Public-Private Partnerships (PPP) in Highways
International Experience and Lessons for Success
Transport Forum, March 29, 2006Jose Luis Irigoyen
Sector Manager LCSFT
P P P s in R o a d s W o r ld w id e P r o je c t N u m b e r a n d In v e s t m e n t 1 9 9 5 - 2 0 0 4 ( C u m u la t iv e s in c e 1 9 8 5 )
0
1 0 0
2 0 0
3 0 0
4 0 0
5 0 0
6 0 0
7 0 0
1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4
Y e a r s
Num
ber
of P
roje
cts
5 0 , 0 0 0
1 0 0 , 0 0 0
1 5 0 , 0 0 0
2 0 0 , 0 0 0
2 5 0 , 0 0 0
3 0 0 , 0 0 0
3 5 0 , 0 0 0
Cur
rent
US$
mill
ion
N u m b e r o f P r o p o s e d P r o je c ts N u m b e r o f F u n d e d / C o m p le te d P r o je c tsE s t i m a te d I n v e s tm e n t f o r P r o p o s e d P r o je c ts E s t i m a te d I n v e s tm e n t f o r F u n d e d / C o m p le te d P r o je c ts
Source: Public Works Financing-Major Project Survey 1995-2004
PPPs becoming a global business across developed & emerging markets
Only 55% of proposed projects reached financing
… yet anchored in selected group of OECD and developing countries…
Source: PWF Major Project Survey – October, 2004
Top Countries: PPPs in Highways Top Countries: PPPs in Highways Cumulative sum of # projects & estimated costs since 1985 Cumulative sum of # projects & estimated costs since 1985
Country Number of Projects Project Cost (US$ billion)
United States 74 42.7United Kingdom 37 30.5China 53 21.6Spain 47 21.1Mexico 78 20.4Italy 3 18.5Germany 34 17.1Republic of Korea 18 16.2Japan 1 14.4Greece 11 11.8Brazil 44 11.4France 8 10.2Portugal 15 9.8Australia 12 8.6Malaysia 18 7.8Canada 22 7.7Russia 2 6.6Chile 24 6.3Argentina 20 3.7Ireland 14 3.0Denmark 1 2.7South Africa 6 2.3Czech Republic 2 2.2Indonesia 6 2.1Thailand 3 2.1
0
50
100
150
200
250
300
350
DevelopedWorld
LatinAmericaand the
Caribbean
East Asiaand
Pacific
Europeand
CentralAsia
SouthAsia
Sub-SaharanAfrica
MiddleEast and
NorthAfrica
Number of ProjectsProject Cost ($bn)
Num
ber o
f Pro
ject
s –
Proj
ect C
ost (
US
$ bi
llion)
Regional distributionRegional distribution
… and highly influenced by few global concessionaires or sponsors
PPP Projects under
contract
Awarded
ACS Dragados 45 18MIG / Macquarie Bank 23 4Laing / Equion 21 1Ferrovial / Cintra 20 14Sacyr Vallehermoso 19 13Albertis / La Caixa 19 2FCC 17 8
OHL 17 1Cheung Kong Infrastructure 16 22Vinci / Cofiroute 15 19
Top 10 Transportation Top 10 Transportation Developers 2004Developers 2004
Active ownership role in Active ownership role in PPPsPPPs 19851985--20042004
Source: PWF Major Project Survey – October, 2004
14%
16%
18%
20%
22%
24%
26%
28%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Years
Per
cent
age
Concentration of Projects in Top 10 Transport Sponsors 1994-2004
Proposed and Underway
Rise & fall in developing countries shows vulnerability in era of financial shocks
Total Investment in Road Projects with Private Sector Participation 1988-2003
Total Investment Number of ProjectsSource: PPI Database
2
4
6
8
10
12
14
88 89 1990 91 92 93 94 95 96
2003
US$
billi
on
-
10
20
30
40
50
60
70
Num
ber
0097 98 99 2000 01 02 03
Mexican Crisis
Asian Crisis
Argentinean Crisis
…but also reflects impact of project activity within key countries…
YearsRest of the World China Mexico Brazil Malasya Chile Argentina
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2003
US$
mill
ion
Total Investment in Road Projects with Private Participation. Source: PPI Database
Source: PPI Database
T o t a l I n v e s t m e n t i n P P P P r o j e c t s i n R o a d s b y I n c o m e L e v e l s
-
2 , 0 0 0
4 , 0 0 0
6 , 0 0 0
8 , 0 0 0
1 0 , 0 0 0
1 2 , 0 0 0
1 4 , 0 0 0
1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3
Y e a r s
2003
US$
mill
ion
L o w I n c o m e L o w e r M id d le I n c o m e U p p e r M id d le I n c o m e
… with most of the investment going to Middle Income Countries
Upper middle income countries made up for most of recovery in 2000-2002
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2003
US$
mill
ion
Mexico Brazil ChileTotal Investment in Road Projects with Private Participation. Source: PPI Database
