PED 209: Management, Finance, and Regulation of Public Infrastructure in Developing Countries
Tuesdays and Thursdays, 2:45 – 4:00pm, Starr Auditorium
Henry Lee, Spring 2016
This course introduces students to the fundamentals of privatizing, structuring, financing, and regulating
public infrastructure, particularly those that provide water, sanitation, electricity, telecommunications, and
transportation services. Its focus is on public infrastructure outside the United States with an emphasis on
developing countries. In addition to the weekly classes on Mondays and Wednesdays, there will be several
optional review sessions, which will be held on select Friday in Weil Town Hall from 2:45-4:00pm. Most of the
supplemental classes will focus on assisting students with finance.
The course will address three key functions: (1) how, whether, and when to increase private participation in
the development, investment, and operation of public infrastructure; (2) how to finance and value
infrastructure assets; and (3) how to regulate the pricing and the quality of infrastructure services.
The class sessions are discussions of actual cases. Students will be expected to read the cases and be prepared
to participate in an active class discussion. Case questions will be provided for each class to help students
focus their preparation. In addition, further readings are assigned for each class. These provide essential
background information on the topics being discussed. For example, a case focusing on New Delhi’s water
reforms will be accompanied by a reading on the role of private participation in providing water and sewerage
services. The first twenty minutes of a few classes may be used for short lectures. Students will be expected to
read both the cases and the required readings before class.
There will be a take-home final that may be handed out at the last class and will be due on Thursday, May 5 by
5pm. In addition, there will be 3 take-home assignments. Students will also be periodically assigned to
summarize the case discussions and/or submit short policy memos. The final exam will account for 40% of the
grade, the first take-home assignment will account for 20%, the two take home assignments on financing
infrastructure projects will account for 10% each, and in-class participation and short assignments will account
for the remaining 20%. Familiarity with microeconomics and using spreadsheets will be helpful. The finance
section is accessible to those with no prior background in the field.
Henry Lee’s office hours will be Wednesdays, 3pm-4pm and Thursdays, 11am-12pm. Please sign up on the
sheet posted on the door of B302. Or you may schedule an appointment: 617 495-1350,
henry_lee@harvard.edu or through his faculty assistant, Natalie Rios, 617-495-8850,
natalie_rios@hks.harvard.edu. The Course Assistants are Clio Dintilhac, Clio_Dintilhac@hks16.harvard.edu
and Juan Riesco Urrejola, Juan_Riesco_Urrejola@hks16.harvard.edu. The Teaching Fellow for this course is
Peter Deutscher, Peter_Deutscher@hks16.harvard.edu.
We recommend that you purchase “How to Engage with the Private Sector in Public-Private Partnerships in
Emerging Markets” by Edward Farquharson. Several chapters of Professor José Gómez-Ibáñez’s book,
“Regulating Infrastructure: Monopoly, Contracts, and Discretion” and Eduardo Engel, Ronald Fischer, and
Alexander Galetovic’s book, “The Economics of Public Private Partnerships: A basic Guide” are assigned. The
Edward Farquharson book is available for purchase at the Harvard Coop, and 3 copies of each of the three
books are on reserve at the HKS library. All readings will be accessible as links on the syllabus or posted on the
course website. Readings that are starred (*) are optional.
I. INTRODUCTION AND POLITICS
1
TUE
January 26
Infrastructure and Public-Private Partnerships
This lecture will introduce students to the fundamental characteristics of infrastructure and motives and
methods for greater private sector involvement in the expansion and operation of public infrastructure in
developing countries. It serves as a broad overview of the issues discussed in the first half of the class.
