10/11/2013
Public-Private Partnerships:
some lessons from
global experience
Seminar on Public-Private Partnerships and
public account sustainability: compatible realities?
October 7, 2013
Banco de Portugal, Lisbon
Rui Sousa Monteiro
(World Bank Institute)
Assessing global
PPP experience
Currently there is a significant global PPP
experience
– Very good results in terms of effectiveness
– Good results, also, in terms of efficient delivery of
services
– Some concerns regarding “affordability” and
project selection
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What do we call PPPs?
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What is a PPP
Public-private partnerships (PPPs) are long-term
contractual relationships between a public
sector entity and a private sector entity
The private partner
commits itself to providing
a set of services according
to some specified
performance levels
The public partner monitors
the performance and pays
the services or grants the
private partner the right to
collect fees from users
Economic reasoning tells us that PPPs should only
be used for services that require long-life assets
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Rationale for PPPs
Tradit.
D-B
PPP
PPP
PPP
PPP
design of infrastructure
core
construction of infrastructure
maintenance of infrastructure
provision of equipment
maintenance of equipment
provision intermediate services
provision services to end-users
In each case, services provided according to public sector rules
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PPP and public service
• In locking the private partner in a long-term
relationship, the public sector is also locked for
a long period
• Because PPPs relate to public service, the public
partner is very sensitive to service disruption,
giving the private partner added bargaining
power
• When change affects the project, the private
partner may benefit from it; the private partner
may even engage in strategic moves for
inducing change for its own benefit
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Foundations
of PPP efficiency
• Output-based long-term contracts:
– Core: design + construction + maintenance
– Performance-based payments
whole-life costing
• Private capital at stake
credible commitment
• Good project selection (CBA, VFM, affordability)
• Competitive procurement
• Adequate contract management
– Partnering
– Contract enforcement
– Prevention of strategic moves
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Is the PPP experience
relevant?
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Were the Egyptian pyramids PPPs?
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Initial PPP experience:
large programs
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Initial PPP experience:
proliferation
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Current PPP experience:
new large programs
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Current PPP experience:
proliferation
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Current PPP experience:
countries with PPP programs
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Basis for
PPP efficiency
long-term contract with effective risk transfer
requires demand-based or availability-based
credible long-term risk transfer
requires private capital at stake, no easy way out
keeping efficiency in the long term requires proper
contract management and oversight of fiscal risks
but, most of all, PPP efficiency requires good
project selection, identifying costs, benefits & risks
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Why do we need PPPs?
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Public infrastructure
but
often
affected
by
basic for economic growth
and for the quality of life
poor
maintenance
▪
The (non-PPP) case of Lima
metro, Peru
The 7-station elevated metro,
equipped with 32 cars, was officially
opened in 1990 but never operated,
due to poor demand; its operation
started only 21 years later, after
enlargement to 16 stations.
The planned 2nd line will be a PPP !
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The case of
Joá Penteado tunnel 2, Brazil
The 300-meter tunnel was
inaugurated in 2009, 23 years
after the beginning of
construction. Linking downtown
Campinas (in São Paulo state) to
its industrial district on the other
side of a hill, its construction
stopped after one year, for lack of
public funds, when the tunnel was
half dug; it took 20 years to
obtain funds for digging the
remaining 130 meters.
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The case of Salvador da Bahía
metro, Brasil
Half-built and not operational
for 12 years, completed 2012
and still not operational.
