INFRASTRUCTURE PROJECT - uni-weimar.de · 1. Choose a Project: Infrastructure Project with Private Involvement (e.g. PPP) 2. Analyze the PIP Organizational Model within the PIP Toolbox

1 © Professur Betriebswirtschaftslehre im Bauwesen So2017

INFRASTRUCTURE PROJECT

PUBLIC INFRASTRUCTURE PROVISION WITHIN THE FRAMEWORK

OF THE NEW INSTITUTIONAL ECONOMICS

Prof. Dr.-Ing., Dipl.-Wirtsch.-Ing. Hans Wilhelm Alfen

Dr. (AM), Dipl.-Wirtsch.-Ing. (AM) Norayr Badasyan


Biography

Practical Experience

• Team Leader, Inspection Reform Project, Government of RA

• Leading Specialist, Investment Policy Department

• First Class Specialist, Agency of Accreditation

Academic work/studies

• Research Associate at BUW

• Research Fellow at the National Academy of Sciences of Armenia

• Assistant Professor at Armenian State University of Economics

Education

• Defended a Dissertation for the title of Doctor Engineering, BUW

• Doctor of Economics, National Academy of Sciences of Armenia

• Diploma of Economist-engineer, Armenian State University of Economics


Introduction

Introduction to the Project: Structure,

Assessment, Objectives, Methodology of

the Course

Based on ÖBM, Projektfinanzierung and

Economic Feasability Studies


Schedule-Fahrplan

N Date Lecturer Topic Slides

1 13.04.17 NB Introduction to the Project:

Structure, Assessment, Objectives, Methodology of the Course 1 to 13

2 20.04.17 NB Theoretical Background/NIE: Property Rights Theory, Transaction

Cost Theory, Principal Agent Theory 13 to 26

3 27.04.17 NB

Discussions on the Chosen Projects

PIP Toolbox within the NIE: Main Attributes Developing the PIP

Toolbox 27 to 44

4 04.05.17 NB

Identification of the Organizational Models: Privatization Model,

Partnership Model, Contractual Model, Financial Model and

Business Model 45 to 53

5 11.05.17 NB

Identification of the Organizational Models: Privatization Model,

Partnership Model, Contractual Model, Financial Model and

Business Model 54-60

6 18.05.17 NB Mid-term Presentation from Students

7 25.05.17 NB Externalities and Case Study of the North-South Road Corridor 61-79

8 26.05.17-21.06.17 Individual Work on Case Studies, Meetings and Discussions on

the Progress according to the appointmnets

9 22.06.17 AL/NB SUBMISSION OF THE WRITTEN PROJECTS

10 29.06.17 AL/NB FINAL PRESENTATION


Student Tasks

1. Choose a Project: Infrastructure Project with Private Involvement (e.g. PPP)

2. Analyze the PIP Organizational Model within the PIP Toolbox

3. Analyze other possibilities/options of the Project according to the Country and

Sector Specifics

4. Conduct Financial Analysis

5. Conduct Economic Analysis

6. Due Diligence Analysis


Course Assessment and Material

Assessment:

Submission of the Written Case Study (75%),

Presentation/Defense (25%)

Credits: 12

Material:

• Power Point Slides

• Exercises

• Additional Literature to read

• Individual work


Course Objective and Outcomes

• To understand the nature of the

institutions and their influence on the

development of PIP projects

• To understand the nature of the property

rights and transaction costs and the

links between the latter and the PIP

toolbox

• Use the ideas derived from the course

for the analyses of different PIP case

studies bridging the theory and the

practical field

• Analysis of financial and economic

outcomes of the case studies

Source: Alfen, 2010, Alfen,

PPT Singapore 2013


Interests of Public and Private Partners (On the example of the Road

Sector)

Public Private

Reduced Travel

Time

Reduced Vehicle

Operating Costs

Reduced

Number of

Accidents

Increased Traffic

Volume

Reduced

Environmental

Pollution

Adequate Return

on Capital

Investments

Less Life Cycle

Costs

Less Risk Costs

Financial

Stability

Sufficient NPV,

FIRR, etc.

Ad

de

d S

oc

ial W

elf

are

Su

fficie

nt C

as

h F

low

Balance System of the

Interests of the Partners


Economically Unviable Projects

Economic Benefits

Economically

NOT Viable

Economic Costs Project Costs Project Revenues

Financially

Viable

Author‘s own source developed based on „World Bank (2012):

Best Practices in Public-Private Partnerships Financing in Latin

America. The role of subsidy mechanisms”.

PUBLIC/EIRR

PRIVATE/FIRR

BALANCE


Financially Unviable Projects

Economic Benefits Economic Costs

Economically

Viable

Project Costs Project Revenues

Financially

NOT Viable

Author‘s own source developed based on „World Bank (2012): Best

Practices in Public-Private Partnerships Financing in Latin America.

The role of subsidy mechanisms”.

BALANCE

PUBLIC/EIRR

PRIVATE/FIRR


Economically and Financially Viable Projects

Project Costs Project Revenues

Financially

Viable

Economic Costs Economic Benefits

Economically

Viable BALANCE

PUBLIC/EIRR PRIVATE/FIRR

Author‘s own source developed based on „World Bank (2012):

Best Practices in Public-Private Partnerships Financing in Latin

America. The role of subsidy mechanisms”.


Methodology

Lectures

Exercises to

Practice

Relevant Case

Studies

Final Results

Economic and

Financial Analysis

(mid-term

presentations)

Usage of the

Course Material to

Conduct

Organizatinal

Model Analysis

Project-Lectures Student Tasks


Theoretical Background

Theoretical Background/NIE: Property

Rights Theory, Transaction Cost Theory,

Principal Agent Theory

Literature to Read:

1. Williamson, Oliver: A Comparison of Alternative Approaches to Economic

Organization. In Journal of Institutional and Theoretical Economics 146 (1),

pp. 61–71.

2. Williamson, Oliver (1979): Transaction-Cost Economics: The Governance of

Contractual Relations. In Journal of Law and Economics 22 (2), pp. 233–261.

