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  • Bridging the gaps

    Implementation challenges for

    transport PPPs in OIC member

    states

    March 28, 2013

    Vanesa Sanchez, Senior Analyst

    Economist Intelligence Unit

  • PPPs in the OIC member states

    Introduction to the study Bridging the gaps

    Developing transport in OIC member countries is a priority area for COMCEC

    This is part of a broader mandate to enhance economic and commercial cooperation among the

    OIC member states

    PPPs have been identified as one key way to finance and deliver vital transport projects

    In the interest of enabling OIC member countries to better understand, implement and cooperate

    on PPPs in transport, COMCEC commissioned the Economist Intelligence Unit to prepare a study

    on PPPs in OIC member states

    All 57 member states were included and examined in the process

    PPPs are defined as in the previous session

    Existing research and reports; EIU proprietary data and country analysis; interviews with

    government officials and sector experts; international project databases

  • The EIU has experience evaluating and comparing 57

    countries worldwide

    The EIUs Infrascope index assesses country-level capacity

    to develop and implement public-private partnerships

    Evaluates 3 sectors: water and sanitation, transportation and energy

    Focusing on laws, regulations, institutions and practices that affect the

    environment for PPPs

    Looks at the amount and quality of PPP projects in the Asia, Latin

    America and Eastern European regions

    EIU PPP expertise

    Asia 2011

    EECA 2013

    LAC 2009, 2010,

    2012

    EIUs main toolkit includes:

    Thematic reports: based on country-level analysis and

    expert views, best practice

    Learning tools: for country self assessment, allowing to

    produce what if scenarios given changing conditions or

    frameworks

    Benchmarking: the possibility to learn from other countries

    successes and mistakes, to better inform best and worst

    practice

    Economic forecasting models: these allow for

    measurements of country wealth, budgetary position, credit

    risk, and user affordability

  • Objectives

    It is difficult to implement transport PPPs projects well and progress can

    be accelerated with effective use of existing knowledge. Furthermore,

    best practice thinking (as well as challenges) keeps evolving over time.

    1. Highlight global trends

    and best practice

    frameworks

    As obstacles are overcome, it is important for countries to develop

    strategic plans for improvement or expansion.

    2. Identify country

    characteristics in terms of

    legal frameworks and

    experience and establish

    similarities

    3. Discuss challenges for

    implementation and

    indicate pathways for

    improvement/expansion

    An essential part of a countrys learning process in PPP implementation

    is an assessment of existing conditions and reforms in place.

    International comparisons and experiences are useful as practical

    guidance.