Reading:
Andres, Luis et al. Infrastructure gap in South Asia: infrastructure needs,
prioritization, and financing, Volume 1. World Bank, 2014.
https://openknowledge.worldbank.org/bitstream/handle/10986/20327/WPS
7032.pdf?sequence=1&isAllowed=y
World Bank, “Infrastructure: Lessons from the Last Two Decades of World
Bank Engagement.” January, 2006. pp. 1-31. http://wwwwds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2006/02/0
7/000160016_20060207101539/Rendered/PDF/3519910vol.01.pdf
2
THU
January 28
Economic Development and Environmental Politics
The Bujagali Dam was designed to bring power and economic benefits to the people of Uganda. It was
supported by the host government and was to be built by Applied Energy Systems (AES), one of the world’s
most respected private power generating companies. But it triggered the strong opposition of a small US
environmental group concerned over the impact of hydro-electric dams on both the environment and people
displaced. This case will explore the value of the dam to the people of Uganda and the legitimacy of foreign
NGO involvement in infrastructure development.
Reading:
Case study: International Rivers Network and the Bujagali Dam Project (A),
HBS Case #N9-204-083.
Roy, Arundhati, Power Politics, Cambridge, MA: South End Press, 1999, pp. 4347 and 60-68.
Charles Kenny. 2011. “Publishing Construction Contracts as a Tool for
Efficiency and Good Governance.” CGD Working Paper 272. Washington, D.C.:
Center for Global Development.
http://www.cgdev.org/content/publications/detail/1425688/
FRI
January 29
Optional Class: How to Read a Case Study
Some students have had no experience reading and breaking down case studies. In this class, student will
learn how to prepare a case for class discussions. The Lone Pine Case is on the course website.
Reading:
Case study: Trash Collection in Lone Pine: “To Privatize or Not”, HKS Case
1033.0
2
3
TUE
February 2
New Delhi Power and Water Reform
New Delhi successfully privatized its electric distribution companies in 2002, but when it attempted to sign a
private management contract for several districts in the water system, there was a public outcry. This case
compares the two reform efforts and asks why one succeeded and one failed.
Reading:
Case study: New Delhi Water and Power, HKS Case 1891
World Bank, PPIAF and ICA. “Attracting Investors to African Public-Private
Partnerships.” Washington D.C., 2009, pp. 7-34.
http://www.ppiaf.org/ppiaf/sites/ppiaf.org/files/publication/Attracting_Inves
tors_to_African_PPP.pdf
Edward Farquharson, et. al., “How to Engage with the Private Sector in PublicPrivate Partnerships in Emerging Markets.” Washington D.C.: World Bank,
PPIAF, 2011, chapter 2, pp. 9-14. Available in hard copy at the Harvard Coop
or online at:
http://issuu.com/world.bank.publications/docs/9780821378632/1?zoomed=
&zoomPercent=&zoomX=&zoomY=&noteText=&noteX=&noteY=&viewMode=
magazine
4
THU February 4
Reforming State-Owned Enterprises
This class will examine the options for improving or reforming the operations of state-owned infrastructure
projects. Are these reforms a substitute for greater reliance on the private sector?
Reading:
Case study: ENFE: The Bolivian National Railway, HKS Case
Arief Budiman, Diaan-Yi Lin, and Seelan Singham. Improving performance at
state-owned enterprises, McKinsey, 2009
http://www.mckinsey.com/insights/public_sector/improving_performance_at
_state-owned_enterprises
*Optional:
John Nellis, The Evolution of Enterprise Reform in Africa: From State-owned
Enterprises to Private Participation in Infrastructure — and Back? 2005,
http://ageconsearch.umn.edu/bitstream/12193/1/wp050117.pdf
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II. PUBLIC-PRIVATE ARRANGEMENTS
5
TUE
February 9
Negotiating Sustainable Concession Contracts
The Bangkok Second Stage Expressway and the Dabhol Power Facility were the two largest infrastructure
controversies in the 1990s. This case explores the challenge of negotiating a sustainable concession contract,
the impact of failing to do so, and options for designing more sustainable concession contracts in the future.
Reading:
Case study: Bangkok’s Second Stage Expressway, HKS Case 1401.
Gómez-Ibáñez, José, “The Evolution of Concession Contracts: Municipal
Franchises in North America: Regulating Infrastructure: Monopoly, Contracts,
and Discretion,” Cambridge, MA: Harvard University Press, 2003, pp. 157-187.
