International Project Finance: The Public-Private Partnership 3030963896, 9783030963897

Citation preview

Felix I. Lessambo

International Project Finance The Public-Private Partnership

International Project Finance

Felix I. Lessambo

International Project Finance The Public-Private Partnership

Felix I. Lessambo New Britain, CT, USA

ISBN 978-3-030-96389-7 ISBN 978-3-030-96390-3 (eBook) https://doi.org/10.1007/978-3-030-96390-3 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Acknowledgments

Writing a book is always a challenge. However, writing a book on International Project Finance, a more daring intellectual exercise. I would like to thank my astoundingly supportive friends who motivated me all along the project, knowing my dedication to the subject and thought I am more than able to complete this project: Dr. Marsha Gordon, Dr. Linda Sama, Dr. Lavern A. Wright, Dr. Lester Reid, Yanick Gil, and Jerry Izouele. Last but not least, thank you to all the original readers of this book when it was in its infancy. Without your enthusiasm and encouragement, this book may have never been ready.

v

Contents

1 1 3 6 6

1

Introduction to Project Finance 1.1 General 1.2 Characteristics of Project Financing 1.3 Public-Private Partnership Framework 1.3.1 PPP Policy

2

Project Financing and Direct Conventional Financing 2.1 General 2.2 Corporate Finance 2.3 Traditional Procurement 2.4 Project Finance 2.5 Advantages and Disadvantages of Project Finance 2.5.1 Advantages 2.5.2 Disadvantages 2.6 Evolution of Project Finance 2.6.1 The Extractive and Oil Industry 2.6.2 The Natural Resource Industry 2.6.3 The Power Industry & Beyond

11 11 11 12 13 14 14 15 16 16 17 18

3

Sources of Project Funds 3.1 General 3.2 Sources of Funds 3.3 Project Financing Participants 3.4 Public–Private Partnerships 3.5 Structuring Project Finance

19 19 19 26 29 29 vii

viii

CONTENTS

4

Bankability 4.1 General 4.2 Bankability Assessment 4.2.1 Certainty of Revenue Stream 4.2.2 Risk Factors 4.2.2.1 Political Environment 4.2.2.2 Economic Environment 4.2.2.3 Legal System 4.2.2.4 Regulatory Framework 4.2.2.5 Environmental Risk 4.2.2.6 Project Specificity 4.2.2.7 Project Financial Structure 4.2.2.8 Third-Party Risk Allocation 4.2.2.9 Contract Agreement 4.3 Bankability Tradeoff

33 33 34 34 36 36 37 37 37 38 38 39 39 40 40

5

Public Procurement: Laws and Regulations 5.1 General 5.2 Public Procurement Legal Framework 5.3 Principles of Public Procurement 5.3.1 Transparency 5.3.2 Integrity 5.3.3 Efficiency 5.3.4 Fairness 5.3.5 Openness 5.3.6 Competition 5.3.7 Accountability 5.4 Public Procurement Cycle 5.4.1 Competitive Tendering 5.4.2 Pre-qualification of Bidders 5.4.3 Processing and Evaluating Bids 5.4.4 Making Award Recommendations 5.4.5 Negotiating Contracts 5.4.6 Contract Award Letter and Signing the Contract 5.5 Public Procurement Laws in the United States, EU, and China

43 43 44 45 45 46 46 47 47 48 48 48 48 49 49 50 50 50 50

CONTENTS

5.5.1 5.5.2 5.5.3

Public Procurement Laws in the United States Public Procurement Laws in the European Union Public Procurement Laws in China

ix

50 53 55

Assessment of Project’s Viability and Analytical Tools 6.1 General 6.2 The Procurement Process 6.3 The Six Assessment Areas 6.3.1 Project Identification and PPP Screening 6.3.2 Appraisal and Preparation Phase 6.3.3 Structuring and Drafting Phase 6.3.4 Tender Phase 6.3.5 Contract Operational Management 6.3.6 Contract Finalization Management 6.4 The Analytical Tools: Infrastructure Prioritization Framework 6.4.1 Infrastructure Prioritization Framework

57 57 58 58 58 59 59 60 60 61

7

The Identification and Management of Risks 7.1 General 7.2 Identification of Projects: Project Cycle 7.3 Risk Assessment 7.3.1 Risk Identification 7.4 Risk Allocations 7.4.1 The Project Sponsor 7.4.2 The Lenders 7.4.3 The Contractor 7.4.4 The Suppliers 7.4.5 The Customers 7.4.6 The Project Company 7.4.7 The Governments

65 65 65 69 70 77 78 78 78 78 79 79 79

8

The Project Finance Contractual Arrangement 8.1 General 8.2 PPP Types 8.2.1 Build–Operate–Transfer (BOT) 8.2.2 Build–Own–Operate–Transfer (BOOT) 8.2.3 Buy-Build-Operate (BBO)

81 81 81 81 82 83

6

61 61

x

CONTENTS

8.2.4 8.2.5 8.2.6 8.2.7 8.2.8

8.3 8.4

9

Build–Own–Operate (BOO) Build–Own–Operate–Transfer (BOOT) Design–Build Design–Build–Finance Design–Construct–Maintain–Finance (DCMF) 8.2.9 O & M (Operation & Maintenance) 8.2.10 Lease-Purchase 8.2.11 Turnkey Contract Bidding and Award Procedure PPP Contract Clauses 8.4.1 PPP Contracts Under Various Legal Systems 8.4.2 PPP Key Contractual Terms 8.4.2.1 Force Majeure 8.4.2.2 Material Adverse Government Action 8.4.2.3 Change of Law 8.4.2.4 Termination of Contract 8.4.2.5 Governing Law and Dispute Resolution

Alternative Dispute Resolution 9.1 General 9.2 Advantages and Disadvantages of ADR 9.2.1 Benefits of ADR 9.2.2 Disadvantages of ADR 9.3 Forms and Types of ADR 9.3.1 Adjudicative ADR 9.3.2 Evaluative ADR 9.3.3 Facilitative ADR 9.4 International Platforms 9.4.1 The ICSID 9.4.1.1 Functions 9.4.1.2 Composition of Arbitral Tribunal 9.4.1.3 Applicable Rules of Law and Conduct of the Arbitration 9.4.1.4 Arbitration Award 9.4.2 The International Chamber of Commerce

83 83 84 84 85 85 85 85 86 87 87 88 88 94 94 95 98 99 99 100 100 101 102 102 104 105 106 107 107 107 108 108 109

CONTENTS

9.4.2.1 9.4.2.2

9.4.3

9.4.4

9.4.5

9.4.6

ICC Functions Composition of Arbitral Tribunal 9.4.2.3 Applicable Rules of Law and Conduct of the Arbitration 9.4.2.4 Arbitration Award The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) 9.4.3.1 The SCC Functions 9.4.3.2 Composition of Arbitral Tribunal 9.4.3.3 Applicable Rules of Law and Conduct of the Arbitration 9.4.3.4 Arbitration Award The Hong Kong International Arbitration Centre (HKIAC) 9.4.4.1 The HKIAC Missions 9.4.4.2 Composition of Arbitral Tribunal 9.4.4.3 Applicable Rules of Law and Conduct of the Arbitration The Singapore International Arbitration Centre 9.4.5.1 Functions 9.4.5.2 Composition of Arbitral Tribunal 9.4.5.3 Applicable Rules of Law and Conduct of the Arbitration 9.4.5.4 Arbitration Award The Cairo Regional Centre for International Commercial Arbitration 9.4.6.1 Functions 9.4.6.2 Composition of Arbitral Tribunal 9.4.6.3 Applicable Rules of Law and Conduct of the Arbitration 9.4.6.4 Arbitration Award

xi

109 110 111 112 113 114 114 115 116 117 117 117 119 120 120 120 120 122

122 123 123 124 124

xii

CONTENTS

10

Project Finance Governance 10.1 General 10.2 OECD Principles for Public Governance of PPP 10.3 Quality Infrastructure Investment Principles 10.4 PPP Governance Paradigm 10.4.1 Traditional Public Administration 10.4.2 New Public Management 10.4.3 Collaborative Governance 10.4.4 Private Governance Approach

127 127 127 129 131 131 131 132 132

11

International Project Finance and Corruption 11.1 General 11.2 Forms of Corruption 11.3 Fighting Corruption Within World Bank Group-Financed Projects 11.3.1 Effects of Corruption on Projects Finance 11.3.2 Corruption in the Extractive Industries 11.3.3 Example: Extractive Industries Transparency Initiative

133 133 133

12

13

138 139 140 140

Infrastructure Projects Finance 12.1 General 12.2 Substantial Project Financing 12.2.1 Water and Sanitation Project 12.2.1.1 Human Right to Water and Sanitation 12.2.1.2 Water and Sanitation PPP 12.2.2 Transportation and Telecommunications Projects 12.2.2.1 Transportation 12.2.2.2 Telecommunications 12.2.3 Climate and Energy 12.2.3.1 Climate Change 12.2.3.2 Energy Power

143 143 143 143

Public Fiscal Risk Assessment Model 13.1 General 13.2 Understanding the Fiscal Metrics 13.3 PPP Accounting and Reporting 13.3.1 Budgeting

165 165 166 166 167

144 145 149 149 154 158 158 160

CONTENTS

13.4 13.5 14

13.3.2 Accounting 13.3.3 Reporting PPPs in Public Deficit and Debt Assessment of Fiscal Risk Performing the Sensitivity Analysis

Cases Study 14.1 General 14.2 Successful Stories 14.2.1 Breaking New Ground: Lesotho Hospital Public-Private Partnership—A Model for Integrated Health Services Delivery 14.2.1.1 Conclusion 14.2.2 Ukraine: Providing Safe Harbors for Ukraine’s Economic Growth 14.2.3 Senegal—A Road Leads to Economic Opportunities 14.2.4 China (1997): The Greenfield Project to Install Modern Medium-Density Fiberboard Plants 14.3 Unsuccessful PPP 14.3.1 Liberia Education Advancement Programme (LEAP) 14.3.2 The New Paris Courthouse 14.3.3 International Airport of Chinchero—Cuzco

xiii

167 168 168 170 173 173 173

173 182 182 185

186 188 188 191 194

Glossary

199

Bibliography

203

Index

211

Acronyms

AAA AALCO ARRA ASPA BIT BOO BOOT BOT DBFO EC EU FAR FARA FI FIDIC FPASA GPL HKIAC IATA IBRD ICB ICC ICSID IDA IFC IPSAS

American Arbitration Association Asian-African Legal Consultative Organization American Recovery and Reinvestment Act Armed Services Procurement Act of 1949 Bilateral Investment Treaty Build, Own, Operate Build, Own, Operate, Transfer Build, Operate, Transfer Design Build Finance Operate Capital Expenditure European Union Federal Acquisition Regulation Federal Acquisition Reform Act of 1949 Financial Intermediary International Federation of Consulting Engineers Federal Property and Administrative Services Act of 1949 Government Procurement Law (China) Hong Kong International Arbitration Center International Air Transport Association International Bank for Reconstruction and Development International Competitive Bidding International Chamber of Commerce International Center for Settlement of Investment Disputes International Development Association International Finance Corporation International Public Sector Accounting Standard xv

xvi

ACRONYMS

LCIA LIB MIGA NASA NCB NPM OBA OBM OECD OFPP PCG PFRAM PPP PPPLRC PRG RFP SBD SCC SIAC SPV TPA WB WBG WTO

London Court of International Arbitration Limited International Bidding Multilateral Investment Guarantee Agency National Aeronautics and Space Administration National Competitive Bidding New Public Management Output-Based Office of Management and Budget Organization for Economic Cooperation and Development Office of Federal Procurement Policy Partial Credit Guarantee Public Fiscal Risk Assessment Model Public-Private Partnerships Public-Private Partnership Legal Resource Center Partial Risk Guarantee Request for Proposal Standard Bidding Document Stockholm Chamber of Commerce Singapore International Arbitration Center Special Purpose Vehicle Traditional Public Administration World Bank World Bank Group World Trade Organization

List of Figures

Fig. 2.1 Fig. 3.1 Fig. 3.2 Fig. 4.1 Fig. 6.1 Fig. 7.1 Fig. 13.1

PPP versus Traditional Procurement (Source World Bank [2019]) Role of World Bank in PPPs (Source World Bank [2017]) Typical PPP project structure (Source World Bank [2017]) PPIAFF—enabling infrastructure investment (Source World Bank) PPP process cycle (Source World Bank Group [2020]) Identification of project cycle (Source World Bank) GFS—Government Finance Statistics (Source Fact Sheet, Government Finance Statistics [GFS], Statistics Department, IMF [2009]. http://www.imf.org/ext ernal/pubs/ft/gfs/manual/comp.htm)

13 30 31 34 59 66

169

xvii

List of Tables

Table 3.1 Table 4.1 Table 13.1

Infrastructure finance instruments Example of bankability—tradeoff in Sheffield highways PF Risk category

20 41 170

xix

CHAPTER 1

Introduction to Project Finance

1.1

General

The origins of project finance date back to the thirteenth century, when the financing of a mining operation was structured not unlike todays’ methods. In 1299 A.D., the English Crown financed the exploration and the development of the Devon silver mines by repaying the Florentine merchant bank, Frescobaldi, with output from the mines.1 In the seventeenth century, another form of project finance emerged with fund sailing ship voyages with Investors providing financing for trading expeditions on a voyage-by-voyage basis. Upon return, the cargo and ships were liquidated and the proceeds of the voyage split among investors.2 Over centuries, project financing has evolved into primarily a vehicle for assembling a consortium of investors, lenders, and other participants to undertake infrastructure projects that would be too large for individual investors to underwrite. To date, project financing, as an alternative to conventional direct financing, is a well-established technique for large capital-intensive projects. Finnerty defines project finance as

1 John W. Kensinger and John D. Martin (1993): Project Finance: Raising Money the Old-Fashioned Way. In Donald H. Chew, Jr. (Ed.) The New Corporate Finance: Where Theory Meets Practice (p. 326). New York: McGraw-Hill. 2 Kensinger and Martin (1993): Project Finance- Raising Money the Old fashion Way. McGraw-Hill.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_1

1

2

F. I. LESSAMBO

the raising of funds to finance economically separable capital investment projects, where the project cash flow serves as the source of funds to service loans and provide returns on the equity invested in the project.3 The OECD defines project finance as the financing of long-term infrastructure, industrial, extractive, environmental, and other projects/public services (including social, sports, and entertainment PPPs) based upon a limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project (typically, a special purpose entity (SPE) or vehicle (SPV)).4 Project finance helps finance new investment by structuring the financing around the project’s own operating cash flow and assets, without additional sponsor guarantees. Project financing involves nonrecourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. Thus, the technique is able to alleviate investment risk and raise finance at a relatively low cost, to the benefit of sponsor and investor alike.5 Prior to World War I, private entrepreneurs built major infrastructure projects all over the world. During the nineteenth century, ambitious projects such as the Suez Canal and the Trans-Siberian Railway were constructed, financed, and owned by private companies. However, the private sector entrepreneur disappeared after World War I and as colonial powers lost control, new governments financed infrastructure projects through public sector borrowing. The state and the public utility organizations became the main clients in the commissioning of public works, which were then paid for out of general taxation. After World War II, most infrastructure projects in industrialized countries were

3 J.D. Finnerty (2013): Project Financing: Asset-Based Financial Engineering, 3rd edition, New York: Wiley. 4 OECD (2015): Infrastructure Financing Instruments and Incentives (p. 13). https:// www.oecd.org/finance/private-pensions/Infrastructure-Financing-Instruments-and-Incent ives.pdf. 5 IFC (2009): Lessons of Experience No. 7: Project Finance in Developing Countries, Chapter 1-importance of project finance, https://www.ifc.org/wps/wcm/connect/public ations_ext_content/ifc_external_publication_site/publications_listing_page/lessonsofexperi enceno7.