  • Scope: 57 OIC countries

    Afghanistan, Bahrain, Brunei, Egypt,

    Iran, Iraq, Jordan, Kuwait, Lebanon,

    Oman, Palestine, Qatar, Saudi Arabia,

    Syria, Turkey, United Arab Emirates,

    Bangladesh, Indonesia, Malaysia,

    Maldives, Pakistan

    Albania, Azerbaijan, Kazakhstan,

    Kyrgyz Republic, Tajikistan,

    Turkmenistan, Uzbekistan

    Guyana, Suriname

    Algeria, Benin, Burkina Faso, Cameroon,

    Chad, Comoros, Djibouti, Gabon, Gambia,

    Guinea, Guinea-Bissau, Ivory Coast, Mali,

    Mauritania, Morocco, Mozambique, Niger,

    Nigeria, Libya, Senegal, Somalia, Sudan,

    Togo, Tunisia, Uganda, Yemen, Sierra

    Leone

  • Country groupings

    Group 4

    Countries with a PPP framework that

    have implemented at least one

    transport PPP

    Group 3

    Countries without a PPP framework

    that have implemented at least one

    transport PPP

    Group 1

    Countries without a PPP framework

    and no transport PPP experience

    Group 2

    Countries with a PPP framework and

    no transport PPP experience

    Framework development

    Experience

  • Group 1 Group 2 Group 3 Group 4

    Countries without a PPP

    framework and no

    transport PPP experience

    Countries with a PPP

    framework and no

    transport PPP experience

    Countries without a PPP

    framework that have

    implemented at least one

    transport PPP

    Countries with a PPP

    framework that have

    implemented at least one

    transport PPP

    Afghanistan Bangladesh Algeria Albania Azerbaijan Kuwait Benin Egypt

    Bahrain Kyrgyz Republic Burkina Faso Indonesia

    Brunei Cameroon Ivory Coast

    Chad Comoros Kazakhstan

    Gambia Djibouti Malaysia

    Guinea-Bissau Gabon Morocco

    Iran Guinea Nigeria

    Libya Guyana Pakistan

    Mauritania Iraq Sierra Leone

    Niger Jordan Tunisia

    Oman Lebanon

    Palestine Maldives

    Somalia Mali Tajikistan Mozambique

    Turkmenistan Qatar Uzbekistan Saudi Arabia

    Senegal

    Sudan

    Suriname

    Syria

    Togo

    Turkey

    Uganda

    United Arab Emirates

    Yemen

    Country groupings

    Data for country

    groupings was taken

    from the World Bank

    PPIAF database, which

    spans 1990-2011

    The concessions and

    greenfield categories

    were used to filter

    country results

  • Group 1

    Countries without a PPP

    framework and no

    transport PPP experience

    Afghanistan Azerbaijan

    Bahrain

    Brunei

    Chad

    Gambia

    Guinea-Bissau

    Iran

    Libya

    Mauritania

    Niger

    Oman

    Palestine

    Somalia Tajikistan

    Turkmenistan

    Uzbekistan

    Country groupings

    Countries in group 1 span several regions, across Sub-Saharan Africa, the Middle East,

    North Africa, Central and East Asia

    Many of these countries struggle with overall country and economic competitiveness

    Many are found in the bottom 95 of the World Economic Forum

    rankings, or not included

    Exceptions are Azerbaijan, Brunei, Bahrain, Oman and Iran

    Sub-Saharan African countries have low per capita GDP

    Additional highlights:

    Azerbaijan is the largest economy in central Asia; Iran is the largest of

    all group 1

    Small countries Bahrain, Oman and Brunei have the highest WEF

    competitiveness positions

    Group 1 overview

  • Issue 1:

    Planning approach

    Issue 2:

    Pricing infrastructure

    Issue 3:

    Contracts and competitiveness

    Challenges group 1

    -Change decision-making

    criteria (from politics-based

    to) strategy and market-

    based)

    -Long vs short-term

    -Project bankruptcy or

    renegotiation or distress

    -User affordability and

    willingness are low

    (population is unused to

    tolls)

    -Without good contract

    enforcement, private sector

    interest will be low

    -Unstable economies. Low

    employment, inflation, etc.

    lower user affordability

  • Challenges group 1, contd

    Issue 4:

    Human resources

    Issue 5:

    Country instability

    Issue 6:

    Local financial markets

    -Need understanding of PPP

    procurement, implementation

    and oversight process

    -Difficult to get the right

    people; also costly

    -Regulatory , institutional and

    legal risks deter investors

    -Financial and economic risks

    deter investors

    -Underdeveloped markets

    mean high dependency on

    IFIs, international banks and

    state-run development

    institutions

    -Ultimately means higher

    financial risk

  • Overview of countries without a framework

    Group 3

    Countries without a PPP

    framework that have

    implemented at least one

    transport PPP

    Algeria

    Benin

    Burkina Faso

    Cameroon

    Comoros

    Djibouti

    Gabon

    Guinea

    Guyana

    Iraq

    Jordan

    Lebanon

    Maldives

    Mali

    Mozambique

    Qatar

    Saudi Arabia

    Senegal

    Sudan

    Suriname

    Syria

    Togo

    Turkey

    Uganda

    United Arab Emirates

    Yemen

    These countries all do span every region in COMCEC; however only Turkey and

    Mozambique have implemented more than 3 projects since 1990.

    This speaks to the difficulty of implementing such projects continuously

    and successfully without adequate laws, regulations and institutions in

    place

    Like group 1, many of these countries struggle with overall country and economic

    competitiveness, as well as political and economic stability

    However countries such as Turkey, Qatar, Saudi Arabia, Gabon, Cameroon and the

    UAE stand out thanks to strong macroeconomic indicators.