6
THU February 11
Aguas Argentina: Concessions in an era of political Turmoil
In 2002, Argentina suspended payment to Suez, a French infrastructure company, which owned the
concession for water and sewerage in Buenos Aires. Over the previous nine years, Aguas had dramatically
improved water services in the city, but now finds itself facing the decision whether to walk away from the
concession or to try and persuade the Argentina government to honor the concession contract. This class will
look at whether the original contract was fair to all parties and then will discuss the options available to the
foreign investors.
Reading:
Case study: Aguas Argentina: Settling a Dispute, HBS Case 9-705-019
Lou Wells: Protecting Foreign Investors (HBS Note 9-706-044, November
2010)
*Eduardo Engel, Ronald Fischer, and Alexander Galetovic: The Economics of
Public Private Partnerships: A basic Guide (Cambridge University Press, 2014).
Chapter 7, page 122-130.
4
7
TUE
February 16
Trans-Java Highway
The government of Indonesia is keen to develop the Solo-Kertosono Highway - which constitutes the last 187
kilometers of the 900 kilometer Trans-Java toll road – as a public-private partnership. This case explores what
constitutes a traditional government procurement and what constitutes a Public-Private Partnership (PPP)?
What are the principal features of a PPP?
Reading:
Case study: Completing the Trans-Java Highway, HKS Case, Akash Deep and
Junglim Hahm.
Eduardo Engel, Ronald Fischer, and Alexander Galetovic: The Economics of
Public Private Partnerships: A basic Guide (Cambridge University Press, 2014).
Chapter 1, page 1-20.
8
THU February 18
Negotiating Public-Private Partnerships
This case explores the institutional and political challenges of designing a sustainable public-private
partnership (PPP). Specifically, it looks at an effort by the Province of British Columbia to develop a PPP with a
private firm to collect payments for its health insurance program.
Reading:
Case Study: Hard Won Accord: British Columbia and EDS Canada
Negotiate a Complex Revenue Management Contract, HKS Case #
1835.0
Edward Farquharson, et. al., “How to Engage with the Private Sector in PublicPrivate Partnerships in Emerging Markets.” Washington D.C.: World Bank,
PPIAF, chapters 6 and 9, pp. 77-91 and 111-131.
http://issuu.com/world.bank.publications/docs/9780821378632/1?zoomed=
&zoomPercent=&zoomX=&zoomY=&noteText=&noteX=&noteY=&viewMode=
magazine
9
TUE
February 23
Developing and Enforcing Performance Goals
The class explores the structure of the first PPP in Africa for both the construction and management of a new
hospital facility and the provision of clinical services to ensure that the private party provided adequate
services which were enforceable and realistic for a developing country. One of the most difficult challenges
encountered by the sponsors was writing and implementing performance indicators. This case focuses on the
development of these indicators for the new referral hospital in Lesotho and the viability of healthcare in
poorer developing countries.
Reading:
Case study: Lesotho Hospital and Filter Clinics: A Public-Private Partnership by
Henry Lee and Iulia Cojocaru, HKS Case 1999.0.
U.S. Department of Transportation Key Performance Indicators in Public
Private Partnerships (DOT, 2011, Washington, D.C.), pp. 1-4, 6-12.
http://international.fhwa.dot.gov/pubs/pl10029/pl10029.pdf
Take-home assignment 1 – Due Tuesday, March 1 at 2:00pm
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II. REGULATION
10
THU February 25
Regulation and Competition
This class will look at Sri Lanka’s efforts to regulate its bus systems and why those efforts encountered so
much difficulty. It serves as an introduction on why governments regulate infrastructure projects.
Reading:
Case study: Sri Lanka Transport (A): The Bus Industry, HKS Case 1377.0
Gómez-Ibáñez, José, Regulating Infrastructure: Monopoly, Contracts, and
Discretion, Cambridge, MA: Harvard University Press, 2003, pp. 1-13, 18-36.
