Public-Private Partnerships (PPP)

Workshop on PPPs in Russia

(Moscow - March 3-4, 2005)

Port sector

Michel Audig Lead Port Specialist ECA region The World Bank

The Four Main Russian Gateways to the Global Market

Distribution of Roles in The New Ports Era

Public Port and Marine Authorities Provide basic infrastructure (access / protection / connection) Establish a reliable administrative framework Traffic Safety and Environment Protection Technical regulation matters Promote Port Community dialogue Commercial Terminals (Private Sector) Handle operational aspects Manage commercial risks Propose and implement investment policy Incentives for high performance and competitive tariffs Play a crucial role in fostering efficient logistics development

Source ADB

Definition of PPP Schemes

Very wide spectrum, from work and service contracts to full privatization
Pros and Cons of PPP schemes In any case, a long up to 18 months -- and complex [two or three steps] process to ensure success, i.e., resulting from long term win-win deals In each case a tailor-made design is required Size matters, i.e., US$100 million minimum per deal

PPPs : Options and Challenges for Success

Key Challenges for Success:

Policy Framework (i.e., PPP legislation, institutional capacity, economic regulation and communication program) Transaction Design (i.e., market structure, cost recovery and affordability) Financiability (i.e., adequate risk allocation mechanisms) Public Sector Risk Management (I.e., assessing and monitoring governments commitments under PPP schemes)

PPPs : Pros. and Cons.

Pros.

Cons.

Competitive process Increased transparency Well designed risk allocation Balance sheet consideration Private sector efficiencies and innovation Commercial risk sharing

Complexity High transaction costs Higher borrowing costs than public financing Skill deficit for Administration Structuring risks Public perception and political reactions

Reference EBRD 2004

Why Seeking for PPPs in Ports?

Mainly for mobilizing private financing, but also

to improve port competitiveness [examples: Antwerp, Mexican, and Laem Chabang ports]; to strengthen linkage with global market [illustration: Maersk in St. Petersburg (Transib), and Algeciras]; to boost international trade to/from Russia with the rest of the world [promising development of international container trade, doubled in the present decade.]

Developments in The Container Business

Increase in flows of containers; Increase in maximum vessel sizes; Growth of ICT and automation; High performance demands; Major international players; and

Need for investments in terminal facilities and modern handling equipment.

Development of The International Container Trade

(Sources: Various)

700 600
million TEU

500 400 300 200 100 0

19 73 19 76 19 80 19 84 19 88 19 92 19 96 20 00 20 04 20 08 20 12

Year

A competitive land bridge for containerized cargo?

Source: MOTC Finland - 2005

Key Factors for a Successful PPP in Ports

Objectives of the PPP: difficult choice between two extremes:

Maximum revenue for Port Authority versus Maximum competitiveness for port users];

Public and transparent tendering process; Optimal risks allocation [2 slides]; Standard timeframe for a well designed PPP; and Two-step vs. Three-step approach [3 slides].

Optimal Risks Allocation (1/2)

Political Risks (Confiscation / Expropriation / Nationalization, Civil Strife / War). Mitigation through International Arbitration and Risk Guarantee (IBRD and MIGA)
Government Performance Risks (Compliance to contractual terms in a Concession Agreement). Mitigation through insurance and guarantees (IBRD and MIGA) Environment and Safety Risks Environmental and safety constraints to be defined in Concession Agreement Construction Risks Risk generally borne by Concessionaire. Acquisition of land by Government before construction. Issue of geotechnical risks

Optimal Risks Allocation (2/2)

Technical Operation Risks Risk to be borne by Concessionaire
Revenue Risk in existing facilities Often an acceptable risk to be borne by Concessionaire (adequate provision on tariff in Concession Agreement) Revenue Risk in newly-built facilities A major risk (traffic volume, tariff setting, revenue in local currency). Often not possible for Concessionaire to bear all the risk

Financial Risks Inconvertibility/Transfer Risk to be insured. Issue of Exchange Risk. Other risks borne by Lenders. World Bank Partial Risk Guarantees.

