Project 4

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 on
the French experience , already at that time deeply-rooted and widely-practiced, in
the 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 the
methods needed to associate the private sector in performing public service assign-
ments. The French experience, featuring a broad-based approach applicable to a
cross-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 facilities
management.
Since then, the range of public-private partnerships, in terms of both geographic
location and service sector, has continued to spread throughout the world.
A large number of diverse countries, stretching across all continents, have been
holding 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 partnerships
taking on a wide variety of forms.
Reliance upon a delegated management framework (whether a concession or
another type of public-private partnership), as a means of improving the quality of
public services, has thereby come to the fore as one of the basic tools in economic
modernization. Moreover, this brand of partnership has helped refocus the role and
resources of the public authority on its regulatory missions.
During these past six years, the debate over managing public services through
delegation (in all its international, economic and legal dimensions) has both matured
and become less vehement. No longer is it concentrated on the legitimacy of joint
public-private intervention in satisfying public service or facility requirements, but
rather on the most efficient manner in which such facilities and services can be set up
and operated, via a veritable and well-balanced partnership between public authority
and private operator. In conjunction with these developments, considerable advan-
1. DAEI (French Minstry of Public Works, Economic and International Affairs Division), Private
Financing of Public Infrastructure, supervised by Claude Martinand, Paris, 1994.

3

FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTS

ces (e.g. other publications, conferences, seminars, manuals) have allowed gaining
greater insight into the topic.
French firms have participated extensively in this opening onto the world by
demonstrating their longstanding tradition of involvement in public services within
many countries. These firms have made the most of their practical experience of
working 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 and
each project. This book has been intended to draw upon the depth and richness of
their 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 public
and private actors as far and wide as possible, in an effort to incite meaningful and
beneficial exchanges. From a public authority’s standpoint, this book provides:
– series of recommendations, reflecting the outcome of such practices and up-to-date
realities;
– 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 the
globe.
The Ministry’s Division of Economic and International Affairs has sought, by
virtue of this latest book (which combines a broad range of contributions from com-
pany sources, consultants, public authorities and financial advisers), to extend the
geographic 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 highlighting
successful 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

Outline

Foreword ........................................................................................................................................................................................................ 3
Outline ............................................................................................................................................................................................................ 5
Introduction .............................................................................................................................................................................................. 7
Summary ....................................................................................................................................................................................................... 9
I. PUBLIC-PRIVATE PARTNERSHIP IN THE CONSTRUCTION
AND MANAGEMENT OF MAJOR INFRASTUCTURE AND PUBLIC SERVICE
A. In favor of a pragmatic approach towards public-private partnership ....................... 17
B. Ten years of public utility reforms: 7 lessons
(from privatization to public-private partnership) ............................................................................ 31
II. CONDITIONS FOR A SUCCESSFUL PUBLIC-PRIVATE PARTNERSHIP
A. The concessionary contract: a framework, a process, a contract ...................................... 43
B. Risk analysis and sharing: the key to a successful public-private
partnership ....................................................................................................................................................................................... 57
C. The contract’s life cycle .................................................................................................................................................... 81
D. The legal framework ........................................................................................................................................................... 91
E. The financial approach .................................................................................................................................................. 103
III. CONCESSIONS IN THE FIELD OF TRANSPORTATION
A. Roads and road-related infrastructure ......................................................................................................... 125
B. Public transit systems ...................................................................................................................................................... 169
C. Ports .................................................................................................................................................................................................... 201
D. Airports .......................................................................................................................................................................................... 219
IV. DELEGATED MANAGEMENT OF MUNICIPAL SERVICES
A. Municipal services: the stakes involved in delegation ............................................................... 245
B. Water and sanitation services ................................................................................................................................. 277
C. Waste management ........................................................................................................................................................... 309
V. CLOSE UP: THEORETICAL FRAMEWORK
AND PERSPECTIVE OF MULTILATERAL ORGANIZATIONS
A. A draft typology of public-private partnerships ............................................................................... 333
B. The European Commission’s point of view:
Mobilising partners for networks of tomorrow ................................................................................ 349
C. Public-private partnership financing for European infrastructure:
The role of the European Investment Bank ......................................................................................... 355
D. The World Bank’s point of view ....................................................................................................................... 363
LISTE OF CONTRIBUTING AUTHORS ............................................................................................................................... 377
TABLE OF CONTENTS ................................................................................................................................................................... 383

