48320 FebruAry 2009 About the Author Mission Difficult...but not Impossible robert tAylor Making public-private partnerships Work Infrastructure Advisory Services, has 24 years' for the poor experience in the World bank and IFC working on private sector delivery of public Public-private partnerships (PPPs) hold great promise for improving public services. services for the poor in emerging markets. But charting the political waters, ApprovIng MAnAger balancing the needs of governments, consumers, investors, and lenders, and laurence Carter, Director, Advisory Services. making the transaction transparent and sustainable are challenging tasks and not for the faint of heart. This SmartLesson summarizes 10 years of lessons of IFC's Infrastructure Advisory Department in its role as transaction advisor to governments on more than 100 mandates. PPPs involve a government con- tracting with a private sector com- pany for delivery of infrastructure and/or services. as transaction ad- visor, IFC enters into a formal transaction mandate with a gov- ernment client to structure and implement a PPP-type transaction. IFC's work typically involves: · Analyzing the project's fundamentals; · Reviewing PPP options and recommending a transaction structure; · Financial modeling of the PPP project; · Promoting the project to SONEL power utility in Cameroon.Transaction closed in 2001. investors and getting their feedback; successfully completed 36 mandates. recent · Preparing the PPP contract and tender highlights include the Lesotho Hospital PPP, procedures; and power generation and distribution PPPs in · Assisting in conducting the tender and albania, small independent power projects in selecting the winner. rural Philippines, and a new airport terminal in amman, Jordan. roughly 40 percent of current IFC seeks to focus on first-of-a-kind transactions advisory mandates are in International with high developmental impact in frontier Development association (IDa) countries. sectors (such as health) and regions or countries that often present difficult challenges and so transactions typically take 18­24 months to are of less interest to commercial advisors and complete, and IFC's success rate is about 40­50 investment banks. percent (excluding active mandates still under way). Delays and failure to complete a Results transaction have an opportunity and morale cost on staff. So the department makes a over the past 10 years, IFC's Infrastructure considerable effort to glean lessons that will advisory Services has signed 112 advisory increase the success rate and speed up mandates (including 43 active mandates) and implementation. IFC SmartLeSSonS -- FeBrUarY 2009 1 Lessons Learned these questions seem obvious but can easily be overlooked in the rush to respond to a government request. It doesn't 1) Lesson 1: Politics is (and will always be) the main require a huge, lengthy analysis before signing a mandate, cause of death for transactions. It may be vested interests, but some quick answers can be gleaned by: who would lose from a transaction (especially a privatization),thateventuallysabotageit.oragovernment · Checking investor (and lender) interest informally realizes that the project may not be acceptable to the with a few local and international players. public at the necessary tariffs. or the transaction simply · Doing quick back-of-the envelope calculations to see runs out of time to be completed before elections. the project's impact on consumer prices or the government budget. We have rejected several requests Political factors are the single most important impediment from governments for airport concession transactions to success. Yet this is an area that IFC tends to pay less due to low passenger volumes (in one case, less than attention to, since most staff are primarily technicians. But 12,000 passengers annually). In two water projects in ignore at your peril. Here is some practical guidance to Africa and Latin America, we recommended against minimize political risk: proceeding with the transaction after our preliminary analysis showed that the tariffs required for project · Avoid taking on mandates within 12 (maybe even 18) viability were simply unrealistic. In two Middle East and months before elections, since most governments North Africa (MENA) countries, we were asked by avoid anything potentially controversial close to governments (unrealistically) to find PPP operators for elections (and some countries actually have laws that new public hospitals that had been built (with external prohibit major new contractual obligations within a loans) but lacked funding for operations. Fortunately, specifiedperiodbeforeelections).Twoofoursuccessful we discovered this before signing a mandate and backed mandates(Romaniadialysis,Kenyatelecom)completed out gracefully. tenders just two days before national elections. And · Seeing whether it can be done under existing laws. If the Moatize mining PPP was signed one month before not, try for a decree, regulation, or government elections. But one municipal client stopped a water decision, but don't count on new laws being passed to project, citing concerns about water tariffs, just ahead get it done. The absence of enabling legislation of elections. stopped our work on water PPPs in three different · Assess top-level political commitment before signing a countries, though for different legal reasons in each mandate. Best if there is also a project champion with case. status and clout. Many of our successful transactions · Doing some quick analysis on whether the project have had strong client champions and top political (service type, level, and location) is really needed by the support, such as the Panama and Lima power public. Avoid the "white elephant" syndrome, driven by privatizations, Queen Alia International Airport in politics, not need. And check for other more cost- Jordan, Kenya Rail, Kenya Airways, South African