Published on March 6, 2014
What makes a PPP framework attractive? The project sponsor’s view Gilles Erdogan Project Director, VINCI Concessions OECD, 7th Meeting of Senior PPP Officials, Feb 17th 2014
1rst Part What makes a PPP framework attractive?... … for who?
The project sponsor's view? What is VINCI Concessions ? A private partner in charge of delivering infrastructure and services, to the benefit of users - citizens 5 core business units Highways & Bridges Railways Airports Stadium Car parks Not only the view of the project sponsor, but also : - Constructor Coordinator of contract and civil society stakeholders Operator of the infrastructure Service provider 3 OECD, Senior PPP Officials, February 2014
Who expects what? What are the private partner’s objectives? Make reasonable financial profits Improve reputation What are the public authority’s objectives? Have well-functioning infrastructure Keep safe public finance Be re-elected What are users’ objectives? Use high quality infrastructure and access services Get Value for Money Apparently diverging objectives… Make them converge and find win-win-win arrangements, in the long run 4 OECD, Senior PPP Officials, February 2014
2nd Part In which conditions shall we find the ground for long term win-win-win arrangements ? OECD, Senior PPP Officials, February 2014
Macroeconomic indicators (step 1) Favourable GDP growth rate, even in low income countries Infrastructure and facilities equipment rate Car ownership rate Stability of institutions Transparency International indicators 6 OECD, Senior PPP Officials, February 2014
Socio-economic utility of identified projects (step 2) We only answer to projects that are desirable from the socio-economic point of view: = projects that correspond to real demand and needs. How can the « socio-economic utility » be assessed? Not only financial aspects are taken into account But also indirect aspects that measure the effects for the society: in terms of accessibility, reliability, safety, time savings, environmental concerns, attractivity of the area The Socio-economic Cost-Benefit Analysis enables to valorize socio-economic aspects into quantitative terms and compare them to the cost 7 OECD, Senior PPP Officials, February 2014
Socio-economic utility of identified projects (step 2) By experience, we know that a high socio-economic utility makes the payment of a toll by users /tax by taxpayers, more politically acceptable [Piron, 2004]. On the contrary, «White Elephants » low socio-economic utility, leading to: A decrease in the credibility of the public authority Alteration of our reputation Increase of the public debt In some cases, bankruptcy of the private operator In the end of the day, a high socio-economic utility confirms the link between sound infrastructure and growth… for all the parties! 8 OECD, Senior PPP Officials, February 2014
Political will and institutional stability (step 3) There must be a real long term infrastructure policy program, not only political gimmicks A public authority ready to take on the role of monitoring Upstream: priorize the projects and define a functional program Downstream: Incentivize and monitor the results of the private partner Capacity building sometimes needed (OECD, WB, UN, EPEC or other international institutions should be used) Importance of technical, financial and legal advisors 9 OECD, Senior PPP Officials, February 2014
Project dimensioning (step 4) Feasibility studies, showing project is Technically feasible and Economically viable With objectives that are - Specific Measurable Achievable Realistic Time-bound Bidding for a project is very costly for private partners. They will not bid if the environment is non-credible Phasing projects, with the option to increase the scope of the investment later, in particular in countries with limited experience, allows to ease the obtention of financings and to lower its cost. 10 OECD, Senior PPP Officials, February 2014
Relevant risk distribution (step 5) At the stage of pre-bid, main risk analyzed: the demand risk Concessions: the private partner is paid thanks to users’fees (he bears the demand risk) Availability contracts: the private partner is paid a fixed price by the public authority, based on his performance (he does not bear the demand risk) Depends on wealth, willingness to pay and acceptability Unbalanced risk sharing increases the project cost and may kill the project (no economic equilibrium) If availability contracts, importance of the credibility of the availability payment: PPPs are not a « free lunch » Proper risk allocation Increased bankability Reduced availability charge for the Authority / toll for users 11 OECD, Senior PPP Officials, February 2014
Transparency and credibility of the award process (step 6) VINCI Concessions would not bid for projects in countries poisoned by corruption VINCI Concessions would not lower its cost to the point of denying its quality standards. Our reputation is at stake The goal of the award process: select an efficient partner, prone to innovate and deliver services in the long run Importance of the award criteria Usually, public authorities prefer the cheapest bid (price criteria) or the lowest duration. But 2 possible drawbacks: Reflect of a poor quality Aggressive bids [Guasch, 2004] and likelihood of later opportunistic renegotiation OECD, Senior PPP Officials, February 2014
Transparency and credibility of the award process (step 6) To avoid such drawbacks, and allow a win-win-win arrangement: Prequalification: select operators with experience, technical skills related to the project and financial solidity Competitive dialogue: enrich the functional program and let innovative solutions emerge Weighted selection criteria: including price, quality (organisation skills, sustainable devpt, innovation), respect of human and technical norms Transparency & qualitative criteria are a feasible mix Importance to eliminate candidates at each stage: lowers the cost for the Public Authority Importance of a credible calendar: increases the quality of bids Importance of reputation and experience of the selected private partner OECD, Senior PPP Officials, February 2014
Transparency and credibility of the award process (step 6) Importance of reputation and experience of the selected private partner Benefits for the public and the private partners Gains of opportunism: low cost (PA) and high markup (PP) Good reputation = cooperation in the long run Loss: no working infra (PA) and no more contracts (PP) Time 14 OECD, Senior PPP Officials, February 2014
To conclude, main messages summarized Studying only the private partner perspective cannot lead to any recommandations for successful PPP framework Successful PPP framework Make sure the perspective of all the parties is taken into account, for long term win-win-win arrangements We only go in countries with a potential for growth We answer to projects with a high socio-economic utility We go in countries with credible institutions and infrastructure development program We bid for correctly dimensionned projects We expect a relevant risk sharing, allowing affordability for users, and for taxpayers Multiple selection criteria are necessary to select a reliable operator OECD, Senior PPP Officials, February 2014
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