5

Introduction

Objectives of this book
As of the 16th century in France, public authorities began envisioning the use
of private entities to perform, on behalf of and under the control of the authority
itself, an economic activity aimed at public service provision or a contribution to
the overall economy. The nation’s very first concession was granted to Adam de
Craponne in 1554 for the construction of a canal.
These partnerships between public sector and private sector began to take on
prominence in France towards the beginning of the 19th century, with the appearance
of new public services, especially in the area of water supply. Private companies
have been commissioned to treat and distribute water to the population as an
economic 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 partnership
has enjoyed, the world over, renewed success. A host of factors explain this regained
interest, 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 division
of roles between public entity and private operators. In this vein, a pragmatic
approach has taken shape, enabling greater overlap of both parties’ objectives for the
modernization and improvement of public services, while transferring a portion of
the taxpayer’s financial burden onto users.
The advent of public-private partnership can also be legitimized by the respective
roles played by the public authority and the private operator. The former is responsible
for ensuring the provision of services essential to the population’s economic and social
well-being, in accordance with society’s expressed needs; while the latter seeks to carry
out assigned missions in optimizing the cost-benefit ratio. The use of public-private
partnership thus enables reconciling these two positions. Nonetheless, considerable
insight into the process is a basic prerequisite; prior to calling upon a public-private
partnership, the public authority must have a solid grasp of the potential advantages
and inherent risks, and fully comprehend the process for enhancing a partnership’s
success.
Public-private partnership has thus become a key issue for the beginning of
the new millennium in the field of public-sector management worldwide. Its
implementation necessitates in-depth preparation in order to develop a truly global
approach. This book aims at underscoring the main characteristics associated
with delegated management and concessions, as well as displaying their economic

7


configurations, preparation conditions, contract-award procedures and execution.
The presentation format includes both the general theoretical standpoint and a
sector-by-sector analysis; each chapter closes with a series of recommendations
addressed 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 examine
these conditions for success in a pragmatic fashion, by economic sector, for the
various modes of transportation and types of urban public services. Part V is aimed at
sharpening some of the theoretical angles and gleaning the perception of multilateral
organizations involved in such projects.
As for presentation, this book has been designed to accommodate a variety of
reading approaches: from a quick skim to a more thorough perusal. Each chapter
is led off by a brief abstract which provides an overview of its contents. A section
has been included at the end to highlight the set of recommendations addressed to
public authorities seeking to enter into partnerships with private operators. Chapters
are also accompanied, whenever necessary, by tables or summary diagrams of the key
points discussed. In a number of cases, inserts allow grasping a particular subject in
greater detail; in the sector-specific chapters, descriptions of example set-ups help
illustrate the material presented.

8

Summary
Gautier CHATELUS

Part I – Introduction
The first (introductory) part of this book is aimed at discerning the key stakes
involved 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 the
degree of partner involvement and the project’s intrinsic quality.
Chapter I-B presents 7 general conclusions which can be drawn from experience
with 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-private
partnership “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; the
necessity of a contract regulator; and the need to take contractual procedures through
to 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 necessary
for a partnership to succeed. The introductory chapter (II-A) presents the contrac-
ting process and the features of the contract itself. The contracting process must
begin by defining a host framework for the public-private partnerships and then
developing the specific contract. It is essential to distinguish between the concessio-
nary contract containing a public service-delegation component and a conventional
public procurement contract. The contracting process must be laid out clearly, yet
incorporate 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 governing
contract 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 entails
the evaluation of risks, their limitation and the breakdown of those risks impos-
sible to contain. This exercise, valid for all public-private partnership projects and
applicable over the long run, is fundamental to the project’s overall configuration.
Many risks can be mitigated thanks to effective measures on the institutional and
regulatory environment and a solid project organization. Others need to be split

9


between partners in accordance with the principle of risk assignment to the party
most capable of bearing the risk, depending both on the benefit derived from the
project and on the notion of contractual equilibrium.
Chapter II-C focuses on the primary parameter influencing a partnership: the
contract’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 public
authority and private operator that last a good number of years, and in most cases
span decades. Such a contract therefore must be set up to adapt to the inevitable
changes 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 the
economic and institutional framework up front and the options available following
the award procedure.
Chapter II-D helps clarify the project’s legal-related concerns and describes the
set of legal clauses essential to the preparation of a regulatory and institutional envi-
ronment for awarding contracts and ensuring successful partnerships. It also goes
into 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 different
types of national legal systems, while maintaining the potential to adapt the contract
to a particular context.
To close this Part, Chapter II-E is aimed at presenting the appropriate financial
approach to public-private partnerships. This approach cannot be merely based on
conventional banking tools due to the level of risk involved from the banks’ stand-
point and the length of contractual periods. The financial organizations working in
this 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 economic
justification.
Part III – Concessions in the field of transportation
Parts III and IV lay out a sector-by-sector approach organized around two major
themes: transportation and municipal services. Public-private partnerships do not
entail 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 acquired
in each allows identifying how best to integrate the general principles described in
Part 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 the
economy. Consequently, owing to the magnitude of capital investments involved as
well as to the fact that users can be required to pay for services, the public-private

10

Summary

partnership 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 to
very sizable investment outlays coupled with highly-uncertain and imprecise revenue
projections. Public-sector subsidies are often justified and essential. A key to toll
road, bridge and tunnel projects, especially in urban settings, concerns the social
acceptability of paying tolls.
Chapter III-B discusses public transit systems. In this case, the partnership may
be focused not only on the infrastructure component, but on service operations as
well. Such services often exhibit low profitability levels, yet remain essential to urban
cohesion (at least as far as urban public transit is concerned). Concessionary con-
tracts can thereby incorporate a variety of elements. Rail operating franchises enable
optimizing 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 considerable
subsidization up front. Tramway or metro systems can be handled using different
types of project set-ups, with varying doses of management delegation.
Chapter III-C takes a close look at port systems. Their complexity lies in the
multiplicity of agreements relative to two functions: port authority (regulatory) and
operator (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 regarding
competition, traffic volumes handled, etc.
Chapter III-D presents the characteristics of airport systems. This category of
transportation infrastructure has undoubtedly come to represent the most profitable
and the most straightforward to implement as concessions. The concessionaire is
entrusted with the status of airport authority and must coordinate operations with
four 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 a
truly multi-faceted partnership established over the long term.
Part IV – Delegated management of municipal services
Part IV describes public-private partnerships principles pertaining to municipal
services. Though the nature of such public-oriented services remains heavily under
the responsibility of the competent local public authority, the economic activities
they engender may be delegated. Quite often, these services associate a local facility
with a specific service provision, which in general comprises the very core of the acti-

