Structuring Effective PPP Units

Stephan Schmitt-DegenhardtBratislava Regional Center

Budapest, 7th June 2010

2

Entry point:

“Successful PPP units address areas where the government has identified

weaknesses or low/no capacities”

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Ultimatum Game Link PPP – Ultimatum Game

– The splitting of some potential gains between Government (offerer) and private consortium (receiver).

– In a repeated game the optimal strategy is fairness/cooperation General experience:

– The average offer is between 40% and 50%! – Approximately half of the receivers turn down offers under

30%! Conclusion: PPP tenders and contracts need to be

designed with perceived fair splits in mind.

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Prerequisites for successful partnerships

Expected answers according to intuition:

“Trust” and potentially derivatives such as transparency, credibility, honesty, etc.

“Flexibility”Rules of the game

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“Most people can be trusted”Country % 35 countriesTurkey (2nd)** 4.9%Latin America 13.1% Peru**, Brazil**, Chile**, Colombia**, Mexico**,

Guatemala**, Argentina**

Non-EU SEE/CEE

19.0% Macedonia*, Serbia**d, Bosnia/Herz.*, Moldova**, Croatia*, Ukraine**

EU new members

20.6% Slovakia*, Latvia*, Slovenia**, Poland**, Romania**i, Hungary*, Bulgaria**, Estonia*, Czech Rep.*, Lithuania*

CIS without CEE

21.2% Kyrgyzstan*, Georgia**, Azerbaijan*, Albania*, Armenia*, Russia**

EU15 35.8% Portugal*, France**, Spain**d, Greece*, Luxembourg*, Italy**, UK**, Belgium*, Austria*, Ireland*, Germany**, Netherlands**d, Finland**, Denmark*, Sweden**

Belarus* 41.9%Scandinavia 66.9% Finland**, Denmark*, Sweden**, Norway**

Source: World Values Survey, *1999/2000 wave , **2005/08 wave, (i)/(d) significant increase/decrease between last two waves

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“Do you think most people try to take advantage of you?”

Country/Region Median score 52 countriesMorocco 3.9

SEE/CEE 5.0 Serbia, Bulgaria, Poland, Romania, Ukraine, Slovenia, Moldova

Russia 5.4

EU + Norway 6.2 Spain, Italy, Germany, UK, France, Netherlands, Finland, Sweden, Norway

Georgia 6.9

Scandinavia 7.0 Finland, Sweden, Norway

Source: World Values Survey 2005/8 (comparison with 1999 survey not possible)1 = Would take advantage, 10 = Try to be fair

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Prerequisites for successful partnerships

Conclusions: Trust is highly culture specific (extent and

specificity)Accordingly, PPP Units should contribute to trust

building

“Widespread distrust in a society … imposes a kind of tax on all forms of economic activity; a tax that high trust societies do not have to pay.”

Francis Fukuyama, US Political Economist

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Flexibility of agreementsPPPs in transition economies face many uncertainties:

– Developing legal and regulative frameworks– Developing formal and informal institutions– Unpredictable development patterns– Developing social/environmental concerns (e.g. MDG)– Changeable tariff structures– Fluctuating exchange rate (rather: risk)

and thus require exceptional flexibility. Flexibility requires:– Flexible contracts– Trust– Low uncertainty avoidance

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Uncertainty avoidance index

Country/Region ScoreSingapore 8

EU-North + Norway 38.5 Scandinavia (Denmark 3rd lowest), Anglo-Europe

EU-Midwest 62.7 Netherlands, Germany, Austria

SEE/CEE 79.5 Slovakia, Estonia, Czech Rep., Croatia, Hungary, Bulgaria, Slovenia, Romania, Serbia, Poland

EU-Roman 86 Luxembourg, Italy, Spain, France, Belgium, Portugal

Russia 95Greece 112

Source: Hofsteede

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Consequence in terms of principle – agent problem

Principle-agent problem: Information asymmetry (obtaining information costly for principle)

– Behavior based contracts (e.g. Management contracts)– Outcome based contracts (e.g. Concessions)

But in SEE/CEE basic assumption of risk averse agent and risk neutral principal (often) wrong

Conclusion: Based on differences in risk aversion, outcome based contracts should be preferable

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Corruption Perception

Therefore: Good arbitration agreements

Country/Region ScoreNew Zealand 9.4

Scandinavia 9.0 Denmark, Sweden, Finland, Norway

EU (West/North) 7.8 Netherlands, Luxembourg, Germany, Ireland, Austria, UK, Belgium, France

EU (South) 5.0 Spain, Portugal, Italy, Greece

EE (New EU members) 5.0 Estonia, Slovenia, Hungary, Poland, Czech Rep. Lithuania, Latvia, Slovakia, Bulgaria, Romania,

Balkans 3.5 Croatia, Macedonia, Serbia, Albania, Bosnia/Herzeg.

