bcg strategic infrastructure initiative ppp final tcm80-133746

7/26/2019 BCG Strategic Infrastructure Initiative PPP Final Tcm80-133746

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Strategic InfrastructureSteps to Prepare and

Accelerate Public-PrivatePartnerships

May 2013

Prepared in collaboration with The Boston Consulting Group

Industry Agenda


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World Economic Forum

2013 - All rights reserved.

No part of this publication may be reproduced or transmitted in any form or by any means,

including photocopying and recording, or by any information storage and retrieval system.

The views expressed are those of certain participants in the discussion and do not necessarily

reflect the views of all participants or of the World Economic Forum.

REF 010513


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3Steps to Prepare and Accelerate Public-Private Partnerships

Contents

3 Foreword

6 Contributors

7 Context and Objectives of the Report

8 Executive Summary12 Overview of the Strategic

Infrastructure Initiative

14 Introduction: The PPP ProjectPreparation Gap

14 The Infrastructure Investment Needs

15 The Opportunity for PPPs

17 The Challenges for PPPs

18 The Imperative for Best Practice PPPPreparation

22 1 Managing a Rigorous ProjectPreparation Process

22 1.1 Team

23 1.2 Leadership

23 1.3 Project Governance

24 1.4 Project Management

25 1.5 Project Preparation Funding

25 1.6 Project Preparation Facilities

28 2 Conducting a Bankable FeasibilityStudy

28 2.1 Demand Forecasting

30 2.2 Technical Specifications

32 2.3 User Charges and OtherFunding Sources

33 2.4 Bankability Testing and Market

Sounding35 2.5 Stakeholder Engagement

37 2.6 Legal Due Diligence, Permitsand Land Acquisition

40 3 Structuring a Balanced Risk Allocation

40 3.1 Contract Model

43 3.2 Price Regulation and Competition

46 3.3 Risk Allocation and Mitigation

48 3.4 Adaptive Regulation

49 3.5 Quality Regulation

51 3.6 Intervention Options

54 4 Creating a Conducive Enabling

Environment54 4.1 Public Sector Readiness: Legal

and Institutional Framework

56 4.2 Public Sector Readiness:Capacity Building

59 4.3 Private Sector Readiness: Accessto Finance

61 4.4 Private Sector Readiness: LocalIndustry Development and TradeReforms

63 4.5 Civil Society Readiness:Transparency and Anti-corruption

64 4.6 Civil Society Readiness:Communication, Information and

Participation66 5 The Way Forward

70 Overview of Further PPP Guidance

71 Abbreviations

72 Endnotes

74 Bibliography

Foreword

Foreword by the World Economic Forum

Todays global infrastructure demand is estimated at approximately US$ 4 trillion in annualexpenditure, with a gap or missed opportunity of at least US$ 1 trillion every year. Inspite of the much needed investment in infrastructure, and the significant supply of privatecapital from pension funds, insurance firms, sovereign wealth funds and private equityfunds in excess of US$ 60 trillion, countries are often faced with the paradox of a drypipeline of projects.

A countrys competitive economic advantage clearly depends on a properly articulatedvision for infrastructure and long-term planning. However, government leaders mustcritically inspect their project portfolios and decide which ones to accelerate first basedon their strategic importance, independently of the restricted duration of a political cycle.

Yet vision and planning alone are not sufficient, and it is fundamental that governmentslearn how to assess and select the right infrastructure delivery model at the early stagesof the project preparation process.

While it is true that governments are the leading financiers of the vast majority of strategicinfrastructure projects, they are incapable of closing the gap alone, and the private sectormust also play a role. Without innovative financing and delivery models, as well as privatecompanies that are suited to carry out the much-needed infrastructure projects, it will notbe possible to meet the demand. In fact, infrastructure is coming of age as an investmentclass and has shown its ability to resist inflation, outperforming general equities. And eventraditional infrastructure companies (of bricks and mortar reputation) have launchedinfrastructure funds in response to the demands of investors worldwide, who seek adiversified portfolio of infrastructure assets with attractive returns.

The World Economic Forums Strategic Infrastructure Initiative is a collaborative reflectionof the steps required to effectively and efficiently deliver economic infrastructure projects;while the first phase investigated infrastructure project identification and prioritization, thecurrent second phase is focusing on how governments can prepare and accelerate keyinfrastructure projects through a Public-Private Partnership delivery model that provides

optimal economic and social benefits for their countries. The Strategic InfrastructureInitiative, with its linkages to the B20 and G20, and its cumulative track-record of pan-regional engagement of the private sector, government and civil society, has identifiedsome key challenges. These include a lack of project preparation and sluggish progress,as well as insufficient mobilization of capital flows into the investment in physical assets.

This report assumes that infrastructure projects have already been selected andprioritized on the basis of a countrys infrastructure vision and plan, and that a life-cyclebased economic valuation has indicated that the Public-Private Partnership deliverymodel renders value for money. In this context, the four best practice areas concerningPublic-Private Partnerships covered in this report are: (i) managing a rigorous projectpreparation process, (ii) conducting a bankable feasibility study, (iii) structuring a balancedrisk allocation and regulation, and (iv) creating a conducive enabling environment. Foreach of these best practice areas the report identifies and explores six critical success

factors that governments should be aware of and seriously consider when preparing aninfrastructure project to be delivered as a Public-Private Partnership.

The Strategic Infrastructure Initiative and its Knowledge Series Reports will provide aroadmap to inform governments and key stakeholders of best practices while providingactionable frameworks that ensure resources and funding in order to secure andaccelerate a robust pipeline of bankable projects at an early stage. Furthermore, theInitiative will continue to carve out a space for a number of future regional and nationaldiscussions throughout the next two years including in Africa, Asia, and Latin

America, but also in Europe and North America, which will transform the globally acquiredknowledge and experience into concrete measures that contribute to boosting strategicinfrastructure development.

This report is a direct result of a cooperative process with leaders from government, civil

society and the private sector, particularly the engineering and construction, financialservices and investors industries. In this regard, we would like to thank and acknowledgethe World Economic Forum partner companies that served on the Strategic InfrastructureInitiative Steering Committee: ABB; Alcoa; Amec; Arup; Bilfinger; CH2M HILL; CVCCapital Partners; Fluor Corporation; GE; Hindustan Construction Company; LeightonHoldings; Petrofac; Prudential; Punj Lloyd; Siemens; SNC-Lavalin Group; and WelspunCorporation.


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4 Steps to Prepare and Accelerate Public-Private Partnerships

We would also like to thank the many experts who contributed to the Report through theirrole on the Strategic Infrastructure Initiative Advisory Committee: Norman Anderson (CG/LA Infrastructure); Victor Chen Chuan (University of Sichuan); Nathalie Delapalme (MoIbrahim Foundation); Angelo DellAtti (IFC); Clive Harris (World Bank Institute); RashadKaldany (IFC); Rajiv Lall (IDFC); Yves Leterme (OECD); Clare Lockhart (Institute for StateEffectiveness); Thomas Maier (EBRD); Rajat M. Nag (Asian Development Bank); MthuliNcube (African Development Bank) and Mark Romoff (Canadian Council for Public-Private Partnerships).

Finally, we would like to give special acknowledgement to the leadership provided byHamish Tyrwhitt (Chief Executive Officer of Leighton Holdings), Gordon Brown (PrimeMinister of the United Kingdom 2007-2010 and Chair of World Economic Forum GlobalIssues Group), Tidjane Thiam (Group Chief Executive, Prudential and Chair of the CannesG20 High-Level Panel on Infrastructure and Cannes B20 Task Force on InfrastructureDevelopment), Rajat M. Nag (Managing Director General, Asian Development Bank),and Donald Kaberuka (President, African Development Bank), and thank them for theirgenuine, relentless interest and commitment to the Strategic Infrastructure Initiative.

The experience, perspective and guidance of all the above people and organizationssubstantially contributed to a number of remarkable discussions with particular highlightsat the World Economic Forum on East Asia in May 2012, the World Economic Forumon India in November 2012, and the World Economic Forum Annual Meeting in January2013.

