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PPPs

One question, eight experts, part five: Gajendra Haldea

Gajendra Haldea's picture

To gain a better understanding of how innovation in public-private partnerships (PPPs) builds on genuine learning, we reached out to PPP infrastructure experts around the world, posing the same question to each. Their honest answers redefine what works — and provide new insights into the PPP process. This is the question we posed: How can mistakes be absorbed into the learning process, and when can failure function as a step toward a PPP’s long-term success?

Our fifth response in this eight-part series comes from Gajendra Haldea, Advisor to the Government of Rajasthan (India) and CEO, Bureau of Partnerships in Rajasthan. 

Photo: Wikimedia Commons

It is a truism that infrastructure projects, like much else in life, do not unfold exactly as planned. However, there is little room for failure because it would affect a large number of users for which the government would be accountable.

India happens to be the largest laboratory of PPP projects and offers a plethora of evidence. While most projects have succeeded, some have faced failure mainly because they were encumbered by lack of conceptual clarity in policy formulation as well as contractual framework.

Many assert that all future events cannot be predicted and a PPP contract must, therefore, be regarded as incomplete. They need to be reminded that if man could succeed in sending a satellite to space and operate it for several years without any ability to modify it, why can’t this be done while launching an infrastructure project?

Preventing renegotiation, fostering efficiency

Rui Monteiro's picture
Lawyers usually say that “the best contract is the one you never have to pull out of the drawer” — a view that focuses on trust, common understanding and mutual advantages. And then they will add that public-private partnership (PPP) contracts, even with the best government–business relationship, are a bit more complex. That’s because they are based on incentive mechanisms that require not only regular monitoring, but also some degree of cooperation and a modicum of strategic management — the three components of PPP contract management.
Photo: Wikimedia Commons
The ultimate success of a PPP contract depends on effective service delivery under conditions of sustained efficiency. The efficiency comes from linking private operator rewards to performance over the long-term (output focus), and from providing credible commitment by the private partner through private finance (or, as it’s known in some circles, “hostage capital”).
There are many cases, as seen in previous issues of Handshake, of PPPs providing high-quality reliable service to users at a reasonable cost for users and taxpayers. But there is also recognition that, over the long-term, PPP efficiency may be jeopardized by contract renegotiation — by necessity renegotiation under no competitive pressure, with asymmetrical information.

This sort of renegotiation creates a risk of breaking the initial commitment, changing rewards and risk allocation. Though theoretical economists would say 
that “in the long-term” renegotiation of incomplete contracts is unavoidable, PPP practitioners should do their best in order to avoid the need for renegotiation, while simultaneously preparing for renegotiation when it is the best solution in terms of public interest.

​Are we harnessing the power of the sun?

Isabel Chatterton's picture

Also available in: العربية


Are we harnessing the power of the sun? With the success of rooftop solar and other initiatives, we’re beginning to head in the right direction.
 
Photo: Bernd Sieker/flickr

Solar success has come from unexpected quarters. For example, Germany is probably not the first country that comes to mind when you think of sunshine, but we can follow Germany’s lead. It’s the world’s biggest small-scale photo-voltaic user with an installed capacity of 32 gigawatts, and 60 percent of capacity is from solar panels that are installed on people's roofs.

Germany also launched a 100,000 rooftops program, which provided concessional, 10-year loans along with attractive feed-in tariffs to further incentivize households to participate. This was soon after the success of its pilot 1,000 rooftops program, which created the right incentives and targets were achieved a year ahead of schedule – in 2003. 
 
Germany, Japan and the U.S. state of California are fulfilling their strong solar power potential, and we could all learn from their examples – especially nations that haven’t yet explored the proven promise of solar.
 
Statistics like these convince me that there is so much more we can and must do. I’m heartened that progress in India has been steady, with successes that prove the country is ready for more.

One question, eight experts, part four: Richard Abadie

Richard Abadie's picture
Photo: Wikimedia Commons

To gain a better understanding of how innovation in public-private partnerships (PPPs) builds on genuine learning, we reached out to PPP infrastructure experts around the world, posing the same question to each. Their honest answers redefine what works — and provide new insights into the PPP process. This is the question we posed: How can mistakes be absorbed into the learning process, and when can failure function as a step toward a PPP’s long-term success?