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The (non-PPP) case of
Barcelona subway line 9, Spain
Cost forecasts: €2,600m in 2003; then €3,700m; later
€6,900m; currently €16,000m; beginning of construction:
2003; end of construction: unknown (for lack of financing)
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A non-PPP case: Requena-Utiel
HSR station, Valencia, Spain
Cost: €12m; surrounded by vineyards, midway between
Requena and Utiel; demand is slowly growing, having
reached 50 passengers/day
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The (non-PPP) case of
Cuenca HSR station, Spain
Cost: €20m; the first “green” rail station in Spain: noncontaminant materials, geothermal water supply; 250-car
parking; demand is so low that Renfe suppressed a few trains
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The case of
Laredo marina, Spain
Cost €90m (half of that still owed to the banks by Municipality),
but still incomplete; no users; locals complain the beach
nearby is being eroded by the changes in sea currents
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The case of the marina of
Lugar de Baixo, Madeira (1)
Initial expected cost €24m; current cost €44m according to
regional gov’t (or €100 according to the opposition); opened
in 2004, with berths for 291 yachts; destroyed in 2005
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The case of the marina of
Lugar de Baixo, Madeira (2)
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The case of the marina of
Lugar de Baixo, Madeira (3)
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Casa da Música, Porto, Portugal
House of Music, Porto, Portugal, €100m
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Ciudad de las Artes y las
Ciencias
City of Arts and Sciences, Valencia, Spain, $500m
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The (non-PPP) case of
Jaén tram, Spain
Cost: €100m, completed in 2011, procured by the regional
government, then transferred to the municipality, who operated
the service for two weeks and closed it for lack of funds to
operate a tram service with scarce users (even with zero fee)
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The case of
Ciudad Real airport, Spain
Cost €1,100m; 4,000m runway; the first private international
airport in Spain; capacity: 2,500,000 pass; demand in 2010:
33,520; closed in April 2012 after three years in operation
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The case of
Huesca airport, Spain
Cost €40m; opened in 2007; with no commercial activity since
February 2011; demand: zero passengers August 2011, four
in September, all from small private planes
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The case of Castellon airport,
Valencia, Spain
Cost: €150m; officially declared “open” in March 2011; not
licensed due to design errors; a $375,000, 79-feet tall statue
of Carlos Fabra, a local politician, was erected in the airport
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The case of
Pamplona-Noáin airport, Spain
Cost €50m; capacity for 1,100,000 passengers/year; demand in
2010: 291,553
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The case of
León airport, Spain
Three times enlarged in the past decade; after the last
enlargement, costing €29m, it presents capacity for 500,000
passengers, i.e. 5 times current demand
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Spanish “ghost” airports
(“aeropuertos fantasmas”)
• Spain has more international airports for commercial flights
than any other country in Europe: 48 public and 2 private
• 20 of those airports handle fewer than 100,000
passengers/year
• Too many airports? (And also too many rail lines, ports, and
highways? And too many sport and entertainment facilities?)
• Or were they simply built in the wrong location, in order to
serve local politicians’ interests?
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PPP projects:
Highways in Spain
Significant cost overruns, in some cases over 50 percent; low
demand, reaching 1/10 of expected traffic. In 2012, AP41
Madrid-Toledo, Radial 4R4, and Cartagena-Vera concessionaires
filed for bankrupcy. Several more are close to bankrupcy.
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The empirical evidence:
unintended consequences
•
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The empirical evidence
A
•
•
•
•
•
large track-record of poorly managed projects:
Poor project selection
Cost overruns
Insufficient demand
Collapsed and struggling projects
Insufficient governance
But also examples of well managed projects (many of them
PPP projects)
And mixed cases of great service effectiveness (users ☺)
and poor use of public resources (taxpayers )
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We have hundreds of
successful PPP projects
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Chile is an example
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And also a few successful
non-PPP projects
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Øresund bridge, between
Sweden and Denmark
• Cost: $5700m
• User-fees will repay
the bridge until 2035
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The new railway station in
Stuttgart (Germany) (1)
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The new railway station in
Stuttgart (Germany) (2)
• Original cost estimate: €3100 million.
• In December 2009, Stuttgart21 project approved
(by Deutsche Bahn and the federal, state and
municipal governments) with a cost estimate of
€4100 million, on condition that its cost does not
exceed €4500 million
• The approving entities (DB and governments) did
commit on funding the expected cost, and on a
€400 million contingency provision
• Works started February 2010
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The new railway station in
Stuttgart (Germany) (3)
• Cost expectation €4100m + €400m = €4500m
• But currently, after three years of construction,
the cost estimate reached €6800 million (with a
4-year delay)
• State and municipal governments refused to
provide more funds, and the Finance Ministry did
consider the option of cancelling Stuttgart21
• But Stuttgart21 will be completed because the
cost of cancelling the project will be higher than
the cost of completing it.