Alex Wong

Senior DirectorHead of Business Engagement(Geneva)

Pedro Rodrigues de Almeida

DirectorHead of Infrastructure &Urban Development Industries


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Contributors

Project Team

Christoph Rothballer

Project Manager, Strategic Infrastructure

Initiative, Infrastructure & Urban DevelopmentIndustries, World Economic Forum

Hanseul KimSenior Manager, Head of Engineering &Construction Industry

Editors

World Economic Forum

Alex WongSenior Director, Head of BusinessEngagement (Geneva) and Head of BasicIndustries

Pedro Rodrigues de AlmeidaDirector, Head of Infrastructure & UrbanDevelopment Industries

The Boston Consulting Group(Adviser and Knowledge Partner)

Philipp GerbertSenior Partner and Managing Director, GlobalHead of Infrastructure

Jeff HillPartner and Managing Director, Head ofEngineering & Construction Americas

Jan Justus

Principal, Infrastructure Expert

Strategic Infrastructure InitiativeSteering Committeee

ABB Roman Schafer, Head of Business

Intelligence, Corporate Strategy

Chief Executive Officer: Joseph M. Hogan

Alcoa Kevin McKnight, Director of Environment,

Health, Safety, and Sustainability

Chief Executive Officer: Klaus Kleinfeld

AMEC

Hisham Mahmoud, Group President Duncan Guy, Senior Vice-President and

Head of Government Relations

Chief Executive Officer: Samir Brikho

Arup Peter Chamley, Chair, Global Infrastructure

Practice; Director

Chairman: Philip Dilley

Bilfinger Joerg Weidner, Senior Manager,

Technology Centre

Chairman of the Executive Board: RolandKoch

CH2M HILL Jacqueline Hinman, President,International Division

Chief Executive Officer: Lee A. McIntire

CVC Capital Partners Stephen Vineburg, Partner and Chief

Executive Officer, Infrastructure

Co-Founder and Co-Chairman: DonaldMackenzie

Fluor Corporation Robert Prieto, Senior Vice-President

Chief Executive Officer: David T. Seaton

GE

JayIreland, Chief Executive Officer, GEAfrica

Nils Tcheyan, Head, Africa Policy, GEAfrica

Chairman and Chief Executive Officer:Jeffrey R. Immelt

Hindustan Construction Company Arjun Dhawan, President, Infrastructure

Business

Chairman and Managing Director:AjitGulabchand

Leighton Holdings Patrick Brothers, Executive General

Manager, Corporate Strategy

Chief Executive Officer: HamishTyrwhitt

Petrofac Matthew Harwood, Group Head of

Strategy

Group Chief Executive:AymanAsfari

Prudential Pierre-Olivier Boue, Managing Director,

Chief Executive Officers Office

Group Chief Executive:TidjaneThiam

Punj Lloyd Luv Chhabra, Director of Corporate Affairs

Chairman:Atul Punj

Siemens

Roland Busch, Member of the ManagingBoard and Chief Executive Officer,Infrastructure and Cities Sector

Chief Executive Officer: Peter Lscher

SNC-Lavalin Group Nicola Angelini, Vice-President, Corporate

Strategy and Development

Chief Executive Officer: Robert G. Card

Welspun Corporation Vineet Mittal, Co-Founder and Managing

Director, Welspun Energy

Chief Executive Officer: BalkrishanGoenka

Strategic Infrastructure InitiativeAdvisory Committee

Norman AndersonPresident and Chief Executive Officer, CG/LAInfrastructure

Victor Chen ChuanProfessor of Engineering Management,Business School, Sichuan University

NathalieDelapalmeDirector of Research and Policy, Mo IbrahimFoundation

Angelo DellAtti

Manager, Change Management Office,International Finance Corporation (IFC)

Clive HarrisManager, Public-Private PartnershipsProgram, World Bank Institute

Rashad KaldanyVice-President and Chief Operating Officer,International Finance Corporation (IFC)

Rajiv LallVice-Chairman and Managing Director,Infrastructure Development Finance Company

Yves LetermeDeputy Secretary-General, Organisation forEconomic Co-operation and Development

Clare LockhartDirector, Institute for State Effectiveness

Thomas MaierManaging Director, Infrastructure, EuropeanBank for Reconstruction and Development

Rajat M. NagManaging Director-General, AsianDevelopment Bank

Mthuli NcubeChief Economist and Vice-President, AfricanDevelopment Bank

Mark RomoffPresident and Chief Executive Officer,The Canadian Council for Public-PrivatePartnerships


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Context and Objectives of the Report

Infrastructure is a key driver of sustainedeconomic growth and social well-being,but infrastructure development by thepublic sector has often turned out to beslow and/or inefficient in many countries.While the investment requirements forinfrastructure are huge, the fiscal situation ofmany countries is increasingly constrained.In such an environment, Public-PrivatePartnerships (PPPs) offer a promising wayforward: they can accelerate infrastructuredevelopment by tapping the private sectorsfinancial resources and skills in designing,building and operating infrastructureeffectively and efficiently on a whole life-cycle cost basis. Early PPP experienceshave been both promising and sobering:some projects have proven to be financially

viable, with social and economic benefits,while other projects have been plagued bydelays, cost overruns or renegotiations.This report identifies a key challenge thatmany governments are faced with the lackof effective PPP project preparation andrecommends actionable best practices toaddress this issue.

The reports role is not to advocate PPPsrelative to other modes of infrastructuredelivery, but rather to provide neutral adviceif the PPP route is chosen. (The basis forthat choice a rigorous value-for-money

analysis was discussed in StrategicInfrastructure: Steps to Prioritize and DeliverInfrastructure Effectively and Efficiently,the previous report of the StrategicInfrastructure Initiative.)

Target AudienceThis report is designed primarily forsenior government leaders and for theofficials responsible for planning anddelivering infrastructure projects. Otherstakeholders would also benefit from thereport the private sector (construction

and operating companies, financiers andothers), multilateral development banks,the donor community, and civil society.The formulation of this common languageand best practices on PPP preparation willenable them all to have a more productiveengagement with governments.

Structure and useThe report is structured in keeping with thePPP preparation best practice checklistin figure 2, with four main chapters, each

subdivided into six sub-chapters describingthe critical success factors. According to thereaders interest, the relevance to the localcontext, and the countrys level of maturityin the various critical success factors, thechecklist can help to identify the most

relevant best practices, and the reader canthen refer directly to the corresponding sub-chapters.While the report specifically addressesissues of PPPs, many of the presented bestpractices are also applicable to projectsprocured under traditional delivery andfinancing models.The best practices relatedto the project preparation process (chapter1) and to the feasibility study (chapter 2)are relevant for both PPP and non-PPPmodes, but those related to risk allocation(chapter 3) are specific to PPPs. Some ofthe best practices related to the enablingenvironment (chapter 4) are again applicablein a broader context, but are customized toaccount for the features of PPPs.

ScopeThe report is intended to serve as aroadmap to direct governments and otherstakeholders to the critical success factorsin PPP project preparation. It does this byproviding an actionable framework and casestudies. The report is not a compendiumof the whole PPP life cycle: its focus ison project preparation exclusively, and itassumes that the best practices related toproject identification and prioritization, as

well as to choice of delivery mode, havebeen consistently applied. The frameworkand recommendations have deliberatelybeen kept generic so that the principlesand insights can be applied broadly indeveloped and developing economies andacross sectors of economic and socialinfrastructure.

In the context of this report, infrastructure isdefined in such a way as to include:

Economic infrastructure: assets thatenable society and the economy tofunction, such as transport (airports,

ports, roads and railroads), energy (gasand electricity), water and waste, andtelecommunications facilities;

Social infrastructure: assets to supportthe provision of public services, such asgovernment buildings, police and militaryfacilities, social housing, health facilities,and educational and communityestablishments. At issue here are notjust traditional bricks-and-mortarPPPs, but also public-service PPPs,such as running a passport service forcitizens.

This definition specifically excludes

two other kinds of infrastructure: softinfrastructure (i.e. the public institutionsrequired to maintain society, notably thelegal and judicial system, the education andhealth systems, and the financial system);and industrial infrastructure (such as mineworks or interconnecting roads within alarge factory complex).


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Executive Summary

Many countries are facing significantinfrastructure needs, owing to growingpopulations, economic growth and rapidlyprogressing urbanization. The strongdemand for infrastructure and its insufficientprovision imply a global investment gap of

at least US$ 1.0 trillion per year.1As manygovernments do not have the financialresources and skills to provide the requiredinfrastructure assets, they are increasinglylooking at the private sector to close thegap. In fact, institutional investors holdsubstantial assets under management, forwhich they are seeking attractive, long-terminvestment opportunities.