    Group 3 overview

  • Issue 1:

    Inadequate legal framework

    Issue 2:

    Bidding and procurement rules

    Issue 3:

    Inadequate institutional framework

    Challenges group 3

    -Not all concession forms possible

    -Over-dependence on concessions

    and sea ports and air ports

    -Risk identification and allocation not

    required

    -Reduced competition and

    transparency

    -Incorrect selection criteria

    -Delays to bid, low transparency

    means poor feasibility studies and

    private interest

    -Makes the process costly, reduces

    value for money

    -No lifecycle oversight; no

    development of institutionalised

    expertise

    -Low project buy-in; competition for

    resources, fragments project pipeline

    -Bypass Ministry of Finance

  • Issue 4:

    Risk allocation

    Issue 5:

    Feasibility studies

    Issue 6:

    Broader development issues

    -Inadequate legal framework means there is little experience

    -Since most projects allocate as

    much risk as possible on private

    sector, countries will likely struggle

    when trying to implement more

    complex forms

    -Feasibility studies, because they

    are not subject to consistent

    standards, preparation or oversight,

    vary in quality

    -Also there is an optimism bias in

    terms of willingness to pay and

    traffic estimation. This increases

    demand risk especially

    -Similar to group 1, countries in

    group 3 need to enhance economic

    indicators, human capital, financial

    markets and explore risk

    guarantees for political and

    economic instability

    Challenges group 3

  • Group 2 Group 4

    Countries with a PPP

    framework and no

    transport PPP experience

    Countries with a PPP

    framework that have

    implemented at least one

    transport PPP

    Bangladesh Albania

    Kuwait Egypt

    Kyrgyz Republic Indonesia

    Ivory Coast

    Kazakhstan

    Malaysia

    Morocco

    Nigeria

    Pakistan

    Sierra Leone

    Tunisia

    Country groupings: Groups 2 and 4

    There are far fewer of these countries than groups 1 and 3

    However their project volumes are much higher on

    average

    Despite a much smaller group size (11 compared

    with 26), the total investment amount is 3.5 times

    higher : US$45.1bn versus US$12.8bn

    Groups 2 and 4 overview

  • Issue 1:

    Lack of expertise

    Issue 2:

    Long-term oversight

    Issue 3:

    Incremental improvements

    Challenges groups 2 and 4

    -PPP units are in place, but

    expertise still needs to be

    developed

    -Need to spread knowledge

    to sector ministries and other

    key stakeholders

    -Project monitoring for contract

    compliance and quality

    standards is a lower focus

    relative to other project phases

    -This also includes dispute

    resolution mechanisms

    -Legal frameworks

    -Coordination

    -Quality of feasibility studies

    -Stronger institutional design

  • To address the issues raised, country or project-specific interventions can occur

    Interventions can also occur across countries

    Options

    Risk identification and

    risk matrix construction (p.

    69 of report)

    Institutional design

    Legal and regulatory

    design

    Feasibility studies

    Application of the risk

    matrix

    Stakeholder consultation

    Institutional reform

    Legal and regulatory

    reform

    IFI support

    On the job training

    Developing private sector

    Learning to engage

    external consultants

    Training on project

    accounting and planning

    for Ministries of Finance

    Training on financial

    instruments and guarantee

    methods

    Project or country-specific Can be shared by countries

  • Legislative and regulatory reform In several OIC countries, the existing laws may need to be modified to allow for successful

    infrastructure PPP projects, such as enabling the granting of step-in rights to lenders and

    requiring open and fair procurement processes. These modifications may be embodied in sector-

    specific law or in the case of procurement or competition law.

    OIC members should also consider disclosing concession agreements:

    a) It provides a further check on corruption, which may strengthen private sectors legitimacy

    when involved in sensitive sectors.

    b) It provides consumes with a clearer sense of rights and obligations and can facilitate

    public monitoring of concessionaires performance.

    Groups 1 and 3: Have the most pressing challenge of developing their

    legal, institutional and regulatory frameworks. Laying the foundations for

    competitive processes is fundamental.

    Groups 2 and 4: Consistency of the legal framework is fundamental, but

    structuring effective procurement processes is paramount. Increasing

    transparency and competitiveness, as well as post-bid regulations, should

    be the main focus.

    Improving implementation

    Group-specific recommendations

  • Institutional support and institutional building

    In-house training, on-the-job

    Countries with sufficient staff skilled in PPPs at line and core ministries have been more capable of

    implementing successful PPP projects. Specific training sessions, can be used to build or enhance

    local capacity.

