PublicInvestmentManagementfor PublicPrivatePartnerships:APIMfor PPPDiagnosticFramework

JayHyung Kim WorldBank,PRMPS ICGFMWinterConference,WashingtonDC December911,2013

Outline
WhytheNeedforaUnifiedFrameworkIntegratingPIMandPPP? BenefitsfromaUnifiedFramework ChallengestoHavingaUnifiedFrameworkinPractice UnderstandingtheDifferences:ThePPPContract PIMforPPPDiagnosticFramework:EightplustheContractFeatures
Stage1:StrategicGuidanceandPolicyforPPP Stage2:AUnifiedFrameworkforProjectAppraisal Stage3:IndependentReviewoftheAppraisal Stage4:PPPProjectSelectionandBudgeting AnExtraFeature:ThePPPContract Stage5:PPPProjectImplementation Stage6:PPPProjectAdjustmentbyRenegotiationandRefinancing Stage7:PPPOperationandMaintenance Stage8:PPPProjectCompletionandExPostEvaluation

WhytheNeedforaUnifiedFrameworkIntegratingPIMandPPP?
Mostcountrieshavebeenmanagingpublicprivatepartnership(PPP)

projectsseparatelyfromtraditionallyimplementedprojects(TIPs).
PPPshavebeenmostlyappraised,selected,budgeted,and

monitoredseparatelyfromTIPs.
Thisdisparityhasunderminedadequatepublicfinancial

managementandcreatedunduefiscalrisks,causingfiscalconcerns withrespecttoappropriateformsofaccounting,reporting, budgeting,andotherprocesses.

Fromafiscalpointofview,a principalkeytoinitiatingPPPprojectsisto

establishwhetheragovernmentcanmaintainthesameleveloffiscal efficiencyandsustainabilitythroughPPPasthroughTIP.
Importanttoestablishthefactthatthereshouldnotbesuchathinga

PPPprojectintrinsically PPPisaformofimplementingapublic investmentproject.

AunifiedframeworkforintegratingbothTIPandPPPisinneed.
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BenefitsfromaUnifiedFramework
Helpensuringconsistentassessmentanddecisionmaking
Thechoicebetweena PPPandTIPisoftenskewedbyfactorsotherthan

valueformoney.PoliticalpreferencefororagainstPPPsmayplayarole inskewingchoicesandaffectingoutcomes.
Aunifiedframeworkhasthepotentialtominimizesubjectivedecisions

concerningTIPversusPPPimplementation.
Helpsupportingoptimalrisktransfer
Ifeachproject,whetherTIPorPPP,isseparatelymanaged,theconcept

ofoptimaltransferfromonetotheothermaynotbeensured.
Helpavoidingunmanagedfiscalriskswhileimprovingtransparency
Theframeworkmaydiscourageparallelbudgetingbyreportingthe

knownandpotentialfuturefiscalcostsofPPPsintraditionalbudget system.
BystrengtheningproceduralcontrolsonPPPcommitments,the

frameworkhelpstoimproveoveralltransparencyinthePFMsystem.

ChallengestoHavingaUnifiedFrameworkinPractice
Constraintsanddifficultiesremaintoswiftlyapplysuchaunifiedframework. Itisimportantthereforetoidentifycommonalitiesanddifferencesbetween

TIPandPPP byrunningthroughthePIM stageswhichcorrespondtoeight musthavefeaturesforPPPandtodiscuss entrypointstomovetowardsuch a unifiedframework.

NeedtodevelopaPIMdiagnostictoolforPPP:PIMforPPP
Stage1:StrategicguidanceandpolicyforPPP Stage2:Aunifiedframeworkforprojectappraisal Stage3:Independentreviewoftheappraisal Stage4:ProjectselectionandbudgetingforPPP Stage5:PPPprojectimplementation Stage6:PPPprojectadjustmentbyrenegotiation/refinancing Stage7:PPPoperationandmaintenance Stage8:PPPprojectcompletionandexpostevaluation
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UnderstandingtheDifferences:ThePPPContract
KeyissuesthatthePIMforPPPwillneedtoaddressarethosethat

differentiatethetwoformsofimplementation.
PPPsaredifferentfromTIPsinthattheyneedtoattracttheattentionand

resourcesofprivateinvestors,lendersandoperatorsbythecontract.
InaPPPimplementation,thecontractTheProjectAgreementtakeson

evenmoresignificancethaninaTIPimplementationasitframesthe entirerelationshipbetweentheresponsiblegovernmententityandthe privateentity.