11


vity. Use of the generic term “delegated management” for these service partnerships
is definitely most appropriate.
Chapter IV-A discusses the entire array of municipal services. As a result of the
diversity encountered among these services, it would have been difficult to devote a
separate chapter to each. Four major categories have nonetheless been assembled:
– environmental protection services (water and waste, which are developed in this
book in two distinct subsequent chapters);
– economic services, both basic (energy, telecommunications) and specific (public
fairs, tourism, slaughterhouses, etc.), and all services related to streets and public
space (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 supply
and 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 of
issues arising in service-oriented public-private partnership projects. Though a pro-
duction function is very often present (e.g. water treatment plant), the critical feature
herein revolves around the provision of an absolutely vital service (water supply),
with its array of issues pertaining to user relations, the social acceptability of water
service rates, quality of service, etc. On the other hand, this sector includes services
intended for the locality as a whole, such as sewerage. A wide variety of delegated-
management approaches are available, extending from a simple Build, Operate and
Transfer “BOT” contract (for a treatment plant) or a service management contract
(for overseeing distribution) all the way to the overarching system concession (with
varying 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 is
currently undergoing tremendous growth and features an emphasis on innovation
and heavy capital investment. Service is provided to the local population, but often
indirectly through a local authority (as opposed to water, whereby the user is served
directly). As is the case with water, a combination of pure service activities (waste
collection) and more industrial activities (treatment) typifies this sector. Moreover,
these industrial activities involve a strong degree of product reuse and may combine
provision 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 and
need for making use of a panoply of public-private partnership models, adapted to
specific economic and political contexts and stressing certain invariant parameters

12

Summary

encountered in all forms of public-private partnership. Accompanying chapters pre-
sent the points of view of several eminent international organizations. The opinions
expressed by the World Bank, the European Investment Bank and the European
Commission have all been assembled here.

13

I
PUBLIC-PRIVATE PARTNERSHIP
IN THE CONSTRUCTION AND MANAGEMENT
OF MAJOR INFRASTRUCTURE
AND PUBLIC SERVICES

A. IN FAVOR OF A PRAGMATIC APPROACH TOWARDS PUBLIC-PRIVATE
PARTNERSHIP

Corinne NAMBLARD

1. The public-private partnership: seeking an equilibrium for
generating mutual benefits
Partnership, or partner: this term refers first to the person chosen to share a
dance, then to an ally in a game and finally to a teammate in bringing a project to
fruition. The definition provided in one of the most reputed dictionaries is a rather
interesting 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 supervision
of 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’s
public services and offering a whole host of advantages for both public authority and
private 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-private
partnership yields a “state of grace” (objective) which all project actors, whether
public or private, would have reached through steadfast determination and expe-
rience. Such a view is to be completely avoided: the historical assessment provided in
this book is a cruel reminder for all those who champion public-private partnerships
that 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 for
utilizing such public-private partnership formulae, but rather to highlight the fact
that each application of public-private partnership must be designed and perceived
as one of the most effective solutions to a multi-faceted problem (building a piece
of infrastructure or setting up a public service) involving financial constraints. Its

17

FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTS

implementation however requires the full-fledged support and a sizable and lasting
investment 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 really
changed. Even the term Public-Private Partnership (or PPP for short) is just another
recent 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 introduced
in France during the 16th century or the delegated management of France’s urban
services, which began to thrive towards the end of the 19th century, along with the
panoply of formulae developed throughout the world over this last part of the 20th
century in response to changes in local contexts (with, on occasion, preference being
given to the extreme option of total privatization).
The second section of this article will thus be devoted to the benefits provided by
public-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 to
hone a pragmatic approach focused on identifying a tangible basis for advancing
and executing these desperately-required projects (regardless of their size and level of
sophistication, in both industrialized and developing countries). The third section of
this chapter will undertake an assessment along these lines.
In sum, it is unavoidable to focus on the existence and evolution of public-private
partnership 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 from
longstanding tradition. The last section reviews these notions and proposes several
orientations for future initiatives, including potential courses of action.

2. The primary advantages from the public authority’s standpoint
of utilizing public-private partnership formulae

2.1 A Partnership that provides services of the highest quality at the lowest
cost 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

In favor of a pragmatic approach towards public-private partnership

offering 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 built
between public authorities and private-sector firms/investors in the overall aim of
designing, planning, financing, building and operating infrastructure projects, which
are usually developed through more conventional market mechanisms, such as public
procurement procedures.
Public-private partnership does not only signify reliance upon the private sector
for 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 and
managerial expertise in building and operating public service projects more effi-
ciently throughout the project life cycle. In this respect, the core of a public-private
partnership encompasses more the notion of service provision than simply infra-
structure financing and construction.
This observation leads to describing the basic advantages associated with the
introduction of a public-private partnership approach, along with the implications
of such an approach in terms of the public authority’s role.

