Large Project FinanceLarge Project Finance

WorkshopWorkshop

Presentation Presentation onon

Public Private Partnerships (PPPs)Public Private Partnerships (PPPs)Structural, Legal and Regulatory issuesStructural, Legal and Regulatory issues

Peter KylePeter Kyle

Lead CounselLead Counsel

The World BankThe World Bank

Outline for DiscussionOutline for Discussion

PPPs – Structures, Objectives and OptionsPPPs – Structures, Objectives and Options

PPP Unit PPP Unit

Legal Environment - Key IssuesLegal Environment - Key Issues

Regulatory IssuesRegulatory Issues

What are Public Private Partnerships What are Public Private Partnerships (PPPs)?(PPPs)? a range of relationships between the a range of relationships between the

public and private sectors for the delivery public and private sectors for the delivery of infrastructure servicesof infrastructure services

generally, the public sector enters into generally, the public sector enters into an agreement with a private company to an agreement with a private company to provide a specified public service, in provide a specified public service, in exchange for payments based on the exchange for payments based on the service actually deliveredservice actually delivered

Summary: Range of OptionsSummary: Range of Options

Municipal or Provincial Authority

Divestiture

Delegation to Private Sector

Concession

Lease/ Affermage Contracts

Operation & Maintenance Contracts

Management Contracts

BOT, BOOT etc

Service Contracts

Public Mixed Private

Joint Venture

Corporatisation

Public Water Co.

Pri

vate

Mix

edP

ublicMan

agem

ent

of S

ervi

ce p

rovi

der

Ownership of Assets

Objectives behind PPPsObjectives behind PPPs

Why do governments choose PPPs?Why do governments choose PPPs? insufficient public funds to meet the demand insufficient public funds to meet the demand

for infrastructurefor infrastructure

new sources of financenew sources of finance

a desire to improve the quality of public a desire to improve the quality of public servicesservices

transfer of certain risks to the private sectortransfer of certain risks to the private sector

better value for public investments in better value for public investments in infrastructure by the use of private sector skillsinfrastructure by the use of private sector skills

introduction of innovation/ technologyintroduction of innovation/ technology

Which option fits objectives?Which option fits objectives? Assets – Existing or NewAssets – Existing or New

Existing service to be Existing service to be operated by private sector?operated by private sector?

New facilities to be added New facilities to be added and then operated?and then operated?

Transfer end-user riskTransfer end-user risk Operator takes all risk of Operator takes all risk of

end user – bills user directlyend user – bills user directly

Operator is paid fee by Operator is paid fee by public entity + performance public entity + performance bonus for increased bonus for increased collection ratescollection rates

Management contract/ O & Management contract/ O & M/ Lease/Affermage/ M/ Lease/Affermage/ ConcessionConcession

BOT/ BOOT/ Concession etcBOT/ BOOT/ Concession etc

Lease/ Affermage/ Lease/ Affermage/ ConcessionConcession

Management Agreement/ Management Agreement/ O & M AgreementO & M Agreement

BOT/ Concession with off-BOT/ Concession with off-take arrangementtake arrangement

Pros and Cons of PPPsPros and Cons of PPPs ProsPros

Off balance sheet – Off balance sheet – creates fiscal spacecreates fiscal space

Private sector is seeking Private sector is seeking to make a profit – to make a profit – generally will do what it generally will do what it is paid to dois paid to do

Private sector brings Private sector brings expertise and good expertise and good practicepractice

Private sector paid to Private sector paid to make efficienciesmake efficiencies

ConsCons• Can be expensiveCan be expensive

• Contract needs to be carefully Contract needs to be carefully drafted to ensure operator drafted to ensure operator cannot avoid obligations/ cannot avoid obligations/ benefit excessivelybenefit excessively

• Public body will need to retain Public body will need to retain expertise to monitor operatorexpertise to monitor operator

• Efficiencies are likely to be Efficiencies are likely to be made at expense of workforce made at expense of workforce – don’t underestimate trade – don’t underestimate trade union and public pressureunion and public pressure

PPP UnitPPP Unit

Is there an entity equipped to Is there an entity equipped to implement PPP Program? (Unit in implement PPP Program? (Unit in Treasury, PPP Unit, statutory body etc)Treasury, PPP Unit, statutory body etc) Does it have full mandate from relevant Does it have full mandate from relevant

ministries?ministries? Are all PPPs, in all sectors, handled by this Are all PPPs, in all sectors, handled by this

unit?unit? Will it have all necessary powers?Will it have all necessary powers? How is it funded?How is it funded? How is it staffed?How is it staffed?