Breyer, Stephen. “Typical Justifications for Regulation: Regulation and its
Reform,” Cambridge, MA: Harvard University Press, 1982, pp. 15-35.
FRI
February 26
Optional Introduction Class on Finance
11
TUE
March 1
Regulation: Pricing
This class looks at Great Britain’s efforts to introduce performance based pricing and light handed regulation
as an effort to reduce regulatory uncertainty. It will also discuss the characteristics of effective regulation by
examining the performance of Britain’s water regulator, Ian Byatt.
Reading:
Case study: British Water (A): The Evolution of Price Cap Regulation, HKS Case
1809.0
Breyer, Stephen, “Cost-of-Service Ratemaking in Regulation and its Reform”,
Harvard University Press, Cambridge, 1982, pp. 36-70.
OFGEM, “RIIO – A New Way to Regulate Energy Networks”, Fact Sheet 93,
April, 2010.
12
THU March 3
Regulation in Poorer Developing Countries
This lecture assesses Mali’s efforts to regulate its electricity and water services. It will not only assess the
performance of the regulatory agencies, but also look at the efficacy of various efforts to involve the private
sector in the provision of infrastructure services in Sub-Saharan Africa.
Reading:
Case study: Energie du Mali (EDM), HKS Case 1811.0
Gómez-Ibáñez, José, “The Future of Regulation,” Regulating Infrastructure:
Monopoly, Contracts, and Discretion, Cambridge, MA: Harvard University
Press, 2003, pp. 341-357.
6
13
TUE
March 8
Unbundling and Network Access Pricing
(Guest Speaker: Tony Gomez-Ibanez)
Many countries have attempted to improve the quality of infrastructure services by "unbundling" their utilities
to separate the activities that are potentially competitive from those that are not. Unbundling introduces
competition to a wider range of activities, potentially improving services and lowering costs. But these
benefits often come with a reduction in coordination. This case looks at Chile's efforts to unbundle its
telecommunication sector.
Reading:
Case study: Regulating Broadband in Chile: The Debate Over Open Access, HKS
Case, 1955.0
Gómez-Ibáñez, José, “The Trade-off in
Unbundling: Competition versus Coordination” and “The Prospects for
Unbundling,” in Regulating Infrastructure: Monopoly, Contracts, and
Discretion, Cambridge, MA: Harvard University Press, 2003. Chapter 10 pp.
247-263 and Chapter 13 pp. 326-339.
14
THU March 10
Designing Sustainable Investments in Poorer Developing Countries
This class will explore the actions taken by the Gencor Corporation in building a $1.4 billion in Mozambique
following the Civil War. It will discuss how investors can reduce the risk of expropriation and the role of the
International Finance Corporation.
Reading:
Case study: Financing the Mozal Project, HBS Case 200-005.
Ahmed, Priscilla A. and Xinghai Fang, et al , Project Finance in Developing
Countries, (Washington: International Finance Corporation,1999), "Mitigating
Major Project Risks", pp. 38-58.
March 14—18 is spring break; there will be no class
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IV. PROJECT FINANCE
Students are urged to use Brealey, Richard, and Stewart Myers, Principles of Corporate Finance (McGraw Hill,
11th Edition), which is on reserve at the HKS library as a reference for general questions on this topic.
15
TUE
March 22
Introduction to Project Finance
This will be the introductory class for project finance. It will present the general features of a typical project
finance transaction—in which lenders have almost no recourse to project sponsors - and illustrates these
features through the financing of Nam Hinboun Dam in Laos.
Reading:
Case study: Financing the Theun-Hinboun Hydroelectric Project, HKS Case
1829.0
Deep, Akash, "A Firm Foundation for Project Finance" The Financial Times
(June 6, 2000) and in Mastering Risk, Part I - Concepts, 2001, (Ed: James
Pickford), Prentice Hall, pp. 218 - 223.
*Barbara Weber and Hans Wilhelm Alfen, “Infrastructure as an Asset Class”
(Wiley, 2010) ch. 5, p. 141 – 195.