3. Williamson, Oliver (1985): The economic institutions of capitalism. Firms,

markets, relational contracting. New York, London: Free Press; Collier

Macmillan.

4. Williamson, Oliver (2000): The New Institutional Economics: Taking Stock,

Looking Ahead. In Journal of Economic Literature 38 (3), pp. 595–613.

5. Coase, Ronald (1937): The Nature of the Firm by Coase. In Economica: New

Series 4, No: 16, pp. 386–405.

6. Coase, Ronald (1960): The Problem of Social Cost. In Journal of Law and

Economics 3, pp. 1–44.


Political and Economic Institutions: Differences (Nogales City)

• Free Political and

Economic Institutions

are the Point of

Departure for the

Development

• Political Institutions

Develop the Economic

Institutions

• No Free Economic

Institution Exist without

Free Political Institution


Neoclassical and New Institutional Economics

Contractual

Non-

Contractual

Neoclassical

Other

Environmental

rules

Organizations

Public

Private

Public Choice

Property

Rights

Ex-post

Ex-ante

Agency

Theory

Transaction

Cost Theory

Source: Williamson,

1991


New Institutional Economics

Source: (Williamson, p. 62)


Coase Theory

…if the property rights are clearly defined and transaction costs are equal to

zero, the allocation of recourses will remain unchanged and effective

regardless of the changes in the distribution of the property rights (Coase,

1960).

Example (Dan Quint, 2011)

If it’s efficient for you to have the party… Your benefit from having the party is greater than my benefit from a good night’s sleep

If you start out with the right to have the party, no problem

If I start out with the right to quiet, you can pay me for the right to have the party

If it’s efficient for you not to have the party… Good night sleep is worth more to me

If I have right to silence, no problem

If you have right to party, I can pay you not to have it

The point: either way, we achieve efficiency If it’s efficient to have the party, you have the party

If it’s efficient not to, you don’t

Regardless of who started off with the right


Exercise 1 on PR Theory

Description

You have rented a new apartment near the Music School. The Music School works from 9:00-22:00 and a loud music comes from their window. Rather than to put a

sound proof windows, the Music School uses the basic ones saving 1000 Euros yearly. You are affected from the sound coming from there because the Music

School doesn’t spend the 1000 Euros to put the required windows.

Legal Restrictions

The Music School doesn’t have right to make a noise from 20:00-8:00 (in the evenings).

Question 1

Externalities occur when there is an external benefit (positive) or external lose (negative) from the activities of the other parties.

What kind of externalities the loud music from the Music School can cause for you (positive or negative)? Bring examples (also for other cases).

Question 2

In case you stay and work at home from 13:00-17:00 earning 40 Euros every day during this time period. The loud music from the Music School doesn’t let you focus

on your daily topics and you lose the opportunity to earn 30 Euros per day.

How does the allocation of the property rights impact the relations between you and the Music School? Who will buy the sound proof windows? Will you pay 1000

Euros yearly to put sound proof windows?

Question 3

You have a right to ban/prohibit the loud music after 20:00. The Music School earns 50 Euros 5 times per week in between 20:00-22:00, as there are a lot people

interested in evening classes (you don’t work at home and come back home after 18:00). Who will buy the sound proof windows?

Question 4

The Music School prefers to work more after 20:00 earning 50.000 Euros per year and is obliged to compensate you 800 Euros per year for the noise. Will the Music

School pay 1000 Euros yearly for the sound proof windows?

Question 5

Coase theory says that when there are no transaction costs or the transaction costs are low and if the property rights (rights of the parties) are clear and well defined,

then negotiations will lead to efficiency.

Explain Coase theory on the current example (Music School).


Attributes of the Property Rights Theory

Property Rights, are the social institutions that define or delimit the range of privileges granted to individuals to specific resources… (Libecap, 1989) • Right to exclude non-owners from access; • Right to appropriate the stream of economic rents; and • Right to sell or otherwise transfer the resource to others.

Bundle of rights (Alchian and Demsetz, 1972) • Owner has the right of residual claimant; • Owner has a right of input behavior; • Owner is the central party common to all contracts with inputs; • Owner alters the membership of the team; • Owner has a right to sell all these rights

Honore’s bundle of rights (Honore, 1960) • the right to possess, • the right to use, • the right to manage, • the right to the income, • the right to the capital, • the right to security, • the incident of transmissibility, • the incident of absence of term, • the prohibition of harmful use, • liability to execution, • residuary character.


Attributes of the Property Rights to be used in PIP

• Right to own-right of exclusive physical control of an asset,

• Right to manage-the right to decide who and how can use the asset,

• Right on income-the right to own the results from the asset,

• Right to transfer the power over property-the right to expose, lease, change,

Possession-the right to use and maintain the asset.

Obligations-the rights to recover the violated property rights, bearing responsibility for

the negative effects of the usage and maintenance of the asset.


Meaning of the Transaction Costs

Transaction Costs are “all

those costs that cannot be

conceived to exist in a

Robinson Crusoe economy

where neither property

rights, nor transactions, nor

any kind of economic

organization can be found”

(Wang, 2007)

Trade with Friday would

make a ground for the

transaction costs!

Who can do what? Who is

better in fishing or collecting

nuts?


Exercise 2 on TC Theory

Description

You have been graduated from the University and want to set your own consulting company in the sphere of the public infrastructure

provision. You are considering about two different options to go with your idea.

Option 1

You hire a team of 5 members from the people you studied together. For all of them you have to pay salaries, provide them with relevant

computers and to hire an office area. Each of your team members have different contract scheme and have different salaries.

At the same time you need a loan from the bank or to borrow some money from your other friends to set a business. At the same time

another friend of you is interested to invest in your business and each month to receive X amount of money for the next 5 years.

You participate in tenders, you get offers, and you work with the clients, set deadlines, provide the clients with relevant outcomes and at the

same time pay every month the needed amount from the loan with the interests or the money you borrowed.