LEGAL ISSUES LEGAL ISSUES The laws, regulations and concession The laws, regulations and concession

agreements are not the whole storyagreements are not the whole story Government commitment on a continuing Government commitment on a continuing

basis is keybasis is key Stable and investor-friendly legal/ enabling Stable and investor-friendly legal/ enabling

environment is keyenvironment is key Involvement of all stakeholders from an Involvement of all stakeholders from an

early stage in project development is keyearly stage in project development is key Need for high quality legal advisers – Need for high quality legal advisers –

foreign and domesticforeign and domestic Need for sophisticated financial Need for sophisticated financial

instruments and financing techniquesinstruments and financing techniques

92

2.98

2.91

2.83

2.83

2.68

2.66

2.49

2.43

2.00

3.57

3.11

3.11

Minor Major Critical

“Deal-breaker”

Legal Protection of Investors 

Consumer Payment Discipline

Government/Multilateral Guarantee

Government Efficiency

Judiciary's Independence 

Clear Rules for Exit

Investment Grade Debt Rating

Transition to Competitive Market 

Corruption Index Ranking

Domestic Borrowing

Competitive Selection

Possibility of Vertical Integration 

LEGAL ISSUES - Trends in Power Industry PPPs:LEGAL ISSUES - Trends in Power Industry PPPs:World Bank 2003 Survey of Investor ConcernsWorld Bank 2003 Survey of Investor Concerns

Local Legal Environment - Key Local Legal Environment - Key Issues (1)Issues (1)

Is the environment a safe one in which to invest?Is the environment a safe one in which to invest? Legal/ political certaintyLegal/ political certainty

What power does the government have to expropriate What power does the government have to expropriate assets?assets?

Are adequate dispute resolution systems available?Are adequate dispute resolution systems available?

Foreign exchange controls – are there limits on the amounts Foreign exchange controls – are there limits on the amounts of forex that can be brought into or out of the country?of forex that can be brought into or out of the country?

Is the return that the operator is to receive protected Is the return that the operator is to receive protected by contract? Who is responsible for setting tariffs?by contract? Who is responsible for setting tariffs?

Are political risk insurance/ guarantees available– eg Are political risk insurance/ guarantees available– eg MIGA, World Bank MIGA, World Bank

Local Legal Environment - Key Local Legal Environment - Key Issues (2)Issues (2)

Can the public body (Ministry, PPP Unit) delegate powers Can the public body (Ministry, PPP Unit) delegate powers and obligations?and obligations? If the service is decentralized, does the legal instrument If the service is decentralized, does the legal instrument

delegating authority to municipality allow it to delegate powers?delegating authority to municipality allow it to delegate powers?

Even where the authority has general power to delegate, Even where the authority has general power to delegate, is it actually possible to delegate what is contemplated?is it actually possible to delegate what is contemplated? If it is intended that private operator is to bill end-users, is this If it is intended that private operator is to bill end-users, is this

allowed? What recourse does private operator have against non-allowed? What recourse does private operator have against non-payers? In the case of the utility, can the user have service cut payers? In the case of the utility, can the user have service cut off?off?

A utility will need powers to work on third party property, can this A utility will need powers to work on third party property, can this be delegated?be delegated?

Local Legal Environment - Local Legal Environment - Key Issues (3)Key Issues (3)

Property rightsProperty rights If the private entity is to build a new power plant, and is to receive If the private entity is to build a new power plant, and is to receive

financing to do this, are the laws on title to land sufficiently clear financing to do this, are the laws on title to land sufficiently clear to allow entity to own plant and have rights of access over land?to allow entity to own plant and have rights of access over land?

