 1986;Littlechild, 1986; Vickers and Yarrow, 1989). Ten years later, at the end of the 1990’s, the change is striking. What had to bejustified and defended ten years ago today is simply taken for granted; the age ofheated debate has been left behind. All of the major industrialized countries haveadopted a stance in favor of such policies, and but a few of the developing coun-tries have yet to join the movement. For these reasons, the overall issue regardingdelegated management has shifted considerably. Emphasis is no longer on decidingwhether to delegate, nor on discussing the virtues of large private firms versus publicagencies: focus has moved from the “why” to the “how”. How should a durable coop-eration be organized between public authority and private firm? How can services bedeveloped to ensure accessibility to the greatest number of users while fulfilling all 31
  27. 27. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSpertinent public service obligations? How can contracts be made robust enough towithstand crises? On the basis of a broad array of experience, encompassing a handful of sectors onall continents, an objective assessment can now be drawn. At this juncture, such anassessment is aimed at deriving general lessons reflective of the overall situation. Thehistory of delegated management is still obviously very present; for this reason, theexercise conducted below is to be considered as a sort of intermediate benchmark.The perception, in embarking upon this assessment, depends heavily upon the par-ticular frame of reference, the angle used to approach such operations. In spite ofthese safeguards, a close examination of key issues via a survey of past and presentcases (Lorrain, 1995 and 1999) has yielded a series of germane and pivotal results,leading to a group of seven lessons:1. From political doctrine to a needs-based response The strong debates over the choice of management structure during the initialyears have given way to a stance of pragmatism. The past was characterized byreforms relying upon a critique of existing bureaucracies: too costly, lack of respon-siveness to users; today, on the other hand, the pressures generated by service needsare such that a private sector presence is now mandatory. The reason behind thistransition is quite simple: infrastructure-related needs have become tremendous,whether in the area of large-scale technical systems (telecommunications, electricity,highways or the railroad) or municipal utilities (water, sewerage, waste, public tran-sit). Changing urban demographics in the world’s major conurbations, the industri-alization of developing countries and environmental protection impetus constitutethree forces all favoring the creation of a single gigantic market: a sort of urban infra-structure industry. These heightened needs explain the diversity found in the basic terms for namingthe new formulae between public authority and private firm: Public Private Partner-ship (PPP), Private Finance Initiative (PFI), privatization, delegated management,etc., all added to the lexicon with the traditional French term “concession”. Public-sector budgets have not been designed to accommodate this new level of expendi-ture. The net result is the arrival of major firms in the field of urban services manage-ment, for many of them, a phenomenon which should endure over the long run.This represents a turning point in the evolution of city management, with impactsspanning the spheres of local government and urban planning. Until now in most countries (France not included), urban issues had been han-dled by either a city’s public works department, one of local government’s branchagencies or large public corporations. The arrival of multinational and multi-sectorialfirms raises a whole new set of issues, with respect to both utility network regula- 32
  28. 28. Ten years of public utility reforms: 7 lessonstion and metropolitan area governance. The scope of privatization operations hassurpassed the sector specificity intended at the outset. A decade ago, the experiences conducted throughout the world were still ratherlimited; at present, the number of requests received by firms to undertake projects issoaring. The choices offered are indeed quite broad: the tendency is to opt for majormetropolitan areas, able to propose large-scale projects and whose populations areoften more affluent than the rest of the country (with the prospect of high enoughvolumes to allow benefiting from economy-of-scale effects). A “map” of the world’smajor «privatization» operations closely resembles that of the largest conurbations.It remains to be seen whether a country’s dissemination of such experiences and aharmonious spatial balance can occur.2. From competition among models to a problem-resolutionapproach At the time of the first privatization decisions, defending the use of such prac-tices tended to polarize the contrast between the two most prevalent models: Anglo-American and French. Differences admittedly exist: each country has over the courseof history developed its own conceptions of how to go about structuring its munici-pal utility networks. These