Option 2

You decide for the beginning to find the clients on the internet and to find a team online every time you have an offer. After each offer you can

write to your friends on Facebook to ask them to do a part of the required job and in the end you gather all the parts of the work and submit it

to your client by email.

Question 1

Please, analyze all the pros and cons of both options. What is the main difference of these two options?

Question 2

Which option would you choose? Why?

Question 3

Which option has higher transaction costs? Why? What can be considered as transaction costs in these examples/options?


Transaction Attributes

Investment Characteristics

Nonspecific Mixed Idiosyncratic

Fre

qu

en

cy

Occa

sio

na

l

M

ark

et g

ove

rna

nce

(c

lassic

al co

ntr

acting

)

Trilateral Governance

(neoclassical contracting)

Bilateral governance Unified governance

(relational contracting)

Re

curr

ent

Specificity

Uncertainty

Frequency

Classical

Neoclassical

Relational

Adopted from Williamson 1985


Governance Structure

Governance structure

Attributes Market Hybrid Hierarchy

Instruments Incentive intensity Administrative controls

++ 0

+ +

0

++

Performance Attributes Adaptation autonomous Adaptation cooperative

++ 0

+ +

0

++

Contract Law ++ + 0

++=strong; +=semi-strong; 0=weak.

Adopted from Williamson 1991


Principle-Agent Theory

Moral Hazard

• Shirking (e.g. No monitoring and employees talking on a phone),

• Senior Executives ignoring the interests of the other stakeholders,

• Elected Officers (self interests rather than public interests),

• Different Objectives (Public and Private Sectors)

Principal-Owner of

the Resources (e.g.

Public)

Agent (hired part to

conduct relevant

services)

Contr

act

Info

rma

tion

As

ym

me

try


Exercise on PA Theory

Agent is the seller of iPhones. Agent (seller) supplies either real or fake cellular phones.

Principal is the buyer of the IPhones. Principal (buyer) has to either verify the quality of IPhones

(and has to pay for it) or trust the seller.

Sellers-write on a paper (so no one can see it) whether you are going to sell the real or fake IPhone

(based on your decision you can earn or lose money).

Buyers-write on a paper (so no one can see it) whether you are going to check the quality of the

IPhone (based on your decision you can earn or lose money).

Contract

In case seller sells real IPhones and the buyer doesn’t check, both sides receive additional 20

Euros.

In case seller sells fake IPhone and the buyer is not checking, the seller receives another 20 Euros

and all the money of the buyer.

In case the buyer decides to check the quality, the seller can pay the paid money for the IPhone

back and keep his/her 20 Euros in case he/she has sold a fake IPhone.

Talk together (buyer and seller) about your strategy on what are you going to do (you can lie what

you have written on a paper earlier, which probably can make you earn more money and win).


PIP Toolbox

PIP Toolbox within the NIE:

Main Attributes Developing the

PIP Toolbox

Literature to Read:

1. Weber, B., Alfen, H. W. English. (2010). Infrastructure as an asset class:

Investment strategies, project finance and PPP, Wiley.

2. Buschmeier, B., & Alfen, H. W. (2014). Projektentwicklungsmodell für die

Optionen der Beschaffung von Bundesfernstraßen: Ökonomisches

Entscheidungsmodell begründet auf einer optimierten institutionellen Lösung und

einer vervollständigten Nutzerfinanzierung. Schriftenreihe der Professur

Betriebswirtschaftslehre im Bauwesen: Vol. 20. Kromsdorf: Bauhaus-Univ.-Verl.

Weimar als Imprint von VDG.

3. Badasyan, N., Alfen, H.W., "The Public Infrastructure Provision Toolbox within

the Framework of the New Institutional Economics", European Procurement and

Public Private Partnership Law review, Volume 10, Issue 2 (2015), pp. 72-82.


Essence of the PIP Toolbox


Privatization Models

Adopted from Weber, Alfen

2010

DesignFinan-

cing

Invest-

mentBuild

Ope-

ration

Transfered tasks

Type of privatisation

Ownership

Public PrivateDuration

Provision

function

Formal privatisation: „public entities in private clothes“

legally ...

financially

private business model

private financing (company)

public

public

100% unlimited

Functional privatisation: „The private partner as the assistant of the public”

outsourcing ...public

100%

limited

... of single delegable tasks / services

... of comprehensively integrated services x% x%

Materially privatisation: transfer of ownership / provision function

partial material

privatisation public/private x%

umlimited

joint venture

sale of shares to private investors 100%

x%

privatefull material

privatisation



Developed based on: Weber, Barbara; Alfen, Hans Wilhelm (2010): Infrastructure as an asset class. Investment strategies, project

finance and PPP. Chichester, West Sussex, U.K: Wiley; Williamson, Oliver (1992): Markets, hierarchies, and the modern corporation.

An unfolding perspective. In Journal of Economic Behavior and Organization 17, pp. 335–352; Kleiss, Torsten (2008): Institutional

arrangements for municipal solid waste combustion projects. Weimar: Bauhaus-Univ (Schriftenreihe der Professur

Betriebswirtschaftslehre im Bauwesen, No. 6).

Administrative

Controls (++)

Adaptation

Cooperative (++)

OWNERSHIP TASKS DURATION MODEL CRITERIA GOV.