effective measures such as improving throughput (for national parks, Polynesian Air, and our small-power example, ports) or efficiency in consumption (for projects in the Philippines. In contrast, we had a failed example, water metering) or buying the service from airline privatization and a failed airport concession existing private providers (for example, hospitals). transaction due to the lack of high-level political support. the scope of the PPP project is also important. In principle, · Identifyandassessvestedinterestswhowouldlosefrom the greater the risk and responsibility transferred to the the transaction. Several of our projects in different private sector, the greater the potential gains in efficiency sectors ­ electricity, water, transport and health - never and service quality (if well-structured). Don't use PPPs solely reached tender, primarily for this reason. asafinancingtechniquetoavoidpubliccapitalexpenditures. · Check in advance to determine whether provincial or local-level transactions need national buy-in. In one of our solid-waste projects, we needed approvals at the municipal and national levels--an extremely lengthy process because governments kept changing. When we finally got approvals of the bidding documents at both levels, the municipal government got cold feet due to upcoming elections and stopped the process. · Work closely with the World Bank to provide the broader necessary perspective on country politics and economics. 2) Project fundamentals should be sound. Is the project needed (by the public), affordable (for consumers and the government), attractive Polynesian Airlines in Samoa.Transaction closed in 2003. (to investors), and legal (without new laws)? 2 IFC SmartLeSSonS -- FeBrUarY 2009 But be aware that increased private sector participation helps to have investors tell the government directly. and responsibility also tend to generate more opposition Nothing has the same impact as a major investor telling from public sector employees. the government why it won't participate. The art in this business is separating the real deal breakers from the 3) Plan and manage your team and consultants for desirable-but-not-essential list. But sometimes, clients maximum efficiency and results. transactions typically don't take our advice. In a municipal water PPP in Latin require a diverse team of financial and transaction experts America, we experienced two failed tenders due to (usually IFC staff); technical and sector specialists who can unrealistic expectations of the municipality about what best determine project need, sizing, and specifications; and it could get from the market. transaction lawyers to vet the legal framework and put the · PayparticularattentiontothepricingandPPPpayment project into proper contracts. structure and adjustment formulae. They may well be the most important element of the contract for But getting the team in place, funded, and functioning as incentivizing performance and efficiency. an efficient unit is not straightforward. often the technical · A balanced contract and good regulation are the most consultants and lawyers are funded in part through donor effective tools for sustainability (and yet the hardest to funds, which may take time to arrange. and hiring the achieve in many client countries). If a deal is too good to consultants requires adherence to IFC procurement be true (for one side or the other), chances are it won't guidelines, which also takes time. last. And if it depends on big price increases for consumers, it is probably doomed to failure. A major the data and information that IFC requires from its reason for the success and sustainability of some of our consultantsfortransactionsareveryspecificandtransaction- power and water transactions was our ability to close driven. So it is imperative to ask for only what is needed for thetransactionwiththesame,orevenreduced,consumer the transaction analysis and contract documents. We're not tariffs (for example, the Panama power privatization here to do studies. resulted in an immediate 10 percent reduction in consumer tariffs). You can accelerate the transaction preparation and get effective results by: 5) Be sure there is transparency throughout the process. In all these transactions, IFC's reputation is most at risk if · Lining up donor funds before signing the transaction investors or the government believe that there has been mandate (or in parallel with mandate negotiations); favoritism or a lack of neutrality or transparency, · Compiling available client and project data before the particularly in structuring and implementing consultants are on board, so they don't waste time prequalification and bidding. Such a perception can result searching for it; and in lawsuits, negative press, and a tarnished reputation. · Having a joint kick-off session with the team, the consultants, and the client team to set everybody off on transparency sounds easy, but in fact there are decisions the same track. throughout a transaction which affect the perception of transparency. traditionally, IFC has followed a somewhat the global/local approach is crucial to success--both in rigid approach that favors objectivity and simplicity over signing transaction mandates and in successfully subjectivity and complexity. implementing the transactions. the Infrastructure advisory Department was at the forefront of the global/local How does this work? typically, where there is a movement, setting up regional-based managers and local prequalification process as a precursor to bidding, we staff starting in the early 2000s. the results have been clear: favor quantifiable and verifiable technical and financial many more mandates signed and better productivity (more criteria, such as "at least five years' experience as an mandates per staff). Being close to clients (in this case, operator of a water distribution company serving at least governments) is absolutely