differences are not at all trivial or superficial; they per-tain to design, project selection, control measures, contractual relationships, conflict-settlement procedures, etc. The types of institutional architecture are also not thesame (Martinand, 1993). Moreover, these differences have on occasion been insti-gated by the competition held among firms since competitive bids were typicallyinvolving France’s three major service-provision firms, the main English utilities anda few of the top American players from the fields of energy services, waste and sys-tems engineering. Yet these stable «formulae» (referred to as models), thanks to theirdurability, reflect above all a level of constancy in the solutions to problems previ-ously encountered, without adding any presumption regarding solutions to new-found problems. One of this past decade’s key lessons has been to downplay the theoreticalantagonism between models. Actors in this domain wind up adopting pragmaticapproaches, depending upon the nature of the problems at hand, such that:• Actors set out to devise well-adapted technical solutions with a balanced cost struc-ture based on a service fee affordable to all users. This approach has allowed involv-ing private firms in those countries and cities with sizable shares of low-incomepopulation. If for cost-related reasons it proved impossible to provide the same qual-ity of service as in industrialized countries, operators would seek out and implementnew solutions. 33
  29. 29. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTS • Actors innovate with financing set-ups, combining equity contributions with bor- rowing from international financial markets. Here once again, each contract is to be handled case-by-case. • The contractual structures themselves are getting fine-tuned. Regardless of their national origin, contracts are designed to offer a steady stream of solutions, giving rise to a wide range of potential learning situations and public-private partnerships. This line of discussion strengthens the argument against the presence of irreconcila- bly-opposed “models”. Through the use of different terms, each country has created distinct types of contracts which correspond with varying degrees of private-sector involvement and contract durations. From a low involvement profile to complete privatization, the gradation of potential solutions spans the entire gamut. In each case, the pertinent public authority chooses from among the range of available con- tract types, which all stem from either American, English or French legal doctrine. The firms, for their part, simply adapt. The various type of contract. High Privatization Concession BOOT BOTLevel of authority conferred Leasing “Affermage” to the firm Contracting out Incentive contracts, management contracts “Marché d’exploitation” Delegated management Low Operating & maintenance Short-term Medium-term Long-term Length of commitment The “invention” of new urban service provision models, assemblages of bits and pieces from existing models coupled with lessons drawn from past experience, is certainly ongoing. The number of multinational, multi-sectorial firms created over these last ten years attests to this trend: they are able to develop and implement solu- tions across sectors and across countries. 34
  30. 30. Ten years of public utility reforms: 7 lessons3. Public-private partnership as a customized solution Out of this discussion comes the simple idea that no one best way, no singlepreferred model, exists which could be reproduced from one sector to the next orfrom one urban setting to the next. In order to last, contracts must be adjusted tomeet specific problems, contexts and actors. They must also be designed to accommodate both the type of service networkand the responsibilities being assigned to the firm:• Type of service network: Each category of network is naturally a unique technicalcomposition and features distinct constraints in terms of coordination. The first fewyears of the privatization process tend to focus on economic and bid-related consid-erations. It sometimes seems that the same tender procedures (competition for themarket) and the same competitive framework (competition on the market) couldbe applied to all sectors – from electricity to transportation, from cable networks towater supply systems. The inclusion of real factors, such as sunk costs1, and the issueof asset “indivisibility” have instigated the search for customized solutions in eachtype of network.