STRUCTURE

Public

Private

Business Model

Private

Financing

Outsourcing

Single Tasks

Outsourcing

Comprehensive

Tasks

Public/Private Sales of Shares

to Private

Private Sales of 100%

Shares to

Private

Unlimited

Limited

Unlimited

Unlimited

FORMAL

FUNCTIONAL

PARTIAL

MATERIAL

FULL

MATERIAL

Incentive

Intensity(+)

Administrative

Controls(+)

Adaptation

Autonomous (+)

Adaptation

Cooperative (+)

Hierarchy

Hybrid

Incentive

Intensity (++)

Adaptation

Autonomous (++)

Market








Administrative

Controls (++)

Adaptation

Cooperative (++)


STRUCTURE

Public

Private

Business Model

Private

Financing

Outsourcing

Single Tasks

Outsourcing

Comprehensive

Tasks


to Private


Shares to

Private

Unlimited

Limited

Unlimited

Unlimited

FORMAL

FUNCTIONAL

PARTIAL

MATERIAL

FULL

MATERIAL

Incentive

Intensity(+)

Administrative

Controls(+)

Adaptation

Autonomous (+)

Adaptation

Cooperative (+)

Hierarchy

Hybrid

Incentive

Intensity (++)

Adaptation

Autonomous (++)

Market








Administrative

Controls (++)

Adaptation

Cooperative (++)


STRUCTURE

Public

Private

Business Model

Private

Financing

Outsourcing

Single Tasks

Outsourcing

Comprehensive

Tasks


to Private


Shares to

Private

Unlimited

Limited

Unlimited

Unlimited

FORMAL

FUNCTIONAL

PARTIAL

MATERIAL

FULL

MATERIAL

Incentive

Intensity(+)

Administrative

Controls(+)

Adaptation

Autonomous (+)

Adaptation

Cooperative (+)

Hierarchy

Hybrid

Incentive

Intensity (++)

Adaptation

Autonomous (++)

Market








Administrative

Controls (++)

Adaptation

Cooperative (++)


STRUCTURE

Public

Private

Business Model

Private

Financing

Outsourcing

Single Tasks

Outsourcing

Comprehensive

Tasks


to Private


Shares to

Private

Unlimited

Limited

Unlimited

Unlimited

FORMAL

FUNCTIONAL

PARTIAL

MATERIAL

FULL

MATERIAL

Incentive

Intensity(+)

Administrative

Controls(+)

Adaptation

Autonomous (+)

Adaptation

Cooperative (+)

Hierarchy

Hybrid

Incentive

Intensity (++)

Adaptation

Autonomous (++)

Market


Partnership Models


2010


Partnership Models


Partnership Models


Partnership Models


Organizational Models

Vertical

Horizontal

Ow

ners

hip

Public

Public/

Private

Private

Private business model

Private financing

Outsourcing of single

tasks

Outsourcing of

comprehensively

integrated services

Joint venture

Sales of shares to

private

Formal Privatization

Functional privatization

Partial material

privatization

Full material

privatization

Full material

privatization on spot

market

Unlimited

Unlimited

Unlimited

Unlimited

Short

Hierarchy

Hybrid

Market

Ownership

Ownership

Provision

Provision

Transferred

task

Transferred

task

MODEL

MODEL

Duration

Duration

Governanc

e structure

Governanc

e structure

Adm.

Control;

Adapt.

Coopera

tive

Incentive

int.;

adm.

Controls;

adaptati

on aut.;

adapt.

Coop;

Contract

law

Adm.

Control;

Adapt.

Coopera

tive

Incentive

int.;

adaptation

aut.;

Contract

law

Incentive

int.; adm.

Controls;

adaptation

aut.; adapt.

Coop;

Contract

law

Incentive

int.;

adaptation

aut.;

Contract

law


Contractual Models

… and to material privatization …to formal

…to

fu

nc

tio

nal

pri

va

tiza

tio

n

Ou

tso

urc

ing

of

task

s/s

erv

ice

s

Force account of the administration

100% Public eneterprise

Design

Design+Build

Design+Build+Maintain

Design+Build+Finance

PPP-Models Design+Build+Maintain+Operate+Finance

Without/with temporary transfer of ownership

Private SPC Mixed SPC

PPP

Path of privatization

Public partner as shareholder

… Regulator

Publ

ic p

artn

er a

s cl

ient

(+re

gula

tor)

Step1 Step 1

Step 2

Step 3

Step 4

Step 2

Step 3

100% Public eneterprise under

private law

Step 4

Full Partial

Mixed enterprise with permanent

transfer of ownership

100%

Private eneterprise

From traditional administration i.e New Public Management


2010


Contractual Models


…to

fu

nc

tio

nal

pri

va

tiza

tio

n

Ou

tso

urc

ing

of

task

s/s

erv

ice

s



Design

Design+Build






PPP



… Regulator

Publ

ic p

artn

er a

s cl

ient

(+re

gula

tor)

Step1 Step 1

Step 2

Step 3

Step 4

Step 2

Step 3


private law

Step 4

Full Partial



100%

Private eneterprise


Adverse selection and moral hazard

Pro

pe

rty R

igh

ts

Tra

nsa

ctio

n

Property rights


Organizational Models

Vertical

Horizontal

Contractual

PPP

Institutional

PPP

D

DB

DBM

DBF

PPP

models

Transferred

function

Transferred

function

100% Public

100% Public

under private

law

Mixed

100% Private

Ow

ners

hip

Public

Public/P

rivate

Private

Private business model

Private financing

Outsourcing of single

tasks

Outsourcing of

comprehensively

integrated services

Joint venture

Sales of shares to

private

Formal Privatization

Functional privatization

Partial material

privatization

Full material

privatization

Full material

privatization on spot

market

Hierarchy

Hybrid

Market

Ownership

Ownership

Provision

Provision

Transferred

task

Transferred

task

MODEL

MODEL

Governanc

e structure

Governanc

e structure

Adm.

Control;

Adapt.

Coopera

tive

Incentive

int.;

adm.

Controls;

adaptati

on aut.;

adapt.

Coop;

Contract

law

Adm.

Control;

Adapt.

Coopera

tive

Incentive

int.;

adaptation

aut.;

Contract

law

Incentive

int.; adm.

Controls;

adaptation

aut.; adapt.