Western CIS 2.6 Moldova, Belarus, Ukraine,

Central Asia, South Caucasus

2.4 Georgia, Armenia, Kazakhstan, Azerbaijan, Russia, Tajikistan, Kyrgyzstan, Turkmenistan, Uzbekistan

Somalia 1.1

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Governance Indicators

TURKMENISTA

N

UZBEKISTAN

BELARUS

KAZAKHSTA

N

BANGLADESH

KOSOVO

ALBANIA

MOLDOVA

ARMENIA

GEORGIA

MACEDONIA

MONTENEG

RO

CROATIAIN

DIA

POLAND

LITHUANIA

LATVIA

KOREA, S

OUTH

CZECH REP

UBLIC

SLOVENIA

ESTO

NIA

BELGIUM

HONG KONG

UNITED KIN

GDOM

IRELA

ND

AUSTRALIA

FINLAND

AUSTRIA

NORWAY

-3

-2

-1

0

1

2

3

Rule of Law

Regulatory Quality

Government Effectiveness

Control of Corruption

Source: World Bank

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Governance and PPP units

Conclusions:PPP units in SEE/CEE need to specifically address

weak governance issues (regulatory environment, corruption, quality of public service, civil society involvement, potentially Human Development)

“Best Practices” are mainly derived from countries with significantly higher governance indicators. A 1:1 transfer might not be advisable.

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Efficiencies of PPPs

Allocative efficiency

Technical efficiency

X-efficiency

Decision on the project/service; Cost-benefit calculation

Decision on the means to obtain project/service;Private sector involvement/PPP;Public Sector Comparator

Dominant objective of PPP!

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Government’s reasons for pursuing PPPs

Limited municipal revenues with tendentially discretionary allocation of additional central/regional resources

Most countries’ municipalities can only get indebted up to 20-30% above budget

Limited experience with cost-benefit analysisÞ PPP as financing and not efficiency instrument

But: No resources to finance PPP project preparation

Conclusion: Focus on finance and Public Sector Comparator

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Sector Diagnostic

Feasibility Study

Decisionon PPP

Calculationof PSC

PPP projectdesign

Tenderingprocess

Award &contracting

Implemen-tation

Ensure fairness

Facilitate civil society involv.

Engage in trust building

Ensure right risk distribution

Advise on regulatory env.

Facilitate anti-corruption

Ensure application of PSC

Advise on financing

Derivative functions

Transparency AccountabilityTrust buildingStakeholder involvementRegulatory adviceProject efficiency

and

Capacity building / technical assistance with goal that gov’t can increasingly take over functions

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Critical issues

Decision power of unit / power of controlIndependence of unit / institutional set-upScope of unit’s responsibilityEvaluation / success factors of unit

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Decision power

may advise decides, “green-lights”

The more decision power the• higher the potential impact • higher the responsibility• more opposed by procuring

government organizations• more dangerous position in

environments of weak law enforcementThe effective decision power

depends on the independence of the unit (low decision power unit attached to high decision power institution can yield similar results as high decision power independent unit)

can be limited to certain steps of the procurement process might be substituted by right to “blow the whistle”/to publish

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Independence

integrateddepartment

fully independentwith automatic

finance

The more independent the• lower the potential interference• lower the potential conflicting

interests (if autom. finance)• less protected and connected

The impact/importance of independence depends on the decision power (independence with low decision

power is rather meaningless) is questionable if unit is dependent upon financing through voluntary

clients

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Scope

few selected steps

complete procurement

process

The higher the scope the• more can effectiveness and

efficiency be ensured• more conflicting interests

can occur• more the unit is exposed to

outside pressure

The impact/importance of scope co-determines the ownership feeling and capacity building chances at the level of

the procuring government organization the unit’s clients and the opportunity to address other stakeholders

(esp. civil society, businesses) beyond the procuring government

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Success factors

The success factors influence the overall PPP programme regarding• its orientation• its efficiency• its scope

The impact/importance of the success factors depend upon the actual influence of the unit on the overall PPP

programme and thus the unit’s power, independence and scope might be very difficult to measure (attribution gap, lags, etc.)