ThePPPContractshouldbesubjecttospecialattentioninPIMforPPP

assessment.
ThereisoneimportantexceptiontotheconsistencyofthePIMeight

musthavefeatures:thePPPContract.
ThePPPContractwilldefinethemeansbywhichtheassetsunderlying

thecontractaredesigned,built,financedandoperatedforasubstantial numberofyears.

PIMforPPPDiagnosticFramework: EightplustheContractFeatures

1 Guidance & Screening

2 Formal Project Appraisal

3 Appraisal Review

4 Project Selection & Budgeting

5 Implement ation -

6 Project Changes

7 Service

8 Project

Delivery Evaluation

ThePPPContract

PIMforPPPDiagnosticFramework: StrategicGuidanceandPolicyforPPP(Stage1)
PPPsareoftenchosenwithoutanyintegratedstrategicguidanceand

coordinationbetweenTIPandPPPimplementationmethods.Theyaremostly managedasstandaloneprojectsorinitiatives.
EstablishingstrategicscreeningandplanningguidanceforpotentialPPPs

shouldthereforebethestartingpointbecauseitoffersthefollowing fundamentaladvantages:
BylistingPPPlegalandinstitutionalarrangements,somegovernmentscan

moredirectlysignalwhereandinwhichsectorsprivatecapitalisrequired tobenefitthepublic.
Onemightarguethatsuchrestrictionslimittheflexibleandinnovative

natureofPPPs.However,anexplicitlegalandregulatoryframework facilitatestheinitiationofPPPprojectsasitconcedestotheprivatesector therightforinitiationorparticipation.

Thegovernmentshouldalsoissueguidelinesongoodpracticethatreflectsthe

importantdifferencesbetweenstakeholdermanagementinTIPandPPP.

PIMforPPPDiagnosticFramework: AUnifiedFrameworkforProjectAppraisal(Stage2)
ItisimportanttoprovidefiscalregulationforPPPprojectassessmentswiththe

samecareappliedtoTIPimplementation.

Astandardizedexampleforprojectappraisalina unifiedframeworkcouldbe

composedoftwophases:(a)decisiontoproceedand(b)decisionto implement.

(a)Decisiontoproceed(preliminaryfeasibilitystudy)
Apreliminaryfeasibilitystudycouldbeconductedtoprepareforthe

decisiontoproceedandafullpreparationina laterstage.Thepreliminary feasibilitystudynotonlyassesseswhethertoproceedwiththefullproject preparationbutalsopushesthegovernmenttoinvestinmoredetailed projectpreparationinadvance.

(b)Decisiontoimplement(valueformoney[VFM]assessment)
Iftheproposedprojectappearstobefeasible,aVFMassessmentwould

thenassesstheimplementationoptionsTIP versusPPP.

Basically,governmentcostsandprojectinputsofan oftenknownpublic

sectorcomparator arecomparedagainstthoseoftheprojectedrisk adjustedcostsofa PPPalternativetoassesswhetherthePPPmight achievebetterVFM.

PIMforPPPDiagnosticFramework: AUnifiedFrameworkforProjectAppraisal(Stage2continued)

VFM(PPP) > VFM(PSC)

VFM(PPP) < VFM(PSC)

Note: Note: VFM = value for money. PSC = public sector comparator. PPP = public-private partnership.

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PIMforPPPDiagnosticFramework: IndependentReviewoftheAppraisal(Stage3)
InthecaseofPPPs,theroleofindependentpeerreviewsmaybeespecially

importantgiventheroleofdedicatedPPPunits.
Themoretheevaluatingentityisindependentfromaparticular

deliverymethodoragency,themoreitsjudgmentislikelytobe unbiased,whichfavorsandfacilitatesanoptimalpartnershipbetween twoparties.