Coop;

Contract

law

Incentive

int.;

adaptation

aut.;

Contract

law


Financing Models (Germany)

Hybrid

Financing

Public Private

Budget Financed Project finance Forfeiting Corporate Finance Short term payments in the spot

market

Hierarchy Market


Financing Model (Example of Armenia based on Determinants)

Source of Finance

Public Donor/Multinational Private

Asset

Diaspora


General Model

Financing

Budget financed

Public Provision Public/Private Provision Private Provision

Private

business

Private

financing

Outsourcing

single tasks

Outsourcing

integrated

services

Joint venture

Sale of

shares to

private

Formal privatization Functional

privatization Partial privatization Full privatization

Full privatization spot

market

Vertical Horizontal

Contractual PPP

Private SPC

Institutional PPP

Mixed SPC Horizontal

partnerships

Desig

n

Desig

n+

Bu

ild

Desig

n+

Bu

ild

+

Ma

inta

in

Desig

n+

Bu

ild

+

Fin

an

ce

PP

P m

od

els

10

0%

pu

blic

10

0%

pu

blic

un

de

r p

riva

te

law

Mix

ed

En

terp

rise

10

0%

pri

va

te

Hybrid Market Hierarchy

Project finance Forfeiting Corporate finance

Public Private

Short payments spot market

Limited Unlimited Unlimited Unlimited

Public Ownership Public/Private Ownership Private Ownership

Without or temporal


Permanent transfer of

ownership

Short


PIP Organizational Models

Identification of the Organizational

Models: Privatization Model, Partnership

Model, Contractual Model, Financial Model

and Business Model

Literature to Read:

1. Weber, B., Staub-Bisang, M., Alfen, H.W. English. (2016). Infrastructure as an

asset class: Investment strategies, project finance and PPP, Second Edition

Wiley., Chapter 3, Chapter 4.

2. Badasyan, N., Alfen, H. W., "Development of the Public Infrastructure Provision

Organizational Models: Examples from the Armenian Transport Sector",

International Journal of Public Administration, Taylor and Francis/Routledge,

(2016), pp. 1-10, DOI: 10.1080/01900692.2015.1136914, ISSN: 0190-0692

(Print) 1532-4265 (Online).


Analysis of the Country, Sector, Project Specifics


Main Components


Development of the Privatization Model in Excel

Ownership Public Public/Private Private

Provision Public Public Public/Private Private

Duration Unlimited Limited

Privatization

Model

Formal Functional Partial

Material

Full Material

Ownership (Own) Option 1 Option 2 Option 3

Provision (Prn) Option 1 Option 1 Option 2 Option 3

Duration (Dun) Option 1 Option 2

Privatization

Model (PMn)

Model 1

Model 2

Model 3

Model 4

1) Ow={1;2;3};

2) Pr={1;2;3};

3) Du={1;2};

4) PM={1;2;3;4}

5) When Ow=1, then Pr=1;

When Ow=2, then Pr={1;2};

When Ow=2, Pr=1, then Du=2;

When Ow=2, Pr=2, then Du=1;

When Ow=3; then Pr=3.

6) PM1=Ow1+Pr1+Du1;

PM2=Ow2+Pr1 or PM2=Du2

PM2=Ow1+Pr1 +Du2;

PM3= Ow2+Pr2;

PM4=Ow3+Pr3.


Development of the Partnership Model in Excel

Privatization Model Formal Functional Partial Material Full Material

Ownership

Transfer Type

Permanent

(Public)

Temporal Permanent

(Public/Private)

Permanent

(Private)

Shareholders Public SPC pure private SPC

mixed

SPC mixed Private

Partnership Model N/A Vertical Horizontal Horizontal N/A

PPP type N/A Contractual Institutiona

l

N/A N/A

Privatization Model

(PM)

PM1 PM2 PM3 PM4

Ownership Transfer

Type (OT)

Option 1 Option 2 Option 3 Option 4

Shareholders (Sh) Option 1 Option 2 Option 3 Option 4 Option 5

Partnership Model

(PAM)

N/A Model 1 Model 2 Model 2 N/A

PPP type (PPP) N/A Model 1 Model 2 N/A N/A

1) When PM=PM1, then OT=1 and Sh=1,

consequently PAM and PPP is not applicable;

2) When PM=PM2, then OT=2, Sh={1;2}, PPP={1;2};

When OT=2, Sh=2, then PAM=1 and PPP=1;

When OT=2, Sh=3, then PAM=2 and PPP=2;

3) When PM=PM3, then OT=3, Sh=4; PAM=2,

consequently PPP model is not available;

4) When PM=PM4, then OT=4, Sh=5, consequently

PAM and PPP are not applicable.

5) PAM1=PPP1=OT2+Sh2;

PAM2=PPP2=OT2+Sh3 or PAM2=OT3+Sh4

(no PPP).


Development of the Contractual Model in Excel

Privatization

Model

Formal Functional Partial Material Full

Material

Transferred

Tasks

B D+B D+B+M D+B+F D+B+M+O+F D+B+M D+B+F D+B+F

Legal Form 100%

Publi

c

100%

Public

100%

Public

under

private

law

100%

Public

100%

Public

under

private

law

100%

Public

100%

Public

under

private

law

SPC (PPP

Models)

Mixed Enterprise

(Joint Venture)

Private

Enterprise

Privatization

Model (PM)

PM1 PM2 PM3 PM4

Transferred

Tasks (TT)

Option

1

Option 2 Option 3 Option 4 Option 5 Option

3

Option

4

Option 4

Legal Form

(LF)

Model

1

Model

1

Model

2

Model

1

Model

2

Model

1

Model

2

Model 3 Model 4 Model 5

1) TT={1;2;3;4;5};

LF= {1;2;3;4;5},

2) When PM=PM1, then TT={1;2;3;4} and LF={1;2},

When PM=PM2, then TT=5; LF=3,

When PM=PM3, then TT= {3; 4}; LF=4,

When PM=PM4, then TT=4; LF=5


Development of the Financial Model in Excel

Financing Part (FP) Public Private

Financial Model (FM) Budget Financed Project Finance Forfeiting Corporate Finance

Financing Part (FP) Option 1 Option 2

Financial Model (FM) Model 1 Model 2 Model 3 Model 4

1) FP={1;2};

FM={1;2;3;4}

2) When FP=1, then FM=1;

When FP=2, then FM={1;2;3}


Development of the Business Model in Excel (e.g. Road)