Our fourth response in this eight-part series comes from Richard Abadie, who leads the Capital Projects and Infrastructure Group at PwC

Having worked in the infrastructure sector for nearly 20 years, I’ve had time to reflect on what success and failure look like in infrastructure PPPs. Mistakes have been, do, and will continue to be made when using PPPs. It is not perfect — nor is its application — but what in life is?

There are so many horror stories around non-PPP construction cost overruns, delays in completion, poorly specified contracts, weak tender management, corruption, failure to run transparent competitive processes, lack of project readiness, significant post-contract variations, and sporadic asset maintenance and management. PPPs eliminate many of the above structural weaknesses, which rightfully earns it its place as a challenging but effective procurement approach.

The chief criticisms of PPP — that it takes longer to procure and is less flexible than conventional procurement — have some validity. Getting price certainty does take time and requires clear contractual risk allocation through the life of the contract.

Protecting Your PPP: Stabilizing partnerships in uncertain times

Waleed Youssef's picture
Uncertainty is inherent in developing and operating complex infrastructure and services projects, and it is for this very reason that government officials seek public-private partnership (PPP) partners to mitigate the most complex of risks. Yet legal and regulatory frameworks, in place for legitimate reasons (especially in emerging markets), often dampen the private sector’s ability to address in an optimal manner the challenges that can and often do arise during the term of a concession.

It is important to distinguish between projects that exceed expectations — and therefore generate greater than expected financial returns to both parties, yet require additional, unanticipated capital investments — and struggling projects where there is an urge by the developer to reduce ongoing investment and maintenance.
 
Istanbul Ataturk Airport. 
Photo: Wikimedia Commons

“Successful PPPs are all alike…”
To paraphrase Tolstoy, successful PPPs are all alike, but every unsuccessful PPP is unsuccessful in its own way.

Successful projects are easier to manage owing to positive cash flows, and could additionally incorporate an obligation by the developer to increase its investment according to certain capacity-related triggers on the basis of floor and ceiling for project returns. This could also be supplemented by sponsor commitments to co-investment or to extend the concession terms based on minimum returns, as well as a sponsor sinking fund to ensure independence from the uncertain and tedious public budgeting process. Very often, concession agreements focus on what to do when things go wrong, but not how to continue to meet demand when things go well, especially toward the end of the concession term.

One question, eight experts, part three: David Bloomgarden

David Bloomgarden's picture

To gain a better understanding of how innovation in public-private partnerships (PPPs) builds on genuine learning, we reached out to PPP infrastructure experts around the world, posing the same question to each. Their honest answers redefine what works — and provide new insights into the PPP process. This is the question we posed: How can mistakes be absorbed into the learning process, and when can failure function as a step toward a PPP’s long-term success?

Photo: Wikimedia Commons

Our third response in this eight-part series comes from David Bloomgarden, Chief of the Basic Services and Green Growth unit of the Multilateral Investment Fund of the Inter-American Development Bank.

U.S. General George S. Patton famously said, “Take calculated risks. That is quite different from being rash.” This quote summarizes how countries should absorb risks into the learning process of a public-private partnership program.

Governments know that complex projects never go exactly as planned. PPPs are among the most complex of all infrastructure projects, because they involve multiple stakeholders in the public and private sectors and tend to be used to procure large infrastructure. Starting a new PPP program requires that governments learn to master the regulatory, institutional and technical challenges involved in planning, designing and implementing a PPP.

Few governments — and especially those of developing economies — can afford failure in the delivery of critical infrastructure and services given the scarce resources and enormous human needs.

And the gold medal for PPP goes to…Galeão International Airport’s record-setting deal

Isabel Marques de Sá's picture
When the Olympic Games comes to Rio in 2016, new medal-worthy sports will include kitesurfing, golf, and rugby sevens. If the Olympic Committee ever considers including our “sport” – the practice of public-private partnerships (PPPs) – the top medal would surely go to the home-grown Galeão International Airport PPP, which set the 2014 record as the largest PPP deal that closed globally. For this gateway to Rio – which is in the midst of preparing to accommodate more than 10,000 athletes and tens of thousands more visitors for the 2016 Olympics – even the concessions merit global rankings.
 