2.2. Financial and budgetary benefits for the State
2.2.1. 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 the
public authority (albeit with the need in most instances for a certain level of project
subsidization). 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 adequate
user acceptance campaign has been conducted beforehand – a task expected of the
public authority. Some financially-profitable projects serve to generate new resources
by 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 other
policy objectives, such as education or health. As a result, a country’s image – or
even its financial rating – gets upgraded, which in turn makes capital markets less
expensive 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-private
partnership set-ups – provided they have been applied to well-suited projects – allows
optimizing project impacts while raising profitability for a given level of investment,

19


in 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, construction
and operations, under the condition that a sole tender be held for all three phases
together;
– 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 project
life cycle (capital investment + maintenance + operations);
– a more effective use of capital, coupled with the generation of complementary
revenue.
2.2.3. Optimal allocation and transfer of part of the risks onto the private
sector
Public-private partnershi-type projects almost always comprise a high level of
risk, due to: the magnitude of the financial stakes involved, uncertainties over con-
struction and operating costs, and revenue-related uncertainties. A partnership-based
project organization relies upon a balanced allocation of these risks (once they have
been properly identified) and enables transferring a certain portion of them onto the
private operator when said operator is better able to shoulder them than the public
authority. In return, the public authority can significantly reduce its risk exposure
(even though certain risks must remain on the authority’s side), while overseeing
project optimization efforts. The analysis, mitigation and allocation of a project’s
risks 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 evaluate
a project’s actual cost. A precise and realistic assessment of costs is of fundamental
importance to project sponsors with respect to attracting financing, both on the
equity and borrowing side. Public-private partnership also enables preventing against
most 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 (and
schedule) controls by virtue of the bond developed between project builder, financial
sponsor and operator. This actual cost then serves as a benchmark for all subsequent
improvements to the quality and efficiency of other public services.

20


2.3. 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 may
eventually stall. Of critical importance herein is for the economic and social benefits
to 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 the
standpoint of obtaining the best service at the most competitive price in meeting the
needs of the largest customer base.
A public-private partnership’s underlying principle stems from the fact that the
public 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 this
specified 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 service
offered.
2.3.1. A streamlined construction schedule and reliable project implementation
able to enhance economic development
Whenever a project is deemed beneficial to society, a public-private partnership
set-up allows speeding up both implementation and construction. In this respect,
it depends to a much lesser extent on budgetary resources, a condition which often
leads to project postponement; it then incorporates a more political dimension. This
accelerated construction schedule, in turn, makes it possible to realize benefits more
quickly for both the private company and the politicians backing such projects. This
perspective remains valid regardless of the level of development of the countries
which 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 adapt
fast to changes in demand, thereby giving rise to a more dynamic modernization of
the economy. Sizable indirect benefits for the country’s overall economic develop-
ment are engendered as a result.

21


2.3.3. Access to financial markets, combined with the development of local
financial markets
Reliance upon private-sector financing also displays a decisively beneficial impact
from a macroeconomic standpoint for developing countries. Such initiatives allow
improving access to international financial markets, by means of: attracting interna-
tional capital; strengthening the country’s image in the capital markets, and utilizing
well-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 act
to 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 identify
its expenses and in scaling back budget allocations, major public-private partnership
projects allow better earmarking resources for financing the unprofitable portion of
a project’s public service provision. Yet, for the most part, financial resources are
freed up for other public services not compatible with the public-private partnership
framework (health, education, social welfare, etc.). As such, local public agencies are
able to channel resources and energy into their social service missions.
Furthermore, some of the case studies developed in Parts III and IV of this book
reveal that public-private partnership set-ups can provide highly-innovative solutions
for accommodating the less well-off population segments (e.g. water supply in La
Paz 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. First
of all, the creation and expansion of environmental services (primarily sewerage and
waste removal/treatment) has become a fundamental component of any sustainable
development program. The infrastructure needed to operate such services requires
sizable capital investment, and collection functions (as regards waste) must be run
under flexible conditions. In this vein, a public-private partnershipapproach allows
creating these services more quickly and efficiently at a considerably lower cost for
public-sector budgets.
The second positive environmental impact of public-private partnershippertains
to the involvement, across the entire range of public services, of major international
corporations with access to the most up-to-date and “environment-friendly” tech-
nologies. These corporate groups are increasingly cognizant of environment-related
needs (noise control, air pollution mitigation) and have considerable experiencing

22


adapting to the strictest of regulatory systems found throughout the world. Moreo-
ver, they are capable of innovating and tailoring their service provision to changes
in environmental demands. Building a partnership between public authority and
private operators enables designing solutions better adapted to reconciling service
quality demands, the economic profiles of both users and the public authority, and
environmental 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 mission
exclusively, which may consist of more accurately identifying public service demands
and 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 with
the associated cost, in order to reach an appropriate tradeoff between economic and
social efficiency. Public-private partnershipset-ups also make it possible to determine
users’ «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 optimize
financing 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 have
already 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 accessible
for the public authority, either in-house or through retained advisers. The resultant
transfer in technology or know-how turns out to be significant from several points
of view:
– construction and operating systems (the most modern techniques can be proposed
in 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 local
firms, whether directly involved in the project or not (by means of benchmarking
for industry-wide standards), but also on the administrative agencies responsible for
monitoring 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 rely
upon local personnel which it can train at the outset of the project, therefore leaving

23


on site just a minimum number of foreign office executive staff beyond the transition
phase.