1

INTRODUCTION TO PROJECT FINANCE

3

built under the supervision of the state and were funded from the respective budgetary resources of sovereign borrowings. In 1978, the United States passed the Public Utility Regulatory Act (PURPA) and established a private market for electric power. In so doing, the United States paved the way for the growth of project financing in many other industrial countries. Similarly, recent large-scale privatizations in developing countries aimed at strengthening economic growth and stimulating private sector investment have given further impetus to project finance structuring. In the 1990s as a means of financing projects designed, to help meet the tremendous infrastructure needs existing in both developed and developing countries, project financing almost replaced the traditional financing model that prevailed for centuries. Perhaps the most prolific use of project financing has been in the UK, where something called the “Private Finance Initiative” (PFI) has been used. PFI was started in 1992 and has been managed by the British government as a systematic public-private partnership program.

1.2

Characteristics of Project Financing

• Capital-intensive Project financings are often large-scale projects that require a great amount of debt and equity capital, from hundreds of millions to billions of dollars. A World Bank study in late 1993 found that the average size of project financed infrastructure projects in developing countries was $440 million. • Highly leveraged Project financing transactions are highly leveraged with debt accounting for usually 65–80% of capital in relatively normal cases. • Long-term The tenor for project financings can easily reach 15–20 years.

4

F. I. LESSAMBO

• Non-recourse or limited recourse financing The project company is the borrower. Since these newly formed entities do not have their own credit or operating histories, it is necessary for lenders to focus on the specific project’s cash flows. That is, “the financing is not primarily dependent on the credit support of the sponsors or the value of the physical assets involved.” Thus, it takes an entirely different credit evaluation or investment decision process to determine the potential risks and rewards of a project financing as opposed to a corporate financing. In the former, lenders place a substantial degree of reliance on the performance of the project itself. As a result, they will concern themselves closely with the feasibility of the project and its sensitivity to the impact of potentially adverse factors. Lenders must work with engineers to determine the technical and economic feasibility of the project. From the project sponsor’s perspective, the advantage of project finance is that it represents a source of off-balance sheet financing. • Controlled dividend policy To support a borrower without a credit history in a highly leveraged project with significant debt service obligations, lenders demand receiving cash flows from the project as they are generated. This aspect of project finance recalls the Devon silver mine example, where the merchant bank had complete access to the mine’s output for one year. In more modern major corporate finance parlance, the project has a strictly controlled dividend policy, though there are exceptions because the dividends are subordinated to the loan payments. The project’s income goes to servicing the debt, covering operating expenses, and generating a return on the investors’ equity. This arrangement is usually contractually binding. Thus, the reinvestment decision is removed from management’s hands. • Economies of scale and externalities Projects financed, in infrastructure may lead to natural monopolies such as highways or energy supply (i.e., Inga Project), which exhibit increasing returns to scale and can generate social benefits. Though the direct payoffs to an owner of an infrastructure project may be inadequate for costs to be covered, nonetheless, the indirect externalities can still be beneficial for

1

INTRODUCTION TO PROJECT FINANCE

5

the economy as a whole. Such social benefits are fundamentally difficult to measure.6 • Numerous participants These transactions frequently demand the participation of numerous international participants. It is not rare to find over ten parties playing major roles in implementing the project. The different roles played by participants are described in the section below. • Allocated risk Because many risks are present in such transactions, often the crucial element required to make the project go forward is the proper allocation of risk. This allocation is achieved and codified in the contractual arrangements between the project company and the other participants. The goal of this process is to match risks and corresponding returns to the parties most capable of successfully managing them. For example, fixedprice, turnkey contracts for construction, which typically include severe penalties for delays put the construction, risk on the contractor instead on the project company or lenders. The risks inherent to a typical project financing and their mitigants are discussed in more detail below. • Costly Raising capital through project finance is generally costlier than through typical corporate finance avenues. The greater need for information, monitoring and contractual agreements increase the transaction costs. Furthermore, the highly specific nature of the financial structures also entails higher costs and can reduce the liquidity of the project’s debt. Margins for project financings also often include premiums for country and political risks since so many of the projects are in relatively high risk countries. Alternatively, the cost of political risk insurance is factored into overall costs.

6 OECD (2015): Infrastructure Financing Instruments and Incentives (p. 10). https:// www.oecd.org/finance/private-pensions/Infrastructure-Financing-Instruments-and-Incent ives.pdf.

6

F. I. LESSAMBO

1.3

Public-Private Partnership Framework

There is no single, model PPP framework. A government’s PPP framework typically evolves over time, often in response to specific challenges facing its PPP program. In the early stages of a program, the emphasis may be on enabling PPPs, and creating and promoting PPP opportunities. Once several PPPs have been implemented on an ad hoc basis, concern about the level of fiscal risk in the PPP program may be the impetus for strengthening the PPP framework. Often the initial phase of this iterative process involves introducing PPP-specific institutions, rules, and procedures to ensure PPP projects are subject to similar discipline as public investment projects. 1.3.1

PPP Policy

The first step for any government in establishing a PPP framework is to articulate its PPP policy. PPP policy is used in different ways in different countries. PPP policy is meant to explain how to mean the government intent to use PPPs, the course of action, and the guiding principles for that course of action. A PPP policy would typically include:(i) PPP rationale/program objectives, (ii) PPP program scope, and (iii) implementing principles and governance arrangements. • PPP Rationale There are various rationales for governments to adopt PPP as a method for the procurement of public services. Enhancing private sector involvement in economic development seems to be the main rationale for PPP. Other rationales include: – PPP enables the public sector to reduce its borrowing figure and the projects will be financed using private sector capital. – PPP provides efficient use of resources for delivering public services. – PPP allows the public sector to enjoy value for money in the longterm, as the private sector is not only providing the financing but also operating the PPP facilities for the benefit of the public. – PPP enables the public sector to provide services at a lower price.

1

INTRODUCTION TO PROJECT FINANCE

7

• PPP Scope The scope of the PPP framework indicates the types of projects for which the framework applies. As such, the scope is generally defined by jurisdiction, sector, size, and contract type. The scope of the PPP has to be established during the process of strategic planning. The scope of the public-private partnership must be considered in terms of geographical area and service requirements. However, the regulatory framework is another aspect through which the parameters of the partnership must be defined. In terms of geographical area, the scope needs to be defined with regard to both the nature of the project (e.g., if the service to be provided is water supply, waste management, and so on) and the objectives of the decision-maker. Projects often deliver improved value for money if the scope of the contract is increased to provide greater possibilities for innovation and economies of scale. However, other projects may be sufficiently large and/or complex to the degree that there exist a number of sub-options to the PPP. These options may relate to the separation of a business by function or geographical area. For example, if the government is considering the use of a PPP to provide integrated waste management services in a particular region, it could use a number of areabased contracts or separate PPP contracts for waste collection and waste treatment/disposal. Where such sub-options exist, the costs and benefits of each sub-option need to be appraised in monetary and non-monetary terms and the preferred option identified in the PPP assessment. • PPP Implementation Principles The implementation of public-private partnerships can be challenging in developing economies. The shortage of government financial resources, public sector inefficiencies, uncertainties in contractual environment, public and private partners’ capacity deficiencies, weak political willingness, and administrative bottlenecks are hurdles to a proper implementation of PPP. Efficient PPP requires: – Public authority and private companies must act as partners. To achieve this close relationship, both parties must build trust based on each partner’s credibility,

8

F. I. LESSAMBO

– Engaging all stakeholders that are either directly involved in the PPP project or directly or indirectly affected in the short and/or long run, – Ensuring clear accountability mechanisms; – Ensuring transparency, including in public procurement frameworks and contracts; – Ensuring participation, particularly of local communities in decisions affecting their communities; – Ensuring effective management, accounting, and budgeting for contingent liabilities, and debt sustainability; – Alignment with national priorities and relevant principles of effective development • PPP Governance Arrangements The OECD has set forth the following principles for the governance of PPP7 : – The political leadership should ensure public awareness of the relative costs, benefits, and risks of public-private partnerships and conventional procurement. Popular understanding of public-private partnerships requires active consultation and engagement with stakeholders as well as involving end-users in defining the project and subsequently in monitoring service quality. – Key institutional roles and responsibilities should be maintained. This requires that procuring authorities, Public-Private Partnerships Units, the Central Budget Authority, the Supreme Audit Institution, and sector regulators, be entrusted with clear mandates and sufficient resources to ensure a prudent procurement process and clear lines of accountability. – Ensure that all significant regulation affecting the operation of public-private partnerships is clear, transparent, and enforced. Red tape should be minimized and new and existing regulations should be carefully evaluated. 7 OECD (2012): Recommendation of the Council on Principles for Public Governance of Public–Private Partnerships (pp. 1–14). https://legalinstruments.oecd.org/public/doc/ 275/275.en.pdf.

1

INTRODUCTION TO PROJECT FINANCE

9

– All investment projects should be prioritized at senior political level. As there are many competing investment priorities, it is the responsibility of the government to define and pursue strategic goals. The decision to invest should be based on a whole of government perspective and be separate from how to procure and finance the project. There should be no institutional, procedural, or accounting bias either in favor of or against public-private partnerships. – Carefully investigate which investment method is likely to yield most value for money. Key risk factors and characteristics of specific projects should be evaluated by conducting a procurement option pre-test. A procurement option pre-test should enable the government to decide on whether it is prudent to investigate a PublicPrivate Partnerships option further. – Transfer the risks to those that manage them best. Risk must be defined, identified and measured, and carried by the party for whom it costs the least to prevent the risk from realizing or for whom realized risk costs the least. – The procuring authorities should be prepared for the operational phase of the public-private partnerships. Securing value for money requires vigilance and effort of the same intensity as that necessary during the pre-operational phase. Particular care should be taken when switching to the operational phase of the public-private partnerships, as the actors on the public side are liable to change. – Value for money should be maintained when renegotiating. Only if conditions change due to discretionary public policy actions should the government consider compensating the private sector. Any re-negotiation should be made transparently and subject to the ordinary procedures of public-private partnership approval. Clear, predictable, and transparent rules for dispute resolution should be in place. – Government should ensure there is sufficient competition in the market by a competitive tender process and by possibly structuring the Public-Private Partnerships program so that there is an ongoing functional market. Where market operators are few, governments should ensure a level playing field in the tendering process so that non-incumbent operators can enter the market. – In line with the government’s fiscal policy, the Central Budget Authority should ensure that the project is affordable and the overall investment envelope is sustainable.

10

F. I. LESSAMBO

– The project should be treated transparently in the budget process. The budget documentation should disclose all costs and contingent liabilities. Special care should be taken to ensure that budget transparency of Public-Private Partnerships covers the whole public sector. – Government should guard against waste and corruption by ensuring the integrity of the procurement process. The necessary procurement skills and powers should be made available to the relevant authorities.

CHAPTER 2

Project Financing and Direct Conventional Financing

2.1

General

Project finance is the process of financing a specific economic unit that the sponsors create, in which creditors share much of the venture’s business risk and funding is obtained strictly for the project itself.1 Project finance is generally structured to maximize tax benefit and to assure that all available tax benefits are used by the sponsors or transferred to the extent possible to another party through a partnership, lease, or vehicle.2 Project finance differs from traditional finance where the primary source of repayment for investors and creditors is the sponsoring company, backed by its entire balance sheet, not the project alone.

2.2

Corporate Finance

Corporate finance deals with the financing and investment decisions set by the corporations’ management in order to maximize the value of the

1 João M. Pinto (2017): What Is Project Finance. Investment Management and Financial Innovations, Vol. 14, Issue 1, 200. 2 Katharine C. Baragona (2004): Project Finance. Global Business & Development Law Journal, Vol. 18, Issue 1, 141.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_2

11

12

F. I. LESSAMBO

shareholders’ wealth.3 In traditional corporate finance, the primary source of repayment for investors and creditors is the sponsoring company, backed by its entire balance sheet, not the project alone. Although creditors will usually still seek to assure themselves of economic viability of the project being financed so that it is not a drain on the corporate sponsor’s existing pool of assets, an important influence on their credit decision is the overall strength of the sponsors balance sheet, as well as their business reputation. If the project fails, lenders do not necessarily suffer, as long as the company owning the project remains financially viable. Corporate finance is often used for shorter, less capital-intensive projects that do not warrant outside financing. The company borrows funds to construct a new facility and guarantees to repay the lenders from its available operating income and its base of assets. However, private companies avoid this option, as it strains their balance sheets and capacity, and limits their potential participation in future projects. Project financing is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. Project finance is usually for large, complex, and expensive installations such as power plants, chemical processing plants, mines, transportation infrastructure, environment, media, and telecoms.4

2.3

Traditional Procurement

Traditional procurement can be defined as a comprehensive process by which designers, constructors, and various consultants provide services for design and construction to deliver a complete project to the client.5 In traditional public procurement, the government manages a set of independent short-term contracts: with banks and investors for procuring project finance; with construction firms for developing the asset; and with operating firms for operating the asset. The government is ultimately responsible for designing, financing, constructing, operating, and 3 Stefan Cristian Gherghina (2021): Corporate Finance. Journal of Risk & Financial

Management, MDPI. 4 Basel Committee on Banking Supervision (2001): Working Paper on the Internal Ratings-Based Approach to Specialised Lending Exposures (p. 2), BIS. 5 Molenaar, K., Sobin, N., Gransberg, D., Tamera McCuen, T.L., Sinem Korkmaz, S., and Horman, M. (2009): Sustainable, High Performance Projects and Project Delivery Methods. The Charles Pankow Foundation and The Design-Build Institute of America.

2

PROJECT FINANCING AND DIRECT CONVENTIONAL FINANCING

13

Fig. 2.1 PPP versus Traditional Procurement (Source World Bank [2019])

managing the asset, although it hires private companies to do these on its behalf. In a PPP, the government signs one long-term contract with the private partner (often established as a special purpose vehicle, SPV). The SPV is responsible for providing an infrastructure asset and services in line with the contract specifications agreed to with the government. Then, the private partner manages a set of contracts with banks and construction and operating companies; the government ensures that the asset and services provided are in line with the performance specifications agreed to in the PPP contract (Fig. 2.1).

2.4

Project Finance

In corporate finance, the sponsoring company typically procures capital by demonstrating to lenders that it has sufficient assets on its balance sheets, to use as collateral in the case of default. The lender will be able to foreclose on the sponsor company’s assets, sell them, and use the proceeds to recover its investment. However, in project finance, the repayment of debt is not based on the assets reflected on the sponsoring company’s balance sheet, rather on the revenues that the project will generate once it is completed. Project finance greatly minimizes risk to the sponsoring company, as compared to traditional corporate finance, because the lender relies only on the project revenue to repay the loan and cannot

14

F. I. LESSAMBO

pursue the sponsoring company’s assets in the case of default. In addition, transferring responsibility to the private sector for mobilizing finance for infrastructure investment is one of the major differences between PPPs and traditional procurement. Where this is the case, the private party to the PPP is responsible for identifying investors and developing the finance structure for the project. In project finance, a team or consortium of private firms establishes a new project company to build own and operate a separate infrastructure project. The new project company to build own and operate a separate infrastructure project. The new project company is capitalized with equity contributions from each of the sponsors. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project.6 The project is not reflected in the sponsors’ balance sheets.

2.5

Advantages and Disadvantages of Project Finance 2.5.1

Advantages

Project finance offers a means for investors, creditors, and other unrelated parties to come together to share the costs, risks, and benefits of new investment in an economically efficient and fair manner. Project finance can provide a strong and transparent structure for projects, and through careful attention to potential risks, it can help increase new investment and improve economic growth. Project finance reduces the cost of capital for the project and allows a higher amount of debt to be used, which generates bigger tax savings. Project finance transactions allow the reduction of funding costs when compared with traditional sources of funds. The rates charged on project finance loans are often lower than the rates charged on non-project finance loans. Finally, yet importantly, because the debt is non-recourse to the sponsors, the project leaders have to claim against the other assets of the

6 Benjamin C. Esty (2003): The Economic Motivations for Using Project Finance (p. 10), HBS. https://faculty.fuqua.duke.edu/~charvey/Teaching/BA456_2006/Esty_F oreign_banks.pdf.