In such an environment, Public-PrivatePartnerships (PPPs) can accelerateinfrastructure development by tappingthe private sectors financial resources as

well as its skills in delivering infrastructureeffectively and efficiently on a whole life-

cycle cost basis. But despite this seeming fitbetween demand for and supply of privatesector participation, too few projects get offthe ground. The reason for this paradox especially in developing countries, thoughalso in some developed countries is the

project preparation gap, i.e. the lack ofwell-prepared, bankable PPP projectswhere investors are sufficiently reassuredby the commercial and technical feasibility,the risk allocation, the public sector`scontractual commitment and capacity aswell as the institutional and legal framework.Furthermore, of those PPPs that have beenimplemented, several have been plagued bydelays, cost overruns or renegotiations as aresult of a suboptimal preparatory phase.

This report, developed within the frameworkof the World Economic Forums Strategic

Infrastructure Initiative, outlines governmentbest practices in overcoming the various

challenges and closing the preparation gap.As shown in figure 1, the report focuseson the subset of PPP best practices thatguide the public sector through the crucialpreparation phase from the initial decisionto structure a project as a PPP, on through

the feasibility study and regulatory contractdesign, to the point where the project isbankable and ready for tendering. In linewith the Initiatives previous report, StrategicInfrastructure: Steps to Prioritize and DeliverInfrastructure Effectively and Efficiently, thisreport assumes that projects have beenidentified and prioritized on the basis of anintegrated infrastructure plan and rigorouseconomic cost-benefit analysis, and that thePPP delivery mode has been indicated byan unbiased value-for-money analysis of thewhole life cycle (see the synopsis of phase Ireport on project origination best practices).

Figure 1: PPP best practice framework

Life-cyclebased

assessmentof public vs.

private delivery(Value for

Money test)

Rigorousmonitoring of

construction andoperations &

ex-post evaluation

Integratedinfrastructure plan

& cost-benefit basedproject prioritization

Competitive,transparenttendering

& financingsupport

Life-cyclebased



)Money test



ex-post evaluation



ompetitive,ransparentttenderingfinancingsupport

Balancedrisk allocation& regulation

Bankablefeasibility

study

Conduciveenabling environment

Public-sector readiness

Private-sector readiness

Civil-society readiness

Project preparation

Projectorigination

Projectimplementation

Focus ofpresentPhase II

Focus of

previousPhase I

Focus of

forthcomingPhase III

The four best practice areas detailed in thisreport are:

1. Managing a rigorous project preparationprocess:How to effectively set up theproject team and leadership, design theproject governance structure and projectmanagement, and secure the requiredpreparation funding;

2. Conducting a bankable feasibility study:How to conduct a robust and high-quality technical, commercial, legal andenvironmental feasibility study;

3. Structuring a balanced risk allocationand regulation:How to balanceefficiency incentives, risk mitigation, andpublic-interest safeguards to ensurea successful long-term partnershipbetween the public and the privatesector;

4. Creating a conducive enabling

environment:How to enhance public,private and societal readiness for PPPprojects.

For each of these four areas, this reportidentifies six critical success factors thatgovernments should take into consideration

when preparing PPPs (see figure 2). Whilethe report focuses on the specific issuesof PPPs, many of the presented bestpractices, including those related to theproject-preparation process, the feasibilitystudy and (to some extent) the enablingenvironment, are also relevant to otherproject delivery modes. Depending on thecountrys maturity in each critical success

factor and the relevance of the particularsuccess factor to the countrys particularcontext, governments can use this holisticchecklist to identify and prioritize the areaswhere change is required.


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Figure 2: Checklist of PPP preparation best practices

Rigorousproject

preparation

process

Conduciveenabling

environment

Balancedrisk allocationand regulation

Bankablefeasibility

study

2.4.Test bankability continuously and

conduct market sounding early

1.6. Leverage project-preparation facilities

(with cost recovery, advisory and monitoring)

3.2.Apply incentive-based price regulation

and evaluate competition options

3.4.Adopt regulation that is adaptive to

exogenous changes and volatility

2.2.Fix contractible, innovation-friendly output

specification cross-checked by cost forecast

2.6. Complete holistic legal feasibility check

and expedite permits and land acquisition

4.2.Enhance individual capacity with training,

and build institutional capacity in PPP units

4.5.Insist on transparency and enforce

anti-corruption standards

4.3. Facilitate access to local currency, long-

term finance and guarantees

3.6. Provide for government intervention

options in a predictable and fair way

1.3.Set up a governance structure with clear

roles/responsibilities and a coordinator

1.2.Secure buy-in and leadership of high-

level political champions and public servants

Civil-societyreadiness

Private-sectorreadiness

Public-sectorreadiness

Safeguards

Riskmitigation

Incentives

Commercialattractiveness

Technicalscope

Prerequisites

Governance &project mgmt

Team andleadership

Preparationfunding

2.3.Apply user charges, ancillary revenues,

land-value capture and government payments

3.1.Adopt a life-cycle oriented contract model

aligned with the policy objectives

3.3.Identify all risks, allocate them to the best-

suited party, and apply risk sharing/mitigation

3.5.Fulfil social objectives via enforced

quality regulation and efficient monitoring

2.1.Conduct robust and sophisticated

demand forecasting

2.5.Pursue proactive, inclusive and

professional stakeholder engagement

4.1.Establish a solid legal framework and

independent regulators/dispute resolution

4.4.Develop a competitive and capable local

industry/workforce and pursue trade reforms

4.6.Optimize public communication,

information and participation

1.4. Pursue rigorous project management,

and devise multi-stage planning

1.1.Assemble an experienced, cross-

functional team

1.5.Secure sufficient preparation funding,

and minimize costs through standardization

Managing a rigorous project preparation

process

The PPP preparation process is quitecomplex, as it involves large teams andmultiple stakeholders (including ministries,regulators, engineering firms, banks andusers), as well as a multitude of interfacesbetween the different functional feasibilitystudies and the regulatory contractdesign. So it is of paramount importanceto assemble capable and experiencedcross-functional teams with a well-definedgovernance structure backed by strong andcommitted political and project leadership.A project management office should definea multi-stage project plan along with

decision gates and potential exit ramps,and should flag issues early, as well ascoordinate and monitor the workstreams.When responsibilities are spread acrossdifferent levels of government andjurisdictional boundaries, decision-makingcan be improved and accelerated byestablishing a designated coordinatingauthority, and by defining clear rolesand responsibilities for all other agenciesinvolved.

High-quality project preparation is alsocostly for medium and large-sized

projects the feasibility studies and contractdesign typically consume 1-3% of thetotal costs. In many cases, insufficient orad-hoc funding has led to poor quality,inconsistencies and delays in project

preparation. PPP planners need to ensuresufficient upfront funding, to be disbursedat set milestones, to conduct a thoroughfeasibility study. Governments should alsoestablish project-preparation facilities i.e.dedicated funds for feasibility studies with cost-recovery mechanisms as wellas supervisory and advisory capabilities,to provide sustainable sources of project-development funding. To reduce thefunding needs, the planners should tryincreasing the standardization of theproject-preparation process; for example,by using common feasibility-studyguides, standard specification manuals oradjustable draft concession agreements.

Conducting a bankable feasibility study

Many PPPs have failed owing to a faultyappraisal of just one single variable:demand.2The optimism bias inherent inmany demand forecasts for greenfieldtoll roads, for instance, actual traffic afterthe facility opens is on average 23% andsometimes even 50% below projections has led to notorious renegotiationsor even bankruptcies. To avert forecastinaccuracies, it is crucial to maintain theindependence of the forecaster, ensure

high-quality data and process guidelines,and challenge the results under multiplerobust methodologies and scenarios as wellas from different stakeholder perspectives.

The forecast itself should take into accountfactors such as willingness to pay, inter-and intra-modal competition, ramp-upeffects, and long-term macroeconomic andpopulation trends depending on whichfactors are most relevant for a given assetand environment.

Besides estimating future demand, projectpromoters also need to determine theprojects technical specifications. Beforedetailing these, they should pause andconsider various alternative ways ofeasing the infrastructure bottleneck forexample, managing demand through newpricing models, or reducing transmissionlosses rather than making costly capital

expenditures. The project promotersmust also make sure, when drafting thetechnical specifications, that these areoutcome/output-oriented, so that potentialcontractors can devise innovative andcost-effective solutions. And lastly, theproject promoters should carefully forecastcosts and assess risks to avoid gold-plateddesigns (which are over-specified well pastthe point at which extra effort is addingvalue).