Business Model (BM) User fees

Budget fees

Source of

Remuneration in

Business Model (RM)

Mileage based

tolls

Time based

charges

Availability

Payment

Active traffic

management

Shadow toll

Business Model (BM) Option 1 Option 2

Source of

Remuneration in

Business Model (RM)

Model 1 Model 2 Model 3 Model 4 Model 5

1) BM={1;2}

RM={1;2;3;4;5}

2) When BM=1; then RM={1;2},

When BM=2; then RM={3;4;5}


Business Models in the Road Sector

Revenue Source

User Financed Budget Financed

Direct Indirect

e.g. Tolls,

Vignettes e.g. Fuel Tax,

Vehicle Ownership

Tax

Availability

Payments Models

Combination of both


Business Models in the Rail Transport Sector

Revenue Source


Direct Not Direct

e.g. Ticket Prices

(Fares) both for

passengers and

goods

e.g. Offering transportation

services to regional

companies at a fixed price.

The principal collects the

ticket prices.

Subsidies


Business Models in the Air Transport Sector

Revenue Source


e.g. Airlines (take off, landing, aircraft parking,

baggage, etc.) and Passengers,

Commercial Services (Food, Drink, hotels, car

parking and rental

Government

Grants


Business Models in Water Sector

Revenue Source


Fixed Charges Variable Charges

e.g. Price per Liter

of Water

e.g. location,

consumption,

volume, season,

etc.

Availability

payments

Prepaid Charges

e.g. prepaid cards


Business Models in Water Sector

Revenue Source


Multi-tier Single-tier

e.g. Flate rate

Fees for Land,

Area, Number of

Inhabitants,

Households,

Containers, etc.

Only Based on

one of the Criteria

from Multi-tier

Fees

Subsidies Performance

e.g. Volume of the

Container, Weight

or Volume of the

Collected Waster


Business Models in Energy Sector

Revenue Source


e.g. Selling the Electricity into the Grid on the

Wholesale Market to Utility Companies, who then

Sell to Consumers

Subsidies


Map of the PIP as a Decision Making Guide

Ownership Public Public-Private Private

Provision Function Public Public Public-Private Private

Organization

Function

Private Business Model Priv

ate

Fina

ncin

g

Outsour

cing of

single

delegab

le

tasks/se

rvices

Outsour

cing of

compre

hensivel

y

integrat

ed

services

Outsour

cing of

single

delegab

le

tasks/se

rvices

Outsourcing of

comprehensively integrated

services

Joint Venture Sale of shares to

private Investors

Duration Unlimited Limited Limited Unlimited Unlimited

Privatization type Legally Fina

ncia

lly

Outsourcing Outsourcing Partial material Full Material

Privatization Model Formal Functional Functional Material Material

Ownership transfer

type

Permanent (Public) Temporal Temporal Permanent (Mixed) Permanent

(Private)

Shares holder in

organization

Public SP

C

pur

e

priv

ate

SPC mixed SP

C

pur

e

priv

ate

SPC mixed SPC mixed Private

PPP type - Con

trac

tual

Institutional Con

trac

tual

Institutional Institutionalized -

Partnership Model - Vert

ical

Horizontal Vert

ical

Horizontal Horizontal -

Contractual Model Design Design+Build Des

ign+

Buil

d+

Mai

ntai

n

Design+Build+

Operate+Maint

ain

Design+Build+Operate+Maintain+Finance

Financial Model Public Finance Donor Finance Private Finance

Source of paid

charges

Customers/Users Budget Sources

Business Model User Fees Budget Fees


Economic and Financial Analysis

Externalities and Case Study of the

North-South Road Corridor


Conversion of market to accounting prices

Use long term

marginal costs

or willingness to

pay

From Market to Accounting

Prices

Tradable goods Non-tradable goods

Turn directly into border

prices

Real Recourses Economic Flows

Major items Minor items

Output Input

Labor force Input produced

Use SCF

Tradable Non-tradable

Use sector CF Use CF for labor

force based on

shadow wage

Disaggregate

the item or use

SSCV

Source: EC, 2014

Fiscal corrections

(excl. taxes,

subsidies, etc.)

Correction of

externalities


Calculation of Benefits

To identify project costs and benefits the situation without the project

should be compared with the situation with project (ADB, 1997; EU,

2008).

1. Reduction of travel time RT=(Daily Vehicle hours without project-Daily Vehicle hours with project) x Estimated

Cost Hour

2. Reduction of KM travelled Rkm=(Daily Vehicle km without project-Daily Vehicle km with project) x Estimated

Cost per vehicle

3. Accident Reduction AC=(Annual number of accidents by severity with project-Annual number of accidents

by severity without project) x cost of accidents by severity

4. Any other benefit Based on a comparison of without and with project case (e.g. pollution)


From financial to economic values

𝐶𝐹 =𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑝𝑟𝑖𝑐𝑒/𝑆ℎ𝑎𝑑𝑜𝑤

𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 (1) (ADB, 2013)

𝑆𝐶𝐹 =𝑀+𝑋

𝑀+𝑇𝑚 +(𝑋−𝑇𝑥) (2), (EC, 2008)

M-total imports,

X-total exports,

Tm- import taxes,

Tx- export taxes.