PPP contracts - Number

PPP contracts - Turnover

PPP contracts - Sustainability

Procurement - Life cycle efficiencyProcurement - Cost savings

Stakeholders - Satisfaction

Unit - Cost per deal

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Comparison of PPP units globally

None of the established PPP units actively deals with transparency, accountability, trust building, stakeholder involvement

Their scope and power is usually rather limited

Most are established as dependent governmental units

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Food for thoughtPPP units in SEE/CEE should actively engage in issues of transparency, accountability,

trust building and stakeholder involvement might have limited decision power but should be obliged and

protected to “blow the whistle” should nevertheless be institutionally linked to powerful

ministries might be engaged in all public procurement processes (cf.

Korea) but at least in most core processes (except negotiation) & mediation during implementation

Might be evaluated according to efficiency cum sustainability criteria

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Sources and further information CRGP: “Public-Private Partnership Agencies: A Global Perspective”, 2008 OECD: “Dedicated Public-Private Partnership Units - A Survey of Institutional and

Governance Structures”, 2010 PPIAF: “GridLines: Designing and using public-private partnership units in

infrastructure - Lessons from case studies around the world”, 2007 UNECE: “Guidebook on Promoting Good Governance in Public-Private

Partnerships”, 2008 UNDP: “Toolkit on Pro-Poor Municipal PPP”, 2006 UNDP: “Review of the national policy, legislative and institutional environment

necessary for the establishment of municipal public private partnerships (PPPs) for public service delivery and local development in the Europe and CIS region”, 2006

World Bank: “Public-Private Partnership Units: What Are They, and What Do They Do?”, 2006

World Bank: “International Experience in Establishing and Operating PPP Units”, 2007

World Bank/PPIAF: “Public-Private Partnership Units: Lessons for their Design and Use in Infrastructure”, 2007

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Thank you!

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Definition of PPP unitsWorld Bank: “Any organisation designed to promote and/or improve public-private partnerships that has a lasting mandate to manage multiple public-private partnerships transactions in response to government failures (poor procurement incentives, lack of co-ordination, lack of skills, high transaction costs, lack of information, etc.).“ It may control the total number of public-private partnership projects and ensure that proposed projects fulfil specific quality criteria (e.g. affordability, value for money and appropriate risk transfer). A dedicated unit’s possible functions are policy and strategy, project identification, project analysis, transaction management, contract management, monitoring and enforcement.

Asian Development Bank: “A point of co-ordination, quality control, accountability and information on public-private partnerships for one or more sectors.” These units are created as a new agency or within a ministry such as the finance ministry, which is seen to be at arm’s length from the sector utilising public-private partnerships as a service delivery mechanism.

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Pros and cons of PPP units

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Approach to PPP Unit development

Functions Mandate Scope

Stakeholder outreachFundingTemplates

Structure Phasing

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Government failures

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Presidential, semi-presidential and parliamentary systems

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Evolution of PPP unit development

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PPP units globallyAsia/Pacific:

Australia, Bangladesh, China, Fiji, Japan, India, Indonesia, Israel, Japan, Pakistan, Papua New Guinea, Philippines, Kazakhstan, Rep. of Korea, Singapore, Sri Lanka

Africa: Egypt, Malawi, Mauritius, Nigeria, South Africa, Turkey

Europe: Austria, Belgium, Croatia, Czech Rep., Denmark, Estonia, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Moldova, Netherlands, Poland, Portugal, Russia, Slovakia, Slovenia, Spain, Switzerland, UK

Americas: Brazil, Canada, Chile, Costa Rica, Jamaica, Peru, Puerto Rico, USA

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Functions of benchmark PPP units  Korea Germany S.Africa UK Vic./AUS China Turkey

 