Once the demand and cost estimates aremade, it is time for the evaluation of the

projects commercial viability. A commondanger here is to focus too sharply on usercharges or direct government payments asfunding sources.3For certain assets in high-density environments, ancillary revenues


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for instance, from retail operations andland-value capture can contribute up to50% of the funding requirement. Whenuser charges are applied, they shouldbe differentiated by time, location andusage intensity: such differentiation canmaximize revenues and ensure efficientcapacity usage. Although user chargesoften arouse opposition, they tend to gainacceptance when the new infrastructureasset proves that it gives users a higherservice level or new opportunities. Asfor the adverse social consequences ofuser charges, these should be mitigatedthrough tariff reductions or alternatives for instance, a slower rural road parallelto the tolled highway. For some particularassets, bankability needs to be enhancedby asset-bundling or viability-gap funding i.e. the provision of a public subsidyto make a project viable for investors but without sacrificing fiscal prudence,transparency and competitiveness. Toevaluate the attractiveness and the risks

of the overall PPP project to the privatesector, the projects planners must conducta robust business-case analysis, includingsensitivity analyses on key risks andpotential economic scenarios. They shouldthen carry out early market sounding testing the proposed PPP package with awide range of construction and operatingfirms, multilateral development banks andfinanciers to understand key concernsand elicit suggestions for improvement.

Apart from the technical and commercialaspects, there are two other frequent

sources of project delays: stakeholderopposition and incomplete legalprerequisites. It is crucial, even in thefeasibility stage, to conduct proactive andprofessionalized stakeholder engagement.The projects planners should consultthought leaders across all stakeholdergroups (some of which may already be,or may become, active promoters ofthe project), as well as less organizedgroups such as ordinary local residents.This consultation process should activelyengage the citizenry on aspects of theproject by communicating transparently

both negative and positive impacts andproviding feedback opportunities. Effortsmust be made to mitigate the social andenvironmental impact: these should notonly focus on short-term measures andcash compensation, but also take a longer-term view for example by arrangingcommunity-owned maintenance of facilitiesor by providing administrative support in thecase of involuntary resettlement. In addition,prior to tendering, public-sector sponsorsshould complete the other essentialpreliminaries: obtain land-planning andenvironmental permits, acquire land and

rights-of-way, as well as dedicate fundingand obtain approvals for the construction ofessential connections to the infrastructureasset.

Structuring a balanced risk allocation

and regulation

PPPs tend to be contracted for 20 years ormore a timeframe with potentially majorchanges. It is often the quality of the riskallocation and the regulation that determineif a partnership can successfully masterthese uncertainties while continuing to fulfilthe expectations of both the public and theprivate side.

There is a fundamental design objective inthe allocation of risk and in the regulationof price, service and investment namely,striking a balanced trade-off betweenattractiveness for the private sector on theone hand and safeguarding public interestsand optimizing overall economic returnson the other. The chosen trade-offs aresector-, country- and asset-specific, yetthe fundamental objective stays the same:to allocate risks to the party best able tomanage them. For example, governments

can increase investor attractiveness bysharing or mitigating difficult-to-managerisks, such as traffic volume, by meansof sliding scales, guaranteed minimumoff-takes, least-present-value-of-revenuesauction mechanisms, or availability-based concessions. On the other side,governments can protect the public interestby various means: choosing a concessionmodel and pricing regime that incentivizesthe concessionaire to operate efficientlyand invest adequately, or introducingservice regulation that provides qualityincentives via bonus and penalty schemes,

for instance. In addition, the regulatorysystem can include adaptive mechanismsthat self-correct against economiccycles or commodity price volatility forconcessionaires. Many regulations, forexample, automatically adapt to inflation,while many power-sector regulationsinclude pass-through clauses for volatilityin the cost of fuel. With regard to public-sector intervention options whetherthey concern contract termination, capitalexpenditure or financing these need tobe clearly defined in the contract; theyshould have well-specified triggers and

an established consultation and decision-making process to balance public-sectorflexibility with the private sectors desire forpredictability.

Creating a conducive enabling

environment

In addition to sophisticated preparation,any PPP project also relies on a conduciveenabling environment. If a broaderPPP programme is pursued, the publicsector needs to ready itself with regard

to legislation, institutions and capacitybuilding. Needed first of all is a robustlegal and institutional PPP framework, withan independent regulatory function anda trusted dispute-resolution process toenhance regulatory commitment. Secondly,

the public sector needs to attract high-quality local staff through solid pay andcareer prospects, and to train them tobuild up the capacity (in particular, financial,legal and transaction skills) for negotiatingwith the private sector on an equal basis.But individual capacity building needs tobe complemented by institutional capacitybuilding for example, by disseminatingstandardized tools and knowledgeproducts and by establishing PPP unitswith adequate executive authority (not justan advisory function), located in a powerfulcentral ministry such as the Ministry ofFinance.

Governments can also help to increasethe readiness of the private sector andcivil society for PPPs. They should fosterthe development of a resourceful andcompetitive local set of industries as wellas a skilled workforce. To attract both localand international companies to the market,governments would do well to formulate a

steady project pipeline and an integratedinfrastructure plan, while also enablingpolicy dialogue with the private sector.To complement industry development,governments should take further measures,to improve the concessionaires accessto local currency, long-term financing by such means as creating innovativerisk-guarantee and currency hedging/convertibility schemes, facilitating access toinvestment opportunities, and developingdomestic capital and banking markets.Furthermore, to unlock demand forinfrastructure, governments might need to

initiate trade reforms; for example, fasterborder and visa procedures would enablehigher throughput for a cross-borderhighway and would increase trade flows.

Civil societys readiness for PPPs canbe enhanced by communicating moreeffectively the PPP value proposition andits relevance for social and economicprogress, as well as by introducingparticipatory elements during the feasibilitystudy. Transparency standards need to bemaintained: they are critical in deterring,detecting and penalizing corruption in both

the public and private sectors, and will helpto reassure the public at large.

The way forward

The recommendations presented in thisreport are aimed at helping governmentsto close the project preparation gap andaccelerate infrastructure development.Governments should start by reviewingand benchmarking their PPP policiesand frameworks against the bestpractice checklist presented here to

identify those areas most relevant to thecountrys particular context and mostin need of change. Based on theseinsights, governments should aim tostandardize their PPP approach along bestpractices; for example, by establishing


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Overview of the Strategic Infrastructure Initiative

The Strategic Infrastructure Initiative ofthe World Economic Forum supportsgovernments in their efforts to addressand debate two fundamental questions tomaximize their returns on investment fromstrategic infrastructure projects:

How should they prioritize whichinfrastructure projects create thegreatest impact on economic growth,social uplift and sustainability?

Once they have selected theinvestments, howshould they prepare,procure and deliver these assets mostefficiently and effectively?

The first phase in 2011/12 centred onproject identification and prioritization, andproduced the report Strategic Infrastructure:Steps to Prioritize and Deliver InfrastructureEffectively and Efficientlyin September2012 (a synopsis is provided on page 13as these practices are a precondition forthis report). The second phase in 2012/13,which is summarized in this report, focusedon project preparation, specifically looking atPublic-Private Partnerships as an exemplaryproject delivery mode. The third phase in2013/14 will investigate issues of existinginfrastructure assets, such as throughputoptimization as well as operations and

maintenance. Figure 3 provides an overviewof the three phases of the Initiative and theirrespective topic focus.

The Initiative expands on work alreadycommissioned by the World EconomicForum, including Paving the Way:Maximizing the Value of Private Finance

in Infrastructure(2010) and PositiveInfrastructure: A Framework for Revitalizingthe Global Economy(2010).

The Initiative draws on partners fromthe Forums Infrastructure & UrbanDevelopment and other relevant industries,including Mobility, Energy and Investors.Experts from multilateral developmentbanks, academia, governments and thewider infrastructure community are also

participating in the Initiative. Refer to figure11 for an overview of the various meetingsat which the Initiative partners convened.

Figure 3: Overview of the Strategic Infrastructure Initiative

Source: World Economic Forum; Global Strategic Infrastructure Initiative

* Tentative planning for Phase III

Infrastructure planning & project

identification

Project prioritization & selection

Choosing delivery modes

Project preparation process

Feasibility study

Regulatory design

Enabling environment

Operations & maintenance

Throughput optimization

Upgrades & renewals

Environmental & social impact

optimization

Specifictopics

addressed

Phase I Phase II Phase III

Projectphase and

title

Project origination Project preparation Project implementation*

Prioritization and selection ofinfrastructure projects

Preparation and acceleration ofPublic-Private Partnerships

Operations and maintenance ofexisting infrastructure

Report published in Oct. 2012

Strategic Infrastructure

Planner Tool and Framework

Report in May 2013

PPP Maturity Assessment

Tool

Report in spring 2014 Operations & Maintenance

Evaluation Tool

Outputs

How to operate

and maintainexisting

infrastructure?