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Stuttgart21
and fiscal risks
• This Stuttgart21 project provides an example
of the fiscal risks that always affect public
infrastructure projects
• But we should emphasize a few points:
– Its budget included a provision for contingencies (in
the current case, an insufficient one)
– The realization of cost overruns did induce strategic
behavior by all involved public entities (DB and the
federal, state and municipal governments)
– Besides fiscal risks, political risks are present: the
opposition complained, as well as environmentalists
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Public infrastructure and
fiscal risks
Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter
did investigate public infrastructure all over the world
and identified a tendency for cost under-estimation:
managers and decision makers present low cost
estimates and hide risks, in order for their
projects to obtain government approval
Adverse selection: "Those who provide honest
estimates for projects from the very beginning have
little chance of getting them off the ground“
See (2003) Megaprojects and Risk: An Anatomy of
Ambition, Cambridge University Press
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New Berlin-Brandenburg
airport
• PPP option abandoned; first tender canceled
• Cost: €2000m en 2006
• Completion date: 2011
€4300m + compensations
2014?
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Rail tunnel in Leipzig
• Cost: €572m
€960m
• Completion date: 2009
Dec 2013
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New North-South metro
line, in Koln
• Cost: €600m in 2000
€1040m
• Collapse of municipal archive (€1000m damage)
• Vibration in the Cathedral
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Second rail tunnel in Munich
• Cost: €2047m in November 2012, plus €500m for
contingencies; but the current estimate is €2433m
• Completion date: 2020
2021 or 2022
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Some good practices
• Cost of public projects (including PPPs) is
presented in the budget and fiscal reports
• German governments, federal and sub-national,
do not adopt the out-of-the-book approach
• Large projects require co-funding schemes
between different levels of government (federal,
state, municipal), inducing better analysis
• Provisions for risks are budgeted
• Role of MoF
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How can PPPs help?
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PPPs as credible commitment
• PPPs present a credible commitment for
implementing a transport project
– project revenue is dependent on
reaching the operational phase, creating
a strong incentive for completion
– the private partner starts the project
with a full financing scheme, avoiding
the usual public finance troubles
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PPPs and economic rationality
Allocating project implementation to a
private entity allows for the private partner
to use full economic rationality in designing
and building infrastructures and in
selecting and procuring equipment,
services and staff
And PPPs may present additional benefits…
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A non-standard approach:
PPPs as project filtering
• The case of Dublin’s metro
• The case of UK’s light rail projects
• The case of Fertagus rail service
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The case of
Dublin subway
• Project decided in 1996
– studies by the state-owned public
transport operator
• In 2001, new agency
– a rail procurement agency
• PPP studies:
– subway lines cancelled
– tram lines approved (38km Luas)
– Luas started operating 2004
• Subway lines
(Dublin Metro)
– deferred again in 2011
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The case of UK’s light rail
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The case of Fertagus railway
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The case of
Fertagus rail service
• The project
• The solutions
• The negotiation
(2004)
– challenging the private
operator
– facing lobbies:
•
•
•
•
rail-line design
regulation
trains
safety systems
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The case of St Barts hospital
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How can PPPs harm?
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Case: Canal du Midi / Garonne
“mettre en risque mon bien et mon honneur à
défault de réussite et, par contre-coup,
acquérant un peu de l'un et un peu de l'autre,
en cas que j'en sorte heureusement”
Riquet, a local tax collector,
presented to Louis XIV this
unsolicited proposal: building a
canal connecting the Atlantic
Ocean to the Mediterranean at
no cost to the taxpayer or
royal purse
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Case:
Canal du Midi / Garonne
Riquet was awarded
a perpetuous
concession in 1666,
with the right to
collect a special
purpose new tax.