2

PROJECT FINANCING AND DIRECT CONVENTIONAL FINANCING

15

sponsors. That is, sponsors do not expose themselves to the risk of financial distress in the event the project has trouble. Although creditors’ security will include the assets being financed, lenders rely on the operating cash flow generated from those assets for repayment. Depending upon the structure of project financing, the project sponsors may not be required to report any of the project debt on its balance sheet because such debt is non-recourse or of limited recourse to the sponsor. 2.5.2

Disadvantages

A project finance project needs to be carefully structured to ensure that all the parties’ obligations are negotiated and are contractually binding. Financial and legal advisers and other experts may have to spend considerable time and effort on this structuring and on a detailed appraisal of the project. These steps will add to the cost of setting up the project and may delay its implementation. Moreover, the sharing of risks and benefits brings unrelated parties into a close and long relationship. A sponsor must consider the implications of its actions on the other parties associated with the project if the relationship is to remain harmonious over the long-term. Since project finance structuring hinges on the strength of the project itself, the technical, financial, environmental, and economic viability of the project is a paramount concern. Anything that could weaken the project is also likely to weaken the financial returns of investors and creditors. Therefore, an essential step of the procedure is to identify and analyze the project’s risks, then to allocate and mitigate them. Such risks are many and varied. Some may relate to a specific subsector, others to the country and policy environment, and still others to factors that are more general. Last but not least, a complex financing mechanism can require significant lead times. Project finance is expensive to arrange as it involves establishing the project company, forming a consortium of equity-holders and lenders, gaining agreement to a complex set of contractual arrangements between the parties involved, and arranging costly documentation.

16

F. I. LESSAMBO

2.6

Evolution of Project Finance

Project finance has evolved from its beginnings in the natural resources industry in the 1970s, to the US power industry in the 1980s, to a much wider range of industry applications and geographic locations in the 1990s and 2000s, and most recently to infrastructure finance in the 2010s.7 2.6.1

The Extractive and Oil Industry

Developing countries have long used grants and concessional finance (from the World Bank and others) to develop infrastructure. The excessive cost of natural resource exploitation led some of them to consider PPP as an alternative to ordinary financing. More and more developing countries are entering into Resource Finance Infrastructure agreements with lenders. Under an RFI arrangement, a loan for current infrastructure construction is securitized against the net present value of a future revenue stream from oil or mineral extraction, adjusted for risk. The revenues for paying down the loan, which are disbursed directly from the oil or mining company to the financing institution, often begin a decade or more later, after initial capital investments for the extractive project have been recovered. Angola postwar reconstruction was financed mainly through RFI deals. Later on, the RFI mode of contracting was used in several other African countries—predominantly by Chinese banks, including China Development Bank, but recently also by Korea Exim Bank for the Musoshi mine project in the Democratic Republic of Congo (DRC). The infrastructure component of an RFI transaction can be structured as a government procurement project, with 100% government ownership, or in any number of other ways consistent with a publicprivate partnership (PPP) transaction. Thus, the success of a specific RFI transaction depends on proper structuring and implementation. Whereas RFI has stood as a model for a while, developing countries have recently embraced the PPP as a more appropriate financing model for their development. The PPP model leaves more room for government involvement both initially and over time. This model is frequently used where a project

7 Jakob Müllner (2017): International Project Finance: Review and Implications for International Finance and International Business. Management Review Quarterly, Vol. 67, 97–133.

2

PROJECT FINANCING AND DIRECT CONVENTIONAL FINANCING

17

finance model transaction has been considered, but will not work because of the need to fill a gap in project risks that only the government can fill. Because of the many ways it can be applied, it is a very flexible model. From natural resource exploitation, many developing countries have extended the recourse to PPP in other areas. 2.6.2

The Natural Resource Industry

Developing countries are entering into PPP arrangements as a means to manage and preserve their natural resources such as water and forests. For instance, On September 5, 2016, the Eranove Group signed an agreement protocol with Côte d’Ivoire for the financing, design, construction, operation, and maintenance of a thermal combined cycle power plant of 390 MW.8 As lead arranger and overall coordinator, the International Finance Corporation (IFC) negotiated all the debt financing which, besides IFC, is provided by the African Development Bank (AfDB), the Netherlands Development Finance Corporation (FMO), the German Cooperation Bank (DEG), the Emerging Africa Infrastructure Fund (EAIF), and the OPEC Fund for International Development (OPEC Fund). In 2018, the IFC arranged a Euro 303 million financing package to Eranove, a French industrial group that manages several water and electricity assets, for the construction and operation of a new 390 MW natural gas plant in Ivory9 Coast. Several financing agreements have been signed between the project developer, the pan-African group Eranove; the International Finance Corporation (IFC), the World Bank Group’s private sector financing arm; and the government of Ivory Coast. The facility, which will be built as part of a public-private partnership (PPP), will inject 390 MW into the Ivorian national power grid. The project will result in the construction of a combined cycle power plant, i.e., producing electricity through two turbines. With such a process combining steam and natural gas, CO2 emissions are divided by two compared to an ordinary thermal power plant. The new power plant will support public policies aimed at facilitating access to electricity in Ivory Coast and meeting national and regional electricity needs generated by strong economic

8 https://www.eranove.com/en/africa/atinkou/. 9 IFC (2016): Eranove, Côte d’Ivoire. https://disclosures.ifc.org/#/projectDetail/SII/

39096.

18

F. I. LESSAMBO

growth. The group specializing in the production of electricity and drinking water will operate the Atinkou power plant for a period of 20 years, in accordance with the agreement signed with the Ivorian government in December 2018. Eranove considers that its plant will be able to supply around 1 million households in Ivory Coast. Up to 2,500 people will be employed during the construction phase of the Atinkou combined cycle power plant. 2.6.3

The Power Industry & Beyond

Many countries have adapted energy policies and laws to encourage investment in renewable energy (RE) sources. Renewable energy projects rely on a number of legal contracts: the power purchase agreement (PPA), which governs the sale and purchase of power, and other contracts such as land use agreements, supply agreements, installation agreements, O&M agreements, and implementation agreements. Many countries both developed and developing are funding their renewable energy projects through PPP financing. In the Anglo-American world, project finance came to prominence in the mid-twentieth century in the United States where it was used to finance mining and rail companies. In the 1980s, project finance evolved or expanded its scope to finance the construction of natural gas projects and power plants in Europe and in North America following the 1978 Public Utility Regulatory Policy Act.10 Since then, a bulk of project finance projects involve the power or energy sector. The power sector is a fundamental building block for economic advancement in any country. Power is a critical input for the successful growth and functioning of a country’s economy, across all its sectors, and thus for job creation. Electricity demand is closely correlated with GDP growth and other socio-political advancements. As such, power investments demonstrate a clear and quantifiable economic return upon completion and commissioning of the financed power projects, with a resultant multiplier effect on the broader economy.11 These transactions require substantial and long-term investments which have long repayment periods. They often require highly technical and specialized knowledge and expertise to prepare and implement.

10 https://www.publicpower.org/policy/public-utility-regulatory-policies-act-1978. 11 Asghar, Zahid (2018): Energy—GDP Relationship: A Causal Analysis for the Five

Countries of South Asia. Applied Econometrics and International Development, Vol. 8, Issue 1, 167–180.

CHAPTER 3

Sources of Project Funds

3.1

General

The financing of PPP combines equity, loans, and government grants. The initial equity investors, who develop the PPP proposal, are typically called project shareholders. Typical equity investors include project developers, engineering or construction companies, infrastructure management companies, and private equity funds. Lenders to PPP projects in developing countries include commercial banks, multilateral and bilateral development banks and finance institutions, and institutional investors such as pension funds and insurance companies. Projects’ shareholders often have an incentive to finance a PPP with a high ratio of debt to equity—that is, to achieve high advantage. Conversely, governments often provide more protection to debt investors than to equity investors, providing a further incentive for high leverage.

3.2

Sources of Funds

Project finance comes from a variety of sources: equity, debt, and government grants. Project sponsors, government, third-party private investors, and internally generated cash provide equity. Equity providers require a rate of return target, which is higher than the interest rate of debt financing. This is to compensate the higher risks taken by equity investors as they have junior claim to income and assets of the project. Lenders © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_3

19

20

F. I. LESSAMBO

of debt capital have senior claim on income and assets of the project. The other sources of project finance include grants from various sources, supplier’s credit, etc. Government grants can be made available to make PPP projects commercially viable, to reduce the financial risks of private investors, and to achieve socially desirable objectives such as to induce economic growth in lagging or disadvantaged areas. Many governments have established formal mechanisms for the award of grants to PPP projects. Where grants are available, depending on government policy they may cover 10–40% of the total project investment (Table 3.1). Generally, debt finance makes up the major share of investment needs (usually about 70–90%) in PPP projects. The common forms of debt are. • Syndicated Commercial Loans

Table 3.1 Infrastructure finance instruments

Source OECD analysis drawing on OECD (2015b)

3

SOURCES OF PROJECT FUNDS

21

Syndicated commercial loans are funds lent by commercial banks and other financial institutions and are usually the main source of debt financing. Put differently, a commercial loan is a debt-based funding arrangement between a business and a financial institution such as a bank. It is typically used to fund major capital expenditures and/or cover operational costs that the company may otherwise be unable to afford. In general, banks provide or finance project finance transactions. Bank loans provide several advantages over bonds or other structured instruments as (i) banks provide an important monitoring role; (ii) projects finance need gradual disbursement of funds, and bank lending has the required flexibility; and (iii) projects finance are relatively more likely to require debt restructurings in unforeseen events, and banks can quickly negotiate restructurings with each other.1 In the banking model of infrastructure finance, banks underwrite loans for infrastructure projects, hold them on their books, and service the loan through maturity. Increasingly, loans are being originated by a lead underwriting bank, or a consortium of banks, and syndicated among financial institutions and investors. The lead underwriting bank collects fees for arranging the deal, or fees are shared depending on level of participation in the syndicate.2 However, as a result of the constraints imposed by Basel III, the appetite of banks to participate in the longer-term tenors required by project financing has lessened. The limited availability of long-term commercial funding for projects has slowed the momentum of the project finance sector in recent years. With a diminished group of banks willing to commit to the longer-term financings demanded by sponsors required by the economics of the project, appetite for tenors in excess of 15 years has been tepid since the outbreak of the financial crisis in 2008 and the introduction of more onerous Basel III requirements. Bank loans have the lowest level of risk on the project finance debt risk scale: They are senior debt instruments and are usually secured to a sufficient extent by collateral. The amount of the loan is

1 Esty, B., and Megginson, W. (2003): Creditor Rights, Enforcement, and Debt Ownership Structure—Evidence from the Global Syndicated Loan Market. Journal of Financial and Quantitative Analysis, 689–721. 2 Weber, Barbara, and Alfen HH (2010): Wilhelm: Infrastructure as an Asset Class: Investment Strategies Project Finance and PPP, Wiley Finance Series.

22

F. I. LESSAMBO

related to the liquidation value of the asset and in its ability to generate cash flow to service debt payments. • Bridge Finance Bridge financing is a short-term financing arrangement (e.g., for the construction period or for an initial period) which is generally used until a long-term financing arrangement can be implemented. In other words, bridge financing is a form of temporary financing intended to cover a company’s short-term costs until the moment when regular long-term financing is secured. Thus, it is named as bridge financing since it is like a bridge that connects a company to debt capital through short-term borrowings. In most cases, bridge financing sources are from investment banks and venture capital institutions in the form of either debts or ownership contributions. Bridge loans have higher interest rates than permanent loans, typically LIBOR plus 3–4%. Because they are intended for the short term, the loan term is only six months, though some lenders are willing to extend this term longer for a fee equaling one or two “points.” There are no prepayment fees. Mostly, there are two types of bridge finance: (i) Debt Bridge Financing One option with bridge financing is for a company to take out a shortterm, high-interest loan, known as a bridge loan. Companies who seek bridge financing through a bridge loan need to be careful, however, because the interest rates are sometimes so high that it can cause further financial struggles. (ii) Equity Bridge Financing Sometimes companies do not want to incur debt with high interest. If this is the case, they can seek out venture capital firms to provide a bridge financing round and thus provide the company with capital until it can raise a larger round of equity financing (if desired). In so doing, the company offers the venture capital firm equity ownership in exchange for

3

SOURCES OF PROJECT FUNDS

23

several months to a year’s worth of financing. The venture capital firm will take such a deal, if they believe the company will ultimately become profitable, which will see its stake in the company increase in value. • Bonds and Other Debt Instruments Bonds are long-term interest-bearing debt instruments purchased either through the capital markets or through private placement (which means direct sale to the purchaser, generally an institutional investor). Bonds can be structured to have long-term maturities that extend over the life of long-term assets. Bonds financing can be obtained through either private-placement debt or public markets through registered corporate and government bonds. • Stapled Financing Stapled financing is a pre-arranged financing package for the project, developed by the government, and provided to bidders during the tender process. The winning bidder has the option, but not the obligation, to use the financial package for the project. Stapled financing is common in Mergers and Acquisition deals and has been used for infrastructure projects. • Equity Finance Equity finance refers to all financial resources that are provided to firms in return for an ownership interest. Investors may sell their shares in the firm/project, if a market exists, or they may get a share of the proceeds if the asset is sold. They are crucial in the financing of infrastructure investments as the providers of risk capital to initiate a project or refinancing. Listed shares are indirect participation rights in corporations, projects, and other entities; investors hold minority positions with limited ability to influence management. Unlisted shares often confer direct ownership,

24

F. I. LESSAMBO

control, and operation of the corporate entity or project asset due to concentrated shareholder positions and closer ties to managers.3 • Mezzanine Loan Mezzanine debt is a type of privately placed subordinate loan or bond unique to project finance or private equity investments, often with equity participation. Mezzanine debt can be interest-bearing instruments that include a share in the value growth of the project or interest-only instruments. Payment in kind (where debt payments would be delivered through equity offerings) features are increasingly being used. Mezzanine loans are subordinate tranches of debt often used in project finance to provide credit enhancement for senior debt tranches. Mezzanine is higher risk and pays higher yields than senior issues and often includes equity participation.4 • Hybrid Instruments Hybrid instruments deserve to be mentioned as a distinct finance instrument—because despite the fact that they are essentially debt instruments, they often possess both equity- and debt-like characteristics. Subordinated loans and bonds are the chief category in this section and can be part of a corporate finance structure or project finance. • Pension Funds Pension funds have long-term liabilities on their balance sheets in the form of future pension payments. To avoid a mismatch of maturities between the two sides of their balance sheets, pension funds need to invest in long-term assets. Thus, the long-term nature of infrastructure investments suits the investment profile of pension funds, and their returns, 3 OECD (2015): Infrastructure Financing Instruments and Incentives, p. 10, https:// www.oecd.org/finance/private-pensions/Infrastructure-Financing-Instruments-and-Incent ives.pdf. 4 OECD (2015): Infrastructure Financing Instruments and Incentives, p. 1, https:// www.oecd.org/finance/private-pensions/Infrastructure-Financing-Instruments-and-Incent ives.pdf.

