How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets

How to Engage with

the Private Sector in

Public-Private

Partnerships in

Emerging Markets

How to Engage with

the Private Sector in

Public-Private

Partnerships in

Emerging Markets

Edward Farquharson

Clemencia Torres de Mästle

and E. R. Yescombe

with Javier Encinas

© 2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW

Washington DC 20433

Telephone: 202-473-1000

Internet: www.worldbank.org

All rights reserved

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ISBN: 978-0-8213-7863-2

eISBN: 978-0-8213-8552-4

DOI: 10.1596/978-0-8213-7863-2

Library of Congress Cataloging-in-Publication Data

Farquharson, Edward, 1962–

How to engage with the private sector in public-private partnerships in emerging markets / Edward Farquharson, Clemencia Torres de Mästle, and E.R. Yescombe; with Javier Encinas.

      p. cm.

  Includes bibliographical references.

  ISBN 978-0-8213-7863-2 — ISBN 978-0-8213-8552-4 (electronic)

1. Public-private sector cooperation. 2. Infrastructure (Economics)—Finance. 3. Public works—Finance. I. Torres de Mästle, Clemencia, 1962– II. Yescombe, E. R. III. Title.

  HD3871.F37 2010

  352.2’9—dc22

2010044905

Cover photos: © World Bank.

Cover design: Naylor Design, Inc.

CONTENTS

ACKNOWLEDGMENTS

This book was made possible by a grant from the Public-Private Infrastructure Advisory Facility (PPIAF). It builds on an earlier publication, Attracting Investors to African Public-Private Partnerships, and the authors would like to acknowledge the contributions of all those who commented on that work. The present book, How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets, goes beyond the earlier publication by expanding in scope and in depth on some of the key aspects to successful and sustainable public-private partnerships (PPPs), such as the various financing mechanisms for PPPs and the diversity of PPP contractual arrangements in countries with different legal traditions. This book broadens the discussion to other emerging PPP markets beyond Africa and discusses the nuances that emerge in the recommended paths when taking into account this diversity. It includes a wide range of case studies from several regions and sectors and illustrates the different activities involved in transforming a desirable project in a government’s eyes to an attractive investment opportunity for a private partner, and ultimately into a PPP project that would benefit all parties involved.

Many people have contributed valuable comments and feedback to make this book as complete as it is, yet accessible to those interested in understanding and undertaking PPPs. The authors are particularly grateful to colleagues inside and outside the World Bank Group who dedicated many hours to provide detailed and constructive comments on the individual chapters and whose contributions have resulted in a stronger and richer book. They include Jeff Delmon, Vicky Delmon, Katharina Gassner, Michael Gerrard, José Luis Guasch, Clive Harris, Cledan Mandri-Parrot, Mark Moseley, Cathy Russell, and Derek Woodhouse. Special thanks to Michael Gerrard and Mark Moseley also for the many hours spent discussing and brainstorming on many fine points of the whole subject. Many thanks as well to Karina Izaguirre and Edouard Pérard for their assistance with the use of numbers and graphs from the World Bank/PPIAF Database. Any errors in the text remain the authors’ sole responsibility.

The authors would also like to thank various people who helped make this book a reality. Special thanks in PPIAF to Andrew Jones for his most efficient collaboration in the finalization of the book, to Janique Racine for her guidance in the early stages of this project, and to Amsale Bumbaugh for her continuous support during the production process. Many thanks also to Janice Tuten in the World Bank’s Office of the Publisher for her dedication and infinite patience throughout the production of this book.

ABOUT THE AUTHORS

Edward Farquharson works for Infrastructure UK (previously Partnerships UK), the infrastructure body recently established by Her Majesty’s Treasury. Edward leads IUK’s international team working with governments around the world on the establishment and implementation of public-private partnership (PPP) policies and projects. He has more than 25 years of experience in infrastructure finance in the United Kingdom, Africa, Asia, and Latin America as a private equity investor, lender, and adviser and has lived in the United Kingdom, Brazil, and Southern Africa. He trained as a project finance specialist in a leading U.K. investment bank and worked on one of the United Kingdom’s first PPPs in the mid-1980s. Edward has an MBA from Manchester Business School and a degree in philosophy, politics, and economics from Oxford University.

Clemencia Torres de Mästle is the program leader for Global Knowledge and for West and Central Africa in the Public-Private Infrastructure Advisory Facility (PPIAF). Previously, at the World Bank, she was senior economist in the Energy Unit for Latin America and the Caribbean, senior private sector development (PSD) specialist in the PSD and Finance Department for the Middle East and North Africa, and a consultant in the Public Sector Management and PSD Division. Before joining the World Bank, she worked as a consultant on privatization and regulation. Her areas of expertise include infrastructure economics, institutional and regulatory issues in these markets, private sector participation, and state-owned enterprises’ performance. She has written about electrification and regulation and on investment behavior in transmission. She holds a Master’s degree and PhD in economics from Boston University.