The canal, built in
1666-1683, was a
success, but the
public partner paid
two thirds of its cost.
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Vasco da Gama bridge
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Skye bridge
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Sources of fiscal risks
•
•
•
•
•
•
•
•
Bad projects
Poorly researched projects
Bad contracts
Technological or commercial change
Demographic change
Political or legal change
Poor contract management
Lack of global affordability
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Alternative perspectives
on PPPs
• PPPs may be perceived as a convenient way
for some decision-makers to circumvent
existing budgetary rules
or
• PPPs may be perceived as a way for some
private firms to capture government and
create long-term sources of rents
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PPPs,
rent-seeking and corruption
• PPPs as a rent-seeking tool
– rents extracted from users, or
– rents extracted from the government
• The role of MoF
– project appraisal (CBA or similar)
– contractual review (evaluation of fiscal risks)
– project prioritization (affordability checks)
• PPPs as a corruption tool
• The role of transparency and external auditing
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Preventing and managing
•
•
•
•
•
•
Good project appraisal
Careful draft contract design
Gateway processes: costs and risks
The role of audit offices / courts of auditors
Continuous evaluation of fiscal risks & costs
Contract management
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PPP and
fiscal accountability
• Budgetary costs:
– certain
– contingent
• Budgetary risks are much more than
contingent liabilities
• Fiscal accountability requires much more than
accounting rules
– effective fiscal management
– contract disclosure
– contract oversight and fiscal risk management
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On the sustainability of
non-contingent liabilities
or:
• The fiscal iceberg
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Transport in Portugal:
the fiscal iceberg
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Transport in Portugal:
the fiscal iceberg
Translating:
– Transport expenditure (Min. Public Works)
– Transport expenditure (Min. Finance)
€449m
€251m
• Total reported expenditure 2008: €700m
• Net change in assets in transport sector SOE:
€2,500m to €3,000m
• Net change in (out-of-budget) PPP commitments:
€3,000m
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Effectiveness and efficiency
effective
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Effectiveness and efficiency
effective
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Effectiveness and efficiency
effective
efficient from
the viewpoint of
public purse
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Effectiveness and efficiency
effective
efficient from
the viewpoint of
public purse
efficient from
the viewpoint of
society
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Effectiveness and efficiency
effective
efficient from
the viewpoint of
public purse
efficient from
the viewpoint of
society
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Sydney’s BD tunnel
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Managing fiscal risks
Fiscal risks refer to the possibility of
deviations in fiscal variables from what
was expected at the time of the budget
or other forecast
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Selecting the adequate
infrastructure projects
• cost-benefit analysis
• long-term resilience
technological change
policy change
demographical change
• prioritization
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Checking for affordability
• assessing long-term expected costs
• assessing long-term contingent costs
• fiscal and political commitment
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Designing proper PPP
schemes and contracts
• allocating risks
• designing incentive schemes
• measuring performance
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Preventing free-riding by
sub-national governments
• affordability challenges
• efficiency concerns
• fiscal and financial reporting
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Promoting competition
• double concern:
- selecting the best partner
- at the lowest cost
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Preparing for
contract management
contract
enforcement
partnering
strategic
analysis
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Change management and
risk management
• assessing change
• identifying risks
• mitigating impacts
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Managing
contingent liabilities
• assessing liabilities
• reporting liabilities
• managing liabilities
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Overseeing and controlling
PPP commitments
• Ministry of Finance
• Auditing entities
• Media, taxpayers, general public
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Institutional capacity:
government
• Is government able to assess project risks?
• Is government able to define the KPI?
• (Tendering is the “easiest” part)
• Is government able to manage the contract?
• Is there a gateway process?
Is government able to increase its capacity?
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Thank you
Rui Sousa Monteiro
senior public-private partnerships specialist
World Bank Institute
1818 H Street, N.W.
Washington, D.C. 20433, USA
tel: +1-202-473-9450
e-mail: RMonteiro@WorldBank.org
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