PPPUnitasaPPPPromoteroraGateKeeper?
ThetworolesoftheunitasaPPPpromoteroranindependent

appraisermayactuallybeinconflictwitheachother.
Inlightoftheserisksandpossibleconflictsofinterest,thekey

recommendationisthattherebestrictindependencefromthedirect interestsofspendingministriesandagencies.
Thesystemofindependentreviewshouldbeformalizedor/andsupervised

bytheMinistryofFinance,andthereviewersarefullyindependentandhave novestedinterestintheoutcome.

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PIMforPPPDiagnosticFramework: ProjectSelectionandBudgetingforPPP(Stage4)
AccountingPPPs:
Theabsenceofclearandoperationallyrelevantaccountingstandardslimitsthe

enforcementofspendingcontrols,andthereforePPPprojectsoftencircumvent spendingceilingsandfiscalrules.
However,recentdevelopmentsininternationalaccountingandstatisticsstandards,

suchastheIFRSandtheIPSAS,increasinglyreducetheopportunitiestousePPPsto distortfiscalrealities.

BudgetingPPPs:
IMF(2006)andOECD(2012)addresstheprinciplethatbudgetdocumentationshould

transparentlydiscloseallinformationpossibleregardingthecosts(capitaland recurrent),explicitliabilities,andcontingentliabilitiesofPPPs.
WhengovernmentsprovideupfrontpaymentstoPPPs,thepaymentsrequiredare

similartothoseforTIPs,andtheycanbebuiltintoannualbudgetsandthemedium termexpenditureframeworkrelativelyeasily.

SafeguardCeilingforPPPs:
Giventhedifficultiesindecidingwhethera particularPPPcommitmentisaffordable,

limitsorceilingsonaggregatePPPexpenditurecanbea helpfulwaytoensurethat thegovernmentstotalexposuretoPPPsremainswithinmanageablelimits(for examples:Brazil,Hungary,Korea,etc.)

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PIMforPPPDiagnosticFramework: ThePPPContract(AnExtraFeature)
AnextraassessmentofthePPPContract,whichlinkstheprojectselection

process(instagesof14)withtheprojectimplementationprocess(instages of58),isimportanttoensureconsistentdecisionmaking.
CheckqualityandcomprehensivenessoftheContract,andcomparewith

internationalgoodpractices.
TheContract setsoutthewayinwhichtherisksareapportionedbetween

thepartiestotheagreement.Itprofoundlyaffectstheentireeffectiveness andefficiencyoftheprojectanddeterminestheoutcomes.
Whilstitcouldbearguedthatthequalityofthecontractitselfisonlya

reflectionoftheoverallframework,itcannonethelesspointspecifically toweaknessesinthatframeworkandinparticularintheknowledgeand negotiatingskillsofpublicofficialsandtheiradvisers.

TIPprojectshavecontractstoo,mainlyconstructionorengineering

contracts.Whilsttheseareimportantinthemselves,theydonot encompassaworkingrelationshipbetweenpublicandprivatesector entitiesforperiodsofupto25or30years.

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PIMforPPPDiagnosticFramework: PPPProjectImplementation(Stage5)
DuringimplementationofaPPPproject,VFMoutcomesarecontingenton

effectivemanagementovercontractterms.
Poorcontractmanagementwiththeprivatepartnercanresultinhigher

costs,wastedresources,andimpairedperformance.
Acompetitivebiddingprocess(whilenottheonlypossiblewayofselection)is

essentialtoensureVFMandoptimalallocationofriskbetweenthepublicand theprivatesector.
Itisusefultodevelopandannouncestandardimplementationguidelinesfor

decidingprocurementstrategy,managingbidprocesses,developingmodel projectagreementandstandardclauses.

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PIMforPPPDiagnosticFramework: PPPProjectAdjustmentbyRenegotiationandRefinancing(Stage6)
Asprojectsenterintotheimplementationphase,itisessentialtoclearly

understandtheprocessofPPPprojectadjustment,particularlyregardingthe twodistinctcasesofrenegotiationandrefinancing.
Beforemajoradjustments,reassessmentofeconomicviabilityandVFMis

requested;thiswouldenablethegovernmenttorechecktheimpactofchanges inprojectcontentsorthebusinesscaseaswellastoscrutinizetheadequacyof theadjustment.