3

SOURCES OF PROJECT FUNDS

25

which tend to keep up with inflation, help hedge pension funds’ liabilities that are also inflation-prone. Additionally, pension funds are interested in diversifying their portfolios to lower the volatility of their returns. Infrastructure investments can be attractive when the correlation between their anticipated returns and those of traditional assets is low. • Government Grants Governments can provide financial support to the private partner in the PPP in various forms: guarantees, subsidies, equity injection, tax amnesty, or a contribution in kind. • Under a debt guarantee, the government guarantees the repayment of part or all of the debt of the SPV to finance the investment under the PPP. • Subsidies can be provided as lump-sum payments, or they may be linked to the volume produced and sold by the private partner: – The lump-sum subsidy is recorded as a one-off payment from the government. It is an outflow from and cost for the government and an inflow or revenue to the private partner. – The volume-based subsidy is calculated from a subsidy amount per unit and the volume consumed. These payments constitute a periodic outflow from and cost for the government, and a periodic inflow or revenue to the private partner. • An equity injection is a contribution from the government to finance the project company, which may require a cash outflow. • The government might grant the private partner a tax amnesty, exempting it from certain taxes, for example, to reduce the private partner’s cost of business or to reduce service cost for users. • Governments often provide contributions in kind to the project company. These include the transfer of existing assets or the right to use government assets temporarily, for example, the right to use the ground around a public infrastructure, such as a road, for commercial exploitation.

26

F. I. LESSAMBO

3.3

Project Financing Participants

• Project Sponsors or Owners The sponsors are the generally the project owners with an equity stake in the project. It is possible for a single company or for a consortium to sponsor a project. Because project financings use the project company as the financing vehicle and raise non-recourse debt, the project sponsors do not put their corporate balance sheets directly at risk in these often high-risk projects. However, some project sponsors incur indirect risk by financing their equity or debt contributions through their corporate balance sheets. To further buffer corporate liability, many of the multinational sponsors establish local subsidiaries as the project’s investment vehicle. • Project Company The project company is a single-purpose entity created solely for executing the project. Controlled by project sponsors, it is the center of the project through its contractual arrangements with operators, contractors, suppliers, and customers. Typically, the only source of income for the project company is the tariff or throughput charge from the project. The amount of the tariff or charge is generally extensively detailed in the off-take agreement. Thus, this agreement is the project company’s sole means of servicing its debt. Often the project company is the project sponsors’ financing vehicle for the project (i.e., it is the borrower for the project). The creation of the project company and its role as borrower represent the limited recourse characteristic of project finance. However, this does not have to be the case. It is possible for the project sponsors to borrow funds independently based on their own balance sheets or rights to the project. When a project is located in a high-tax country, and the project company in a lower-tax country, it may be beneficial for the sponsor to locate the debt in the high-tax country. The company maximizes its interest tax shields in so doing. • Contractor The contractor is responsible for constructing the project to the technical specifications outlined in the contract with the project company.

3

SOURCES OF PROJECT FUNDS

27

These primary contractors will then sub-contract with local firms for components of the construction. Contractors also own stakes in projects. • Operator Operators are responsible for maintaining the quality of the project’s assets and operating the power plant, pipeline, etc. at maximum efficiency. It is not uncommon for operators to also hold an equity stake in a project. Depending on the technological sophistication required to run the project, the operator might be a multinational, a local company, or a joint venture. • Supplier The cost of the input usually drives the project’s competitiveness. The supplier provides the critical input to the project. If only a few firms dominate the supply of a critical factor of production relative to the number of potential customers, a project, absent mitigating factors, could be at higher risk because the supplier is in a better position to dictate terms of sale. Projects that rely on fixed and dedicated transportation systems, such as pipelines or rail lines, to deliver necessary inputs, may have few substitutes available. • Customer The customer is the party who is willing to purchase the project’s output, whether the output be a product (electrical power, extracted minerals, etc.) or a service (electrical power transmission or pipeline distribution). The goal for the project company is to engage customers who are willing to sign long-term, offtake agreements. • Multilateral Agencies The World Bank, International Finance Corporation, and regional development banks often act as lenders or co-financiers to important infrastructure projects in developing countries. In addition, these institutions often play a facilitating role for projects by implementing programs to

28

F. I. LESSAMBO

improve the regulatory frameworks for broader participation by foreign companies and the local private sector. In many cases, the multilateral agencies are able to provide financing on concessional terms. The additional benefit they bring to projects is further assurance to lenders that the local government and state companies will not interfere detrimentally with the project. • Export Credit Agency Because infrastructure projects in developing countries so often require imported equipment from the developed countries, contractors to support these projects routinely approach the export credit agencies (ECAs). Generally, the ECA will provide a loan guarantee or funding to projects for an amount that does not exceed the value of exports that the project will generate for the ECA’s home country. ECA participation has increased rapidly. In just four years, ECA involvement in project finance has risen from practically zero to an estimated $10 billion a year. Again, ECA participation can bolster a project’s status and give it a certain amount of de facto political insurance. • Legal Advisers Legal advisers play a role in assembling project finance transactions given the number of important contracts and the need for multi-party negotiations. Legal advisers also play a role in interpreting the regulatory frameworks in the local countries. From the outset, the project sponsors might work with a financial adviser, e.g., commercial bank, investment bank, or independent consultant, to structure the financing for the project. • The Trustee The trustee is typically responsible for monitoring the project’s progress and adherence to schedules and specifications, usually working with the independent engineer to coordinate fund disbursements against a project’s actual achievement.

3

SOURCES OF PROJECT FUNDS

29

• Insurance Companies The risk transfer contracts that we described earlier have the effect of transferring many of the project risks from the project sponsor to the other parties to the project. Further risks are transferred by a variety of insurance contracts, such as completion insurance, insurance against force majeure, and insurance against political risks.

3.4

Public–Private Partnerships

A public–private partnership is a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility and remuneration is linked to performance.5 Well-structured PPPs bring private capital for investment, private sector expertise, and commercial management incentives needed for enhancing service provision to users.6 Most PPP projects present a contractual term between 20 and 30 years; others have shorter terms; and a few last longer than 30 years. PPPs have been used in a wide range of sectors to procure different kinds of assets and services (Fig. 3.1).

3.5

Structuring Project Finance

The project finance structure underlying PPP projects is a response to the agency problem that arises from the differing and conflicting interests of various parties involved in an infrastructure project. In the case of PPP project finance structure, a complex series of contracts and financing arrangements distributes the different risks presented by a project among the various parties involved in the project, including sponsors and investors, lenders, contractors, suppliers, and the government. In many cases, the project company retains ownership of the project assets. Thus, project finance must be carefully structured and provide comfort to its financiers that it is economically, technically, and environmentally feasible, and that it is capable of servicing debt and generating financial returns commensurate with its risk profile. The private party to most

5 World Bank (2017): Public–Private Partnerships, Reference Guide, p. 14, World Bank Document, 122,038-WP-PUBLI-PPPReferenceGuideVersion.pdf. 6 Idem.

30

F. I. LESSAMBO

Fig. 3.1 Role of World Bank in PPPs (Source World Bank [2017])

PPP contracts is a specific project company formed for that purpose— often called a Special Purpose Vehicle (SPV). This project company raises finance through a combination of equity—provided by the project company’s shareholders—and debt provided by banks, or through bonds or other financial instruments. The finance structure is the combination of equity and debt, and contractual relationships between the equity holders and lenders. When a PPP involves private finance, the investor typically has primary responsibility for developing the finance structure of the project. There below are commonly found characteristics to most project financings:

3

SOURCES OF PROJECT FUNDS

31

Fig. 3.2 Typical PPP project structure (Source World Bank [2017])

• the project is developed through a separate, and usually singlepurpose, financial and legal entity; • the debt of the project company is often completely separate (at least for balance sheet purposes) from the sponsors’ direct obligations; • the sponsors seek to maximize the debt to equity leverage of the project, and the amount of debt is linked directly to the cash flow potential, and to a lesser extent the liquidation value, of the project and its assets; • the sponsors’ guarantees (if any) to lenders generally do not cover all the risks involved in the project; • project assets (including contracts with third parties) and revenues are generally pledged as security for the lenders; and • firm contractual commitments of various third parties (such as construction contractors, fuel, and other feedstock suppliers, purchasers of the project’s output, and government authorities) represent significant components of the credit support for the project (Fig. 3.2).

CHAPTER 4

Bankability

4.1

General

Governments willing to enter into PPPs have to prepare robust projects that ensure key project risks are transferred to the private sector party but not fully at the expense of undermining the interest of financiers and/or burdening users or government. To that end, they must prepare bankable PPPs. There is no uniform definition of the bankability of a project. Commonly, bankability is the willingness of well-established financial institutions to finance a project or proposal at a reasonable interest rate. That is, bankability is a state where a project is sufficiently attractive to raise private finance.1 It is essentially a function of risk and reputation. To some, bankability relates to the ability of a project to yield optimal returns. A PPP project would be considered bankable if lenders are willing to finance it or the sponsor can convince the lenders to support it. From the assessment perspective, a bankable project involves a solid financial, economic, and technical plan, with a risk allocation scheme appropriate for the nature of the project, the risks involved, and the interests of the lenders, implying an acceptable credit risk (Fig. 4.1).

1 World Bank (2017): Bankability in Highway PPP Projects, PPIAF, https://ppiaf.org/ documents/3181/download.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_4

33

34

F. I. LESSAMBO

Fig. 4.1 PPIAFF—enabling infrastructure investment (Source World Bank)

4.2

Bankability Assessment

The aim of the bankability assessment is to assist lenders in the financial evaluation and ranking of PPP projects. Furthermore, it provides lenders with the maximum limit for funding these projects. The bankability assessment is based on the accounting factors and the project risk factors.2 4.2.1

Certainty of Revenue Stream

In general, PPP never generates revenue until the project is put into operations. Investors use forecasts to predict the revenue stream of their investments. They are more likely to invest in a PPP where the forecasted revenue stream is certain and the forecast model is more accurate. Future forecasts of demand, cost, and regulation of the sector in any relevant

2 Hassan Ibrahim El Fathali (2015): Private Partner Selection and Bankability Assessment of PPP in Infrastructure Projects, Thesis for the Degree of Doctor of Philosophy (Civil Engineering) at Concordia University, p. 72.

4

BANKABILITY

35

site country will be important to private sector investors considering the revenue prospects of the project.3 To that end, investors would like to: – examine demand projections and information on the historical willingness of consumers to pay tariffs and to pay such tariffs on time; – look at prospects for growth, demographic movements, current tariffs, and projections of consumer attitudes toward paying increased tariffs; – where tariffs are based on indices, look at projections of the future movement of such indices and their relation to actual costs, including operating costs, finance costs, capital expenditure requirements, and other such costs, etc. – Ensure that the projected cash flows of the project is high enough to cover debt service plus an acceptable margin. Moreover, lenders seek to have trigger events, which grant them additional rights and powers in the event of their occurrence (for instance, if certain ratios such as debt to equity ratios or debt service cover ratios are breached by the company). Some financial ratios (i.e., debt/ equity ratio; loan life cover ratio; debt service cover ratio; rate of return; Weighted Average Cost of Capital) and financial covenants (i.e., cure right; stepin-right; lender protections) are often used.4 Where revenues are to be earned in some currency other than that in which the debt is denominated, the lenders will want to see the revenue stream is adjusted to compensate for any relevant change in exchange rate or devaluation.5

3 The World Bank (2020): Key Issues in Developing Financed Transactions, https://ppp.worldbank.org/public-private-partnership/financing/issues-in-projectfinanced-transactions. 4 Step-in rights are rights given to lenders in project-financed arrangements to “step in” to the project company’s position in the contract to take control of the infrastructure project where the project company is not performing. 5 The World Bank (2020): Risk Allocation Bankability and Mitigation in Project Finance, https://ppp.worldbank.org/public-private-partnership/financing/risk-allocationmitigation.

36

F. I. LESSAMBO

4.2.2

Risk Factors

4.2.2.1 Political Environment The risk that an investment’s returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policymakers, or military control.6 Political risk categories can be grouped into insurable and not insurable. Non-insurable risks are risks, which insurance companies would not insure because the potential losses or claims cannot be calculated, whereas insurable risks are risks in which the insurance provider can calculate potential future losses or claims. The most common political risks are: – Expropriation: any legislative or administrative action from the host government, which has the effect of depriving an investor of its ownership or control of or substantial benefit from its investment, with the exception of non-discriminatory measures of general application. – Political violence: acts of war, civil war, insurrection/civil disturbance, terrorism, sabotage, or landowner and/or indigenous people’s disturbance in the host country. – Breach of contract: any repudiation or breach of a contract by a host government: (i) when there is no recourse to judicial or arbitral forum to determine the claim; (ii) a decision by such forum is not rendered within reasonable period of time; or (iii) such decision cannot be enforced. – Currency inconvertibility and transfer restriction (CI/TR): any action attributable to host government restrictions on the conversion and transfer of currency outside the host country into a freely usable currency, including the failure of a host government to act within a reasonable period of time on an application for such transfer. – Legal And bureaucratic risks: risks within the administrative process that cannot be directly attributed to one of the above. These include the legal enforceability and execution of laws, conflict of authority, corruption, transparency, issuing of approvals and consents, change

6 Tillmann Sachs, Robert Tiong, and Shou Qing Wang (2007): Analysis of Political Risks and Opportunities in Public–Private Partnerships (PPP) in China and Selected Asian Countries, Researchgate.net.

4

BANKABILITY

37

of government causing changes in law, policy, and taxation, and obstruction during the arbitration process. – Non-governmental action risks. “Non-governmental action risks” are those risks which the government has no direct influence on and do not fall within any of the above categories. These include actions by environmental and union activists, religious fundamentalism, ethnic tension, interventions by the United States and/or European Union, and foreign exchange risks. 4.2.2.2 Economic Environment Economic risk is the chance that macroeconomic conditions like exchange rates, government regulation, or political stability will affect an investment, usually one in a foreign country. There are many types of economic risk that businesses need to identify and manage to best defend against global supply chain risks.7 4.2.2.3 Legal System Legal risk refers to the risk of uncertainty due to legal actions or uncertainty in the applicability or interpretation of contracts, laws, or regulations. Some of the common examples in this area are: contract formation, perfection of an interest in collateral, and netting agreements. The legal systems of nearly all countries are generally modeled upon elements of five main types: civil law (including French law, the Napoleonic Code, Roman law, Roman-Dutch law, and Spanish law); common law (including US law); customary law; mixed or pluralistic law; and religious law (including Islamic law). An additional type of legal system—international law—which governs the conduct of independent nations in their relationships with one another. 4.2.2.4 Regulatory Framework Regulation is the monitoring and control of a sector or business by government or an entity appointed by government. An adequate regulatory framework is essential to foster and implement public–private partnership. Any given country may easily attract PPP projects if it has or offers a specific PPP or concession law, scope, and boundaries of

7 Victor Platon, Simona Frone, and Andreea Constantinescu (2014): Financial and Economic Risks to Public Projects. Procedia Economics, and Finance, Vol. 8, 204–210.

38

F. I. LESSAMBO

specific laws. Nonetheless, countries may or may not have specific PPP law(s). What matters the most is that they offer other enabling legislations relating to specific sectors, procurement, or private sector participation in projects.8 Private investors are always looking for checks and balances to be built into the legal framework of regulation. For instance, contract enforceability depends on a series of factors such as a country’s judicial tradition as well as the degree of economic development in a country.9 4.2.2.5 Environmental Risk In order to attract international lenders, in particular IFIs, the project must meet minimum environmental and social requirements that may exceed those set out in applicable laws and regulations. Environmental and social laws and regulations may impose liabilities and constraints on a project. The cost of compliance can be significant and would need to be allocated between the project company and the grantor. 4.2.2.6 Project Specificity PPP project even falling under the same label (i.e., road, railway, ports) are not always comparable. Each one has its own specificities. Thus, the bankability of an infrastructure project is determined at a much earlier phase of project life, taking into consideration the very specific features of the project. Designing an optimal risk-sharing protocol at the project development phase is at the crux of ensuring bankability.10 Governments can use either a Project Preparation Facility (PPF) as a means of developing bankable, investment-ready projects, or Market Sounding approach. PPF aims to strengthen and shorten the project preparation stage, facilitating loan approval and project execution.11 Under PPFs, technical and/or 8 The World Bank (2016): Country Readiness Diagnostic for Public–Private Partnerships, https://thedocs.worldbank.org/en/doc/943711467733900102-0100022016/ original/CountryPPPReadinessDiagnosticTool.pdf. 9 The World Bank (2021): Regulation of Sectors and Regulatory Issues Impacting PPPs, https://ppp.worldbank.org/public-private-partnership/regulation-sec tors-and-regulatory-issues-impacting-ppps. 10 Fida Rana (2017): Preparing Bankable Infrastructure Projects, The World Bank Blogs, https://blogs.worldbank.org/ppps/preparing-bankable-infrastructure-projects. 11 Oshani Perera, David Uzsoki, and Fida Rana (2017): Project Preparation Facility: Enabling Local Governments Access to Private Finance, International Institute for Sustainable Development, p. 3, https://infrastructure.iisd.org/research-and-reports/project-pre paration-facility-enabling-local-governments-access-private-finance.