𝑆𝐸𝑅𝐹 =𝑅𝐸𝑅

𝑂𝐸𝑅×(1+𝑡−𝑠) , (ADB, 2013)

OER-actual exchange rate,

t-average rate of tax on trade,

s-average rate of subsidy on trade,

RER-long run exchange rate for the economy

𝑆ℎ𝑎𝑑𝑜𝑤 𝑊𝑎𝑔𝑒 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑊𝑎𝑔𝑒 × (1 − 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑎𝑡𝑖𝑜𝑛), (EC, 2014)

Special CF e.g. materials (StnCF=(1-income tax)x(1-VAT)x Market Price


Case Study of the North-South Corridor in Armenia


Organizational Model of the Project


…to

fu

nc

tio

nal

pri

va

tiza

tio

n

Ou

tso

urc

ing

of

task

s/s

erv

ice

s



Design

Design+Build






PPP



… Regulator

Publ

ic p

artn

er a

s cl

ient

(+re

gula

tor)

Step1 Step 1

Step 2

Step 3

Step 4

Step 2

Step 3


private law

Step 4

Full Partial



100%

Private eneterprise



2010


Financial Structure of the Project

Source Amount ($ Million) %

A. ADB

1. Ordinary Capital

Recourses

440.0 46

1. Special Fund

Recourses

60.0 6

A. Government and

other Cofinanciers

462.0 48

Total 962.0 100


Economic Analysis of the Project (Chapter 5)

Item Car Minibus Bus 2-axle 3-axle 4+-axle

Economic Cost $'000 17 16 40 20 30 80

Fuel Cost cents/Liter 74 74 57 74 57 57

Oil Cost $/Liter 5,5 4,1 4,1 2,7 2,7 2,7

Tire Cost $/Tire 51 76 144 212 212 255

Maintenance Labor $/Hour 4,9 8,6 8,2 9,6 9,6 11

Crew Wages $/Hour 0 1 1,3 1,7 1,7 2,3

No. of Passengers 2,5 15 40 0 0 0

Passenger Work Time $/Hour 2009 2 2 2 - - -

Non-work Time $/Hour 2009 0,65 0,65 0,65 - - -

Work-related Time % 75 75 75 - - -

Annual Utilization km'000 20 60 70 30 86 86

Vehicle Life Years 10 7 8 12 14 14

ADB, 2010


Economic Output of the Tranche 1,2 (Chapter 5)

Year

Initial Investment

Periodic Maintainance

Total Cost

VOC Saving

Time Saving

Total Benefit

Net Benefit

With Project

Without Project

Without VOC

Without Time

1 8,87 0,00 0,00 8,87 0,00 0,00 0,00 -8,87 -8,87 -8,87

2 14,79 0,00 3,59 11,20 0,79 0,40 1,19 -10,01 -10,80 -10,41

3 5,91 0,00 0,00 5,91 0,94 0,49 1,43 -4,48 -5,42 -4,97

4 0,00 0,00 0,00 0,00 1,27 0,08 1,35 1,35 0,08 1,27

5 0,00 0,00 0,00 0,00 1,62 0,31 1,93 1,93 0,31 1,62

6 0,00 0,00 0,00 0,00 2,04 0,60 2,64 2,64 0,60 2,04

7 0,00 0,00 3,59 -3,59 2,54 0,98 3,52 7,11 4,57 6,13

8 0,00 0,00 0,00 0,00 1,88 0,29 2,17 2,17 0,29 1,88

9 0,00 0,00 0,00 0,00 2,39 0,65 3,04 3,04 0,65 2,39

10 0,00 2,76 0,00 2,76 3,00 1,10 4,10 1,34 -1,66 0,24

11 0,00 0,00 0,00 0,00 3,62 1,69 5,31 5,31 1,69 3,62

12 0,00 0,00 3,59 -3,59 4,48 2,44 6,92 10,51 6,03 8,07

13 0,00 0,00 0,00 0,00 3,15 1,07 4,22 4,22 1,07 3,15

14 0,00 0,00 0,00 0,00 3,95 1,79 5,74 5,74 1,79 3,95

15 0,00 0,00 0,00 0,00 4,92 2,71 7,63 7,63 2,71 4,92

16 0,00 0,00 0,00 0,00 6,06 3,87 9,93 9,93 3,87 6,06

17 0,00 2,76 3,59 -0,83 7,41 5,26 12,67 13,50 6,09 8,24

18 0,00 0,00 0,00 0,00 6,13 2,63 8,76 8,76 2,63 6,13

19 0,00 0,00 0,00 0,00 7,67 4,00 11,67 11,67 4,00 7,67

20 0,00 0,00 0,00 0,00 9,46 5,77 15,23 15,23 5,77 9,46

21 0,00 0,00 0,00 0,00 11,68 7,72 19,40 19,40 7,72 11,68

22 0,00 0,00 3,59 -3,59 14,36 10,46 24,82 28,41 14,05 17,95

23 -8,87 0,00 0,00 -8,87 17,52 13,83 31,35 40,22 22,70 26,39

Total 20,70 5,52 17,95 8,27 116,88 68,14 185,02 176,75 59,87 108,61

EIRR

1 16,77% 7,94% 13,08%

1 At a discount rate of 12%


Economic Output for Tranche 3 (Chapter 5)