    Twinning arrangements

    Certification

    Training in the financial assessment of PPP projects

    Training on competitive selection of the private partner

    Improving implementation

    Groups 1 and 3: Should develop planning capacity, crucial aspects such

    as land acquisition. Particular attention to public sector capacity in the

    transport sector and to project prioritisation.

    Groups 2 and 4: While PPP unit have been established mainly within

    Ministry of Finance, the capacity of line ministries should be strengthened.

    Group-specific recommendations

    Capacity building through:

  • Technical assistance

    Resident advisors

    Short-term experts

    Terms of reference and other resources

    TOR for a PPP feasibility study

    Improving implementation

    Groups 1 and 3: Technical assistance is key to develop frameworks and

    expertise in group 1. Group 3 should aim to improve selection processes

    and feasibility studies.

    Groups 2 and 4: Technical assistance should be considered for

    institutional development as well as any areas for improvement at planning

    and evaluation

    Group-specific recommendations

    Bridging capacity gaps by contracting for technical assistance

    Technical assistance can help provide expertise and know-how in areas which are often lacking. This

    is a quick solution to a longer-term problem.

  • Improving implementation

    Investment climate and private sector development Even relatively experienced local contractors may require some help to bid satisfactorily, win and

    implement a PPP project in a OIC member state as a concession, as opposed to a traditional

    construction or maintenance contract. This is because it involves longer-term planning and future-

    project cost estimates that local contractors may not be used to. More targeted support should be

    defined through a survey and interviews with the local contactors and government officials.

    Strategies for private sector strengthening:

    Groups 1 and 3: While important, a pipeline should first be developed to

    maximise full gains. Of such efforts.

    Groups 2 and 4: Building the confidence of the private sector, for PPP

    investments, requires increased political and regulatory stability.

    Group-specific recommendations

    Direct advisory services and training on project management models

    Support through financial instruments, such as loans and partial risk guarantees

    Association with more experienced outside bidders, for example forming a joint-

    venture, or initially, as a sub-contractor

  • Improving implementation

    Risk sharing The Risk Matrix should be updated and refined as project

    preparation evolves. It is usually prepared with the support of

    transaction experts and in consultation with potential bidders.

    Ultimately, risk allocation determines a PPP projects financeability.

    Good practice in preparing risk matrices is to adopt the following

    structure for each stage of the project:

    -Description of the risk

    -Proposed allocation of the risk (usually two columns: grantor and

    concessionaire)

    -Comments

    A typical risk matrix for a transport PPP

    project includes the following types of risks

    a)Design risks

    b)Site risks

    c)Construction risks

    d)Force-Majeure risks

    e)Revenue risks

    f)Operation and maintenance

    g)Performance risks

    h)Other market risks

    i)Political risks

    j)Default risks

    k)Strategic risks

    Groups 1 and 3: Should aim at developing capacity for effective

    risk allocation. Groups 2 and 4: Clear and equitable risk

    allocation is key to success, and this requires full specification in

    the legal framework. Affordability should be considered as a

    central aspect for full assessment of budgetary risks and

    contingencies.

    Group-specific recommendations

  • Improving implementation

    Financial instruments Risk mitigation instruments are financial instruments that transfer

    certain defined risks from project financiers to creditworthy third

    parties who have a better capacity to accept such risks. The

    advantages of these instruments include:

    a)The public sector is able to mobilise domestic and international

    private capital to build infrastructure, supplementing limited public

    resources.

    b)Private-sector lenders and investors will finance commercially viable

    projects when risk-mitigation instruments cover those risks that they

    perceive as excessive or beyond their control.

    c)Governments can share the risk of developing infrastructure by

    using their limited fiscal resources more efficiently and by attracting

    private investors.

    Instruments commonly used to

    mitigate risk include guarantees and

    event/political insurance products.

    Groups 1 ,2, 3 and 4: Countries across groups

    should explore options to mitigate political and

    financial risk, as well as strategies to overcome the

    constraints of underdeveloped financial markets.

    Group-specific recommendations

    A commitment by the government to repay the projects

    debt, under certain circumstances, is called a government

    guarantee. Mechanisms include:

    a)Equity and debt guarantees

    b)Political risk guarantees

    c)Shadow toll

    d)Availability fee or annuity

    e)Minimum traffic or revenue guarantees

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