4

BANKABILITY

39

financial support is provided to project owners or concessionaires. Such support can cover a wide range of activities, such as undertaking project feasibility studies, including value-for-money analysis, developing procurement documents and project concession agreements, undertaking social and environmental studies, and creating awareness among the stakeholders.12 Through market sounding exercises, important feedback from the lender community can feed into the project preparation phase and shape the risk allocation matrix in a market-acceptable manner. An effective market sounding exercise provides an opportunity for a structured dialogue between the private and the public sectors at early stages of the PPP process. In short, the market sounding is a dialogue between the government and experienced providers of the infrastructure and services. 4.2.2.7 Project Financial Structure The private party to most PPP contracts is a specific project company formed for that purpose—often called a Special Purpose Vehicle (SPV), and the government’s primary contractual relationship is with the project company. In general, the capital structure of a PPP project defines seniority of claims between different sponsors and the amounts that each one represents. The way in which different sources of financing are tapped determines the way in which they will be paid, a concept usually referred to as the waterfall of cash flows. Equity investors carry first the SPV losses. That is, any project losses are borne first by the equity investors, and lenders suffer only if the equity investment is lost. Therefore, equity investors are exposed to a higher risk than debt providers are and thus require a higher return on their investment. A sound structuring of a PPP project convinces the lenders to provide financing to a project. 4.2.2.8 Third-Party Risk Allocation A PPP project must have in place a comprehensive insurance scheme, avoiding gaps or overlapping coverage. For instance, lenders would require that the project company be isolated from sanctions for the breach of environmental regulations and compensation for environmental damage.

12 Fida Rana (2017): Preparing Bankable Infrastructure Projects, The World Bank Blogs, https://blogs.worldbank.org/ppps/preparing-bankable-infrastructure-projects.

40

F. I. LESSAMBO

4.2.2.9 Contract Agreement To ascertain that all risks are appropriately allocated to various participants, lenders would closely look at the network of contracts with the SPV. The most relevant contracts include the concession agreement, the construction contract, the operation and maintenance (O&M) agreement, the input supply agreement, etc. Government guarantees are important tools to help make many infrastructure projects bankable from the private sector’s perspectives. They can increase investor confidence in PPPs; demonstrate government commitment and support; increase the amount and sources of financing available; and reduce the required returns and cost of capital.13 Furthermore, in terms of international financing, obtaining the guarantee from a multilateral investment agency is regarded as the most effective measure in mitigating expropriation risk and obtaining the support of the project developer’s home government. In addition, the force majeure and relevant arbitration when a dispute occurs were also identified as critical risks in PPP development.

4.3

Bankability Tradeoff

The demand for infrastructure projects is high in most developing countries. Population growth, coupled with the need to enhance economic growth, are the driven force behind. Though needs are rising, the supply of new infrastructure is limited, as government budgets from the lender countries have shrinked. The mismatch between demand and supply involves a global investment gap of at least US$1.0 trillion per year—with all the dire consequences for economic growth and social progress.14 To attract infrastructure finance, governments have to carefully consider some trade-offs to ensure bankability but should always consider 13 Jenny Chao, and Jason Zhengrong Lu (2020): Using Government Guarantees Carefully as the Private Sector Redefines Bankability, World Bank Blogs, https://blogs.worldb ank.org/ppps/using-government-guarantees-carefully-private-sector-redefines-bankability. 14 Christoph Rothballer and Philipp Gerbert (2015): Preparing and Structuring Bankable PPP Projects, Public Private Partnerships for Infrastructure and Business Development, pp. 57–80.

4

BANKABILITY

41

Table 4.1 Example of bankability—tradeoff in Sheffield highways PF

Source WB-Example of Bankability Tradeoff in Sheffield Highways PFI (UK)

whether there remains value for money. Any given public project creates a direct liability for the government or state-owned enterprise (SOE) since the asset, as well as any associated financing and risks, is wholly owned (Table 4.1).15

15 Sebnem Erol Madan (2020): Is There a Tradeoff Between Debt Sustainability and Infrastructure Investment? World Bank Blogs, https://blogs.worldbank.org/ppps/theretradeoff-between-debt-sustainability-and-infrastructure-investment.

CHAPTER 5

Public Procurement: Laws and Regulations

5.1

General

Public procurement is a major economic activity—12% of GDP, 1/3 of Gov. expenditures and is well framed by laws and regulations.1 Governments spend $9.5 trillion each year procuring goods and services from the private sector, making public procurement the largest global marketplace.2 Public procurement refers to the purchase by governments and stateowned enterprises of goods, services, and works. Public procurement is a crucial pillar of services delivery for governments. Public procurements represent significant budget share, and therefore, desire careful consideration. Well-conceived and governed public procurement plays a major role in fostering public sector efficiency. It also contributes to achieving pressing policy goals such as environmental protection, innovation, job creation, and the development of small and medium enterprises.3 The 1 Paulo Magina (2017): Enhancing Integrity in Public Procurement—The OECD Holistic Approach, 1–26. https://www.procurementinet.org/wp-content/themes/inet/ img/presentation/document/2017/PauloMaginaOECD13thPRIMOForum.pdf. 2 World Bank (2018): Why Modern, Fair and Open Public Procurement Systems Matter for the Private Sector in Developing Countries. https://www.worldbank.org/en/ news/feature/2018/05/16/why-modern-fair-and-open-public-procurement-systems-mat ter-for-developing-countries. 3 OECD: Public Procurement Recommendations. https://www.oecd.org/gov/publicprocurement/recommendation/.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_5

43

44

F. I. LESSAMBO

goal of public procurement is to award timely and cost-effective contracts to qualified contractors, suppliers, and service providers for the provision of goods, works, and services to support government and public services operations, in accordance with principles and procedures established in the public procurement rules. The ultimate aim of public sector procurement is to provide public services and support government operations at all levels within a country.4

5.2

Public Procurement Legal Framework

The public procurement legal and regulatory framework defines the rules that govern the procedures and processes of every aspect of public procurement management and ensure achievement of the principles of public procurement to the fullest. The components of the procurement legal and regulatory framework include: • The Constitution The constitution of a country is the organic law, which is the foundation of all laws in that country. No law is supposed to contradict this body of law, but support it. According to the Merriam-Webster Dictionary, a constitution is the basic principles and laws of a nation, state, or social group that determines the powers and duties of the government and guarantees certain rights to the people in it. National procurement policies or laws must support the constitution. Anything to the contrary is invalid. • National Procurement Laws These are policies or laws that generally define and govern procurement using public funds. These laws are not to contradict the constitution of the country. Example of national procurement laws includes the Public Procurement and Concessions Act 2010 of Liberia, the Public Procurement Act (Amendment) 663 of Ghana, and the Public Procurement and

4 Jorge Lynch (2014): Public Procurement: Principles, Categories, and Methods, Chapter 1, Procurement Classroom Series No. 2.

5

PUBLIC PROCUREMENT: LAWS AND REGULATIONS

45

Assets Disposal Act 2015 of Kenya. Usually, the national procurement law of a country originates from the legislature. • Procurement Regulations Next to the procurement laws are the regulations in some countries. These legal instruments support the national procurement law. They usually originate from the procurement regulatory body of the country. These regulations support the procurement law by providing detailed explanations of provisions of the procurement law. The procurement legal framework is usually further developed into policies and procedures, procurement and contract administration manuals and guidelines, including standard solicitation documents that are used to call for offers from contractors, suppliers, and service providers.

5.3

Principles of Public Procurement 5.3.1

Transparency

Transparency is a key requirement of a modern public procurement system. It gives to the public information concerning, and access to the law, regulation, policies, and practice of procurement by government agencies. Transparency in public procurement is about information. The access to key procurement information by civil society, the media, and other stakeholders, and the ways in which these can use the information, directly affects accountability.5 A transparent procurement process requires legislative and administrative measures such as transparent proceedings, protection against corruption, fair prequalification procedures, and transparent selection of the winning bidder. Other transparency relevant measures include: open bidding procedures; prompt disclosure of the results of bids, i.e., prompt notification to successful as well as unsuccessful bidders; publication of annual procurement plan; bid challenges system; engaging the private sector in the procurement process; and keeping a complete and an adequate record of procurement activities.

5 UNDP (2010): Procurement Notices—4687. https://procurement-notices.undp.org/ view_notice.cfm?notice_id=4867.

46

F. I. LESSAMBO

5.3.2

Integrity

The integrity of the procurement process assures confidence in the public procurement process. Bidders and all other stakeholders need to have assurance that they can rely on any information disseminated by the procurement entity, formally or informally. Bribery by international firms in OECD countries is more frequent in public procurement than in utilities, taxation, and judicial system, according to a survey of the World Economic Forum. Bribery in government procurement is estimated to be adding 10–20% to total contract costs. Because governments around the world spend about USD 4 trillion each year on the procurement of goods and services, a minimum of USD 400 billion per year is lost due to bribery.6 The OECD integrity principles provide guidelines to observe all along the procurement process at each phase of the investment cycle: • Selection phase: making investment decisions in the public interest • Appraisal phase: ensuring credible and objective estimations of all costs and benefits related to the project • Planning phase: ensuring tender documents and processes do not unduly favor some stakeholders • Tendering phase: ensuring processes that promote qualification, accountability and value for money • Implementation phase: minimizing delays for completion, excess costs, and ensuring quality • Evaluation phase: auditing the government project upon completion by an independent institution. 5.3.3

Efficiency

Efficiency refers to how the procurement process is handled. The principle of efficiency requires that public funds be managed with care and due diligence so that prices paid for goods, services, and works are within the acceptable range and represent good value for the public funds

6 Peter Eigen (2002): Corruption Perceptions Index, Transparency International. https://www.transparency.org/en/cpi/2002.

5

PUBLIC PROCUREMENT: LAWS AND REGULATIONS

47

expended on them. Procurement efficiency as an element of public performance management contributes to achieving value for money by reducing administrative overhead costs and directing resources to support more complex procurement processes.7 5.3.4

Fairness

Fairness means reasonableness and impartiality. That is, time to respond to a bid must be reasonable enough to prepare and submit the bid. Similarly all suppliers must be treated equally, all bids must be evaluated using the same criteria. Given the use of public funds, public procurement opportunities should be open to all qualified firms and individuals, and the public should have access to information pertaining to public procurement. Fairness requires that decision-making, actions be unbiased, and that no preferential treatment is given to any stakeholders. 5.3.5

Openness

The principle of openness should prevail in public procurement. This means that, given the use of public funds, public procurement opportunities should be open to all qualified firms and individuals, and the public should have access to information pertaining to public procurement. Openness in public procurement is important in that it leads to greater and more effective competition in the award of public contracts, thereby encouraging innovation, delivering better value for money and ultimately, and contributing to long-term economic development.8 Indeed, the principle of openness in public procurement has found expression in the Agreement on Government Procurement (GPA).

7 Anjali Kumar, Arvind Nair, and Juliane Piecha (2015): Measuring Efficiency in International Public Procurement. Journal of Public Procurement, Vol. 15, Issue 3, 365–389. 8 Eversheds & Sutherland (2017): Openness in Public Procurement—A Worthy Cause Facing New Challenges. https://www.eversheds-sutherland.com/global/en/what/art icles/index.page?ArticleID=en/Public_Procurement/openness-in-public-procurement030817.

48

F. I. LESSAMBO

5.3.6

Competition

Competitive procurement involves the buyer receiving bids from sellers and evaluating those bids before choosing a supplier. In competitive procurement, any company that could provide the good or service is able to submit a bid or proposal. Competitive process means the process of procuring goods and services and construction-related services by fair and open competition, under varying market conditions, with the intent of minimizing opportunities for favoritism and assuring that contracts are award equitably and economically using various factors in determining such equitability and economy. 5.3.7

Accountability

Accountability is the process by which officials and participants whose actions determine public procurement outcomes are held responsible for such outcomes. Thus, it is a critical ingredient in public procurement corruption. Accountability in procurement requires that governments keep an oversight and control mechanism all along the public procurement cycle, including appropriate complaint and sanction processes. Internal control functions (management controls, financial controls, and independent internal audit assurance), external controls, and audits must be well coordinated or resourced, with skilled persons in order to achieve effective oversight.

5.4

Public Procurement Cycle

Public procurement cycle refers to the chain activities, assessing the requirements, competition, and award of the contract. In some definitions, elements of inventory and logistics management are also included but they actually are a part of contract administration. 5.4.1

Competitive Tendering

Competitive tendering is a purchasing procedure whereby potential suppliers are invited to make a firm and unequivocal offer of the price and terms on which they will supply specified goods and services, which

5

PUBLIC PROCUREMENT: LAWS AND REGULATIONS

49

on acceptance, shall be the basis of a subsequent contract.9 In general, tenders are based on a specification of requirements prepared by the purchaser. Alternatively, the purchaser may invite suppliers to submit a solution and a price to a problem stated by the purchaser. Moreover, a competitive tendering must be based upon the aforementioned procurement principles. Tenders can be open, restricted, selected, negotiated, etc. 5.4.2

Pre-qualification of Bidders

Pre-qualification of bidders consists of a basic review of the potential bidders for the project. The purpose of prequalification is to assess the technical and managerial competency and financial soundness of the interested bidders. The purpose of the prequalification process is to impartially evaluate a contractor, and to properly determine by its responsible business practices, work experience, manpower, and equipment that it is qualified to bid on a project. Each prospective bidder on contracts identified for prequalification by the Bid Agent submits an application on the approved prequalification application form in order to become prequalified.10 5.4.3

Processing and Evaluating Bids

The evaluation process involves (i) assessing bid completeness and compliance with minimum requirements of bid process; (ii) assessing conformity with requirements of the project brief. In general, evaluation criteria are decided in advance and set out in the request for proposal (RFP) documentation. Some countries specify evaluation criteria options in legislation. Evaluation criteria typically incorporate technical and financial elements.

9 K. Lysons and B. Farrington (2006): Purchasing and Supply Chain Management, 7th Edition. England: FT Prentice Hall. 10 United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) (2008): A Primer to Public-Private Partnerships in Infrastructure Development. https:// www.unescap.org/sites/default/files/PPP-Primer-Final-Original-edited.pdf.

50

F. I. LESSAMBO

5.4.4

Making Award Recommendations

After evaluating all the bids, the “Procurement committee” makes a determination recommending contract award to the responsible offeror whose proposal is determined to be the most advantageous to the government, considering price and evaluation factors set forth in the RFP. 5.4.5

Negotiating Contracts

After the recommended awardee has provided all required signed contract documentation and all verification and confirmations have occurred, the procurement officer shall provide notice to all remaining offerors of the recommendation for award prior to final approval of the contract. Negotiation is conducted with the intent of all parties reaching an agreement. The ideal outcome is win-win but this is not always achievable. Negotiation can involve a number of ploys and tactics but regardless of the approach taken, preparation is key. 5.4.6

Contract Award Letter and Signing the Contract

A client/employer as written confirmation that a tenderer has been successful and will be awarded a contract sends a letter of award, also known as an award letter. The letter will typically contain details of the amount of the award, the date of the award, and when the contract will be signed. The disclosure of award information ensures public confidence in the integrity of the procurement processes, fair and equitable treatment of vendors, contractors, and service providers, and supports full and open competition.