Public, private and PPP delivery Specifically addressed PPPs asan exemplary delivery mode

Public, private and PPP deliveryDeliverymodes


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Synopsis of Phase I Report

Project origination best practices

This report assumes that the best practicesrelated to project origination will beapplied consistently as they constitutea key precondition for successful projectpreparation. Those critical success factorshave been described in detail in theprevious report of this Initiative, StrategicInfrastructure: Steps to Prioritize and DeliverInfrastructure Effectively and Efficiently.

In particular, it is assumed here thatgovernments will create a comprehensiveinfrastructure vision and plan that addresseseconomic, social and sustainability needs.This ideal infrastructure plan will bedeveloped in a methodical way, startingfrom an analysis of the current infrastructurestatus and needs, incorporating all thevarious stakeholder and agency inputs.Such a plan should be based on a

broader, national economic plan and wouldtake an integrated, cross-sector, andsystem-wide perspective including themajor cities and even assuming a cross-border perspective to account for theinterdependencies between the differentcomponents of the infrastructure network.The optimal infrastructure plan will carefully

Delivery mode choice needs to be based on value-for-money analysis

Source: The Guide to Guidance, How to Prepare, Procure and Deliver PPP Projects. July, 2011. Luxembourg: European Investment Bank.

consider both greenfield developmentsand brownfield capacity enhancements.In addition to considering hard assets, itwill also consider infrastructure efficiencyimprovements (for example, by influencinguser behaviours through peak pricing or car-sharing incentives) and soft infrastructureimprovements (for example, by enablingtrade reforms). The infrastructure plannersshould also make provisions for updating

the infrastructure plan regularly, asconditions and requirements change.

After identifying the projects, the plan willprioritize them using robust cost-benefitanalysis, explicitly taking into account theperformance throughout the whole life cycleand the various socio-economic objectives.The plan will then be translated into acontinuous project pipeline, with a cleartimeline for each project and an indication ofthe most appropriate financing and deliverymode private, public or via PPP. To decideon that delivery mode, governments should

conduct a value-for-money analysis thatdetermines whether delivery as a PPP ortraditional procurement/financing is thecheaper option on a whole life-cycle costbasis. This process has to be unbiased andthus should be based on high-quality dataand a clearly specified and standardizedevaluation process.

Value-for-money analysis needs to consider bothcosts and benefits of available delivery modes Costs: Efficiency in investment, operations and

maintenance (PPP typically better);Financing costs, transaction and contract oversight

costs (PPP typically worse)

Benefits: Potential non-financial impacts such asaccelerated and enhanced project delivery

Result of the value-for-money analysis typicallydepends on a number of factors Size of capital expenditure involved Project size relative to transaction costs

Design/implementation expertise of private sector Feasibility of risk identification and allocation Specification of service needs as outputs

Possibility to estimate long-term asset costs Stability of technological aspects

Government to conduct value-for-moneyanalysis to choose appropriate delivery model

Possible options include public, PPPand private delivery

Public

Public-PrivatePartnership

Privatization

A PPP project yields "value-for-money" if provides a net positive economic gain greater than

that of any alternative procurement route (i.e. the public sector comparator)

*DBB = design-bid-build DB = design-build BOT = build-operate-transfer DBO = design-build-operate DBFO = design-build-finance-operate

Civil works contract:DBB* & DB*

Service contracts

Management contracts Lease/ affermage

Concession, BOT*, DBO*,DBFO *

Regulated privatization Liberalization and full

divestiture

Focus of this report


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Introduction: The PPP Project Preparation Gap

Figure 6: Infrastructure PPP investments in developing and emerging countries

Infrastructure PPPs are on the rise in emerging and developing countries

Source:The World Bank and Public-Private Infrastructure Advisory Facility (PPIAF). Private Participation in Infrastructure Database, 2012. http://ppi.worldbank.org/index.aspx.

Total PPP* investment commitments in current US$ billion in low-/middle-income countries**

100

0

11***100908070605040302010099989796959493929190

20

40

60

80 Latin America and the Caribbean

Sub-Saharan Africa

Middle East and North Africa

Europe and Central Asia

South Asia

East Asia and Pacific

This includes management and lease contracts, concessions (or management & operation contracts with major private capital commitments), and greenfield projects (excl. merchantontracts), but excludes divestitures/privatizations. ** Following the World Bank definition *** Data as of December 2012. Sometimes projects are included in the database later, hence011 figures may be downward biased.

Latin AmericanPPP bonanza

Early daysPPP crisis

years

Asianfinancial

crisis

PPP boom

Figure 7: Potential challenges of PPPs

Public-Private Partnerships also face several potential challenges

Potential challenge Description

Restrictedcontrol &

flexibility

Transaction &monitoring

time and costs

Governments are sometimes unwilling to share control of infrastructure due to the

inflexibility to influence future system design and operations, particularly withregard to national interests, social objectives and integration with other facilities.

The indirect and direct costs of management time and advice from experts

in the preparation, procurement and monitoring of PPPs can be very

high yet are often unavoidable. As these expenses are largely fixed, PPPs are

only cost-effective above a certain project size.

Regulatoryfailures

Incompletecontracts

Even the best PPP contract cannot foresee all circumstances that may arise over

a concession duration of multiple decades. Thus, the need to amend the contract

can entail lengthy and expensive renegotiations between the partners.

The design of regulatory regimes is sometimes sub-optimal, or the originally

conceived regulation is gamed by special interest lobbying ("regulatory capture").

Private operators might have insufficient incentives to regard safety, equity,

community and environmental considerations, raising the risk of market failure if

no adequate regulations for internalizing these issues have been stipulated.

Public budgetrisks

If a PPP uses availability payments and is over-dimensioned, this may lead toexcessively high future government payments and possibly costly renegotiations.

In some cases, politicians have excessively used PPPs with availability payments,

effectively moving public obligations into the future and off the government's

balance sheet with a resulting large contingent liability to the public budget.

The Challenges for PPPs

Offsetting the many advantages of PPPs are various challenges, as listed in figure 7.


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As a consequence, in developed anddeveloping countries alike, many promisingPPPs have ended in failure. In Bolivia,for example, a water-project PPP wasterminated after protests targeted a 35%water-price increase.28In Spain, motorway-project PPPs have been bankrupted orrenegotiated after traffic levels turnedout to be half of the original forecast. Inemerging countries, though relatively few

PPPs (about 6%) have experienced distressor cancellation,29a high number of PPPs

(more than 50%) have involved subsequentrenegotiation during their life cycle.30

The Imperative for Best Practice PPPPreparation

The reasons for these failures are as variedas the projects themselves. They rangefrom inaccurate cost-benefit analysis during

project origination, to an uncompetitivebidding procedure during project

procurement, to a weak financial structureand low-quality operations during projectexecution. (See figure 8 for a list of the mostprevalent issues.) But the issues are not onlyrelated to the project cycle itself; many arealso related to the enabling environment:corruption, weak government institutionsand legal systems, shortage of private-sector skills, and so on.

Figure 8: Reasons for PPP failures

Public-Private Partnership failures and dry pipeline are particularly due to preparation issues

tcejorPinception

Projectpreparation

tcejorPimplementation

No integrated strategic plan& long-term project pipeline

Biased demand & costforecasts *

Uncompetitive, opaque &slow tendering

Opportunistic regulation & termination

Unreliable cost-benefitanalysis

Delayed approvals &land acquisition

Weak financial structure &low operational performance

Stakeholder resistance

Inadequate risk sharing/mitigation & misaligned incentives

Lack of preparation funding &rigorous preparation process

Project-cycle

related

Enablingenviron-

ment

related

Weak public-sector capacity

Poor legal & institutional framework

Low local financial market &local industry development

Corruption

Insufficient revenue sources & lack of market sounding

Biased value-for-moneyanalysis

Macroeconomic shocks

* Planning fallacy, optimism bias and strategic misrepresentation

Overbidding & renegotiation

However, the foremost reason for most ofthese failures or false starts is inadequateproject preparation: notably, poor demandforecasts, delayed land acquisition andapprovals, and inadequate risk allocation.For example, ineffective project preparationdelayed the ambitious Philippines PPPprogramme, and most of the ten projectsannounced in 2010 were held back owing toinsufficiently rigorous feasibility studies.