Procuring gov’t organizatio

n

Ministry of

Strategy and Financ

e

PIMAC

Procuring gov’t organiz

ation

Federal

Ministry of

Finance

Partnership Germany

Procuring

gov’t organization

National

Treasury

PPP Unit

Procuring

gov’t organization

HM Treasury

Partnerships UK

Procuring gov’t

organization

Partnershi

ps Victoria

Procuring gov’t organizatio

n

Efficiency Unit, Hongkong

Procuring gov’t organizati

on

Safyada

International PPP

Platform

Pre-tender                                  Project initiation ● - - ● - - ● ● ● ●   ● ● ● ○ ● -Assess feasibility/VfM ● ○ ● ● - ○ ● ● ● ○ ○ ● ● ● ○ ● -Budgeting ● ● - ● ● ○ ● ○ ● ●   ● ● ● - ● -Project approval ● ● ○ ● ● ○ ● ● ● ● ○ ● ● ● - ● -Tender                                  Invitation to tender ● - - ● - ○ ● ○ ● - ● ● - ● ○ ● -Bid evaluation ● ● ○ ● - ○ ● ○ ● - ○ ● - ● - ● -Negotiation ● - ○ ● - ○ ● ○ ● - ○ ● - ● - ● -Bid approval ● - - ● - ○ ● ● ● -   ● - ● - ● -Post-award                                  Contract management ● ○ - ● ○ ○ ● ○ ● - ● ● ○ ● - ● -Payment oversight ● ○ - ● ○ ○ ● ○ ● ○   ● ○ ● - ● -Project M&E ● - - ● - - ● ○ ● ○   ● - ● ○ ● ○Other roles                                  Policy guidance   ●   ●   ●   ●   ●       ●Capacity building   ●   ○   ●   ○   ●   ●   ●Technical support   ●   ●   ●   ●   ●        PPP promotion   ●   ○   ○       ●   ●   ●PPP investment               ●            Indepencence     Y     Y    N     Y      N Y   Y

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Functions of EE/CIS PPP units  Croatia Czech Rep. Estonia Latvia Poland Slovakia Kazak. Russia

 

Procuring gov’t

Agency for

PPP (MF/MinE

c)

Procuring gov’t

Min. Finance

PPP

Association

PPP

Centrum(MF)

Procuring

gov’t

Public

procureme

nt centr

e

Procuring gov

’t

PPP Association

PPP Taskforce(MF)

Procuring gov

’t

Centrum PPP

Institute

PPP

Procuring gov

’t

Min. Finance

Asociac

e PPP

Procuring

gov’t

Kaz. PPP Cent

er (MinEc/Budget)

Procurin

g gov’

t

PPP Centre of

Vnesheconombank

Benchmark units (Korea,

Germany, S. Africa, UK, Aus.)

Pre-tender                                            Project initiation ● - ● - - ○ ● - ● - - ● - - ● - ○ ● - ● - -/●Assess feasibility/VfM ● - ● ○ - ● ● ● ● - - ● - ○ ● ○ - ● ● ● ● ●/○Budgeting ● - ● ○ - - ● ● ● - - ● - - ● ● - ● ● ● ○ -/●/○Project approval ● ● ● ○ - ○ ● - ● - - ● - ○ ● - - ● ○ ● - ●/○Tender                                            Invitation to tender ● - ● - - ● ● ○ ● - - ● - - ● - - ● - ● ○ -/●/○Bid evaluation ● ● ● - ○ ○ ● ○ ● - - ● - - ● - - ● ● ●   ○Negotiation ● - ● - - ● - ● - - ● - - ● - - ● ○ ● ○ ○Bid approval ● ● ● - - - ● - ● - - ● - - ● - - ● ○ ● - -/●/○Post-award                                            Contract management ● ● ● - ○ ○ ● ● ● - - ● - ○ ● ○ - ● ○ ● ○ ○

Payment oversight ● - ● - - - ● - ● - - ● - - ● ○ - ● - ● ○ ○Project M&E ● ● ● ○ ○ ● ● - ● - - ● - ● ● ○ - ● ● ● ○ -Other roles                                            Policy guidance       ● ● ●       ● ●   ○ ●   ● ●   ●     ●Capacity building   ○   ○ ●       ●     ● ●   ●     ●     ●/○Technical support       ● ○ ●           ●   ● ●       ○ ●PPP promotion   ●   ● ●   ○   ● ●   ● ●   ●   ○     ●/○PPP investment                               ○  Independence   N      Y N   Y   Y N    N  Y     Y   N   Y