5.5 Public Procurement Laws in the United States, EU, and China 5.5.1

Public Procurement Laws in the United States

The Federal Acquisition Regulation (FAR) is the principal regulation governing federal procurements. Title III of the Act sets out the procedure for procurement of property and services. The procedure does not however include procurements by the Department of Defense, the Coast Guard, and the National Aeronautics and Space Administration (NASA). Most federal departments and agencies are subject to the FAR

5

PUBLIC PROCUREMENT: LAWS AND REGULATIONS

51

and to federal procurement statutes. The FAR applies to all executive departments, military departments, and independent establishments, as well as to wholly owned government corporations. The two statutes, which stand as the cornerstone of the US federal procurement, are: (i) the Federal Property and Administrative Services Act of 1949 (FPASA) and the Armed Services Procurement Act of 1949 (ASPA). The Office of Federal Procurement Policy (OFPP) in the Office of Management and Budget (OMB) has primary responsibility for public procurement policies and regulation. The OFPP shapes the policies and practices that federal agencies use to acquire the goods and services they need to carry out their responsibilities. The FAR applies to all industries. However, it contains many provisions that apply to particular industries, specifically: (i) construction, (ii) manufacturers and providers of supplies, and (iii) providers of services. Each of these industries is subject to different statutory and regulatory labor standards requirements, including minimum wage and benefit rates, and record-keeping requirements. In the 1990s, the federal procurement system was reformed to more closely resemble the commercial marketplace. Reforms included FASA’s streamlined procedures for purchasing commercially available off-theshelf items and re-organization of the simplified acquisition procedures for small procurements. Another Act passed in the 1990s was the Federal Acquisition Reform Act of 1995 (FARA). It is worthy to note that several US government entities, such as the US Postal Service, the Federal Aviation Administration, and the Federal Deposit Insurance Corporation, are not subject to the FAR, but have their own procurement regulations that are similar to the FAR in most respects. • Threshold requirements The FAR includes financial thresholds that trigger special, simplified procedures. For example, FAR Part 13 includes simplified rules that allow federal agencies to buy products or services more quickly, more economically, and with a focus on small businesses. These simplified FAR rules apply if the contract price is less than US$150,000. Contracts under this threshold are also set aside for award to small businesses. Other provisions containing financial thresholds include the Truth in Negotiations Act and corresponding FAR provisions that require that contractors submit

52

F. I. LESSAMBO

formal cost or pricing data only for contracts and contract changes with a value greater than US$750,000. The FAR also includes thresholds over which the rules for the WTO GPA apply to federal procurements, with certain exceptions. These thresholds are adjusted approximately every two years. The current thresholds for federal procurements are US$202,000 for contracts for goods and services and US$7,777,000 for construction contracts. • Application of FAR to Public-Private Partnerships There are no particular rules for federal PPPs, as these are not commonly used on purely federal projects. PPPs have become common at state and local government levels as vehicles to further the funding, development, construction, and operation of large public infrastructure projects such as highways and mass transit systems. These projects are subject to state and local legal requirements and may include federal requirements when federal funding is involved. • Procurement Procedures 1. Sealed bidding Under the Seal bidding, agencies have broad discretion over deadlines for submission of bids, but must publicize the invitation for bids a “sufficient time” before bid opening, to give bidders a reasonable opportunity to prepare and submit bids. Sealed bidding involves the following stages: • • • •

The publication of an invitation for bids Submission of bids by an established deadline Evaluation of bids following a public bid opening Award to the bidder whose bid is most advantageous to the government, based solely on price or price-related factors.

2. Competitive proposals subject to negotiations The procedures for negotiated procurements based on competitive proposals vary greatly, with respect to both the source selection process

5

PUBLIC PROCUREMENT: LAWS AND REGULATIONS

53

and the degree of formality. In large, complex procurements, it is not unusual for the agency to hold industry conferences and to publish draft proposals before issuing a final solicitation. Once a solicitation is issued and proposals are received, agencies may choose to limit the number of bidders it will consider for final award to a competitive range that only includes bidders it believes have a reasonable chance of success. An agency can then award the contract with or without discussions. If discussions are conducted, the agency may hold several rounds and request one or more revised proposals based on discussions. • Contract and Award Criteria Contract evaluation and award criteria can vary significantly, and agencies have significant discretion over the weight to give to these and other technical award criteria, provided that they can show that the criteria: • Do not unduly restrict competition. • Reasonably relate to the agency’s requirements. All award criteria must be set out in the solicitation, and the agency must amend the solicitation if it determines after the solicitation is issued that these criteria must be modified. An agency’s failure to follow the established criteria, or the application of criteria not set out in the solicitation, is a common ground for bid protest. 5.5.2

Public Procurement Laws in the European Union

Public procurement is subject to the general, basic freedoms enshrined in the Treaty on the Functioning of the European Union, as amended by the Lisbon Treaty; that is, free movement of goods, freedom to provide services, and freedom of establishment within the territories of the twenty-seven EU Member States. In 2004, following a lengthy debate, the European Union (EU) reformed the rules on public procurement in light of case law of the Court of the European Union and adopted two Directives, the so-called Public Procurement Directives, which replaced prior directives. The EU legal regime on public procurement also applies to signatories to the WTO Agreement on Government Procurement.

54

F. I. LESSAMBO

• Public Procurement Legislation The basic public procurement Directives are as follows: (1) Directive 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts, and public service contracts; (2) Directive 2004/17/EC on coordinating the procurement procedures of entities operating in the water, energy, transport, and postal services sectors. (3) Directive 2009/81/EC: Defense and security services (4) Directive 2014/24/EU: public sector gives public authorities greater flexibility to negotiate with companies at both the selection stage and the execution stage (renegotiation).11 (5) Directive 2014/25/EU regarding the awarding of contracts in the water, energy, transport, and postal services sectors (so-called special sectors}. (6) Directive 2014/23/EU: on Concessions. The principles governing the award of public contracts are equal treatment, nondiscrimination, and transparency. As for the award criteria, these are the same in both Directives. Contracting authorities—that is, State, regional, or local authorities, or bodies governed by public law— are required to award public contracts on the basis of either the bid that is most economically advantageous in terms of quality, price, technical merit, environmental characteristics, cost-effectiveness, and delivery date, or the lowest price only. In Europe, the European Union’s directive on public procurement governs all procurement by public sector bodies. This directive contains detailed rules on the process to be followed and what the public sector may or may not do. There are no equivalent rules for the private sector and very few cases involving private sector procurement. A procurement lawyer in Europe therefore looks mostly to the Directive, or the laws that have applied it in the relevant country, such as the Public Contracts Regulations 2006 in the UK, and interprets those laws.

11 Stéphane Saussier and Jean Tirole (2015): Strengthening the Efficiency of Public Procurement. Notes du conseil d’analyse économique, Vol. 22, Issue 3, 1–12.

5

5.5.3

PUBLIC PROCUREMENT: LAWS AND REGULATIONS

55

Public Procurement Laws in China

• Legislative Framework Government procurement in China is primarily under the regulation of two national laws: the Government Procurement Law and the Tender Law, and local government procurement measures. The State Council is currently drafting implementation regulations to the Government Procurement Law, which was recently published in order to solicit public opinions. • Government Procurement Law On June 29, 2002, the People’s Republic of China (PRC or China) Government Procurement Law (GPL) was promulgated and entered into effect on January 1, 2003. It is the first national law passed by China’s top legislature to exclusively regulate government procurement activities. In the past, government agencies and local governments with money from their budgets without reference to a uniformed set of government procurement rules conducted government procurement in China. This system was plagued with a lack of transparency, uncertain rules and standards, corruption, and a lack of dispute resolution mechanisms. According to the GPL, the aim of the GPL is to bring fairness, transparency, and integrity to the government procurement in China. Although China started to introduce regulations on transparent and competitive government procurement system in the mid-1990s, the passage of this law was believed to be a major step in establishing a comprehensive government procurement regulation system by the government of China. • Tender Law The PRC Tender Law is incorporated by the GPL provision, which provides that the PRC Tender Law applies to the procurement of construction projects that require tenders under the GPL. The Tender Law was adopted in 1999 and became effective on January 1, 2000. The Tender Law is designed to standardize tendering and bidding activities in China. As with the GPL, the Tender Law is a primary law on government procurement in China.

56

F. I. LESSAMBO

• Local Government Procurement Measures Local governments at the provincial and municipal levels also publish the government procurement measures applicable within their jurisdictions. As early as 1998, Shenzhen Special Economic Zone has enacted its own government procurement rules, under which public bidding is required for contracts to purchase goods or services in excess of RMB100,000 (approximately US$14,000), and contracts to rent, repair, and landscape in excess of RMB200,000 (approximately US$27,000)0.9 Beijing Municipal Government published The Measures of Beijing Municipal Government Procurement on April 22, 1999, which became effective on June 1, 1999. Methods of Government Procurement GPL, government procurement may be conducted by use of the following six: • Public tender The Tender Law requires that all construction projects include, among others, all large-scale infrastructure or public utility projects relating to the public interest of society or public security, and projects wholly or partly utilizing state capital or state finances to be subject to tenders. For goods and services under central government budgets, the purchase thresholds above which a public tender is required will be decided by the State Council; for those under local budgets, provincial governments will decide the purchase thresholds. • • • • •

Private tender or tender by invitation Competitive negotiation Single-source procurement Inquiry Other methods approved by the State Council regulatory authority for government procurement.

CHAPTER 6

Assessment of Project’s Viability and Analytical Tools

6.1

General

Private investors and lenders undertake their own project analysis based on their experience and strong, profit-driven incentive to assess benefits and costs. The PPP Screening Tool is an excel-based questionnaire that enables government-contracting authorities to evaluate and prioritize projects from long infrastructure investments wish lists. It allows careful selection of projects to save time and costs that would otherwise be used to prepare and procure projects that fundamentally are not fit as PPPs. The tool assesses the project in six areas: strategic suitability, preliminary suitability, risk assessment, PPP suitability, fiscal suitability, and institutional capacity. The screening tool helps assess the strategic suitability of a PPP project to ensure it aligns with national, sectoral, and contracting authority’s priorities. The tool also tests the preliminary feasibility and fiscal affordability of projects, in addition to assessing risks using pre-set qualitative as well as quantitative variables. Going further, the screening tool evaluates the robustness of the country’s legal and regulatory framework as well as the institutional capacity of the contracting authority to prepare and procure PPP contracts. This is critically important. However, it may be costly and time-consuming, detailed risk appraisal is necessary to assure other parties, including passive lenders and investors, that the project makes sound economic and commercial sense. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_6

57

58

F. I. LESSAMBO

6.2

The Procurement Process

Although the nature of PPP procurement may be different from conventional procurement of goods, works, and services, the process for procuring PPPs should be designed and implemented to comply with these principles. In general, the procurement method depends on the government’s budget, capacity, desire to encourage innovation, need for high-level inputs, vulnerability to corruption, and objectives of the PPP project. The PPP procurement process starts with (i) planning and identification of candidates, (ii) preparation, (iii) implementation and procurement, and (iv) contract management or contract term. The standard PPP process involves initial analysis of the project economics and PPP screening in the Identification and PPP Screening Phase, followed by detailed appraisal of the project both as a technical solution and as a PPP during the Appraisal and Preparation Phase.

6.3

The Six Assessment Areas

See Fig. 6.1. 6.3.1

Project Identification and PPP Screening

Project identification is a process in the initiating phase of the project life cycle for identifying a need, problem, or opportunity. Once identified, a project is initially documented objectively defining what was identified. The purpose of project identification is to develop a preliminary proposal for the most appropriate set of interventions and course of action, within specific time and budget frames, to address specific development goals. Likewise, screening helps evaluate projects on qualitative and quantitative variables assuming a fair level of work has been done on the project. In general, screening activities include pre-feasibility studies, site checks, fiscal and budget evaluations, political and economic evaluations, preliminary risk analysis, etc.

6

ASSESSMENT OF PROJECT’S VIABILITY …

59

Fig. 6.1 PPP process cycle (Source World Bank Group [2020])

6.3.2

Appraisal and Preparation Phase

The second phase in any PPP is the appraisal and preparation. Appraisal aims to ensure that developing and implementing PPP makes sense, to test technical feasibility and assess environmental impact. In some countries, the appraisal process follows regulations and established criteria in the form of compulsory guidelines or even legal provisions. Preparing a PPP project is a complex and lengthy process involving multiple agencies and stakeholders as well as large cross-functional teams. To that end, it is preferable to establish a separate governmental delivery vehicle with full-time, focused staff for the project preparation prior to tender. 6.3.3

Structuring and Drafting Phase

Structuring a “PPP project” refers to allocating responsibilities, rights, and risks to each party to the PPP contract. Project structuring is developed through an extended process, rather than by drafting a detailed contract straight away.1 Given the complexity of parties involved, a 1 World Bank Group: PPP Reference Guide-PPP Cycle, p. 140. https://ppp.worldb ank.org/public-private-partnership/library/ppp-reference-guide-ppp-cycle.

60

F. I. LESSAMBO

drafting phase is more than necessary. Therefore, PPP stakeholders prefer to anticipate potential change in the pre-contract phase, “the period between the initial conceptions of the project and the signing of the contract”.2 The aim of the pre-contract phase is: (i) to identify the causes and effects of changes and how to cope with them if they occur,3 and (ii) to prevent the proposed project from becoming less controlled, due to changes during the construction, maintenance, and exploitation phases. Flexibility is more likely to contribute to the project’s success when implemented in the contract design.4 6.3.4

Tender Phase

Tendering usually refers to the process whereby governments and financial institutions invite bids for large projects that must be submitted within a finite deadline. Tenders are usually conducted in four stages: Prequalification; the issue of tender documents; receipt and review of tenders; award of contract. There are various types of tenders, such as open tender, selective tender, serial tender, negotiated tender, and term tender. Tendering can be a one-step tendering or a two-step tendering. The main aim of the single-stage approach is to generate a firm price at the outset through a competitive tendering process, whereas the two-stage approach embraces a collaborative open book approach throughout the project. 6.3.5

Contract Operational Management

Operational management aims to protect the PPP contract throughout its lifetime. PPP contract operational management is the process whereby the parties in a PPP transaction or a contract agreed upon their respective obligations in order to deliver in accordance with the objectives of the PPP contract. Once the contract has been signed, and the “deal” has been

2 A. A. Kodwo and S. Allotey (2014): Cost Overruns in Building Construction Projects: A Case Study of a Government of Ghana Project in Accra. International Knowledge Sharing Platform, Vol. 4, Issue 24, 54–64. 3 A.D. Price and K. Chahal (2006): A Strategic Framework for Change Management. Construction Management and Economics, Vol. 24, Issue 3, 237–251. 4 S. Domingues, D. Zlatkovic, and A. Roumboutsos (2014): Contractual Flexibility in Transport Infrastructure PPP. In European Transport Conference 29 September 2014. Frankfurt, Germany.

6

ASSESSMENT OF PROJECT’S VIABILITY …

61

agreed, each party should perform its respective role. PPP management includes establishing the contract management team, establishing the management decision governance, marketing the PPP, checking the qualifications of bidders, inviting and evaluating proposals, interacting with bidders during the process, and identifying and finalizing the contract with the selected bidder. Failure to adequately manage the project will inevitably erode its value-for-money and may ultimately undermine its objectives.5 6.3.6

Contract Finalization Management

The parties to a PPP contract should ensure that the accounting closure of the contract is fair and comprehensive, and that the amounts owed by one party to the other are actually disbursed. In general, the PPP contract contains specific provisions concerning the handing over of the asset or infrastructure. Contract finalization management aims to assure the parties that all these provisions are met at this point in time (i.e., the private party may have to make material investments before turning the asset over to the authority).