Year Capital Costs

Recurrent Maintainance

Total Cost

VOC Saving

Time Saving

Accident Savings

Total Benefit

Net Benefit With Project Without Project

1 0,00 0,03 0,03 0,00 0,03 0,00 0,00 0,03 0,03

2 0,00 0,05 0,05 0,00 0,04 0,00 0,00 0,04 0,04

3 19,35 0,03 0,08 -19,30 -0,04 -0,02 0,00 -0,06 -19,36

4 45,54 0,06 0,09 -45,51 0,23 0,05 0,00 0,28 -45,23

5 48,96 0,06 0,08 -48,94 0,59 0,16 0,00 0,75 -48,19

6 0,00 0,06 0,09 -0,15 1,80 4,77 2,77 9,34 9,19

7 0,00 0,06 0,09 -0,15 2,15 5,26 2,94 10,35 10,20

8 0,00 0,06 0,09 -0,15 2,78 5,85 3,12 11,75 11,60

9 0,00 0,06 0,09 -0,15 3,52 6,54 3,30 13,36 13,21

10 0,00 0,06 0,09 -0,15 4,40 7,35 3,50 15,25 15,10

11 0,00 0,06 0,09 -0,15 5,41 8,28 3,71 17,40 17,25

12 0,00 0,06 0,09 -0,15 6,58 9,35 3,94 19,87 19,72

13 0,00 0,06 0,09 -0,15 7,97 10,60 4,17 22,74 22,59

14 0,00 0,06 1,16 -1,22 9,60 12,03 4,42 26,05 24,83

15 0,00 0,06 0,09 -0,15 10,04 12,97 4,69 27,70 27,55

16 0,00 0,06 0,70 -0,76 12,06 14,73 4,97 31,76 31,00

17 0,00 0,06 7,88 -7,94 13,46 16,27 5,27 35,00 27,06

18 0,00 0,06 1,39 -1,45 4,87 12,90 5,58 23,35 21,90

19 0,00 0,06 1,01 -1,07 4,13 13,20 5,92 23,25 22,18

20 0,00 0,06 0,52 -0,58 3,71 13,71 6,27 23,69 23,11

21 0,00 0,06 3,72 -3,78 4,13 14,64 6,65 25,42 21,64

22 0,00 0,06 0,32 -0,38 -1,68 12,42 7,05 17,79 17,41

23 0,00 0,06 0,07 -0,13 -1,31 13,13 7,47 19,29 19,16

24 0,00 0,06 0,07 -0,13 -0,30 14,19 7,92 21,81 21,68

25 0,00 0,06 0,08 -0,14 0,81 15,37 8,39 24,57 24,43

26 0,00 0,06 0,09 -0,15 2,55 16,75 8,90 28,20 28,05

27 0,00 0,06 0,09 -0,15 4,73 18,74 9,43 32,90 32,75

28 0,00 0,06 1,06 -1,12 7,46 21,12 10,00 38,58 37,46

29 0,00 0,06 0,09 -0,15 6,78 21,55 10,60 38,93 38,78

30 0,00 0,06 0,09 -0,15 9,94 24,81 11,23 45,98 45,83

31 0,00 0,06 0,09 -0,15 18,51 33,87 11,91 64,29 64,14

32 0,00 0,06 0,09 -0,15 23,46 38,41 12,62 74,49 74,34

33 0,00 0,06 0,09 -0,15 28,57 43,42 13,38 85,37 85,22

34 0,00 0,06 0,09 -0,15 37,29 51,31 14,18 102,78 102,63

35 -68,31 0,06 0,09 -68,16 43,45 55,86 15,03 114,34 46,18

EIRR=15,2%


Tranche 2-Option 1 (Chapter 5)

Widening the existing road to

dual 2-lanes by constructing

a new southbound

carriageway,

Rehabilitating/reconstructing

the existing road as a

northbound carriageway

Cost=US$232.8m

including VAT (or US$194.2 w/o

VAT)

Source: ADB



Construction of a new 2-lane road alongside the existing road,

The existing road remains in its current condition

Advantages Disadvantages

A new road with higher

design standards

Less outcomes in terms of

services (lack of bypass,

expensive to connect to

other main roads and etc.)

Higher operating levels

Less expensive solution

than Option 1

Sufficient capacity for the

volume of

forecast traffic



2 lane through stage construction

Stage 1-reconstruction to the design of the northbound carriageway of a

dual carriageway,

Stage 2-complete construction of southbound carriageway (in case there is

a necessity to increase the traffic volume)

Advantages Disadvantages

…timely investment when

traffic levels have reached

levels that make upgrading

more

economically viable

Uncertainty (conditions may

not be as viable at a future

date)



Minimum cost implications,

No provision for the second carriageway,

Rehabilitating/reconstructing existing road,

Road shoulder, resurfacing, and safety improvements



The section between

Ashtarak

and Talin would be

upgraded to a full 4-

lane highway by new

construction, whilst

the existing

2-lane section

between Talin and

Gyumri would be

rehabilitated to a

Class 1, 2-lane

highway

continuing to operate

with two-way traffic.

Mix of the Option 1

and 4


Tranche 2 under PIP models (Chapter 5)

Option Cost ($ million) EIRR

Low Central High

1 194.23 12.4% 15.5% 17.4%

2 140.11 13.2% 16.3% 18.3%

3 99.98 12.9% 15.5% 17.6%

4 72.96 5.6% Negative Negative

5 148.88 13.1% 15.0% 17.1%

ADB and Ministry of the

Transport and

Telecommunication of the RA,

2010


Case Model in the PIP

Toolbox

FIRR EIRR

Low Central High Central

Base Case - 1,8% 4,6% 6,9%

15,5%

Capital Support

BOT

Business Model 9,3% 12,3% 14,8%

Tolls+6,8$ Million

Annuity (1,5$ per

axle)

Business Model 8,2% 10% 11,8%

No Tolls and 19$

Million Annuity

Business Model 10% 6,6% 14,4%

With Operation

and Maintenance

Contract

Contractual Model 7,9% 10,2% 11,6%

Based on ADB and Ministry of

the Transport and

Telecommunication of the RA,

2010


Exercises to practice

Public sector keeps the ownership of the road and transfers BOMF functions to

a private company for 20 years. What privatization model is the case?

Public sector is involved in the SPC of the project. What partnership model

refers the case?

The legislation of country X limits the rights to transfer the ownership of the

airport to the private company on the unlimited bases. What privatization

model should not be considered in the analysis of different options?

The ownership is transferred from unlimited to limited basis. From which

possible privatization models is the shift to functional privatization model?

Provision function of the asset is conducted by both public and private

sectors. What privatization model is used?


YOUR TASKS

1. Choose a Country

2. Choose a Sector

3. Choose a Project

4. Develop the PIP map for the chosen country and sector

5. Choose the organizational model of the chosen project within the developed

PIP map (Task 4)

6. Describe the benefits of the project (Economic Viability)

7. Describe the financial cash flow of the project (Financial Viability)

8. Summarize the results of the project

9. Give your recommendations

10.Summarize all the tasks/findings in a ppt file

11.Make a presentation


THANK YOU!

QUESTIONS?

Contacts:

Norayr Badasyan

E-mail: [email protected]

Address: Marienstrasse 7a, room 112

mailto:[email protected]



Documents

INFRASTRUCTURE PROJECT - uni-weimar.de · 1. Choose a Project: Infrastructure Project with Private Involvement (e.g. PPP) 2. Analyze the PIP Organizational Model within the PIP Toolbox