Bridging the gaps Implementation challenges for …PPPs in the OIC member states Introduction to the study – Bridging the gaps Developing transport in OIC member countries is a priority

“Bridging the gaps”

Implementation challenges for

transport PPPs in OIC member

states

March 28, 2013

Vanesa Sanchez, Senior Analyst

Economist Intelligence Unit

PPPs in the OIC member states

Introduction to the study – Bridging the gaps

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

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

OIC member states

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

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

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

on PPPs in OIC member states

All 57 member states were included and examined in the process

PPPs are defined as in the previous session

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

government officials and sector experts; international project databases

The EIU has experience evaluating and comparing 57

countries worldwide

The EIU’s Infrascope index assesses country-level capacity

to develop and implement public-private partnerships

Evaluates 3 sectors: water and sanitation, transportation and energy

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

environment for PPPs

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

America and Eastern European regions

EIU PPP expertise

Asia 2011

EECA 2013

LAC 2009, 2010,

2012

EIU’s main toolkit includes:

Thematic reports: based on country-level analysis and

expert views, best practice

Learning tools: for country self assessment, allowing to

produce “what if” scenarios given changing conditions or

frameworks

Benchmarking: the possibility to learn from other countries’

successes and mistakes, to better inform best and worst

practice

Economic forecasting models: these allow for

measurements of country wealth, budgetary position, credit

risk, and user affordability

Objectives

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

be accelerated with effective use of existing knowledge. Furthermore,

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

1. Highlight global trends

and best practice

frameworks

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

strategic plans for improvement or expansion.

2. Identify country

characteristics in terms of

legal frameworks and

experience and establish

similarities

3. Discuss challenges for

implementation and

indicate pathways for

improvement/expansion

An essential part of a country’s learning process in PPP implementation

is an assessment of existing conditions and reforms in place.

International comparisons and experiences are useful as practical

guidance.

Scope: 57 OIC countries

Afghanistan, Bahrain, Brunei, Egypt,

Iran, Iraq, Jordan, Kuwait, Lebanon,

Oman, Palestine, Qatar, Saudi Arabia,

Syria, Turkey, United Arab Emirates,

Bangladesh, Indonesia, Malaysia,

Maldives, Pakistan

Albania, Azerbaijan, Kazakhstan,

Kyrgyz Republic, Tajikistan,

Turkmenistan, Uzbekistan

Guyana, Suriname

Algeria, Benin, Burkina Faso, Cameroon,

Chad, Comoros, Djibouti, Gabon, Gambia,

Guinea, Guinea-Bissau, Ivory Coast, Mali,

Mauritania, Morocco, Mozambique, Niger,

Nigeria, Libya, Senegal, Somalia, Sudan,

Togo, Tunisia, Uganda, Yemen, Sierra

Leone

Country groupings

Group 4

Countries with a PPP framework that

have implemented at least one

transport PPP

Group 3

Countries without a PPP framework

that have implemented at least one

transport PPP

Group 1

Countries without a PPP framework

and no transport PPP experience

Group 2

Countries with a PPP framework and

no transport PPP experience

Framework development

Experience

Group 1 Group 2 Group 3 Group 4

Countries without a PPP

framework and no

transport PPP experience

Countries with a PPP

framework and no



framework that have

implemented at least one

transport PPP


framework that have


transport PPP

Afghanistan Bangladesh Algeria Albania Azerbaijan Kuwait Benin Egypt

Bahrain Kyrgyz Republic Burkina Faso Indonesia

Brunei Cameroon Ivory Coast

Chad Comoros Kazakhstan

Gambia Djibouti Malaysia

Guinea-Bissau Gabon Morocco

Iran Guinea Nigeria

Libya Guyana Pakistan

Mauritania Iraq Sierra Leone

Niger Jordan Tunisia

Oman Lebanon

Palestine Maldives

Somalia Mali Tajikistan Mozambique

Turkmenistan Qatar Uzbekistan Saudi Arabia

Senegal

Sudan

Suriname

Syria

Togo

Turkey

Uganda

United Arab Emirates

Yemen

Country groupings

Data for country

groupings was taken

from the World Bank

PPIAF database, which

spans 1990-2011

The “concessions” and

“greenfield” categories

were used to filter

country results

Group 1


framework and no


Afghanistan Azerbaijan

Bahrain

Brunei

Chad

Gambia

Guinea-Bissau

Iran

Libya

Mauritania

Niger

Oman

Palestine

Somalia Tajikistan

Turkmenistan

Uzbekistan

Country groupings

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

North Africa, Central and East Asia

Many of these countries struggle with overall country and economic competitiveness

