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Successes and Failures of

PPP Projects

Vickram Cuttaree
The World Bank
Europe & Central Asia Region
Warsaw June 17, 2008

Introduction
Objective of the presentation is to show some
contributors of successful PPP programs
Mexico and Chile PPP programs illustrate the importance
of proper design of a PPP program
Experience in the region but also worldwide converge into
the same essential elements:

Strong public sector capacity


Appropriate PPP and sector Framework
Planning and solid feasibility study
Transparent and Competitive Procurement
Strong monitoring and flexibility towards unpredicted events
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Investment is now less concentrated


in Latin America and East Asia

Countries with strong public sector institutions have typically performed best. Examples include the
United Kingdom, South Africa, Australia and Chile.
These countries are not only good examples but represent also competition for Poland in PPP
investment
Source:
PPIAF Database
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Success Story: Chile Road Concession


Program
Between 1993 and 2001 Chile awarded 21 road
concession worth US$ 5 billion on a competitive basis
Bidding started with smaller projects, in order to test the
market and reduce the risk to the private sector
The bidding attracted 27 consortia and more than 40
Chilean and foreign companies, from 10 countries
PPP program is viewed as transparent and competitive,
with only one minimum revenue guarantee called
Surveys of users, consultations with local and national
leaders, and focus groups graded Concessions System
at 6 on scale from 1 to 7
Source: Hodges (2006)

(In)Famous PPP Failure: Road Concession


Program in Mexico
Between 1987 and 1995, 52 projects (25 competitively tendered)
was awarded (largest PPP toll road program)
By the end of 1995, 34 projects had reached financial close for US$
9.9 billion in private investment committed
Shortest concession period would win (max 15 years), led to very
high tolls
Concessioned roads obligated to have a parallel toll free road
Construction cost overruns averaged 25% and average actual
revenues were about 30% below forecasts (only 5 projects met or
exceeded targets)
Average toll road fee increased from US$ 0.02/km to US$ 0.17 after
concessioning
Government took over 23 projects and paid outstanding debt to
Mexican Banks (about US$ 5 billion) and construction companies
(about US$ 2.6 billion)

Source: Hodges (2006)

Lessons learned from Chile and Mexico

Chile
Procurement process was
transparent
Focus on creating public
awareness (tolling culture)
Government learned as
program developed and made
adjustments
Attracting international firms
brought finance, credibility,
know-how etc

Source: Hodges (2006)

Mexico
Combination of small contract
duration and low traffic resulted
in high tolls
Existence of free roads
contributed to financial distress
of concessionaires
Situation aggravated by Tequila
crisis
Program resulted in massive
Government bail-out

International experience helps


identify typical causes of failure
Most PPP failures can be attributed to inadequate
or non-existent feasibility studies, including
unrealistic traffic forecasts and undefined public
contribution of funds.

Other common reasons for failure:


- Poor legal framework and enforcement
- Weak institutional capacity and PPP strategy
- Unrealistic revenue and cost estimations
- Lack of thorough financial and economic analysis
- Inappropriate sharing of risks
- Lack of competitive procurement
- Public resistance (willingness to pay not assessed)

Lesson: Solid Revenue and Cost


Estimations
Strong emphasis should be put on forecasting revenues and
costs as part of the feasibility study.
Overestimation of revenues can bankrupt the concession

CASE: Hungary M1/M15


Toll Motorway Project

Hungary M1/M15 was the first toll motorway


tendered and implemented in Central and Eastern
Europe.
Construction of motorway was finished in 1995 on
schedule and within budget.
Traffic volumes were about 40% lower than
anticipated, despite the forecasts being prepared by
independent experts.
High toll rate did not cover for low volume. Instead,
it led to a court case by dissatisfied road users.
As a result, the concessionaire was unable to
service its debt and ultimately the government had
to take over the concession at a high cost.
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Lesson: Assess willingness to pay


and prepare a communication plan
Widespread public opposition to a PPP project can
prematurely end the concession.
The absence of an assessment of willingness to pay can
lead to public dissatisfaction, and even violent protests.