If PPP planners could just get thepreparations right, that would not onlyreduce the issues that beset well-advancedprojects, but would also increase the numberof projects that get launched in the firstplace. To put it another way, optimizedpreparation would help to resolve thePPP preparation gap. As Rajat M. Nag,Managing Director-General of the AsianDevelopment Bank, expressed it at the 2012World Economic Forum on East Asia, Everyweek I receive calls from investors lookingfor investment opportunities, and every day I

receive calls from project managers requiringfinancing. Therein lies the paradox: a severeshortage of bankable PPP investmentprojects despite the huge infrastructureconstruction and financing needs.

This preparation gap obviously hassevere negative implications for usersand governments. Projects are late or notdelivered at all, and the preparation phase isneedlessly long or expensive. For the privatesector, these preparation issues imply lostinvestment opportunities. Additionally, if thetender documents are deficient or unclear,the potential bidders have to generate

the required information via extensive duediligence, and this process is costly andwasteful. (The problem is compoundedwhen multiple bidders conduct bidpreparations in parallel.)

This report outlines best practices thatgovernments can adopt to close theproject preparation gap and to addressthe shortcomings of many PPP projects.As shown in figure 9, the focus is on theproject preparation phase, which guidesthe public sector step by step from theinitial decision to identify a suitable projectand structure it as a PPP (which this report

assumes has been dealt with rigorouslyas described in the Phase I report), rightthrough to the point where the project isbankable and ready for tendering. Thisreport details the following four main best-

practice areas, and is organized into fourmain chapters accordingly:

1. Managing a rigorous projectpreparation process: How to effectivelyset up the project team and leadership,design the project governancestructure and project management,and secure the required preparationfunding (chapter 1);

2. Conducting a bankable feasibility study:How to conduct a robust and high-quality technical, commercial, legal andenvironmental feasibility study(chapter 2);

3. Structuring a balanced risk allocationand regulation:How to balanceefficiency incentives, risk mitigation andpublic-interest safeguards to ensurea successful long-term partnershipbetween the public and the privatesectors (chapter 3);

4. Creating a conducive enablingenvironment:How to enhance public,private and societal readiness for PPPprojects (chapter 4).


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Figure 9: PPP best practice framework

Life-cyclebased



Money test)



ex-post evaluation



Competitive,transparenttendering

& financingsupport

Life-cyclebased

assessmeno pu l ic vs.

private elivery(V lue for

)Money test

igorousmonitoring of


ex-post evaluation



ompetitive,ransparentenderingfinancingsuppor

Balancedrisk allocation& regulation

Bankablefeasibility

study

Conduciveenabling environment

Public-sector readiness

Private-sector readiness

Civil-society readiness

Project preparation

Projectorigination

Projectimplementation

Focus of

present

Phase II

Focus of

previousPhase I

Focus of

forthcomingPhase III

Figure 10: Checklist of PPP preparation best practices

Drawing on extensive consultations with themultistakeholder constituencies of the WorldEconomic Forums Strategic InfrastructureInitiative (see figure 11 for an overview ofthe various meetings at which the Initiative

partners convened), this report identifies anddiscusses 24 critical success factors andactionable best practices (see figure 10).

Rigorousproject

preparation

process

Conduciveenabling

environment

Balancedrisk allocationand regulation

Bankablefeasibility

study

2.4.Test bankability continuously andconduct market sounding early

1.6. Leverage project-preparation facilities

(with cost recovery, advisory and monitoring)

3.2.Apply incentive-based price regulation

and evaluate competition options

3.4.Adopt regulation that is adaptive to

exogenous changes and volatility

2.2.Fix contractible, innovation-friendly output

specification cross-checked by cost forecast

2.6. Complete holistic legal feasibility check

and expedite permits and land acquisition

4.2.Enhance individual capacity with training,

and build institutional capacity in PPP units

4.5.Insist on transparency and enforce

anti-corruption standards

4.3. Facilitate access to local currency, long-

term finance and guarantees

3.6. Provide for government intervention

options in a predictable and fair way

1.3.Set up a governance structure with clear

roles/responsibilities and a coordinator

1.2.Secure buy-in and leadership of high-

level political champions and public servants

Civil-societyreadiness

Private-sectorreadiness

Public-sectorreadiness

Safeguards

Riskmitigation

Incentives

Commercialattractiveness

Technicalscope

Prerequisites

Governance &project mgmt

Team andleadership

Preparationfunding

2.3.Apply user charges, ancillary revenues,land-value capture and government payments

3.1.Adopt a life-cycle oriented contract model

aligned with the policy objectives

3.3.Identify all risks, allocate them to the best-

suited party, and apply risk sharing/mitigation

3.5.Fulfil social objectives via enforced

quality regulation and efficient monitoring

2.1.Conduct robust and sophisticated

demand forecasting

2.5.Pursue proactive, inclusive and

professional stakeholder engagement

4.1.Establish a solid legal framework and

independent regulators/dispute resolution

4.4.Develop a competitive and capable local

industry/workforce and pursue trade reforms

4.6.Optimize public communication,

information and participation

1.4. Pursue rigorous project management,

and devise multi-stage planning

1.1.Assemble an experienced, cross-

functional team

1.5.Secure sufficient preparation funding,

and minimize costs through standardization


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This checklist presents a holistic overviewof the critical success factors that shouldbe in place to make PPPs successful. Thelarge number of individual best practicesillustrates how complex PPPs can be, butit certainly does not imply that successfulPPPs are unachievable many countriesand projects have also mastered thechallenge by focusing on certain aspectsthat are most relevant in their particular

context. In reality, many countries arealready mature in several of these aspects,and perhaps need to direct their effortstowards upgrading just a few of the criticalsuccess factors. (Readers may use thechecklist to navigate through the reportand jump directly to the chapters of mostinterest.)

Best practices related to project originationand project implementation (as illustratedin the PPP best practice framework above)are beyond the scope of this report.They have been covered in a previousreport of the World Economic ForumsStrategic Infrastructure Initiative, StrategicInfrastructure: Steps to Prioritize and DeliverInfrastructure Effectively and Efficiently(seesynopsis of best practices on page 13), and

will be elaborated in a future publicationon operations and maintenance of existingassets.

Figure 11: Key meetings of the Strategic Infrastructure Initiative in 2012/13

Bangkok, May 2012 Project preparation gap PPP and enabling environment

best practices

Gurgaon, November 2012 Challenges and best practices

in the Indian PPP programmeDavos, January 2013 Public-private collaboration for

the enabling environment

PPP best practices Ways to unlock private finance

Johannesburg, July 2012 Project origination and

prioritization

Project preparation process Bankability criteria

Addis Ababa, May 2012 Project preparation funding PPPs in the African context

London, October 2012

Framework and checklist ofproject preparation and PPP

best-practices

Location, date Main points of discussion


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1 Managing a Rigorous Project Preparation Process

Figure 12: Skill requirements for PPP preparation

Source: National Public Private Partnership Guidelines, Volume 2: Practitioners Guide. March, 2011. Commonwealth of Australia: Infrastructure Australia

Team size

Economists & policy maker

Regulatory and

legal specialists

Social &

environmental

specialists

Financial

analyst

Transaction and

banking specialistsEngineers &

designers

Planners

Phase-in the right specialist at the right time

112 mths 336 mths 2040 yrs36 mths 618 mths

Contractmanage-

tnem

Origination Procure-tnem

Structur-ing

Feasibility

Cross-functional team required

Review of team size and compositionat major milestones required

Commercial/financial manager+ legal/regulatory manager

Technical manager(+ architectural/engineering

manager)

Operational manager

Communication manager

Project/contract director

Administrative support

Process coordination& oversight

Specification

Forecasting

Business case

Market sounding

Legal due diligence

Operations concept

Transition planning

Stakeholder

engagement

Administration &

documentation

Example activities

Contract

administrator

Plan needed to

manage phase-in/outof team members

and advisers

Many different skills and mindsets are required for Public-Private Partnerships and the needschange over the project life cycle

1.2 LeadershipA further risk to PPP preparations is the lackof attentive and consistent guidance fromsenior government sponsors guidancethat could determine the fate of a project.For example, the cancellation of the

Visakhapatnam water, sewage and urbanroad PPP project in Andhra Pradesh, India,was due at least in part to the change ofcommissioner during the planning phase.31

Assure buy-in and leadership from high-level politicians and technocrats. Politicalwill is a key pre-condition for PPP success.A PPP project will benefit greatly if aprominent public figure champions it anddemonstrates personal commitment to it.For example, the Chief Minister of AndhraPradesh was strongly involved in settingup the Hyderabad airport PPP. Ideally, thispublic figure will articulate a clear visionand goal that appeals to stakeholders,keeps the project focused and minimizesdistractions. The political leaders backingthe project should not just endorse it, butalso be accountable for its success andfor removing roadblocks. An interestingexample is that of the African PresidentialInfrastructure Champion Initiative (PICI),where national presidents report progresson infrastructure projects to their peers atthe African Union Summits, sometimesnaming and shaming suboptimal ordelayed projects and those responsiblefor them. For the optical-fibre project in

Algeria, Niger and Nigeria, the Initiativehas facilitated a joint declaration betweenthe partner countries and accelerated thefeasibility study and project funding.