2.4. The political benefits
2.4.1. A new role for the public authority
The political benefits also prove to be significant. By refocusing public authority
action on its regulatory missions, a public-private partnership strategy transforms
the 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 virtue
of providing a better quality of service, while concentrating its resources on social
welfare issues. In addition, the introduction of a public-private partnershipallows
rethinking the breakdown of public vs. private roles outside the confines of a purely
dualistic mindset.
This political advantage, however, may backfire if the public-private partnership
is not applied under adequate conditions and if the State has not procured the means
for: establishing its objectives realistically, preparing its agencies and institutions for
the 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-private
partnership cases, keep in mind that a public-private partnership is not a privatiza-
tion program. Rather, it serves to attract private investors without abdicating public
service 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 private
operator 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 public
authority possession upon contract expiration). The authority maintains both its
role of shaping public service missions and its regulatory oversight. Moreover, this
process 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 these
services 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 on
a country’s economic, hence political, stability. For one thing, contracts are signed

24


for periods exceeding the terms of elected officials. As a result, the public services
considered tend to be less sensitive to both direct and indirect “electoral” effects. The
parameters of maintenance and quality of service are less likely to be subjected to
uncertainty, and projects will be required to display a tangible socioeconomic value
in 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 economic
well-being in addition to social stability. Here again, any hasty introduction of a
public-private partnership-type partnership must be avoided: taking the time neces-
sary to prepare both the population and local administration and to plan out the
transition periods is crucial to ensure not only acceptance of the notion that one
should pay for service (at least in part), but also an appropriate regulatory framework
to prevent against abusive practices.

3. A therapeutic infusion of reality
3.1. No miracle solution exists.
It should start to become clear by now: public-private partnership can provide
a number of benefits in the domain of public interest projects. This type of set-up
often represents a more efficient alternative to the conventional public procurement
contract formulae for projects featuring a sizable “service” component. But be advised
of 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 to
realize all their projects without investing any effort, time or money.
The public-private partnership tool remains complex to implement and by itself
cannot take any project and turn it profitable. The bottom line is to recognize that a
public service or infrastructure project devoid of any real socioeconomic value cannot
be taken to fruition by virtue of merely introducing a public-private partnership
structure. In order to be deemed viable, a public-private partnership project must
above all fulfill the prerequisite (yet not entirely sufficient) condition of presenting
an adequate level of socioeconomic profitability, i.e. combining utility for society
with economic feasibility.

3.2. A contract between a public administrative entity and a private operator
3.2.1. Instituting a basic contractual relationship between public authority and
private firm
Once these preliminary remarks have been fully incorporated, the public-private
partnership 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


Rémy 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 of
outright public-sector procurement).
As with any contract between a public entity and a private firm, both partners
are seeking to gain from the relationship. The public authority is looking to maxi-
mize the socioeconomic profitability of public-sector investment (i.e. optimizing the
cost-to-benefit ratio from society’s standpoint). The private operator, on the other
hand, is looking to maximize its financial profit (i.e. increasing the return on capital
outlay).
These objectives overlap to some degree (seeing the project succeed) while diverge
otherwise (how to share project-induced benefits): a discussion is thereby held both
to 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 the
tender procedure and competitive bidding process: the public authority establishes
both the project’s objectives and set of specifications, while the bids received from
candidate 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 shared
risks 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 diverging
objectives. Two overlapping and interrelated factors (yet subject to widely-varying
interpretations) set this dance’s tempo: time and money.
For the public authority, the chosen form of public-private partnership must allow
developing and implementing the necessary infrastructure without excess budget
pressures and in a timely manner. For the private operator/builder, the key is to be
able to perform its activity at an acceptable level of remuneration. If the user is solvent
and if his propensity to pay for service enables covering production costs, it may be
envisaged to pass on the entire cost to users. This situation reflects a profitable public
service and the critical issue then turns to ascertaining whether a potential revenue
stream should be tapped and split between operator and delegating authority. Such
is 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 for
supplying and operating the service. On the other hand, both parties share the same
impetus 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 for
the public authority to award a subsidy, either at the beginning of the construction