Renegotiation:
Renegotiationmeansanadjustmentorchangeintheprojectagreement

betweentwoormorepartiesinaPPP.
ExanteVFMshouldnotbenegativelyaffectedwheneverrenegotiationis

made.Anyrenegotiationprocessshouldbemadetransparentlyand subjecttothelaw.
Refinancing:
UnderthetermsofPPPprojectagreements,thegovernmentmayexpectto

sharetherefinancingbenefitsequallywiththeprojectcompany.
Thereshouldbeclearrulesinplaceformanagingrefinancing.
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PIMforPPPDiagnosticFramework: PPPOperationandMaintenance(Stage7)
Bydefinition,a largeportionofvalueformoneyinPPPsshouldbecreatedby

moreefficientmanagementofthedeliveryoftheservicesandoperationand maintenanceoftheassets.
Toachievethevalueformoneyenvisagedatthesigningoftheproject

agreement,boththegovernmentandtheprivatepartnerneedtomake surethattheplannedallocationof responsibilitiesisclearandthatrisks areoptimallysharedandbalanced.

Eachpublicauthoritymanagesprojectsbyfollowingtheprotocolsstipulated

intheprojectagreementsandreceivingprojectprogressreports.
Performancechecksareconductedasspecifiedinthestandardmaintenance

qualityrequirement.
Thepurposeoftheperformancecheckistoassesswhetherservice

deliveryoutputsandoutcomesareinaccordancewiththeproject agreementandoutputspecification.
Deductionscanbeappliedtothepaymentsfromgovernmenttoprivate

partnerforpoorperformancetopromoteprivatesectoraccountability andincentivizebetteroperationalperformance.
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PIMforPPPDiagnosticFramework: PPPProjectCompletionandExPostEvaluation(Stage8)
TheevaluationofPPPprojectsisextremelydifficultbecauseofboththe

conceptualslipperinessandthelargenumberofdisciplinesinvolved economics,accounting,law,politicalscience,engineering,andsoon.
Difficultinpracticetoprovebettervalueformoney:TraditionalversusPPP
Intheoryandwishfulthinking:checkbetterVFMthroughprojectappraisal In

practice:twoseparatetracksfortraditionalpublicinvestmentandPPPs Difficulttocheckandcompare.

OnewaytoevaluatePPPs,nonetheless,istotraceoutevidenceofcost

savingsandefficiencygainaswellasevidenceofPPPcontributiontothe nationaleconomy:
Froma project pointofview: whethergradualimprovements,comparedwiththe

casesofconventionallyimplementedprojects, havebeenmadeintheefficiency ofcosts,tollrates,andeconomicratesofreturn.

Froma widerpointofview: PPPcontributiontothenationaleconomy,whether

theyhaverippleeffectsonthenationaleconomythroughseveralchannels: economicgrowthresultingfromtheinflowofprivatecapital;increasedsocial welfareresultingfromthetimelydeliveryofsocialservices;andtheearly realizationofsocialbenefits.

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Annex:APIMforPPPIndicatorAssessmentTool
PIMforPPP
StrategicGuidanceandPolicy 1 2 3 4 5 ProjectAppraisal 6 7 8 9 IndependentReviewofAppraisal 10 Selection and Budgeting 11 12 ThePPPContract 13 14 ProjectImplementation 15 16 17 ProjectAdjustment 18 19 FacilityOperation 20 21 CompletionReviewandEvaluation 22

SubjectArea
ScreeningofProjectsagainstPolicyPriorities EffectivenessoftheRelevantLegalFramework EffectivenessoftheRelevantInstitutionalarrangements Stakeholdermanagement/engagement RoleofAdvisers Appraisalrules,guidanceandpractice PublicSectorComparator(PSC) Comprehensivenessoftheappraisalprocess Bundlingprojects Qualityandpractices FiscalRisk Transparencyandaccountingtreatment Qualityandcomprehensivenessofcontractsbasedonstandard preagreedpositions Comparisonofkeycontractualtermswithinternationalgood practice Implementationpractices ProcurementProcessandPracticesinPPPprojects Timelinessofimplementation AdjustmentPractices,EffectivenessandEfficiency Refinancing Contractmanagementpractices AssetRegisters Ex postEvaluation

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ThankYou

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