While politicians are essential to providingdirection, the project also needs the whole-hearted backing of high-level civil servants.They ensure unbiased planning andcontinuity if the government changes; afterall, the timeline for preparing and executinginfrastructure projects exceeds the 4-yearlifespan of any particular government.

1.3 ProjectGovernance

Preparing a PPP project is a complex andlengthy process involving multiple agenciesand stakeholders as well as large cross-functional teams. To avoid confusion abouteach groups roles and responsibilities andto enable quick decision-making, PPPpreparation requires a dedicated and cleargovernance structure.

Set up a governance structure involvingall key stakeholders with clear roles andresponsibilities. To help the project developand launch as smoothly as possible, thePPP promoters would do well to take thefollowing actions:

Draw up a detailed governancestructure, including a steeringcommittee, a project managementoffice (PMO) and the workstream teams.The steering committee should haveat least one representative from eachministry or agency involved, but its sizeshould be limited. (Refer to figure 13 fora typical project governance structure.)The assigned roles and responsibilitiesof each agency should be clearlyformulated, and accountability should beenforced in regular meetings.

Select one agency (or committee)as a central point of contact andcommunication hub to coordinatethe other agencies and facilitate theirdecision-making. For example, forthe Latur Water Supply Project inIndia, the process was mediated andcoordinated by the state-level nodal

agency for water supply and sanitation,which had extensive experience inhandling consumers, strong governmentbacking and technical knowledge. Suchcoordinating authorities are particularlyhelpful for cross-border projects. Forinstance, Energie des Grands Lacs(EGL) prepares and procures the RuziziIII hydropower plant PPP on behalf ofthe Democratic Republic of Congo,Rwanda and Burundi.

Consider establishing a separategovernmental delivery vehicle withfull-time, focused staff for the project

preparation prior to tender. This entitywill help to bypass bureaucraticprocedures that are inherent to manygovernment agencies, and will increasestaff flexibility and commitment. In India,for example, each ultra mega powerplant (UMPP) was assigned its ownproject preparation entity to secureclearances and land acquisition.


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1 Managing a Rigorous Project Preparation Process

Figure 14: Risk and return characteristics of project life-cycle phases

Project preparation has different risk and return characteristics relative to later project life-cycle

For effective and sustainable PPFs,the design should incorporate theseconsiderations:

PPFs need thoughtful governance, andshould make provision for cost-recoveryand value-adding services.

Ensure that PPFs have clear eligibilitycriteria (a specified sector, limited

environmental impact, and so on),strong institutional oversight, anddisbursement caps (for example, theIndia Infrastructure Project DevelopmentFund (IIPDF) provides up to 75% of totalproject-preparation costs).

Structure PPFs to provide value-addedservices and capabilities like a venturecapital fund advisory, supervisory,networking. Besides providing funds,PPFs can play an important role indriving the overall preparation processin accordance with established bestpractices.

Make sure that the PPF has adequatestaff with the required financial andoperational expertise. One solutionmight be that of joint public and privatefacilities with mixed teams.

Assure that the PPF stays involved overthe course of the project to strengthenaccountability and monitoring and toenable the sharing of lessons learnedacross multiple projects.

Provide the PPF with adequate initialfunding that is supplemented orreplenished from time to time. Initialfunding sources can include the

government and donors, but couldalso include private-sector players thatare interested in advancing projectpreparation.

Key risks

Expectedequity IRR*

Typicalfinancing

structure

Construction Operations

Planning & system design Permits/land acquisition Environmental

Regulation/political

Stakeholder opposition

Engineering & detailed design Construction Demand ramp-up

Operations & maintenance Demand evolution

Equity

Debt

20

80

30

70100

0

Preparation &development

AnalogyVenture capital

(early stage/seed)Expansion capital(2nd stage/bridge)

Private equity(late stage)

Risk level

30-40% 15-30% 8-15%

* IRR = internal rate of return** Expected equity IRR and typical financing structure depend on project type, sector, local financing market conditions, concession type and length, and the country environment.

Indicativedata **

Indicativedata **

Enable the PPF to recover itspreparation expenses if the project istendered to a private-sector partner fora concession fee; that can help the PPFto become more financially sustainable(as with the South African PPP ProjectDevelopment Facility or the IIPDF).Possible recovery mechanisms include:

Fixed fees: for example, a specified

percentage margin on top of theincurred preparation costs (cost-plus) or a fixed compensation froma rate sheet, depending on theproject size (as used in India).

Variable success fees: a sum tieredaccording to the winning bid or thenumber of bidders.

Equity stakes in the tendered PPPor a share above a targeted returnlevel.

The infrastructure development companyInfraCo, for example, is structured as a

principal project developer, originatingand preparing projects and recoveringits expenses by retaining a shareholdingin the project. Among its projects is thefirst large-scale PPP in Cape Verde, theCabelica Wind Power project, which hasbeen prepared thoroughly by working inclose partnership with the national utility andthe government, and by bringing in expertsin renewable energy and carbon financing.Thanks to this diligent preparation, theproject launched very promptly, securedloans from multilateral banks, andsuccessfully attracted an equity financier.

The current fragmented assortment of PPFsremains unsatisfactory, and needs to beconsolidated and better coordinated.

For example, the total commitment toproject preparation funds in Africa is onlyabout US$ 190 million and is scatteredacross 16 different facilities.37

Encourage efforts to coordinate thevarious PPFs and exchange information

among them, for example, bystandardizing application proceduresand information requirements forinterested parties. That will help toreduce multiple applications and willease the administrative burden of thoseapplications.

Promote the pooling of resources byfacilitating PPF mergers or syndicationarrangements.

Focus individual PPFs on specificsectors or initiatives (such as transportcorridors) and on highly transformativeprojects, rather than running them as

generic facilities, which lack the sectorand regional expertise as well as thescale to be effective.

Ensure that development banks worksystematically to capture and analysedata on PPF performance and derivebest practices that can be sharedacross countries.


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2 Conducting a Bankable Feasibility Study

Figure 15: Critical demand forecast drivers

Forecasting needs to account for the most critical demand drivers

Ensure the availability and quality ofdata and provide standardized processguidelines. Instead of relying on secondarydata only, acquire fine-grained and context-specific primary data by conducting on-the-ground surveys to clarify market needs andusers willingness to pay. For example, fora greenfield toll road, the traffic on existingroads needs to be counted, distinguishedby different times of day (peak vs off-peak),

different seasons and for different usergroups and trip types (such as discretionaryleisure travellers vs commuters), ideallywith a history of a few years to revealusage trends. The population data has tobe sufficiently up-to-date, not based on acensus from ten years before, given thefast-evolving demographics in emergingcountries.

Governments should also provide integratedsecondary data in a central database,as well as tools, guidelines and processchecklists. For example, New Zealand andthe United Kingdom have a library of modelparameters and standards for modelling,validation and documentation. And Australiaimplemented a National Transport DataFramework to provide readily available andconsistent data across states.

Apply a sophisticated forecastingmethodology that accounts for the keydemand drivers, and check the robustnessof the forecast by means of triangulationand risk analysis. Select a forecastingmethodology that incorporates the keydemand drivers that are particularly relevantto the circumstances. (See figure 15 for

an overview of typical key demand driversfor transportation assets.) For example,the methodology for toll roads shouldinclude an explicit modelling of parallel,un-tolled roads, of ramp-up effects,41and of user values of time and priceelasticity. In contrast, the methodologyfor container ports should emphasize theestimated level of trans-shipment, themacroeconomic and industrial trends,

and the anticipated strategies of shippinglines. Compare the results against thoseproduced by other, simpler methodologies(such as a linear extrapolation), and test theforecast for robustness and riskiness bysuch means as benchmark comparisons(such as reference-class forecasting andbackcasting), probabilistic simulations,sensitivity analyses and scenario analyses.