MexicoMexicoBrazilBrazilChileChile
Insights on performance of few programs
PPP projects in highways have suffered from optimism bias
Forecasting errors from inability to obtain good data or incorrect assumptions in models
price elasticity of traffic to tolls;substitute services/intensified competition;
Political commitment at too early a stagebefore appraisal at sufficient depth to allow graceful exit project timelines inconsistent w/sound bidding practices
Downplaying vulnerability of PPP projects to changing political, financial, economic context
failure to identify/value political and social costs (eg., toll increases)
PPP projects are becoming smaller reflecting financial constraints
-
100
200
300
400
500
600
700
800
900
1,000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Years
2003
US$
milli
on
Average Project Size
… and also that bigger projects already done in more active countries
Source: PPI Database
Structured project finance has come a long way, but not yet for all ...
Fashioning the finance to specific project needs --with risks and returns borne not by sponsor alone but by different types of investors-- is buzzword
mezzanine finance; monoline insurance broadens access to capital marketsinterest rate and foreign exchange hedging increasingly critical as projects become more finely balanced
but available only for certain projects/countriesmostly projects with investment grade credit rating;no realistic opportunities for hedging in many countries;contractual complexity/financial rigidity not always favored by sponsors/allowed by project economics
12
In a global business, financial crises led to:increase in cost of capital, sovereign risks/spreadsreduction in projects IRRincrease in uncertainty with regards to both
... exposing weaknesses in both project finance structures and regulatory frameworks:
high tariffs attract political interventionism drop in demand increases pressure for renegotiationmismatch between risks and returns exacerbated by currency volatility and reliance on hard currency debtgovernments left with costly contingent liabilities they can’t honor on time
Financing tights suddenly in emerging markets due to crises
Source: Gray, P. & Irwin, T., Exchange Rate Risk
Currency devaluation in 5 countries with the most PPPI, 1985-2001
Distressing results of crises:• Governments breach contracts, affecting access to capital markets.
• Users must cope with steep increases in tolls eroding long-term support for PPPs.
Currency depreciation against the US Dollar in 174 countries
(1976-2001)
Current average
depreciation rate (%)
Volatilit(%)1
All Developimg Countries 16 22 East Asia and Pacific 10 20 Europe and Central Asia 23 31 Latin America and the Caribbean 23 33 Miiddle East and North Africa 6 14 South Asia 8 13 Sub-saharan Africa 16 27 OECD 2 11
Measured as the Standard deviation of current depreciation
“pass through” formulas that transfer exchange risk to users fail in midst of abrupt devaluations --and turn exchange risk into political or regulatory risk
Worsening of regulatory environment during crises erodes support for PPPs
Min
Poin
t
Max
Min
Poin
t
Max
Min
Poin
t
Max
Subsidy / payment
Toll
Contract Lenght
Profits / IRR
TRIGGER VARIABLE
CO
MPE
NSA
TIO
N
RISK SHARING APPROACH
Annual Traffic or Revenues
Accumulative Traffic or Revenues
Approach 2: Minimum Income Guarantee CHILE
Approach 3:1) Severn Bridge2) LPVR CHILE3) PORTUGAL
Approach 1:Highway
concessions in FRANCE and SPAIN
Approaches to traffic risk mitigation --no conclusive evidence of what’s best
Source: Jose Vasallo, 2005 “Traffic Risk Mitigation in highway concession projects: the experience of Chile”
Economic & Financial Equilibrium Clauses:•asymmetric information; •poor control of costs (“goldplating”);•unclear renegotiation if procedure to restore equilibrium not defined
Min
Poin
t
Max
Min
Poin
t
Max
Min
Poin
t
Max
Subsidy / payment
Toll
Contract Lenght
Profits / IRR
TRIGGER VARIABLE
CO
MPE
NSA
TIO
N
RISK SHARING APPROACH
Annual Traffic or Revenues
Accumulative Traffic or Revenues