• Along the same lines, the public procurement framework has exerted the mostdominant influence (Laffont and Tirole, 1993); efforts were undertaken to apply thisframework to relationships between private firm and public authority in the area ofpublic service delegation as well. Diversification in the form of privatization thenmade it possible to discern that service operations under private-sector managementresponsibility clearly belonged to a separate category. Two factors certainly accountfor this difference: i) the transaction per se does not pertain to a precisely-definedgood, but rather to the provision of a more nebulously-defined service; and ii) suchcontracts often extend over long periods of time. In order to incorporate these spe-cificities, project actors focus on building institutional configurations adapted tothe risks borne by each project partner. Some of these newly-devised contracts havebecome complex and sophisticated instruments.4. The importance of the institutional environment At the end of the 1980’s, international institutions and a good number of cor-porations embarked on «the good cause» by presuming that private-sector manage-ment of public services simply entailed buying and selling the assets of public-sectormonopolies and conferring operations. Such a vision however did not stand up verylong. The list of failures and incomplete projects have served as ample reminderof the truth that collective action can only succeed when propped up by a set of1. A notion signifying that in this type of sector, a minimum threshold of investment must be met priorto conducting any activity; such investment would be unusable elsewhere should the firm withdrawfrom the project. 35
  31. 31. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSstable, public-oriented rules shared by all the actors. In the area of urban services,the involvement of private firms presupposes the existence of a certain kind of insti-tutional environment. Put otherwise, the presence of action implies having metthe prerequisites for action, a stance which pays tribute to the neo-institutionalismeconomists (Coase, 1937; North, 1990; Williamson, 1994). Once this aspect has been fully recognized, the solution is taken to the halfwaypoint. It is still possible to resurrect a few laws prior to adopting privatization poli-cies, yet their inadequacy would quickly become apparent: passing laws is one thing,but instilling a new mindset is altogether different. The institutional framework inplace cannot be dissociated from the culture and values ingrained in the actors apply-ing the laws. The cultural side of action programs cannot be reformed overnight. This last aspect has incited an evolution in favor of new approaches for designingreforms. In the past, simply privatizing public monopolies and signing contracts wasconsidered sufficient. Now, credence has been placed in the notion of dual-facetedaction featuring the contract as well as the overall project environment. Howeverthe global environment can only be partially altered before privatization by outsidereform. In most instances, the actors themselves build the institutional framework asthe action unfolds on the basis of the problems/solutions encountered. This orientation leads from an instantaneous conception of reform – possiblyincorporated within the scope of a political program – to a process-based concep-tion. It takes time to build effective rules; in order to ensure their acceptance andcomprehension by all actors (elected officials, service users, firms), a participatoryprocess is required. In response to this perception, international institutions invokethe term “capacity-building”.5. The “proper” sequencing and corresponding exceptions In many countries, sizable efforts have been expended by international financialinstitutions to set up initial experiences. As such, reformers and their consultants hadconsidered that by following the “proper” sequence (i.e. preparing the bid, award-ing the contract and then regulating operations), it would be possible to execute thecontract under harmonious conditions. In other words, according to the initial idea,a strong launch phase would be enough to ensure a successful project. Over time however, repeated events have revealed that the launch phase in and ofitself is not sufficient: it proves most difficult to develop forecasts and plan out thedetails of long-term service provision contracts (Annales des Mines, 1999; Defeuilley,1999). Admittedly, greater attention focused on preliminary design studies (hencea more costly preparation phase) has been a step in the right direction. While suchstudies yield a new source of knowledge which can be shared by all actors (public 36
  32. 32. Ten years of public utility reforms: 7 lessonsauthorities, international institutions and firms alike), they are unable to provide theprecision of real-life contract experience or to predict major environmental transfor-mations. The basics tend to get covered, yet implementation often requires adapta-tion to new givens: updated environmental standards, revised investment priorities,a currency devaluation, or even social upheaval. With respect to contracts, it had often been deemed preferable and feasibleduring the first years of privatization to draft complete contracts2 (Henry, 1997).The past decade of experience tends to refute this position and suggests starting outwith incomplete contracts. This approach promotes a new balance in the contractualeffort over time. It turns out to be advantageous not to seek precision at all costsfrom the outset, so as to preserve resources and flexibility over the life of the project.This notion gets reflected in concrete terms during two specific time periods:• Incomplete contracts have practical impacts on the preparatory phase. It is notadvised to advance the design studies too far before selecting the operator since thepreliminary design may be quickly superseded and will, in any event, overlap withthe chosen operator’s input.