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

rankings, or not included

Exceptions are Azerbaijan, Brunei, Bahrain, Oman and Iran

Sub-Saharan African countries have low per capita GDP

Additional highlights:

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

all group 1

Small countries – Bahrain, Oman and Brunei – have the highest WEF

competitiveness positions

Group 1 overview

Issue 1:

Planning approach

Issue 2:

Pricing infrastructure

Issue 3:

Contracts and competitiveness

Challenges group 1

-Change decision-making

criteria (from politics-based

to) strategy and market-

based)

-Long vs short-term

-Project bankruptcy or

renegotiation or distress

-User affordability and

willingness are low

(population is unused to

tolls)

-Without good contract

enforcement, private sector

interest will be low

-Unstable economies. Low

employment, inflation, etc.

lower user affordability

Challenges group 1, cont’d

Issue 4:

Human resources

Issue 5:

Country instability

Issue 6:

Local financial markets

-Need understanding of PPP

procurement, implementation

and oversight process

-Difficult to get the right

people; also costly

-Regulatory , institutional and

legal risks deter investors

-Financial and economic risks

deter investors

-Underdeveloped markets

mean high dependency on

IFIs, international banks and

state-run development

institutions

-Ultimately means higher

financial risk

Overview of countries without a framework

Group 3


framework that have


transport PPP

Algeria

Benin

Burkina Faso

Cameroon

Comoros

Djibouti

Gabon

Guinea

Guyana

Iraq

Jordan

Lebanon

Maldives

Mali

Mozambique

Qatar

Saudi Arabia

Senegal

Sudan

Suriname

Syria

Togo

Turkey

Uganda

United Arab Emirates

Yemen

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

Mozambique have implemented more than 3 projects since 1990.

This speaks to the difficulty of implementing such projects continuously

and successfully without adequate laws, regulations and institutions in

place

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

competitiveness, as well as political and economic stability

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

UAE stand out thanks to strong macroeconomic indicators.

Group 3 overview

Issue 1:

Inadequate legal framework

Issue 2:

Bidding and procurement rules

Issue 3:

Inadequate institutional framework

Challenges group 3

-Not all concession forms possible

-Over-dependence on concessions

and sea ports and air ports

-Risk identification and allocation not

required

-Reduced competition and

transparency

-Incorrect selection criteria

-Delays to bid, low transparency

means poor feasibility studies and

private interest

-Makes the process costly, reduces

value for money

-No lifecycle oversight; no

development of institutionalised

expertise

-Low project buy-in; competition for

resources, fragments project pipeline

-Bypass Ministry of Finance

Issue 4:

Risk allocation

Issue 5:

Feasibility studies

Issue 6:

Broader development issues

-Inadequate legal framework

means there is little experience

-Since most projects allocate as

much risk as possible on private

sector, countries will likely struggle

when trying to implement more

complex forms

-Feasibility studies, because they

are not subject to consistent

standards, preparation or oversight,

vary in quality

-Also there is an optimism bias in

terms of willingness to pay and

traffic estimation. This increases

demand risk especially

-Similar to group 1, countries in

group 3 need to enhance economic

indicators, human capital, financial

markets and explore risk

guarantees for political and

economic instability

Challenges group 3

Group 2 Group 4


framework and no



framework that have


transport PPP

Bangladesh Albania

Kuwait Egypt

Kyrgyz Republic Indonesia

Ivory Coast

Kazakhstan

Malaysia

Morocco

Nigeria

Pakistan

Sierra Leone

Tunisia

Country groupings: Groups 2 and 4

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

However their project volumes are much higher on

average

Despite a much smaller group size (11 compared

with 26), the total investment amount is 3.5 times

higher : US$45.1bn versus US$12.8bn

Groups 2 and 4 overview

Issue 1:

Lack of expertise

Issue 2:

Long-term oversight

Issue 3:

Incremental improvements

Challenges groups 2 and 4

-PPP units are in place, but

expertise still needs to be

developed

-Need to spread knowledge

to sector ministries and other

key stakeholders

-Project monitoring for contract

compliance and quality

standards is a lower focus

relative to other project phases

-This also includes dispute

resolution mechanisms

-Legal frameworks

-Coordination

-Quality of feasibility studies

-Stronger institutional design

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

Interventions can also occur across countries

Options

• Risk identification and

risk matrix construction (p.

69 of report)

• Institutional design

• Legal and regulatory

design

• Feasibility studies

• Application of the risk

matrix

• Stakeholder consultation

• Institutional reform

• Legal and regulatory

reform

• IFI support

• On the job training

• Developing private sector

• Learning to engage

external consultants

•Training on project

accounting and planning

for Ministries of Finance

•Training on financial

instruments and guarantee

methods

Project or country-specific Can be shared by countries

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

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

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

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

OIC members should also consider disclosing concession agreements:

a) It provides a further check on corruption, which may strengthen private sector’s legitimacy

when involved in sensitive sectors.

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

public monitoring of concessionaires performance.

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

legal, institutional and regulatory frameworks. Laying the foundations for

competitive processes is fundamental.

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

structuring effective procurement processes is paramount. Increasing

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

be the main focus.

Improving implementation

Group-specific recommendations

Institutional support and institutional building

In-house training, on-the-job

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

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

local capacity.

Twinning arrangements

Certification

Training in the financial assessment of PPP projects

Training on competitive selection of the private partner


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

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

transport sector and to project prioritisation.

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

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


Capacity building through:

Technical assistance

Resident advisors

Short-term experts

Terms of reference and other resources

TOR for a PPP feasibility study


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

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

and feasibility studies.

Groups 2 and 4: Technical assistance should be considered for

institutional development as well as any areas for improvement at planning

and evaluation


Bridging capacity gaps by contracting for technical assistance

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

is a quick solution to a longer-term problem.


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

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

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

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

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

Strategies for private sector strengthening:

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

maximise full gains. Of such efforts.

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

investments, requires increased political and regulatory stability.


Direct advisory services and training on project management models

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

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

venture, or initially, as a sub-contractor


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

preparation evolves. It is usually prepared with the support of

transaction experts and in consultation with potential bidders.

Ultimately, risk allocation determines a PPP project’s financeability.

Good practice in preparing risk matrices is to adopt the following

structure for each stage of the project:

-Description of the risk

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

concessionaire)

-Comments

A typical risk matrix for a transport PPP

project includes the following types of risks

a)Design risks

b)Site risks

c)Construction risks

d)Force-Majeure risks

e)Revenue risks

f)Operation and maintenance

g)Performance risks

h)Other market risks

i)Political risks

j)Default risks

k)Strategic risks

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

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

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

the legal framework. Affordability should be considered as a

central aspect for full assessment of budgetary risks and

contingencies.



Financial instruments Risk mitigation instruments are financial instruments that transfer

certain defined risks from project financiers to creditworthy third

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

advantages of these instruments include:

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

private capital to build infrastructure, supplementing limited public

resources.

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

projects when risk-mitigation instruments cover those risks that they

perceive as excessive or beyond their control.

c)Governments can share the risk of developing infrastructure by

using their limited fiscal resources more efficiently and by attracting

private investors.

Instruments commonly used to

mitigate risk include guarantees and

event/political insurance products.

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

should explore options to mitigate political and

financial risk, as well as strategies to overcome the

constraints of underdeveloped financial markets.


A commitment by the government to repay the project’s

debt, under certain circumstances, is called a government

guarantee. Mechanisms include:

a)Equity and debt guarantees

b)Political risk guarantees

c)Shadow toll

d)Availability fee or annuity

e)Minimum traffic or revenue guarantees

Documents

Bridging the gaps Implementation challenges for …PPPs in the OIC member states Introduction to the study – Bridging the gaps Developing transport in OIC member countries is a priority