E.R. Yescombe has more than 30 years of experience in various forms of structured finance, including project finance, leasing, export credits, property, and asset finance. He has been an independent consultant on public-private partnerships (PPPs) and project finance since 1998. He has advised project sponsors and government entities on the financial aspects of PPP contracts, as well as on policy issues and contract standardization. He is the author of Principles of Project Finance (2002), which has been translated into Chinese, Hungarian, Japanese, Polish, and Russian and is recognized as a leading work on this subject, and Public-Private Partnerships: Principles of Policy and Finance (2007). He was head of project finance in Europe for Bank of Tokyo-Mitsubishi and its predecessor, Bank of Tokyo. (See www.yescombe.com.)

Javier Encinas joined the international unit of Partnerships UK (PUK) in 2007 and transferred to the international unit of Infrastructure UK (IUK) in 2010. Since 2007, Javier has been involved in providing advisory support to overseas governments implementing PPP policy, programs, and projects. He coordinates IUK’s international training programs and is also a member of the IUK team looking at international cost comparisons for infrastructure delivery, leading the international work. Prior to joining PUK, Javier worked for Renault and for a Paris-based think tank, and undertook strategy consulting and corporate finance assignments with Citigroup and Roche. Javier holds an MBA with distinction and specialization in finance from Manchester Business School in the United Kingdom, and MA/BA degrees (Diplôme de Grande École) from the Institut d’Études Politiques de Paris (Sciences-Po) in France. He is fluent in English, French, and Spanish.

ABBREVIATIONS

1.

INTRODUCTION

What transforms a desirable project on a government wish list to an attractive investment opportunity in the eyes of a potential private sector partner? This guide seeks to enhance the chances of developing effective partnerships between the public and the private sectors by addressing one of the main obstacles to the effective delivery of public-private partnership (PPP) projects: having the right information on the right project for the right partners at the right time.

Data from the World Bank and the Public-Private Infrastructure Advisory Facility (PPIAF) private participation in infrastructure (PPI) project database indicate that private sector investment in infrastructure in developing economies grew steadily over the past decade (see figure 1.1).¹ By 2007 the levels had finally surpassed the peak levels seen in 1997, the end of the previous growth spurt.

However, the history of international credit flows shows that when international markets are down, emerging markets with less developed domestic sources of long-term credit can suffer disproportionately as international lenders retreat back to their own domestic markets, while those with stronger domestic markets may be less affected. The recent credit crisis, started in mid-2008, is only the most recent instance of this (see figure 1.2).

Figure 1.1 Investment Commitments to New and Existing Infrastructure Projects with Private Participation in Developing Countries, by Sector, 1990–2008

Source: World Bank and PPIAF PPI project database.

Figure 1.2 Investment Commitments to New PPI Projects Reaching Closure in Developing Countries, by Region, 1995–2009

Source: World Bank and PPIAF PPI project database and impact of the crisis on PPI database.

Note: Includes only investment commitments at financial or contractual closure; does not include additional investment in subsequent quarters. EAP = East Asia and Pacific; ECA = Eastern Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SA = South Asia; SSA = Sub-Saharan Africa.

Where credit availability falls, lenders then demand higher returns and more onerous terms for the risks they are being asked to take and their tolerance of risk declines. This may have an impact on whole sectors of the market: projects that rely on user demand may struggle more to raise funding than projects that are based on government payments for the availability of a service. Thus, rather than paying for the perceptions (no doubt valid) of higher risk, the challenge is to derisk the situation. Projects more likely to reach closure are characterized by strong economic and financial fundamentals, the backing of financially solid sponsors, and government support.

Over the past decade, there has also been a growing diversity of project sponsors, with firms from emerging economies such as India and China playing a more important role (von Klaudy, Sanghi, and Dellacha 2008). Despite the various crises, an unmistakable trend has been the emergence of the private sector as both a more commonplace and a more diversified player in the delivery of infrastructure services.

However, private sector participation in the financing and delivery of infrastructure services still addresses only a fraction of the demand. Differences also exist between sectors, regions, and types of projects. According to the World Bank and PPIAF PPI database, energy and transport, and to a certain extent telecommunications, have attracted larger shares of investment, while water and sewerage continue to remain challenging sectors for private investment. The data also reveal that investors have tended to favor greenfield projects over projects that rehabilitate existing assets. This would suggest that investors have become generally more cautious about the risks associated with rehabilitating existing infrastructure assets. They are also more wary about sectors that involve political and regulatory risks, especially those that involve tariff issues for end users in socially sensitive areas such as water.

Issues that affect the supply of well-prepared projects, rather than the demand for such projects, have been the main constraints to mobilizing private sector investment and delivery of infrastructure. Given the difficult environment for long-term private sector investment, the challenge will be for even better discipline in the selection and development of projects.

This guide focuses