• While it is acknowledged that long-term contracts cannot forecast all projectparameters with accuracy, contract revisions should not be viewed as project crises.This point is a critical one inasmuch as contractual adaptation has much too oftenbeen perceived as a failure, as an attempt by the firm to realign the contract toits advantage. Contractual adaptation is nothing more than a normal adjustmentmechanism for coping with changes in the initial conditions.6. The need for a regulator Throughout the rivalry between firms and between models, the French havelong challenged the idea of a heavy-handed regulator. National experience leads tothe spontaneous reaction that the same results can be achieved using less expensivemechanisms and that the relationship with the public authority can be set up toavoid confrontation. To a certain extent, experience has affirmed the validity of thisattitude. Regulation carries with it a cost, which may turn out to be quite high andnot necessarily in proportion with the results obtained. On the other hand, it has also been demonstrated that the notion of self-regula-tion, as practiced in a country like France (for urban utilities), proves difficult toapply in developing countries. In France, contractual relationships between localpublic authority and private operator are placed into a long-term setting of laws,rules and standards structured by the State and administrative agencies. When sucha setting is lacking (the case in several developing countries), the absence of an inter-2. A notion developed by economists to designate contracts with outline all possible scenarios andspecify all obligations. 37
  33. 33. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSmediary – the regulator – can leave the public authority and private firm in a paralyz-ing standoff. The contract should not be viewed as a cure-all: it cannot address allproject parameters, especially exogenous parameters. One key lesson from these various experiences is the vital need for a regulator indeveloping countries. The history of the industrialized world shows that building aninstitutional framework within each sector has taken a sizable amount of time: sev-eral decades in order to derive a set of rules covering the majority of situations. It isnot imaginable that developing countries could do likewise in less time: institutionalsystems cannot be exported like any ordinary industrial good. Granted the obligation of a regulator, but how should this regulator be consti-tuted? for which set of missions? In light of the above discussion, it would clearlybe preferable to position the regulator more towards the realm of overseeing theproper implementation of public service-related rules (in accompaniment of Stateand local authority efforts) than with a strict mandate for inspecting/validating con-tract execution. In extending this concept further, a two-tier type of regulation canbe foreseen, featuring:– ongoing technical monitoring on the part of the municipality: this componentwould allow settling the day-to-day, micro-level problems which cannot be anticipa-ted and incorporated into the contract; such problems are specific to the operationsof each utility network and do not merit being routed up to the level of the regula-tory authority;– sector-by-sector regulation performed by a specialized agency, assigned a triplemission: i) overseeing the fulfillment of the major contractual commitments andconducting statistical comparisons; ii) assisting the local public authority; and iii)providing backup for the State level in adapting rules and building the institutionalframework.7. Progress through accepting risk In the absence of appropriate rules however, what course of action should betaken, given the reliance of utilities on a heavy dose of industry-wide rules? Would itbe necessary to wait for a body of rules to be produced? Yet, how are such rules to beproduced and where does the production process begin? Action cannot be initiatedwithout some sort of prop: nothing can be built out of thin air. As opposed to the rationality which guided reforms over the first few years, theinexistence of rules obviously leads to accepting incomplete contracts and toleratingbehavior which does not necessarily comply with the principles of rational action –consistent, communicative – along the lines of the Weberian ideal. One could wagerthat experience generated from these imperfect set-ups is still more valuable thaninaction and that, thanks to the inherent lessons drawn, project actors will be in aposition to draft new, more effective rules. 38