Approach 2: Minimum Income Guarantee CHILE
Approach 3:1) Severn Bridge2) LPVR CHILE3) PORTUGAL
Approach 1:Highway
concessions in FRANCE and SPAIN
Approaches to traffic risk mitigation --no conclusive evidence of what’s best
Source: Jose Vasallo, 2005 “Traffic Risk Mitigation in highway concession projects: the experience of Chile”
$
Year
Construction
Expected Revenues
Bottom Band
Top Band
Real Traffic
Subsidy
Minimum Income Guarantee Approach
Min
Poin
t
Max
Min
Poin
t
Max
Min
Poin
t
Max
Subsidy / payment
Toll
Contract Lenght
Profits / IRR
TRIGGER VARIABLE
CO
MPE
NSA
TIO
N
RISK SHARING APPROACH
Annual Traffic or Revenues
Accumulative Traffic or Revenues
Approach 2: Minimum Income Guarantee CHILE
Approach 3:1) Severn Bridge2) LPVR CHILE3) PORTUGAL
Approach 1:Highway
concessions in FRANCE and SPAIN
Source: Jose Vasallo, 2005 “Traffic Risk Mitigation in highway concession projects: the experience of Chile”
Approaches to traffic risk mitigation --no conclusive evidence of what’s best
$
Years
Construction Discounted Revenues
T0
A
Expected Traffic
Low Traffic
High Traffic
T1
Maximum length
MoMm
Mm-Mo
Original function
Mitigated Function
Project IRR
Pro
babi
lity
dens
ity
Risk profile mitigation with LPVR
duration
Stronger alignment between PPP objective & compensation mechanism
New thinking about the transfer of volume risk and whether the premium paid outweighs benefits
UK – from shadow tolls to payments based on combination of service availability and performance
availability payment, 2000; active management payment, 2002NAO critical of shadow tolls given operator is unable to influence demand
Focus of compensation mechanism on establishing necessary degree of risk allocation in project to induce appropriate performance by private sector
However, some new schemes based on government payments scheduled along operational period becoming increasingly common where tolling and up-front public financing not feasible
A mix of foreign and local sponsors compete aggressively to win contracts
P r i v a t e I n v e s t m e n t b y T y p e o f I n v e s t o r T r a n s p o r t S e c t o r 1 9 9 8 - 2 0 0 3
-
1 , 0 0 0
2 , 0 0 0
3 , 0 0 0
4 , 0 0 0
5 , 0 0 0
6 , 0 0 0
7 , 0 0 0
8 , 0 0 0
1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3Y e a r s
2003
US$
mill
ion
D e v e lo p e d D e v e lo p in g L o c a l D e v e lo p in g F o r e ig n
S h a r e o f P r i v a t e I n v e s t m e n t b y T y p e o f I n v e s t o rT r a n s p o r t S e c t o r 1 9 9 8 - 2 0 0 3
0 %1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %8 0 %9 0 %
1 0 0 %
1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 T O TY e a r
A LPe
rcen
tage
D e v e lo p e d D e v e lo p in g L o c a l D e v e lo p in g F o r e ig n
Source: Developing Country Investors and Operators in Infrastructure –Phase 1 Report, PPIAF, 2005
often overly aggressive concessionaires bid too low with expectation to renegotiate contract conditions as soon as possible
Number of Projects 1990Number of Projects 1990--20032003Source: PPI Database
Concluded7%
Distressed2%
Operational80%
Construction3%
Cancelled8%
Bottom line, few cancellations but opportunistic renegotiations the rule…
Statistics mask high incidence of renegotiations
Country Total Investment 2003 US$ million
Mexico 11,003 China 1,538 Thailand 890 Indonesia 653 Hungary 471 Argentina 181 Lao PDR 115 Grand Total 14,851
Cancelled Projects 1984Cancelled Projects 1984--20032003
Despite slowdown, PPPs remain an attractive option for many governments
tools to bring legitimacy to PPP approaches and project selection and make informed decisions about risk allocation at both policy and project levelimpact of PPP programs on road sector fundingproper accounting, management and funding of contingent liabilities to effectively address public riskpragmatic approaches to building institutional and regulatory capacity to better deliver on “third P”instruments to address financial market constraints (w/ due attention to two sides of “creative financing” coin)
Some key areas for WB attention:
Many [email protected]