16
THU March 24
Structuring Workable Financial Frameworks
This case explains efforts by Groupo Tribasa, one of the largest construction companies in Mexico, to arrange
long-term financing for two toll roads. The class will identify the issues that need to be considered in
fashioning a workable financial structure.
Reading:
Case study: Tribasa Toll Road Trust, HKS 1485.0
Hoffman, Scott, "An Introduction to Project Finance", Project Finance Terms,
Abbreviations, and Acronyms, pp. 697 - 710.
Case study: BP Amoco (A): Policy Statement on the Use of Project Finance,
HBS Case 9-201-054.
Take-home assignment 2 – Due Thursday, March 31 at 5:00pm
FRI
March 25
Optional Review Class
8
17
TUE
March 29
Allocating Financial Risk 1
The Melbourne City Link is a $2 billion privately-funded highway project. This class illustrates the financing of a
large-scale private infrastructure project through the use of equity and debt. By developing a risk allocation
matrix, it shows how specific risks are borne by the sponsors, the project company and the state.
Reading:
Case study: The Melbourne City Link, HKS Case 1539.0
Irwin, Timothy C., “The Allocation of Three Risks,” Government Guarantees:
Allocating and Valuing Risk in Privately Financed Infrastructure Projects,
Washington DC: The World Bank, 2007, pp. 71-101.
18
THU March 31
Valuing Infrastructure Assets
This class will look at the difference between how public and private investors value an asset. The asset in
question is the Rio Janeiro airport--which is scheduled to host the 2016 Olympics. The government of Brazil
decides to sign a concession for the operation and improvement of the airport with private investors. To
insure that the bids reflect the true value of the airport, the government publishes a valuation figure, but
when the bids are open, the winning bid is four times higher than the government's estimate. The class will
assess why these valuations might be so different.
Reading:
Case study: Rio Light - The Privatization of Light—Serviços de Eletricidade, SA:
Preparing the Terms of Sale, HKS Case 1540.0
“Valuation Techniques,” HBS Note 9-384-185
“Diversification, the Capital Asset Pricing Model, and the Cost of Equity
Capital,” HBS Case # 276-183
FRI
April 1
Optional Review Class (note: this class will be at 1:15pm)
19
TUE
April 5
Corporate Governance
This class will introduce the concept of corporate governance and its importance in attracting investment. The
class will also assess corporate governance’s impact on the value of a company.
Reading:
“Sky Air, Inc.,” HBS Case 9-297-110
“PetroChina,” HBS Case 9-701-040
Take-home assignment 3 – Due Tuesday, April 12 at 2:00pm
9
20
THU
April 7
Public-Private Comparator
(Guest Speaker: Prof. Akash Deep)
This case will provide students with an analytical framework for comparing the value of traditional
government procurement for an infrastructure facility and having the private sector develop the project.
Public-private comparators have been used extensively in the United Kingdom and Australia.
Reading:
Case study: Partnerships Victoria, HKS Case 1822.0
World Bank Institute et al. Value-for-Money Analysis – Practices and
Challenges (May 2013), p. 12-30,
https://openknowledge.worldbank.org/bitstream/handle/10986/17622/8408
00WP0Box380ey0Analysis00PUBLIC0.pdf?sequence=1
James Leigland and Chris Shugart, “Is the public sector comparator right for
developing countries? Appraising public-private projects in infrastructure”,
GridLines, PPIAF, Note No. 4, April 2006. 4 pp.
http://www.ppiaf.org/sites/ppiaf.org/files/publication/Gridlines-4Is%20the%20Public%20Sector%20Comparator%20%20JLeigland%20CShugart.pdf
21
FRI
April 8
Optional Review Class
TUE
April 12
Allocating Financial Risk – Airports
Reading:
Case study: Rio de Janeiro Galeão International Airport (GIG) Concession
Hoffman, Scott, "Project Finance Risks", Chapter 2 in The Law and Business of
International Project Finance, pp. 33-51.