6.4 The Analytical Tools: Infrastructure Prioritization Framework There are a set of tools available for project selection. 6.4.1

Infrastructure Prioritization Framework

Infrastructure Prioritization Framework (IPF) is used to inform the selection of projects by combining selection criteria into social-environmental and financial-economic indices. IPF is structured to accommodate multiple policy objectives; attend to social and environmental factors; provide an intuitive platform for displaying results; and take advantage of available data while promoting capacity building and data collection for more sophisticated appraisal methods and selection frameworks. Decision

5 European PPP Expertise Center (2014): Managing PPPs During Their Contract Life. https://www.eib.org/attachments/epec/epec_managing_ppps_en.pdf.

62

F. I. LESSAMBO

criteria, weighting, and sensitivity analysis are decided and made transparent in advance of selection, and analysis is made publicly available and open to third-party review.6 Governments lacking IPF capacities may appraise projects via Social Cost-Benefit Analysis (SCBA) and extensive feasibility analysis. Thereafter, project selection may be based on selecting projects with highest net present values (NPV), best fit with infrastructure policy guidance, or (optimally) both. The IPF differentiates from other multi-criteria decision tools in four ways. First, it systematically incorporates policy goals, social and environmental sustainability considerations, and long-term development aims alongside traditional financial factors. Second, it is predicated on parsimony and pragmatism. Third, results are displayed graphically on an intuitive, graphical interface by which decision-makers can compare alternative investment scenarios. Fourth, it facilitates active deliberation of key decision criteria and priorities for improving project appraisal looking forward.7 • Social Cost-Benefit Analysis Cost-benefit analysis (CBA) is a set of techniques and evaluation tools used to determine the optimal allocation of public resources, by seeking to maximize net social benefits. CBA in the public sphere differs from the analysis of investment in the private sector because the government provides public goods and benefits that individuals do not purchase on the market and which create additional measurement challenges. CBA has considerable overlap with private investment analysis on other issues, such as developing alternatives, common units of measure, discount rates, costing, financing, and risk assessment. Project comparison based upon cost-benefits totals all costs and benefits of a project over its lifetime and discounts future flows to calculate present values. It allows decisionmakers to intuitively compare and rank diverse alternatives based on a

6 Darwin Marcello, Cledan Mandri-perrot, et al. (2016): An Alternative Approach to Project Selection: The Infrastructure Prioritization Framework, World Bank PPP. https:// openknowledge.worldbank.org/handle/10986/24511. 7 Idem, p. 9.

6

ASSESSMENT OF PROJECT’S VIABILITY …

63

single indicator.8 With Social Cost-Benefit Analysis (SCBA), prioritization can be based on selecting projects that maximize the net present values for society overall. Because SCBA assessments require quantification and monetization of positive and negative effects, extensive information about the projects and their projected impacts is required (Van Delft & Nijkamp, 1977). Since information in many contexts is limited and many costs and benefits are difficult to monetize, and since SCBA itself can be quite costly, this can make the standard a tall order for application across all proposed projects. This is particularly difficult when governments possess limited resources for appraising large sets of small- and medium-sized projects. • Multi-Criteria Decision Analysis (MCDA) Multi-criteria decision analysis (MCDA) incorporates key policy criteria. Multi-criteria decision approaches formalize the inclusion of nonmonetary and qualitative factors into decision analysis and can be useful when information or analytical resources are limited.9

8 Thomopoulos, Grant-Muller, and Tight (2009): Incorporating Equity Considerations in Transport Infrastructure Evaluation: Current Practice and a Proposed Methodology. Evaluation and Program Planning, Vol. 32, Issue 4, November, 351–359. 9 Darwin Marcello, Cledan Mandri-perrot, et al. (2016): An Alternative Approach to Project Selection: The Infrastructure Prioritization Framework, World Bank PPP, p. 8. https://thedocs.worldbank.org/en/doc/844631461874662700-0100022016/ori ginal/160423InfrastructurePrioritizationFrameworkFinalVersion.pdf.

CHAPTER 7

The Identification and Management of Risks

7.1

General

Project risk measurement describes methods used to derive qualitative and quantitative measures of risk either at the individual project level or at the level of a portfolio of projects. Closely related to project portfolios are project selection methods: methods that serve the goal of selecting a project from a set of choices with the optimal risk and return characteristics for an investor’s return expectations (Fig. 7.1).

7.2

Identification of Projects: Project Cycle

The project cycle is the framework used to design, prepare, implement, and supervise projects.1 The duration of the project cycle is long by commercial standards. It is not uncommon for a project to last more than four years; from the time, it is identified until the time it is completed. For instance, the World Bank (IFC/IDA) project cycle consists of six steps:

1 James Alexander, Fran Ackermann, and Peter E. D. Love (2019): Taking a Holistic Exploration of the Project Life Cycle in Public–Private Partnerships. Project Management Journal, Vol. 50, Issue 6, 673–685.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_7

65

66

F. I. LESSAMBO

Fig. 7.1 Identification of project cycle (Source World Bank)

• Identification The World Bank, jointly with IFC and MIGA, works with a borrowing country’s government and other stakeholders to determine how financial and other assistance can be designed to have the largest impact. After analytical work is conducted, the borrower and the Bank Group produce a strategy, called Country Partnership Framework, to identify the country’s highest priorities for reducing poverty and improving living standards. Identified projects can range across the economic and social spectrum from infrastructure, to education, to health, to government financial management. The World Bank and the government agree on an initial project concept and its beneficiaries, and the Bank’s project team outlines the basic elements in a Project Concept Note.

7

THE IDENTIFICATION AND MANAGEMENT OF RISKS

67

• Preparation The borrower government and its implementing agency or agencies are responsible for the project preparation phase, which can take several years to conduct feasibility studies and prepare engineering and technical designs, to name only a few of the work products required. The government contracts with consultants and other public sector companies for goods, works, and services, if necessary, not only during this phase but also later in the project’s implementation phase. Beneficiaries and stakeholders are also consulted now to obtain their feedback and ensure the project meets their needs. If necessary, the borrower may prepare an Environmental Assessment Report that analyzes the planned project’s likely environmental impact and describes steps to mitigate possible harm. • Appraisal Appraisal gives stakeholders an opportunity to review the project design in detail and resolve any outstanding questions.2 The government and the World Bank review the work done during the identification and preparation phases and confirm the expected project outcomes, intended beneficiaries and evaluation tools for monitoring progress. Agreement is reached on the viability of all aspects of the project at this time. The Bank team confirms that all aspects of the project are consistent with all World Bank operations requirements and that the government has institutional arrangements in place to implement the project efficiently. All parties agree on a project timetable and on public disclosure of key documents and identify any unfinished business required for final Bank approval. The final steps are assessment of the project’s readiness for implementation and agreement on conditions for effectiveness (agreed upon actions prior to implementation). The Project Information Document is updated and released when the project is approved for funding. • Negotiation/Approval

2 M. D. S. Lopes and R. Flavell (1998): Project Appraisal—A Framework to Assess Non-financial Aspects of Projects During the Project Life Cycle. International Journal of Project Management (United Kingdom), Vol. 16, Issue 4, 223–233.

68

F. I. LESSAMBO

Once all project details are negotiated and accepted by the government and the Consortium of lenders (i.e., World Bank), the project team prepares the Project Appraisal Document (for investment project financing) or the Program Document (for development policy financing), along with other financial and legal documents, for submission to the Consortium leader or Bank’s Board of Executive Directors for consideration and approval.3 When funding approval is obtained, conditions for effectiveness are met, and the legal documents are accepted and signed, the implementation phase begins. • Implementation/Support Project implementation takes place in dynamic socio-physical contexts in which unforeseen events may occur.4 The borrower government implements the development project with funds from the World Bank. With technical assistance and support from the Bank’s team, the implementing government agency prepares the specifications for the project and carries out all procurement of goods, works, and services needed, as well as any environmental and social impact mitigation set out in agreed upon plans. Financial management and procurement specialists on the Bank’s project team ensure that adequate fiduciary controls on the use of project funds are in place. All components at this phase are ready, but project delays and unexpected events can sometimes prompt the restructuring of project objectives. Once underway, the implementing government agency reports regularly on project activities. The government and the Bank also join forces twice a year to prepare a review of project progress, the Implementation Status and Results Report. The government and the Bank throughout the implementation phase to obtain data to evaluate and measure the ultimate effectiveness of the operation and the project in terms of results monitor the project’s progress, outcomes, and impact on beneficiaries. 3 Marcus Ahadzi and Graeme Bowles (2004): Public–Private Partnerships and Contract Negotiations: An Empirical Study. Construction Management and Economics, Vol. 22, Issue 9. 4 Stefan Verweij, Geert R. Teisman, and Lasse M. Gerrits (2017): Implementing Public– Private Partnerships: How Management Responses to Events Produce (Un)Satisfactory Outcomes. Public Works Management & Policy, Vol. 22, Issue 2, 124.

7

THE IDENTIFICATION AND MANAGEMENT OF RISKS

69

• Completion/Evaluation In public–private partnership, performance/evaluation is typically measured during the construction and operation phases using time, cost, and quality and a restricted number of key performance indicators; and a process-based and stakeholder-oriented measurement approach would be better suited to evaluate performance. When a project is completed and closed at the end of the loan disbursement period, a process that can take anywhere from 1 to 10 years, the World Bank and the borrower government document the results achieved; the problems encountered; the lessons learned; and the knowledge gained from carrying out the project.5 A World Bank operations team compiles this information and data in an Implementation Completion and Results Report, using input from the implementing government agency, cofinanciers, and other partners/stakeholders. The report describes and evaluates final project outcomes. The outcomes are then compared to expected results. The information gained during this exercise is also often used to determine what additional government measures and capacity improvements are needed to sustain the benefits derived from the project. In addition, the evaluation team assesses how well the entire operation complied with the Bank’s operations policies and accounts for the use of Bank resources. The knowledge gained from this results measurement process is intended to benefit similar projects the future.

7.3

Risk Assessment

The first step toward structuring the PPP is often to put together a comprehensive list of all the risks associated with the project, known as a risk register. PPP risks vary depending on the country where the project is implemented, the nature of the project, and the assets and services involved. Nonetheless, certain risks are common to many types of PPP projects. These are usually grouped into risk categories that are often associated with a particular function (such as construction, operations, or financing), or with a particular project phase. Many resources provide standard risk lists and preferred risk allocation. Some risks will 5 Henry J. Liu and Peter E. D. Love (2018): Evaluation of Public–Private Partnerships: A Life Cycle Performance Prism for Ensuring Value for Money. Environment and Planning C: Politics and Space, Vol. 36, Issue 6, 1–21.

70

F. I. LESSAMBO

be more significant than others will in terms of likelihood and severity of impact on project outcomes, or both. Risk can be assessed either quantitatively or qualitatively. After full identification of project risks, a mitigation process should occur—wherein, based on a cost–benefit analysis, some project characteristics or procedural steps may be adjusted. For instance, additional geological surveys or traffic studies may be conducted before the tender to reduce uncertainty and contain bidding costs. Performance requirements that are not critical to project success and may create unacceptable risk to private operators may be eliminated. 7.3.1

Risk Identification

A project risk is an unknown event or situation with either positive or negative effects on project objectives.6 • Country risk Country risk (CR) is the risk attached to a borrower by virtue of its location in a particular country.7 Country risk (a.k.a sovereign risk) is the risk that a government could default on its debt (sovereign debt) or other obligations. It is the risk generally associated with investing in a particular country or providing funds to its government. Country risks cover the political economy. For instance, a country with a high debt-to-GDP ratio may not be able to raise money as easily to support itself, which puts its domestic economy at risk. There are many different ways to analyze a country’s risk. From beta coefficients to sovereign ratings, investors have several different tools at their disposal. Well-informed international investors use a combination of these techniques to determine a country’s risk, as well as the risk associated with any finance project. Methods used to assess country risk are either quantitative or qualitative. Quantitative analysis uses ratios and statistics to determine risks, such as the 6 Jokar Ebrahim, Aminnejadb Babak, Lork Alireza (2021): Assessing and Prioritizing Risks in Public–Private Partnership (PPP) Projects Using the Integration of Fuzzy Multi-Criteria Decision-Making Methods. Operations Research Perspectives, Vol. 8, 1–20. ISSN:2214-7160. 7 Samsul Alam (2016): Country Risk and Its Effect on International Finance Management. Daffodil International University Journal of Science and Technology, Vol. 10, Issue 2, 171–187.

7

THE IDENTIFICATION AND MANAGEMENT OF RISKS

71

debt-to-GDP ratio or the beta coefficient of the MSCI index for a given country. International investors can find this information in reports from rating agencies, magazines like the Economist, and through various other online sources. Qualitative analysis uses subjective analysis to determine risks, such as breaking political news/opinion or realistic market rumors. International investors can find this information in financial publications (i.e., The Economist, The Wall Street Journal). The most common way that investors assess country risk is through sovereign ratings. By considering these quantitative and qualitative factors, these agencies issue credit ratings for each country and give investors an easy way to analyze country risk. The three most-watched rating agencies are Standard & Poor’s, Moody’s Investor Services, and Fitch Ratings. • Political risk Political risks encompass confiscation, expropriation, nationalization, deprivation, political violence, currency inconvertibility, etc. These risks cover changes within the country’s political landscape, i.e., change of administration, as well as changes in national policies, laws, regulatory frameworks.8 For no apparent reason or justification, foreign governments can seize, confiscate, or otherwise expropriate a foreign investment. Likewise, political terrorism, war, civil strife, or other forms of political violence can damage or destroy a project finance investment and prevent it from conducting its operations. Political risk cover is only available to foreign investors. Cover cannot be provided to local entities against actions/inactions of their own government. To mitigate such risks project finance lenders may seek to buy political risk insurance from private sector insurers. Insurance can be bought as a blanket or as a more specific insurance based on individual project exposures. • Industry risk

8 Felix I. Lessambo (2021): International Finance—New Players and Global Markets (p. 2). Palgrave Macmillan.

72

F. I. LESSAMBO

Industry risk refers to the possibility that a set of factors particular to an industry group drags down the industry’s overall performance.9 While it has always been difficult to predict the next successful technology in any industry, the potential for new technologies to disrupt traditional industries may be greater in some sectors than others. Competitive forces within the industry represent significant risks to the project. It is necessary for project sponsors to analyze the potential risks that their particular project faces vis-à-vis global and local industries. Several factors are used to measure industry risk, including: growth prospects, relative power of suppliers and customers, competitive threats, risk of product substitution, and industry complexity. • Project risk A project risk is an event or condition that, if it occurs, has an effect on project objectives. Project risk is generally associated with the adequacy and track-record of the concerned technology and the experience of the project’s management. The chief mitigant in this area is the selection of contractors, developers, and operators who have proven track records.10 The most common project risks include scope risks, cost risks, time risks, technology risks, resource risks, communication risks, procurement risks, and miscellaneous Risks. • Customer risk The risk with customers is that demand for the product or throughput declines or widely fluctuates. Given the high fixed costs of infrastructure projects, it is difficult, if not impossible, for these projects to reduce costs to match lower demand. The price per unit of output can be fixed, floating or adjusted for inflation or other factors.11 The customer benefits from this arrangement by securing a longterm, guaranteed source of supply for the output, but generally forfeits a

9 Yuval Torbati and David N. Bodek (2013): Direct Ratings—Methodology—Industry Risk (pp. 1–15). S&P. 10 Jennifer Bridges (2021): Risk Analysis 101: How to Analyze Project Risk. Projectmanager.com. 11 Allison Pickens (2015): Managing Risks in Customer Relationships. Gainsight.com.