26


phase or on a proportional basis following start-up of operations. When a subsidy
is involved, the financial discussion is centered on the amount to be offered (and,
in direct correlation, on the partners’ respective risk-bearing thresholds). However, a
second element then comes into play: time. In most cases, the private sector infuses
capital investment at the outset and thus prefers operations to start up as quickly as
possible once construction has gotten underway. In particular, the private partner
will be incited to complete project construction ahead of schedule whenever feasible.
Similarly, once the tender procedure has been held, the private builder/operator has
every interest in seeing the process advance without delay.
In contrast, this issue is much less straightforward from the standpoint of the
public authority. For a combination of socioeconomic and political reasons, the
authority would prefer the project to be built quickly, or at least to be able to
announce a timely construction schedule. This impetus often gives rise to projects
being announced and tender procedures held before the “maturation period” has
been completed. Consequently, the tender process runs the risk of getting bogged
down 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 authority
would be better served by putting off the tender to enable spreading public spending
over a longer period and, to a certain extent, reducing the subsidy amount (since, in
most cases, demand increases over time with respect to both service volumes and user
solvency). The authority is thereby tempted to procrastinate either during the tender
process (which sometimes gets launched prematurely, again for political reasons) or
through obstructing a speedy project implementation (e.g. by holding up certain
vital administrative procedures).
This conflict over timing and schedules can adversely impact the project in that
it engenders heavy surcharges which get passed on not only to the operator, but also
to the users and the authority either directly or indirectly. Such surcharges are to be
avoided 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 involved
in building Partnerships. The discussions held at this stage get reflected in the
project’s organization, which is based on the notion of “risk sharing”. Chapter II-B
provides 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 a
public-private partnership from a conventional public procurement contract: these
risks may take on a wide variety of forms, anywhere from the basic construction risk

27


(a water treatment or waste plant BOT) to the full-fledged construction/commercial
operations risk (State Highway 91 in California).
In basic terms, the project itself must dictate how risks are to be divided to best
ensure 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 be
considered like a transfer of risk free of charge from the authority to the private
partner, but rather a more optimal allocation of risks among partners based on their
respective risk-bearing capacities. This feature also signifies that the cost associated
with a given level of risk assumption is sometimes the factor being minimized in a
public-private partnership set-up. As an example, the construction/operations risk
may be controlled to a large extent by the private partner, hence the private partner’s
perceived low cost for providing protection against this risk (implicitly included in
the 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 rather
high (which would engender a high contract price and an even higher subsidy should
the project happen to be unprofitable). If the authority were to absorb this risk, it
might wind up having to pay out compensation in the event of inaccurate traffic or
use forecasts. Yet, justification could be found for a project carrying with it strong
socioeconomic advantages.
In the end, the sharing of risks is not a miracle solution, but instead a means
for optimizing a project with respect not only to the technical and service quality
options, but to the cost of protecting against inherent risks as well. In this vein, the
approach 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 private
firms on the international scene are now capable of citing the various public-private
partnership “approaches” as references of their past successes. This continual enrich-
ment and overlapping of experience are of great benefit by providing real-life case
studies for assessing the breakdown of risks/costs, the cornerstone of all public-pri-
vate partnershipprojects.

4. Public-private partnership projects cannot be integrated into
a strictly-deterministic model, but instead must be adapted
to 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 “French
model”. The term model is most certainly a misnomer since the very nature of

28


public-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 to
the 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 to
develop strict approaches, yet adapted to each individual case, on the basis of a set of
economic, legal, ethical, administrative and financial principles.
In France, the strong tradition of relying upon concessions has led to setting up
an efficient overall system, some elements of which however have been progressively
criticized within the scope of European integration. Nonetheless, the pertinence of
neither concessions nor the concept of delegated management has been challenged;
rather, implementation practices were deemed not entirely adapted to the evolution
in the economic and institutional context. It has thus been necessary to modernize
the system in the aim of ensuring consistency: the corresponding steps are currently
underway 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 principles
which 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. We
will focus herein on the general approach to be employed for ensuring a successful
public-private partnership.
First of all, it is essential to reinstate the good name of the term partner. Each
member of a partnership is obviously promoting an agenda which cannot (and must
not) 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 and
operate in accordance with contractual specifications.
As such, an approach must be adopted which accommodates the interests of each
party to the greatest extent possible by means of drawing commonalities from these
diverse interests. At the same time, each actor must be able to defend a clear and

29


well-founded position regarding the various points of divergence, so as to stream-
line negotiations in the aim of reaching the fairest and most judicious compromises
between potential economic gain, incumbent costs and assigned risks.
To be avoided therefore are: the fruitless meetings where one partner is played
against the other; overly drawn-out negotiations in which the objectives and goals of
both parties are not clearly expressed; position changes during the course of bilateral
discussions, etc. The financial stakes involved, coupled with the efficient allocation
of 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 obligations
contained in written contracts. The commitments undertaken by project actors
can no longer simply be based on moral grounds, but instead must be expressed
in written, tangible terms. The outcome of negotiations leading to the final mode of
contractual relationship must be recorded in the contract. Furthermore, all contracts
must stipulate arbitration or discussion clauses to handle situations in which the
public-private partnership’s initial hypotheses prove invalid. Every potential scenario
cannot 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 will
require 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 risk
exists for partners with greater leverage in the contractual relationship to elect to
waive their commitments and change the terms of the contract unilaterally. Such
might 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 more
indirectly by failing to execute the planned complementary projects or modifying
the legal and regulatory framework.
Recording the application of public-private partnership formulae in a “formal
register of concessions/public-private partnership”, along the lines of State-backed
financial 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’s
commitments, especially political commitments.

