G531_B_UNECE

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« Conditions for success of Concessions and other PPPs in developing countries :

How to make it work ? »***

Marc Frilet

Managing Partner « Frilet – Société d’Avocats »Secretary general of the French Institute of International legal

Expert (IFEJI)Global Construction and Infrastructure Legal Alliance (GCILA) –

Founding Law firmHead of the PPP Working Group « IFEJI/Paris Bar

Head of the drafting committee CICA PPP Working Group

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Introductory remarks (1)

What is the relevance of our topic?

Without massive investments in the public infrastructure service sector many countries will continue to lose several percentage point of GDP.

Nowhere in the world the public budgets permit to finance such massive investments.

Example in Africa: The gap which cannot be filled by the international community and donors is S$ 40 billion per year. If the gap is not bridged the millennium goals will not be reached.

The industry and PPP champions are losing appetite .

The financial crisis further limit the capacity of the industry to consider PPP.

Nevertheless, under precise and inclusive conditions innovative for most stakeholders, there is a promising future virtually in any country in the world.

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What are we talking about and why: focus on Concessions and other PPPs for public infrastructures services in developing countries

Delivery of public infrastructure services having a strong element of general interest (or public interest) :

In most countries in the world, general interest triggers similar consequences that the parties cannot modify by contract.

Examples in water : Source Michael Klein (former vice-president of the Private sector World Bank)

Can a private operator actually turn off the tap because he owns the water?

Can a water service provider take the pipeline and dig it out and take it at home or

throw it away?

What happens at the end of the Concession of the license period?

How the pricing arrangements are regulated?

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Reasons for cautious optimism if innovative approaches are promoted in an inclusive manner in three directions:

Improvement of the overall governance and investment climate (by

region or by country)

A minimum level of conductive investments climate is necessary.

Identification and promotion of « Gold standards » and related best practices

Promotion of an inclusive institutional, legal, regulatory and

contractual framework.

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Outline of the lessons learnt on the conditions of success

Why it is both necessary and simple to distinguish two families: Concession and assimilated schemes vs PFI and assimilated schemes:

The socio-economic rationale

Illustrative chart outlining the various forms of private participation in public infrastructure

Statistics on Concessions and PPP projects (number and investment value) F

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Illustrative chart outlining the various forms of private participation in public infrastructure

Statistics: number and investment value of Concessions and PFI

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25 000 projects

2 000 projects

PPP : Number of Concession-PPP and PFI-PPP in operation

Concession PFI

€1000 bilions

€200 bilions

PPP : Investment value of Concession-PPP and PFI-PPP

Concession PFI

Proposed definition : Concession- PPP vs PFI-PPP (1)

PFI – PPP

“A physical infrastructure based on public functional requirements is designed, financed, built and operated by a commercial company in accordance with the terms of a contract concluded with the public authority in charge of delivering the service under agreed conditions including performance parameters and providing for the compensation of the commercial company by the public authority […]

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Concession – PPP

“A physical infrastructure which is the basis of a public service is designed, financed, built or rehabilitated or maintained and always operated by a commercial company in accordance with the terms of a contract concluded with the public authority in charge of delivering the service which the commercial company to deliver the service on its behalf based on performance parameters and providing for the compensation entirely or mainly of the commercial company by the end users […]

Definition : Concession- PPP vs PFI-PPP (2)

PFI – PPP

[…] upon the delivery of the service to the public authority for a time period calculated in such a way that the private company is able to fully recover all its costs including financial costs and make a reasonable profit.

At the expiry of period, the infrastructure is transferred to the Public Authority in good operating conditions, generally without consideration or with a consideration agreed at the outset”

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Concession – PPP

[…] upon the delivery of the service to the end users for a time period calculated in such a way that the private company is able to fully recover all its costs including financial costs and make a reasonable profit.

At the expiry of period, the infrastructure is transferred to the Public Authority in good operating conditions, without”.

The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (1)

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1. PPP preparation

2. PPP procurement

3. PPP contract conditions

Conceptual evaluatio

n

Conceptual evaluatio

n

Preliminary business

case

Preliminary business

case

Prefeasibility studiesPrefeasibility studies

Eco-fin.scenarioEco-fin.scenario

Final evaluatio

n

Final evaluatio

n

Pre-selection

Pre-selection

RFP(Functional)

RFP(Functional)

First evaluation

First evaluation

Tunnel exchange

s

Tunnel exchange

s

Final evaluatio

n

Final evaluatio

n

Public service

obligations

Public service

obligations

Business case

transparency

Business case

transparency

Adaptation to changesAdaptation to changes

Early terminatio

n

Early terminatio

n

Partnering

ADR

Partnering

ADR

Average?Average?

Compliance index in developing countries


Low? Low?

(To be discussed)

Average?Average?