CASE: Bolivia
Cochabamba Water System

In 1999, the Bolivian government privatized the


water system in Cochabamba by granting a 40-year
concession to an international consortium called
Aguas del Tunari
Rate structures were immediately modified, which
resulted in increases of up to $20 in water bills for
local families, many of whom often earn as little as
$100/month
In October 1998, groups gathered in protests,
which led to an outbreak of violence, when the
Bolivian army killed as many as nine, injured
hundreds and arrested several local leaders
Finally, Aguas del Tunari announced that the
consortium was withdrawing from the project
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Lesson: Comply with contractual


agreement
Financial profitability and sustainability is heavily dependent on
Governments respect of contractual agreements

CASE: Thailand Don


Muang Tollway

In 1989, the Don Muang Tollway (DMT) company


received a 25-year concession from the Department
of Highways of Thailand to build a $407 million
segment of an elevated highway.
The DMT faced several problems due to nonfulfillment of pre-construction obligations by the
government, which failed to remove a local road
competing with toll revenues.
As a result, traffic volumes and revenues were less
than forecast, and by October 1996 the tollway
company could no longer service its debt.
The government had no option but to authorize a
substantial toll increase and take over some of the
DMTs existing loans
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Lesson: Solid Legal Framework


A solid legal framework for PPP is needed to specify the
rules of the game for the private sector and reduce the project risk
, thus improving the success
rate of PPP projects.

CASE: Poland A1 Toll


MotorwayProject

In August 1997, Gdansk Transport Company


obtained the concession to finance, build and
operate a section of the Autostrada A1 from Gdansk
to Torun.
However, the Concession Agreement could not be
signed because key piece of PPP legislation was
missing.
Multiple rounds of renegotiations and frequent
adjustments to legislation took place in the following
years.
The Concession Agreement was signed in August
2004, 7 years after the beginning of negotiations.
The specifications of the project were significantly
changed and the construction was divided into two
projects, instead of the original plan of one project
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Lesson: Strong Institutional


Arrangements
Institutional Arrangement should ensure coordination, technical
support and that checks and balances are appropriately applied

CASE: Portugal weak


management of its PPP
program

Portugal pursued its first PPPs in the mid-1990s to


more efficiently build new infrastructure
The government PPP unit suffered from lack of
experience with PPP projects and inexperienced
staff
As a result, Portugals early PPPs were subject o
constant delays and cost overruns by 2003, the
countrys PPP-related liabilities amounted to 10% of
GDP
Weak public sector capacity was evident in
insufficient risk transfer to the private sector and
delays in giving government approvals on essential
land and environmental aspects
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Lesson: Value of Competitive


Procurement
Uncompetitive procurement gives a strong position to the
negotiating private party and can lead to long delays and
excessive cost to the government.

CASE: Bulgaria Trakia


Motorway Project

The Bulgarian Government awarded a concession


without competitive bidding for financing,
rehabilitating, constructing, tolling and operating the
a section of the A1 motorway in 2004
Opposition parties attacked the project on the basis
of a lack of transparency, and high government
contribution and construction price
The concessionaire asked to increase construction
costs due to legal obstacles causing substantial
delays and did not want to assume the risk of lowerthan-expected traffic
As a result, the talks with the concessionaire
collapsed in November 2006 and the financial
closure is yet to be achieved
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Lesson: Mitigate Macro-economic


risk and remain flexible
An external macroeconomic shock can create an unexpected
situation for the government, whereby it cannot comply with
its contractual duties in PPP

CASE: Argentina Water


System

As part of a massive privatization program, the


highest profile concession was signed in 1993 with a
consortium called Aguas Argentinas for water
services of Buenos Aires
After the 2001 economic crisis, many concessions
were renegotiated. Some were even terminated and
the responsibility for service provision reverted to
public entities, as was the case in Buenos Aires
When the government rescinded the concession in
March 2006, it argued that Aguas Argentinas did not
comply with obligations on expansion and quality.
The company replied that a freeze in tariffs when
the Peso depreciated in 2001 substantially reduced
the real value of tariff revenues and thus made it
difficult to achieve the original targets
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Summary of Lessons from Successes


and Failures
Strong international competition requires to use international best
practices in preparing, procuring and monitoring PPP projects

Key success factors include:


1. Careful planning of PPP project
2. Solid revenue and cost estimate
3. User willingness to pay and communication plan
4. Extensive feasibility study with use of PPP experts
5. Compliance with contractual agreement
6. Appropriate Legal and Regulatory Framework
7. Strong Institutions with appropriate resources
8. Competitive and transparent procurement
9. Mitigation and flexibility in managing macro-risks

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Success and Failures of PPP projects

THANK YOU !!!

Vickram Cuttaree
The World Bank
vcuttaree@worldbank.org

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