essential for success. In many two million customers," or "net worth of at least $300 cases, an IFC local presence can help keep a transaction on million as of year-end 2008." But setting these criteria track and moving quickly. necessarily involves some degree of arbitrariness and can cause complaints, generally from local firms that are not 4) Make the contract bankable and sustainable. there are big enough to prequalify on their own. true, the decision really two hurdles in this business. the first is getting to a on the precise prequalification criteria is the government's, successful transaction. the second--and more important-- not IFC's, but it is our job to advise the client on right- is having it last. In practice, this requires several things: sizing the criteria for the project and on the implications of different criteria for who will prequalify and who · Check and recheck the risk allocation matrix with won't. investors and lenders to get their reaction and identify any deal breakers early on. Don't stray too far from Despite our best efforts to set quantifiable and verifiable accepted international practices. criteria that will not be subject to dispute in interpretation, · Governments often have an unrealistic view of what we often face interpretation disputes over such issues as they can get from investors and what they have to give accounting standards applied to financial criteria, the up in return. Although it is the transaction advisor's job definition of an affiliate (and whether its experience to communicate the concerns of investors or lenders counts), and so on. We encountered such issues in our (and identify unrealistic assumptions of the client), it armenia power, Bangladesh, and Bucharest water IFC SmartLeSSonS -- FeBrUarY 2009 3 mandates, though none was actually derailed. noted earlier, mandates that drag on will You can never completely eliminate the waste resources and hurt staff morale. Staff possibility of a complaint, but you can go a don't want to work on projects that take a long way toward removing the possibility of long time and are not ultimately successful. interpretation disputes. But it may be hard for IFC to abandon a man- date if the govern- ment still wants to pursue it, since the government is also a shareholder of IFC. Wehaveintroduced three actions to ad- dress this problem: · We spend more time on due diligence of a proj- ect's political risk and fundamentals before signing a transaction man- date. If a project Suape Container Terminal in Brazil.Transaction closed in 2001. has little chance of success, it is better to find out before In the bidding, we have tended to favor price- signing the mandate (and therefore not only bids, with sealed envelopes opened and sign it). read in a public ceremony. this means no · We try to include additional monthly fees business plans, no technical proposals, and no if the transaction goes beyond a specified other documents that could be subjectively timeframe (for factors beyond IFC's evaluated (and hence prone to disputes or control). This signals at the time of bribes) or later prove to be a hollow promise. mandate negotiations that time has a cost and we are not prepared to work on a this approach works best for straightforward transaction indefinitely. projects which are not very conducive to · We are now including more explicit exit innovative technical solutions or major clauses in our transaction mandates; This differences in approaches by bidders. the allows IFC to terminate a mandate if it possibility for complaints and corruption is becomes clear that the transaction is not minimized, but at the cost of rigidity. advancing or has little chance of success. Increasingly, we are faced with complex Conclusion projects where bidders may have valid differences in design and approach which When many of these factors go in our favor, should be considered and cannot be readily we can have quick successes. one of our larg- DISClAIMer standardized into a price-only bid. It may be est transactions--a $950 million privatization IFC Smartlessons is an awards for a new airport (for example, amman) or a of the electricity distribution company in Ceara program to share lessons learned new hospital (for example, Lesotho). In these State (Brazil)--was also one of the fastest: in development-oriented advisory cases, we recommended a set of criteria for eight months from mandate signing to clos- services and investment operations. the findings, evaluating technical proposals, which may be ing. top political support, excellent counter- interpretations, and conclusions either pass/fail or weighted with the financial parts, good tariff levels, and a sound legal en- expressed in this paper are those proposals. It's not perfect or completely vironment all contributed. But when the of the author(s) and do not objective, but rather a recognition that some negatives start piling up, mandates can drag necessarily reflect the views of IFC projects are just too complex or innovative to on mercilessly for years without relief. apply- or its partner organizations, the executive Directors of the World suit a price-only bid procedure. ing our lessons in mandate selection and exe- bank or the governments they cution can reduce, but probably not complete- represent. IFC does not assume 6) Exiting--is there ever a graceful way? our ly eliminate, these poor-performing mandates, any responsibility for the experience clearly demonstrates that the lon- and increase our overall hit rate. completeness or accuracy of the information contained in this ger it takes to sign a mandate, and the longer document. please see the terms it takes to implement a transaction once a man- and conditions at www.ifc.org/ date has been signed, the less likely it is that it smartlessons or contact the will result in a successful transaction. and, as program at smartlessons@ifc.org. IFC SmartLeSSonS -- FeBrUarY 2009 4