30

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, the
privatization movement of the 1980’s was interpreted as a strong statement. It rep-
resented the tearing down of conceptions built between the Great Depression and
the 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 of
market 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 service
management upon private firms. For many, the French “experience” in this field
remained the domain of major nationalized companies, which was not at all the
case.
This initial period of reform was characterized by strong political input and
enthusiasm, along with the excesses such input engenders. The ideas championed
by 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 win
acceptance 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 science
and 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 be
justified and defended ten years ago today is simply taken for granted; the age of
heated debate has been left behind. All of the major industrialized countries have
adopted 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 regarding
delegated management has shifted considerably. Emphasis is no longer on deciding
whether to delegate, nor on discussing the virtues of large private firms versus public
agencies: 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 be
developed to ensure accessibility to the greatest number of users while fulfilling all

31


pertinent public service obligations? How can contracts be made robust enough to
withstand crises?
On the basis of a broad array of experience, encompassing a handful of sectors on
all continents, an objective assessment can now be drawn. At this juncture, such an
assessment is aimed at deriving general lessons reflective of the overall situation. The
history of delegated management is still obviously very present; for this reason, the
exercise 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 of
these safeguards, a close examination of key issues via a survey of past and present
cases (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 initial
years have given way to a stance of pragmatism. The past was characterized by
reforms 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 needs
are such that a private sector presence is now mandatory. The reason behind this
transition 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 constitute
three 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 naming
the 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 impacts
spanning 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 branch
agencies or large public corporations. The arrival of multinational and multi-sectorial
firms raises a whole new set of issues, with respect to both utility network regula-

32

Ten years of public utility reforms: 7 lessons

tion and metropolitan area governance. The scope of privatization operations has
surpassed the sector specificity intended at the outset.
A decade ago, the experiences conducted throughout the world were still rather
limited; at present, the number of requests received by firms to undertake projects is
soaring. The choices offered are indeed quite broad: the tendency is to opt for major
metropolitan areas, able to propose large-scale projects and whose populations are
often more affluent than the rest of the country (with the prospect of high enough
volumes to allow benefiting from economy-of-scale effects). A “map” of the world’s
major «privatization» operations closely resembles that of the largest conurbations.
It remains to be seen whether a country’s dissemination of such experiences and a
harmonious spatial balance can occur.

2. From competition among models to a problem-resolution
approach
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 course
of 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 the
same (Martinand, 1993). Moreover, these differences have on occasion been insti-
gated by the competition held among firms since competitive bids were typically
involving France’s three major service-provision firms, the main English utilities and
a 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 their
durability, 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 theoretical
antagonism between models. Actors in this domain wind up adopting pragmatic
approaches, 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-income
population. 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 implement
new solutions.

33


• 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
BOT
Level 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


3. Public-private partnership as a customized solution
Out of this discussion comes the simple idea that no one best way, no single
preferred model, exists which could be reproduced from one sector to the next or
from one urban setting to the next. In order to last, contracts must be adjusted to
meet specific problems, contexts and actors.
They must also be designed to accommodate both the type of service network
and the responsibilities being assigned to the firm:
• Type of service network: Each category of network is naturally a unique technical
composition and features distinct constraints in terms of coordination. The first few
years of the privatization process tend to focus on economic and bid-related consid-
erations. It sometimes seems that the same tender procedures (competition for the
market) and the same competitive framework (competition on the market) could
be applied to all sectors – from electricity to transportation, from cable networks to
water supply systems. The inclusion of real factors, such as sunk costs1, and the issue
of asset “indivisibility” have instigated the search for customized solutions in each
type of network.
• Along the same lines, the public procurement framework has exerted the most
dominant influence (Laffont and Tirole, 1993); efforts were undertaken to apply this
framework to relationships between private firm and public authority in the area of
public service delegation as well. Diversification in the form of privatization then
made it possible to discern that service operations under private-sector management
responsibility clearly belonged to a separate category. Two factors certainly account
for this difference: i) the transaction per se does not pertain to a precisely-defined
good, but rather to the provision of a more nebulously-defined service; and ii) such
contracts often extend over long periods of time. In order to incorporate these spe-
cificities, project actors focus on building institutional configurations adapted to
the risks borne by each project partner. Some of these newly-devised contracts have
become 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-sector
monopolies and conferring operations. Such a vision however did not stand up very
long. The list of failures and incomplete projects have served as ample reminder
of the truth that collective action can only succeed when propped up by a set of
1. A notion signifying that in this type of sector, a minimum threshold of investment must be met prior
to conducting any activity; such investment would be unusable elsewhere should the firm withdraw
from the project.

35


stable, 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 met
the prerequisites for action, a stance which pays tribute to the neo-institutionalism
economists (Coase, 1937; North, 1990; Williamson, 1994).
Once this aspect has been fully recognized, the solution is taken to the halfway
point. 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 in
place 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 designing
reforms. In the past, simply privatizing public monopolies and signing contracts was
considered sufficient. Now, credence has been placed in the notion of dual-faceted
action featuring the contract as well as the overall project environment. However
the global environment can only be partially altered before privatization by outside
reform. In most instances, the actors themselves build the institutional framework as
the action unfolds on the basis of the problems/solutions encountered.
This orientation leads from an instantaneous conception of reform – possibly
incorporated 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 and
comprehension by all actors (elected officials, service users, firms), a participatory
process is required. In response to this perception, international institutions invoke
the term “capacity-building”.