Indicative Transaction Timetable [15-18months]:

(Two steps process)

Phase I: Strategic Review and Due Diligence [6 months]

Technical/ Operational Review

Legal Review

Financial / Economic Review

Social/ Environml Review

Preliminary Market Assessment

Strategic Options and Recommendations Report

Phase II: Transaction [9 months]

Bid Award & Closing

Info.Memo/ Marketing

Bid PrePrequalification Negotiate Bid Documents Draft Bid Documents

Bidder Due Diligence/ Dataroom

Three Steps Process

1.

Pre-qualification: (Previous experience in port facilities financing and operations, Project finance capacity) Technical Selection: (Essentially on the basis of a detailed Business Plan) using Pass or Fail criteria Financial Selection: (on the basis of unified documentation, i.e., draft lease / concession agreement) Simple selection criterion, e.g., fixed annual fee plus royalty (per container movement) of service provided by Concessionaire to the port users

2.

3.

What Is Eligible for PPP Schemes?

In any case, PPP can only result from economically and financially justified projects
Size does matter [Transaction costs -> minimum project size of US$100 million and more] Private sector interest in port business [see ADB graphic]:
Cargo handling, especially containers; and Marine services (towage, berthing, etc)

Added Value logistic services Port/City interface redevelopment for urban purposes
past experience in Russia and worldwide

List of PPI in The Port Sector in The Region (1992-2003)

Source: WB PPI Database 2003

List of PPI in The Port Sector Worldwide (1992-2003)

Source: WB PPI Database 2003

Possible PPPs Prospects in Russia

as listed in the Russia Transport Strategy until 2020:

St. Petersburg and Ust Luga railway/ferry services with Kaliningrad; Transshipment facilities for oil, grain and containers in the port of Novorossiisk; Vostochnyy/Vladivostok ports and railways access; Plus logistics services and development of inland waterways: Astrakhan water transport node; the Makhachkala port; and Reconstruction of the Kochetov lock on the Don River.

Possible PPPs Prospects in Russia

World Bank Group comparative advantages

Close partnership with Russian authorities

Advisory services from either the IBRD and/or the IFC Skill-mix and worldwide experience

External consultants and experts

Reputation to act as an honest broker Increased confidence of the private sector Balancing interest of both Public and Private sectors Transparent and competitive PPP process and more The Port Reform Toolkit (www.worldbank.org).

WBG: Financial Support for PPPs

Financial Products
Hard Currency:

Advisory Services /1
Institutional Building Capacity:

Loans (Investment & Policy, IBRD, IDA) On-lending facilities Co-financing schemes (A/B Loans, IFC) Guarantees (IBRD, IDA, IFC, MIGA) Insurance (MIGA) Equity and related products (IFC)

PPIAF WSP BNPP (Bank & Netherlands Partner) TAF (PIDG) FIAS

Local Currency:

Project (transaction) Execution:

Currency Conversion Option (FSL) Currency swap Guarantees

DEVCO (IFC Advisory Services) GPOBA Cities Alliance PIDG (EAIF, Guarantco, Infraco also includes financing products)

/1 Includes

Partnerships with other donors

Next Steps (1/2)

Independent review of the Russian port sector to:

Review the relevance of its current institutional framework and administrative organization Determine the level of competition intra- and inter-ports as well as the efficiency and relevance of regulatory mechanisms in place

Assess the level of operational performance, tariffs and shippers degree of satisfaction for the service provided
Assess current and future port capacity (in volume and by type of cargo) Intermodalism and value added logistics Evaluate the prospects for promoting PPP schemes.

Next Steps (2/2)

Short/medium term action plan to:

Develop an appropriate regulatory legal framework
Increase port capacity and efficiency through PPP schemes Improve the overall rail, road and inland waterways connection between the ports and their hinterland, especially with Russias oil/gas production centers Introduce modern information and communication technologies Where necessary, improve port/city interfaces to minimize the impact of port related businesses on the functioning of the city

Public-Private Partnerships (PPP)

Workshop on PPPs in Russia

(Moscow - March 3-4, 2005)

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Michel Audig Lead Port Specialist ECA region The World Bank