  34. 34. Ten years of public utility reforms: 7 lessons This means of conceiving action occurring within imperfect institutional set-tings leads to the notion of “building” markets (the construction of urban servicemodels), i.e. the rules, standards and institutions necessary to incite action do notrepresent a fixed, available, exogenous stock for actors to choose from. In emergingfields – nowadays, information technologies; at the beginning of the 20th century, itwas water and electricity – or in developing countries, these elements get generatedby actors during the action process. This dynamic, which happens to be especiallypronounced in the utilities sector, engenders several consequences:• Contract-based consequences: If all contract parameters cannot be fully antici-pated, if actors are developing some of the rules during the action process itself, theuse of incomplete contracts (designed as a learning process and not as an ultimatedocument) is to be favored.• Regulation-based consequences: Current conceptions (the principal-agent theory)are based on the notion of a separation between regulator and firm. In manyinstances, the absence of rules is due to the public authority’s incapacity to draft themon its own; if the authority delegates there would be no reason to rapidly expandits know-how in this area. What stance should be adopted then? Acknowledge theasymmetry existing between private firm and public authority; recognize that theproduction of new rules is the fruit of a joint effort on the part of these entities; asa consequence, the strict breakdown in those roles which theoretically underpin theregulatory activity is not, in reality, so absolute. One major lesson from this past decade of reforms is the urgency of institutingnew regulatory modes which incorporate: the breadth of skills possessed by largefirms, the principle of jointly-produced rules, and the need to enforce public serviceobligations. What lessons are to be learned from the experiences of the 1990’s?u As a result of sizable and ever-increasing needs, major industrial rms haveentered the domain of public service management in an enduring fashion, in par-ticular in the world’s largest metropolitan areas.u An increasingly-pragmatic approach has been favoring ad hoc project organi-zations adapted to each legal and economic context as well as to each type ofnetwork, as opposed to the application of strict models.u The development of an appropriate institutional framework in accompanimentof the contracts themselves is vital, within the scope of a necessarily-lengthyinstitutional learning (“capacity-building”) process.u The public-private partnership constitutes a long-term association, which isnecessarily based on incomplete contracts. Unforeseen events must be antici-pated, and the regulatory system must often rely on the involvement of an inde-pendent body. 39
  35. 35. FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTSu A public-private partnership is meant to be long-lasting and entails a certaindegree of risk to be shared between partners: risk tolerance proves essential toa project’s evolution.References“L’Europe des grands réseaux”, Annales des Mines, Réalités industrielles, april 1991.“Les réseaux de services publics”, Annales des Mines, Réalités industrielles, october 1994.“Exporter les services publics”, Annales des Mines, Réalités industrielles, october 1999.COASE R.H. – “The Nature of the Firm” in The Nature of the Firm, 1937; Williamson O.E., Winter S.G., London, Oxford University Press, 1991.DEFEUILLEY C. – Services urbains et développement durable. Paris, Ministère de l’Équipement-Isted, Institut de la gestion déléguée, 1999, 20 p.DEMSETZ H. – “Why Regulate Utilities?”, Journal of Law and Economics 11, 1968, p. 55-65.HENRY C. – Concurrence et services publics dans l’Union européenne. Paris, PUF, 1997, 225 p.HIGH J. (ed.) – Regulation, Economic Theory and History. Ann Arbor, The University of Michigan Press, 1991, 191 p.KAY J.A., MAYER C., THOMPSON D. (eds) – Privatisation and Regulation: The U.K. Experience. Oxford, Oxford University Press, 1986.LAFFONT J.-J., TIROLE J. – A Theory of Incentives in Procurement and Regulation. Cambridge, The MIT Press, 1993.LITTLECHILD S. – Economic Regulation of Privatised Water Authorities. London, HMSO, 1986.LONG M. et al. – Les grands arrêts de la jurisprudence administrative. Paris, Sirey, 1993, 820 p.LORRAIN D. (ss la dir. de) – Gestions urbaines de l’eau. Paris, Economica, 1995.LORRAIN D. – Urban water management. Levallois-Perret, Ed. Hydrocom, 1997.LORRAIN D. (ss la dir. de). Retour d’expériences (six cas de gestion déléguée à l’étranger). Paris, Minis- tère de l’Équipement-Isted, 1999, 94 p.LORRAIN D. – “The construction of urban service models”, in Bagnasco & Le Galès (Eds), Cities in contemporary Europe, Cambridge University Press, 2000, p. 153-174.MARTINAND C. (ss la dir. de) – L’expérience française du financement privé des équipements publics. Paris, Economica, 1993.NORTH D.C. – Institutions, Institutional Change and Economic Performance. New York, Cam- bridge University Press, 1990.STIGLER G. – The Theory of Economic Regulation. Bell Journal of Economics 2, 1971, p. 3-21.VICKERS J., YARROW G. – Privatization, (An Economic Analysis). Cambridge, London, The MIT Press, 1989, 433 p.WILLIAMSON O.E. – Les institutions de l’économie. Paris, InterÉditions, 1994. 40
  36. 36. IICONDITIONS FOR A SUCCESSFULPUBLIC-PRIVATE PARTNERSHIP

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