5. The “proper” sequencing and corresponding exceptions
In many countries, sizable efforts have been expended by international financial
institutions to set up initial experiences. As such, reformers and their consultants had
considered 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 the
contract 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 of
itself is not sufficient: it proves most difficult to develop forecasts and plan out the
details of long-term service provision contracts (Annales des Mines, 1999; Defeuilley,
1999). Admittedly, greater attention focused on preliminary design studies (hence
a more costly preparation phase) has been a step in the right direction. While such
studies yield a new source of knowledge which can be shared by all actors (public

36


authorities, international institutions and firms alike), they are unable to provide the
precision 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 feasible
during the first years of privatization to draft complete contracts2 (Henry, 1997).
The past decade of experience tends to refute this position and suggests starting out
with incomplete contracts. This approach promotes a new balance in the contractual
effort over time. It turns out to be advantageous not to seek precision at all costs
from 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 not
advised to advance the design studies too far before selecting the operator since the
preliminary design may be quickly superseded and will, in any event, overlap with
the chosen operator’s input.
• While it is acknowledged that long-term contracts cannot forecast all project
parameters with accuracy, contract revisions should not be viewed as project crises.
This point is a critical one inasmuch as contractual adaptation has much too often
been perceived as a failure, as an attempt by the firm to realign the contract to
its advantage. Contractual adaptation is nothing more than a normal adjustment
mechanism for coping with changes in the initial conditions.

6. The need for a regulator
Throughout the rivalry between firms and between models, the French have
long challenged the idea of a heavy-handed regulator. National experience leads to
the spontaneous reaction that the same results can be achieved using less expensive
mechanisms and that the relationship with the public authority can be set up to
avoid confrontation. To a certain extent, experience has affirmed the validity of this
attitude. Regulation carries with it a cost, which may turn out to be quite high and
not 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 to
apply in developing countries. In France, contractual relationships between local
public authority and private operator are placed into a long-term setting of laws,
rules and standards structured by the State and administrative agencies. When such
a 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 and
specify all obligations.

37


mediary – 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 all
project parameters, especially exogenous parameters.
One key lesson from these various experiences is the vital need for a regulator in
developing countries. The history of the industrialized world shows that building an
institutional 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 is
not imaginable that developing countries could do likewise in less time: institutional
systems 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 clearly
be preferable to position the regulator more towards the realm of overseeing the
proper implementation of public service-related rules (in accompaniment of State
and 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 can
be foreseen, featuring:
– ongoing technical monitoring on the part of the municipality: this component
would 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 operations
of 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 triple
mission: i) overseeing the fulfillment of the major contractual commitments and
conducting statistical comparisons; ii) assisting the local public authority; and iii)
providing backup for the State level in adapting rules and building the institutional
framework.

7. Progress through accepting risk
In the absence of appropriate rules however, what course of action should be
taken, given the reliance of utilities on a heavy dose of industry-wide rules? Would it
be necessary to wait for a body of rules to be produced? Yet, how are such rules to be
produced and where does the production process begin? Action cannot be initiated
without 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, the
inexistence of rules obviously leads to accepting incomplete contracts and tolerating
behavior which does not necessarily comply with the principles of rational action –
consistent, communicative – along the lines of the Weberian ideal. One could wager
that experience generated from these imperfect set-ups is still more valuable than
inaction and that, thanks to the inherent lessons drawn, project actors will be in a
position to draft new, more effective rules.

38


This means of conceiving action occurring within imperfect institutional set-
tings leads to the notion of “building” markets (the construction of urban service
models), i.e. the rules, standards and institutions necessary to incite action do not
represent a fixed, available, exogenous stock for actors to choose from. In emerging
fields – nowadays, information technologies; at the beginning of the 20th century, it
was water and electricity – or in developing countries, these elements get generated
by actors during the action process. This dynamic, which happens to be especially
pronounced 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, the
use of incomplete contracts (designed as a learning process and not as an ultimate
document) 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 many
instances, the absence of rules is due to the public authority’s incapacity to draft them
on its own; if the authority delegates there would be no reason to rapidly expand
its know-how in this area. What stance should be adopted then? Acknowledge the
asymmetry existing between private firm and public authority; recognize that the
production of new rules is the fruit of a joint effort on the part of these entities; as
a consequence, the strict breakdown in those roles which theoretically underpin the
regulatory activity is not, in reality, so absolute.
One major lesson from this past decade of reforms is the urgency of instituting
new regulatory modes which incorporate: the breadth of skills possessed by large
firms, the principle of jointly-produced rules, and the need to enforce public service
obligations.

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 have
entered 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 of
network, as opposed to the application of strict models.
u The development of an appropriate institutional framework in accompaniment
of the contracts themselves is vital, within the scope of a necessarily-lengthy
institutional learning (“capacity-building”) process.
u The public-private partnership constitutes a long-term association, which is
necessarily 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


u A public-private partnership is meant to be long-lasting and entails a certain
degree of risk to be shared between partners: risk tolerance proves essential to
a project’s evolution.

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II
CONDITIONS FOR A SUCCESSFUL
PUBLIC-PRIVATE PARTNERSHIP

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