Image: Wikimedia Commons

Standing by for liftoff
The concession of Galeao International Airport (official name: Rio de Janeiro/Galeão–Antonio Carlos Jobim International Airport) got off the ground in the second round of airport concessions. The first round dates back to early 2012, when the government issued tenders for three major airports: Guarulhos (São Paulo), Viracopos (Campinas) and Brasília.  

In mid-2012, following the successful outcome of these three projects, the Brazilian National Development Bank (BNDES) approached IFC to assist with a second round of airport concessions, including Confins airport (Belo Horizonte) and Galeão (Rio de Janeiro).  IFC teamed up with the Estruturadora Brasileira de Projetos (EBP), a project preparation company owned by some of the biggest Brazilian commercial banks and BNDES. Together, IFC and EBP were responsible for the financial, technical/economic/engineering, and environmental studies. 

One question, eight experts, part two: Fernando Crespo Diu

Fernando Crespo Diu's picture

To gain a better understanding of how innovation in public-private partnerships (PPPs) builds on genuine learning, we reached out to PPP infrastructure experts around the world, posing the same question to each. Their honest answers redefine what works — and provide new insights into the PPP process. This is the question we posed: How can mistakes be absorbed into the learning process, and when can failure function as a step toward a PPP’s long-term success?

Our second response in this eight-part series comes from Fernando Crespo Diu, Director of UTAP, the Portuguese PPP unit.

Although not a desirable outcome, failure is always the first step of the learning process toward more successful projects, in terms of implementation, value for money, and financial and fiscal sustainability. There is an enabling prerequisite for the learning process, particularly given the complexity and long duration of PPP arrangements: the establishment of institutional arrangements that provide stable, professional and fully dedicated teams of experts within the structures of the public sector.

A central PPP unit — ideally located in the Ministry of Finance — should participate in all stages of a project lifecycle, from structuring to contract management, allowing continuous feedback and dialogue between contract management and public teams. In such an environment, the role of external advisors has to be carefully planned, as they provide key skills along the project lifecycle, but must not substitute those tasks where knowledge must be developed, stored and used by the public sector.

Clearing the air: the 5 most common questions about national park PPPs

Warren Meyer's picture
Big Pine Creek Recreation Area, Inyo National Forest, California. Photo: Itoda.com

If the thought of summer conjures up visions of national parks, you’re not alone – in 2014, nearly 3 million tourists visited forests, mountains, trails, and rivers at U.S. national parks.

If you crossed the gate into one of these treasures, you probably didn’t care whether that particular forest or mountain fell under government or private ownership. But it’s worth noting, because national park concessions fill a vital role helping the National Park Service carry out its mission, and there are benefits to these partnerships that can keep the parks viable — and the visitors happy — for decades to come. 

There are also misconceptions about national park PPPs. To clear the air, I’ve answered some of the most common questions below.

Senegal shifts its thinking: Context is everything

Oumar Diallo's picture
Editor's note: this is the second in a two-part series. Click here to read the first part, "Senegal shifts its thinking: Rural water delivery moves to private operators."
 
Photo: flickr/Julien Harnels

In the rural water sector in Senegal, as with many parts of the world that have experienced tremendous changes, context is everything. Rarely does one single act spur a shift at the government level; many elements combine to prompt a change in approach.

The PPP team in Senegal was privileged to be able to develop a brand-new system for rural water delivery in Senegal (see previous post here), but our activity was just one contributing factor in a much larger national and even international effort. The political context in Senegal, along with sustained attention to the Millennium Development Goals (MDGs), created the right atmosphere for this PPP.   
 
Here are five important elements that came together to make Senegal’s paradigm-shifting PPP possible:
  1. Government officials’ forward-thinking views. Coming up with an original plan for the delivery of rural water depended on zoning changes. Our group’s internal study showed that dividing the country into three zones would make it possible to cluster services. Government’s willingness to consider clustering pipe systems across 14 regions was critical, because it made support from the private sector a viable option.

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