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1. PPP underlying principles

To be discussed)

2. Central level institutions

3. Project level institutions

Public service priority

Public service priority

Sovereign interferenc

e

Sovereign interferenc

e

Economic equilibrium

Economic equilibrium

Effective compensatio

n rights

Effective compensatio

n rights

Ownership

Security rights

Ownership

Security rights

Governance IntegrityEfficiency


Planning infrastructure

Planning infrastructure

GeneralPPP

promotion

GeneralPPP

promotion

Project monitorin

g

Project monitorin

g

Choice of outside

advisers

Choice of outside

advisers



Project unitProject unit

Procurement

Committees

Procurement

Committees Average?Average?

(To be discussed)

MonitoringCommitte

e

MonitoringCommitte

e



Low? Low?

Low? Low?

Choice of outside

advisers

Choice of outside

advisers


1) Underlying economic conditions and Project preparation by the public sector Conceptual evaluation

Preliminary business case

Prefeasibility studies

Economic and financial scenario

Final evaluation

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2) Project procurement : distinctive features and innovative approaches The possible scope of unsolicited proposals: limits and consequences

The main rule: competitive bidding

Pre-selection

How to design Request for Proposal and bidding documents (how to identify and draft some key contractual conditions)

How to identify the appropriate awarding criteria and how to choose the best procurement road:

two stages procedure ? competitive dialogue? competitive negotiation ?

The preferred bidder status: misprocurement issues and efficient challenging procedures

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3) Project contract conditions and underlying legal framework

The particular nature of the contractual relationships: a long term venture where the two contracting parties have a common obligation: to render a service satisfactory and affordable to the public.

Consequences in term of contract nature:

Incomplete contract subject to adjustments Adjustment must be organized in a simple and clear manner

without giving rise to hazardous negotiations (a set of ad hoc clauses and related legal principles, including ADR and partnering techniques and/or with the help of outside regulators)

Reference to some important conditions for the delivery of public infrastructure services: Continuity of the service Non discrimination between the users Adaptability of the service Transparency of the financial and operating condition

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The key role of an agreed baseline economic scenario for concession PPP

Outline of some particular contractual rights and obligations in case of concession-PPP

Rights of the conceding Authority: to terminate: how? to impose changes: how? to use the equipment and workforce of the concessionaire even when

dispute arises for continuing the operation of the service: how?

Rights of the Concessionaire: full indemnification when the Public Authority exercises sovereign

rights : how? adequate compensation when an unforeseen impediment (“sujétions

imprévues”) occurs: how? right to reinstate the equilibrium of the contract conditions when a

hardship (“imprévision”) situation arises: how?

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4) Project adaptation and regulation options

Regulation by contract: is it desirable? how can it work? The case of simple and well known public contracts laws

Regulation through renegotiation: is it desirable? how can it work?

Regulation by an outside regulator: is it desirable? How can it work?

5) Project financing The project financing techniques:

Among others: Diverting the project income flow for the ownership of the lenders, Transferring the ownership of the project to the lenders Collateral guarantees : sovereign guarantees, political insurances Their desirability, Their consequences on project delivery and sustainability: how can

it work?

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6) Institutional framework

Prerequisite : Design and promotion of reinforced principles on Governance, Integrity and Efficiency and related procedures (including improved procurement rules for outside consultants and experts)

Central level:

Central PPP Unit: Center of expertise Planning infrastructure General PPP promotion Project monitoring

Regulatory bodies and special courts

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Line ministries level :

Sector PPP Unit Monitoring project preparation Monitoring project implementation

Project development committee

Project level (contracting authority)

Project PPP Unit: preparation and monitoring Procurement committees

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Conclusions, take-away and further exchanges (1)

1) IMMEDIATE ACTION: Better information to public sector and private sector on the inclusive conditions of success for existing projects

Disseminating conditions of success around the world for securing existing projects or projects in a pipeline.

How to accelerate the process? Reference documentation

The Vademecum and other international efforts

The blueprint of a PPP Evaluation Index

How to proceed efficiently in a coordinated and integrated international effort?

the organization the resources

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Conclusions, take-away and further exchanges (2)

2) Six month horizon: innovative approaches for designing appropriate regulations

Need of aggressive actions for design, adoption and effective implementation of an appropriate institutional, legal, regulatory and contractual framework on a country or regional basis.

Additional reference to lessons having given raised to the emergence of innovative and efficient methodological approach based on a new science: « the legistic ».

Main questions to adress:

How to design and promote efficient methodology in line with the real need and expectation of the stakeholders?

How to identify the best expertise? What are the costs and how to finance the process?

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Thank you !

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Marc Frilet

Frilet - Société d’Avocats91, rue du Faubourg Saint Honoré

75008 Paris – France

Tel : + 33 1 56 26 00 40e-mail : [email protected]

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