Is a foreigner permitted to hold property?Is a foreigner permitted to hold property?

Can security be granted over assetsCan security be granted over assets

Possibility of step-in rights for lenders/ direct agreementsPossibility of step-in rights for lenders/ direct agreements

TariffsTariffs If it is intended that tariffs will be increased, are there legal If it is intended that tariffs will be increased, are there legal

limitations on tariff increases? Can the public body guarantee that limitations on tariff increases? Can the public body guarantee that such tariff increases will be implemented, or is this the such tariff increases will be implemented, or is this the responsibility of a third party regulator/ parliament?responsibility of a third party regulator/ parliament?

Local Legal Environment - Local Legal Environment - Key Issues (4)Key Issues (4)

Are guarantees available from the central Are guarantees available from the central government?government?

Is the procurement regime clear and Is the procurement regime clear and transparent?transparent?

Are the labor laws conducive to a PPP investor?Are the labor laws conducive to a PPP investor? What are the taxation implications for the PPP?What are the taxation implications for the PPP? Dose the country have a modern insolvency Dose the country have a modern insolvency

regime?regime? Will the Legislature enact an appropriate Will the Legislature enact an appropriate

PPP/Concession Law?PPP/Concession Law?

Regulatory IssuesRegulatory Issues

• CanCan regulation be achieved in the contract or regulation be achieved in the contract or is there a necessity for a separate regulatory is there a necessity for a separate regulatory body?body?• Relationship between regulator and PPP UnitRelationship between regulator and PPP Unit• Transitional arrangement before regulatory body is Transitional arrangement before regulatory body is establishedestablished

• Formal regulation may not be practicalFormal regulation may not be practical• Who will regulate the contract – independent Who will regulate the contract – independent engineer?engineer?

• Should regulatory body be “independent” Should regulatory body be “independent” What does independence really mean? Who What does independence really mean? Who appoints regulator, is it a board or an individual, appoints regulator, is it a board or an individual, how is it funded (through tariffs or from central how is it funded (through tariffs or from central government)?government)?• Should there be outsourcing of regulatoryShould there be outsourcing of regulatory duties?duties?

ISSUES TO CONSIDER WHEN ISSUES TO CONSIDER WHEN CONTEMPLATING REGULATION/ CONTEMPLATING REGULATION/

GOVERNANCE RE. UTILITIES GOVERNANCE RE. UTILITIES • Should there be a separate regulator to cover Should there be a separate regulator to cover each sector or a common regulator?each sector or a common regulator?• What powers and duties should be given to the What powers and duties should be given to the regulatorregulator

•Can Government step in and reverse Can Government step in and reverse regulator’s actions without recourse to regulator’s actions without recourse to legislation?legislation?•Can other bodies/ courts overrule regulator?Can other bodies/ courts overrule regulator?•Is regulator to set tariffs?Is regulator to set tariffs?•Are there other regulatory body with similar/ Are there other regulatory body with similar/ conflicting powers/ duties?conflicting powers/ duties?

• Need adequate appeals process against Need adequate appeals process against regulatory decisions regulatory decisions

Thank YouThank YouGuidance and MaterialsGuidance and Materials

Uncitral - Uncitral - http://www.uncitral.org/pdf/english/texts/procurem/pfip/guide/pfip-e.pdfhttp://www.uncitral.org/pdf/english/texts/procurem/pfip/guide/pfip-e.pdf   

EBRD - EBRD - http://www.ebrd.com/country/sector/law/concess/core/index.htmhttp://www.ebrd.com/country/sector/law/concess/core/index.htm

Peter Kyle, Lead Counsel, The World BankPeter Kyle, Lead Counsel, The World Bank

Tel: (1) 202 458 2394, Tel: (1) 202 458 2394,

Email: pkyle@worldbank.orgEmail: pkyle@worldbank.org