Effect

Short-term Long-term

Relevance

Relevant in mostproject settings

Relevant only inselect project

settings

Medium-term

Disaggregation in

peak vs off-peak

Disaggregation indifferent seasons

Induced demand

Non-linear demandevolvement

Disaggregation offlows: e.g. freight vs

passenger

User behaviour and

needs

Structural breaks,e.g. new technologies

Tolling amount &structure

Willingness/ability topay, price elasticity

Ramp-up effects

Network effects

(Inter/intra-modal)competition

Trans-shipment/hubbing potential

Macroeconomic trends

Population develop-ment & urbanization

Industry ( siting) and

commodity trends

Indicativechecklist for

transport

The relevant demand drivers depend on thespecific context of the infrastructure asset

Invite selected stakeholders andindependent experts to review andvalidate the forecast. Guard againstmisrepresentation and optimism biasby involving a range of reviewers bothindependent experts and stakeholders withvaried interests in the project and differentlevels of risk-aversion. These stakeholderscould include the sponsoring governmentministry, potential concessionaires andusers, and also typical devils advocatessuch as potential lenders or the Ministry ofFinance. Dont just focus the discussion on

the model results, but also trigger a criticalreview of the assumptions and modeldynamics by explaining them fully andclearly.

Acknowledge and address the uncertaintyof the forecast. Estimate the level ofuncertainty inherent in the final forecast,and make it public, so as to ensuretransparency on the demand risks involvedin the project. For example, some ratingagencies use a traffic risk index that ratesthe uncertainty of a highway traffic forecastby considering such factors as the countrystolling culture, the level of car ownership,the forecast horizon, and the quality of data(see figure 16 for details).42In addition, takeinto account the uncertainty rating when

designing the contracts risk allocation (forexample, by using revenue risk sharingmodels, revenue guarantees, or availability-based concessions where demand risk isborne by the government), the PPPs scope

(demand risk for a corridor or network iseasier to asses than for a single asset), andwhen evaluating private-sector bids, toreduce the likelihood of intentionally inflatedbids and the winners curse phenomenon(for example, by imposing commonmacroeconomic assumptions or usingVickrey auctions43).


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Figure 16: Components of a traffic risk index

Traffic risk index combines different risk factors to create transparency on the overall demand uncertainty

Source: Bain, R., L. Polakovic.Traffic Forecasting Risk Study Update 2005: Through Ramp-Up And Beyond, 2005. Standard & Poors.

http://www.robbain.com/Traffic%20Forecasting%20Risk%202005.pdf.

Traffic risk index has been adopted by a number of traffic consultants,sponsors and rating agencies, e.g. Standard & Poors

Tolling culture

Time horizon

Surveys/data

Private users

Commercial users

Tariff escalation

Road network

Toll roads well established and data onactual acceptance available

No previous toll roads in the country anduncertainty over toll acceptance

Flexible rate setting -

no government approval needed

Regulatory approval needed for tariff

increases

Near-termforecast Long-term forecast

Magnitude of uncertainty

Already existing road ,clear view on future network design

Early planning of a new site , multipleoptions for future network design

Easy to collect data and experiencedsurveyors

Little data available and no data sharingamong authorities

Clear market segments, simple tollstructure, few origins and destinations

Unclear market segments, complex tollstructure, multiple origins and destinations

Fleet operator pays toll, clear time/operating savings, simple route choice

Owner-driver pays toll, complicated timesavings and route choice

Macro-environment

Stable local economyand predictablepopulation growth

Weak or volatile local economyandpopulation development unclear

Traffic growthHigh car ownership, growth correlatedwith established predictable factors

Low car ownership, growth depends onmany uncertain factors Ex

emplarycomponentsoftrafficriskind

ex

2.2 TechnicalSpecificationsIn drafting the specifications for a project,PPP promoters should remain constantlyalert to three broad dangers: defininginadequate project requirements andchanging the project scope; over-restrictingthe way that contractors might approachthe project; and misjudging the amount oftime and costs needed to complete theproject.

For PPPs, the public sector specifies

outputs or performance levels. Thisapproach differs from that of commonpublic-sector procurement, which isbased on detailed input specifications. IfPPPs take that restricted approach, theycould discourage innovative solutions. Forexample, the specifications for the BangkokBlue Line required the entire system tobe run underground, which involvedunnecessarily high costs, higher thanthose required by a more flexible approachcombining underground with above-groundroutes.

Measures to minimize these dangers fall into

four broad categories: defining the scopeand interfaces of the project, ensuringan innovation-friendly output/outcomespecification, keeping input constraints to aminimum, and cross-checking the cost andcomplexity of the project.

Define the scope and interfaces of the

project, after conducting diligent baselining.Identify and understand problems withthe infrastructure status quo by analysingcurrent performance and capacity. Donot assume to know what is needed,but conduct a user survey to clarify therequirements.

Evaluate different solutions notably,improving, expanding or replacing theexisting system. Solutions can often befound that address the infrastructurebottleneck by managing demand throughnew pricing models, or by reducingtransmission losses (for instance, high-voltage direct-current electricity transmissionsuffers lower electrical losses thancommon alternating-current systems), orby increasing the productivity and capacityof existing assets via additional investmentand new technologies (such as automatedhighway tolling, next-generation air-trafficsystems, or new telecommunicationprotocols). Careful consideration of suchalternatives can yield significant capitalexpenditure savings. For example,Mumbais water-distribution system wasupgraded very economically by reducingleakage and theft: the initial proposal a

new water-supply line of more than 100kilometres would have cost six times asmuch if it had been implemented.44

Establish the boundaries of the project early

and assess the boundary risks of the projectand its interdependence with other projects.For example, for the Bangkok Skytrain,ridership was initially jeopardized by poorroad access to the train stations and poorintegration with other transport modes;fortunately, later improvements, such asthe addition of feeder buses and new aerialwalkways, helped to increase ridership.45And assess the safeguards against suchsetbacks; for instance, get approvals foressential connections early and imposecontractual penalties for late completion ofcomplementary public-sector undertakings,such as electricity transmission lines to ahydropower plant, a feeder road or an urbanredevelopment programme.

Ensure that output/outcome specificationsare contractible and innovation-friendly.All specifications should be measurable,clear and achievable; for example, fora bridge they would stipulate that it willbe used by vehicles up to 40 tonnes,not by heavy vehicles or by any roadvehicles. In the output specifications, listthe performance and service requirementsvery clearly, but keep them as broad aspossible to encourage competition between

different technical solutions and allowbidders to propose their own innovativeapproaches. A good example of broadspecification is that of the rural electrificationproject in Senegal, where the specified


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goal was simply to connect the maximumnumber of households leaving it to theconcessionaire to optimize connections andon-grid vs off-grid power supplies. Similarly,the specifications of the PPP bridge over theOhio river in Indiana allowed the contractorto evaluate various design alternatives such as the use of LED lighting, more robustpavement and weathering steel that doesnot need to be repainted to reduce whole

life-cycle costs.46Or consider the exampleof urban transit, which could be specified astechnology-neutral: it would then be left tothe concessionaire to choose between light-rail and monorail options (or even bus rapidtransit), on the basis of capacity needs,future flexibility, and network and depotcompatibility, as well as speed and safety.

If possible, allow for strategic flexibilityoptions that the concessionaire can applyto enable the project to adapt to changing

needs over the long term; such flexibilityis of particular relevance for infrastructureassets, given the high uncertainty offuture user requirements or demand. Twoexamples: Heathrow Terminal 5 usedmodular components for its check-in area(to adapt to fluctuations in passengernumbers) and its aircraft parking stands(to adapt to various aircraft types); and theTagus Bridge in Portugal was constructed

in such a way as to allow a railway line to beadded later on, alongside the car lanes.

Use input specifications sparinglyand selectively. Every additional inputspecification surrenders design options (seethe illustration for a bridge in figure 17), andthus might increase costs. If possible, useinput specifications only where necessaryfor the sake of benefiting society, and wherethe private sector is unlikely to deliver themotherwise (i.e. where delivering them would

not be in its own interests anyway). Inputspecifications might be needed to compelthe integration of systems and services (forinstance, for public-transport ticketing andscheduling), or to ensure compliance withhealth, safety and environmental standards,or to enhance the cyber-security of criticalinfrastructure. If input specifications areused, contractors sho

bcg strategic infrastructure initiative ppp final tcm80-133746

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