“Rating Approach to Project Finance,” Fitch Ratings, August 12, 2004, pp. 112.
Jeff Delmon, at.al. Airport PPPs: Mythbusters (IFC, Issue 6 July 2012) p. 34-37.
http://www.ifc.org/wps/wcm/connect/6ff1e1804bf76ab0a248b6fab39f4e88/
Handshake_Issue6_WEB.pdf?MOD=AJPERES
10
22
THU
April 14
The Role of Infrastructure Funds in a Capital-Constrained World
(Guest Speaker: Jeff Miller - Tremont Group)
Jeff Miller has been actively involved in financing major infrastructure projects. He will discuss the role of
infrastructure investment funds in the financing of transport and power projects. It is said that these funds
continue to have access to substantial capital despite the present economic problems. The class will explore
how these funds might participate in the infrastructure market going forward?
Reading:
Barbara Weber and Hans Wilhelm Alfen, “Infrastructure as an Asset Class”
(Wiley, 2010), p. 40-54.
McLean, Bethany, “Would You Buy a Bridge from this Man?” Fortune, October
1, 2007, (New York, 2007), pp. 138-150, http://ezpprod1.hul.harvard.edu/login?url=http://search.ebscohost.com/login.aspx?dir
ect=true&db=bth&AN=26656102&site=ehost-live&scope=site or
http://archive.fortune.com/2007/09/17/news/international/macquarie_infras
tructure_funds.fortune/index.htm
23
TUE
April 19
Necessary Costs and Benefits of Public Infrastructure
This class will involve differentiating real efficiency gains from financial transfers by examining the proposal to
sell the Pennsylvania Turnpike. If PPPs are able to provide benefits to the public, how do governments
determine and allocate those benefits?
Reading:
Case study: Leasing the Pennsylvania Turnpike, HKS case # HKS102-HCB ENG
Gómez-Ibáñez, José, “Note on the Differences Between Social Benefit-Cost,
Financial, and Regional Income Analyses”. Cambridge: 1996. pp. 1-9.
Anthony Boardman, David Greenberg, Aidan Vining, David Weimer. CostBenefit Analysis (4th Edition). Prentice Hall: 2011, New Jersey. Chapter 1, p. 126.
24
THU April 21
Finance and Regulation Revisited
This class will return to the privatization of Brazil’s electric distribution companies. The Brazilian regulator is
reviewing proposals to increase the retail tariff and is weighing methodologies which would incorporate
regulators’ goals of fairness and consumer protection and the need of the power sector to finance incremental
investment.
Reading:
Case study: Revising Electricity Tariffs in Brazil, Henry Lee and Sunil Tankha
HKS Case 1826.
11
25
TUE
April 26
PPPs: The Perspective of a Private Company
(Guest Speaker: Joe Aiello, CEO, Meridiam – North America)
Meridiam is one of the fastest growing infrastructure companies in the U.S. with significant interest in
transportation and building sectors. It has developed a financing model that has been highly successful. The
discussion will be built around the development of a new courthouse for Long Beach, California, the North
Miami Tunnel, and the Dallas HOT lane project. Material will be made available in advance of the class.
Reading:
TBA
26
THU April 28
Privatization Revisited
This class will explore the developments in Bolivia beginning with the successful capitalization of 40% of
Bolivia’s industrial and infrastructure economy through the public opposition and uprising over the proposed
privatization of the Cochabamba water supply.
Reading:
Case study: Capitalization: The Politics of Privatization in Bolivia, HKS Case
1447.
Finnegan, William. “Leasing the Rain,” from The New Yorker, April 8, 2002,
http://www.newyorker.com/archive/2002/04/08/020408fa_FACT1?currentPa
ge=all
FRI
April 29
Optional Review Class
Final Exam: The exam will be handed out at the last class. A hard copy must be submitted to Natalie Rios (B302) by 5PM on Thursday, May 5 for all students. If you are out of town, you may email your exam to
natalie_rios@hks.harvard.edu or henry_lee@harvard.edu. There will be a point deduction for each day it is
late.
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