7

THE IDENTIFICATION AND MANAGEMENT OF RISKS

73

certain amount of flexibility in sourcing. The project company benefits by eliminating or substantially reducing its marketing risk. • Supplier risk Supplier risk is the risk inherent to any third-party relationship, potentially threatening the contracting company’s assets or profits.12 Supply risk refers to the probability of an incident associated with inbound supply from individual supplier failures or the supply market occurring, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety. If only a few firms dominate the supply of a critical factor of production relative to the number of potential customers, a project, absent mitigating factors, could be at higher risk because the supplier is in a better position to dictate terms of sale. Projects that rely on fixed and dedicated transportation systems, such as pipelines or rail lines, to deliver necessary inputs, may have few substitutes available. • Sponsor risk The project sponsor is typically an entrepreneur or consortium of entrepreneurs who provide the motivating force behind the project. Often, the project sponsor is an entrepreneur without sufficient capital to carry out the project. In other cases, the sponsor might have the necessary capital but is unwilling to bet the parent corporation’s balance sheet on a high-risk venture. The primary risks with sponsors revolve around the sponsor’s experience, management ability, its connections both international and with the local agencies, and the sponsor’s ability to contribute equity. Investors and lenders can mitigate these risks by carefully evaluating the project sponsor’s record of accomplishment with similar transactions.13 • Contractor risk 12 Saurabh Malhotra (2019): Getting a Handle on Supplier Risk in Procurement (pp. 1– 8). Infosys Limited. 13 Brickstone (2015): Role of Lenders and Sponsors in Infrastructure Project Finance. https://brickstone.africa/role-lenders-sponsors-project-finance/.

74

F. I. LESSAMBO

The principal construction risks are schedule delays and budget overruns. Standard & Poor’s, in fact, “believes that it would be difficult for a project to achieve investment-grade ratings prior to substantial completion of the project and initial start- up.” Mitigating these risks involves scrutinizing the contractor, specifically the contractor’s experience with similar projects, reputation in the field, backlog of other projects, and cash flow. The primary method of putting the burden of successful completion on the contractor, as opposed to on the lenders and investors, is a turnkey contract. A turnkey contract essentially binds the contractor to finish construction by a specified date for a fixed amount. The completed project must also meet the agreed upon technical specifications as certified by an independent engineer before payment is made. • Operating risk The operator is the company or entity charged with the responsibility of maintaining the quality of the assets that generate the project’s cash flow. Of course, lenders and investors want to make sure that the assets remain productive throughout the life of the project, or more importantly from their perspective, the life of the loan or investment. Hence, operating risks center around the efficient, continuous operation of the project, whether it is a mining operation, toll road, power plant, or pipeline. Contracted incentive schemes are one way to allocate this risk to the operator.14 • Product risk Product risks might include product liability, design problems, etc. The underlying risk here is unperceived risks with the product, e.g., unforeseen environmental damages. For instance, an electrical transmission project running through a populated area might carry the risk of affecting the population through the detrimental health effects of the electro-magnetic radiation. Using older, tested designs and technologies reduce the risk of unforeseen liabilities. For instance, the Asian infrastructure developer Gordon Wu built his reputation by recycling one straight-forward power

14 World Bank (2020): Risk Allocation Bankability and Mitigation in Project Financed Transactions. https://ppp.worldbank.org/public-private-partnership/financing/risk-alloca tion-mitigation.

7

THE IDENTIFICATION AND MANAGEMENT OF RISKS

75

plant design in his many projects instead of re-designing each individual project. Through using a tested design, Wu was able to not only reduce product and construction risks, but also to reduce design costs through economies of scale. • Environmental risk Environmental risk can be defined as the actual or potential threat of adverse effects on living organisms and the environment by effluents, emissions, wastes, resource depletion, etc., arising out of an organization’s activities. This risk category can also arise due to location of the project e.g., near towns or highway or in proximity to wilderness, heritage, native reserve, or scenic areas. Therefore, it is important to seek the advice of insurance firms specialized in assessing projects for environmental events, disaster, and clean-up policies.15 • Competitor risk This risk is related to industry risk; however, it focused more directly on resources with which the competitor might be able to circumvent competitive barriers. Exclusive agreements, off-take agreements, and supply arrangements all contribute to defending a long-term competitive advantage. • Funding risk The funding risk is that the capital necessary for the project is not available. For example, equity participants might fail to contribute their determined amount. Or, the underwriters might not be able to raise the target amount in the market. Another funding risk is re-financing which occurs if the duration of the initial funding does not match the duration of the project. Funding risks can also relate to the division between local and foreign currency funding. As funding is often the linchpin of project financings, it is difficult to reduce the risk of not finding the 15 World Bank (2020): Risk Allocation Bankability and Mitigation in Project Financed Transactions. https://ppp.worldbank.org/public-private-partnership/financing/risk-alloca tion-mitigation.

76

F. I. LESSAMBO

funding. The choice of an experienced financial advisor as well as seeking capital from a broad range of sources represent two ways to mitigate this risk. In addition, it is sometimes possible to restructure transactions to delay drawdown dates or to change the amounts of foreign versus local currency.16 • Currency risk There are two currency risks facing project companies. The first risk is exchange rate fluctuation, i.e., devaluation erodes the value of a contract or payment in the project company’s home currency, or the currency in which it must service its debt. The second risk is currency controls, i.e., the sovereign government limits the project company’s access to foreign exchange or curtails its ability to make foreign currency payments outside of the country. Another possible means of mitigating currency risk is to engage in a currency swap. If the currency exposure is un-hedged, a project could likely experience a cash shortfall sufficient to cause a default if a sudden and severe devaluation occurs. Another currency risk occurs when project revenues are contractually indexed to pass on the exchange rate risk to off-takers. In this second instance, lenders run the risk that a massive devaluation will make the project’s off-take so expensive in the local currency that off-takers cannot afford to purchase the output. Hence, the risk of contract abrogation may soar.17 • Interest rate risk Interest rate fluctuations represent a significant risk for highly leveraged project financings. Arranging for long-term financing at fixed rates mitigates the risk inherent in floating rates. Furthermore, projects can enter into interest rate swaps to hedge against interest rate fluctuations. To mitigate interest rates’ fluctuations, project finance funders may consider

16 Jon Prior (2021): Participating in PPP Increased Banks’ Risk Appetite, Study Finds. American Bankers. https://www.americanbanker.com/news/participating-in-pppincreased-banks-risk-appetite-study-finds. 17 Ian Giddy and Gunter Dufey (2001): Managing Foreign Exchange Risk. NYU Stern.

7

THE IDENTIFICATION AND MANAGEMENT OF RISKS

77

entering into derivatives agreements such as: interest rate swaps, interest rate caps, forward interest rates.18

7.4

Risk Allocations

Allocating risk, in the context of a PPP, means deciding which party to the PPP contract will bear the cost (or reap the benefit) of a change in project outcomes arising from each risk factor. Allocating project risk efficiently is one of the main ways of achieving better value for money through PPPs. A central principle of risk allocation is that each risk should be allocated to whoever can manage it best. There are some limits to how risks can be allocated in a PPP project. These include the following: Level of detail of risk allocation—in theory, every project risk could be identified and allocated to the party best able to bear it, thereby improving value for money. Risks that cannot be transferred—certain types of risk cannot be transferred through the PPP contract. For example, the private party will always bear certain political risks—in particular, the risk that the government will renege on the contract or expropriate the assets. International institutions such as the Multilateral Investment Guarantee Agency (MIGA) provide political risk insurance to help mitigate this risk. Extent of risk transfer to private party—the equity holders of the private party to the PPP contract—the PPP company—are only exposed up to the value of their equity stake. Moreover, lenders will typically only accept a relatively low level of risk, concomitant with their expected returns. If losses due to a risk turn out to be greater than the equity stake, the equity holders can walk away from the project. Since the government is ultimately responsible for making sure services are provided, the remainder of the project risk remains with the government. Incomplete contracts—even well-designed contracts may suffer from the absence of certain necessary provisions. While PPP contracts cannot provide solutions for every possible situation, they should provide rules (templates or formulas) for the range of foreseeable scenarios, and a decision-making methodology for any other situation.

18 APM Group (2020): Introducing the Main Project Risks and Their Potential Allocation.

78

F. I. LESSAMBO

7.4.1

The Project Sponsor

The project sponsors bear the risks of project completion, operation, and maintenance. This is achieved through a facility management contract that includes guarantees that the project facility will be completed on time, and that it will be built and operated to the desired specifications. The project sponsor may also enter into a “working capital maintenance” agreement or a “cash deficiency” agreement with the lending banks. Such agreements ensure adequate funding for the project in its early years. 7.4.2

The Lenders

The lenders to the project will require the usual assurances from the project company, including security for their loans. However, especially in the early stages of the project, lenders will also have recourse to the project sponsors in the event of specific problems such as cost overruns. Lenders will particularly want to ensure that cash that can be used to service the debt is not paid out to equity holders. The amount of debt service may therefore be linked to the project’s output, and any earnings in excess of debt service requirements may be placed in a “reclaim” account and drawn on if subsequent earnings do not suffice to service the debt. 7.4.3

The Contractor

The main contractor is obviously best able to ensure that construction is completed within cost and on schedule. He will therefore often enter into a turnkey contract that specifies a fixed price and penalties for delays, and he will usually be required to post a performance bond. 7.4.4

The Suppliers

When there is a major supplier to the project, there will be a contract with that supplier to ensure that (i) he does not abuse his possible monopoly power and (ii) he produces efficiently. For example, if the project company is a major purchaser of energy from a monopolistic state-owned enterprise (SOE), the project company will enter into a long-term supply contract with the SOE. The contract purchase price will often be fixed, or indexed to inflation or some other variable that affects project revenues; and the contract may require the SOE to compensate the project company if the SOE fails to supply the contracted energy.

7

THE IDENTIFICATION AND MANAGEMENT OF RISKS

7.4.5

79

The Customers

When there are only a few potential customers for the project’s output, revenue risk is likely to be transferred to those customers by means of long-term sales contracts. These will often include a take- or-pay clause or, as in the case of a pipeline, a throughput agreement that obliges the customer to make some minimum use of the pipeline. Another arrangement for transferring revenue risk to a customer is a tolling contract, whereby the customer agrees to deliver to the project company materials that it is to process and return to the customer. Some power projects, such as Navotas in the Philippines, have been structured in a similar way: the purchasing utility provides the fuel and the project company is simply paid for converting it to electricity. The purpose of transferring revenue risk to customers is to provide them with the incentive to estimate their demand for the project’s output as carefully and honestly as possible. 7.4.6

The Project Company

The contract between project company and customers will as much as possible seek to ensure that the prices of the product are indexed to its costs; and, where there is considerable currency uncertainty, prices may also be indexed to exchange rates as in the case of the Paiton power project. When there are many customers, as in the case of a toll road, long-term purchase contracts with these customers may be impossible. Indeed, if alternative routes are not subject to a toll, it may be infeasible to set a price that provides the project company with a satisfactory return. For example, one of the problems in attracting private finance to the funding of rail projects within central London has been that the revenues from such projects are likely to be highly dependent on transport policy toward other means of transportation in the capital. In such cases, it may be possible to attract project finance only if the government guarantees some minimum payment to investors. 7.4.7

The Governments

When the government grants a concession to a project company, there will need to be a concession agreement that gives the company the right to build and operate the project facility. The concession agreement may also require the government to construct supporting facilities

80

F. I. LESSAMBO

such as access roads. Failure to do so may lead to the failure of the project or may decrease the return on the project. For example, the profitability of Eurostar, the company that operates rail services through the Channel Tunnel, has suffered from the delays in the construction of a promised high-speed rail link in England and a new railway station south of London. The government may also need to guarantee the performance of state-owned companies. For example, if a project sells electricity to a state-owned power utility, the government may need to guarantee the contractual obligations of that utility. The project company will also be concerned about currency convertibility, in particular its ability to service its foreign currency debt and pay dividends to its equity holders. The government may therefore be asked to provide guarantees or comfort letters; and, if the project has hard currency revenues, it may have to consent to having these revenues paid into an offshore escrow account.

CHAPTER 8

The Project Finance Contractual Arrangement

8.1

General

The PPP contract is the document that defines the relationship between the public authority and the private partner and their obligations to each other. It is signed at the end of the procurement phase.1 There are several different types of public–private partnership contracts depending on the type of project, level of risk transfer, investment level, and the desired outcome.

8.2 8.2.1

PPP Types

Build–Operate–Transfer (BOT)

Build-operate-transfer (BOT) is an integrated type of partnership in which the private party bears the responsibility of designing, constructing, and

1 Economic Development of Air Transport (ICAO): Public Private Partnership.

Supplementary Information The online version contains supplementary material available at (https://doi.org/10.1007/978-3-030-96390-3_8).

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_8

81

82

F. I. LESSAMBO

operating the asset.2 Under a build-operate-transfer (BOT) contract, an entity—usually a government—grants a concession to a private company to finance, build, and operate a project. The company operates the project for a period (i.e., 20 or 30 years) with the goal of recouping its investment, and then transfers control of the project to the government.3 A BOT model is generally used to develop a discrete asset rather than a whole network, for example, a toll road. This simple structure provides the most freedom for the private sector partner during construction and the public sector bears the equity risk. In a BOT, a private partner builds to specifications provided by the public partner. Then, the private partner operates the facility under contract (contract term designed to be long enough to allow recovery of any private provided funding). Since the productive life of the project varies according to the type of project and structurally, it sometimes complicates the formulation of BOT policies and regulations so that all parties remain in their favor.4 After that, the ownership is transferred to the public partner at the end of the construction. 8.2.2

Build–Own–Operate–Transfer (BOOT)

In the case of a Design, Build, Own, Operate (BOOT) contract, the private partners are responsible for the design, building, operation, and financing of a capital asset. The private sector builds and owns the facility for the duration of the contract, with the primary goal of recouping construction costs (and more) during the operational phase.5 At the end of the contract, the facility is handed back to the government. In such a PPP, private partners receive payment from either the government (at 2 Andrea Renda and Lorna Schrefler (2006): Public–Private Partnerships: Models and Trends in the European Union, European Parliament (pp. 1–15). https://www.europarl. europa.eu/RegData/etudes/note/join/2006/369859/IPOL-IMCO_NT(2006)369859_ EN.pdf. 3 S. C. McCarthy and R. L. Tiong (1991): Financial and Contractual Aspects of BuildOperate-Transfer Projects. International Journal of Project Management, Vol. 9, Issue 4, 222–227. 4 Tareq A. Kaleel and Muntadher Kareem (2019): Determine the Factors That Affect the Applicability of Build-Operate-Transfer Contracts for Infrastructure in Iraq. IOP Conference Series: Materials Science and Engineering, Vol. 518, 022079. 5 Karim Bakhteyari (2007): Public Private Partnerships as a Public Infrastructure Optimizer. Nottingham Trent University, Department of Public Technology, p. 6.

8

THE PROJECT FINANCE CONTRACTUAL ARRANGEMENT

83

regular intervals) or user charges, or both for delivering the services. This structure is suitable when the government has a large infrastructure financing gap as the equity and commercial risk stays with the private sector for the length of the contract. This model is often used for schools, hospitals, power stations, water treatment facilities, and sewage facilities. 8.2.3

Buy-Build-Operate (BBO)

In a BBO, the private partner purchases existing assets, provides rehabilitation or expansion and the private partner operates the facility, due to its unique experience.6 Put differently, a buy-build-operate implies a transfer of a public asset to a private or quasi-public entity usually under contract that the assets are to be upgraded and operated for a specified period. Public control is exercised through the contract at the time of transfer. 8.2.4

Build–Own–Operate (BOO)

BOO is a project delivery mechanism in which a government entity sells to a private sector party the right to construct a project according to agreed design specifications and to operate the project for a specified time. A BOO is a similar structure to BOOT (below), but the facility is not transferred to the public sector partner. A BOO transaction may qualify for tax-exempt status and is often used for water treatment or power plants. In a BOO, a private sector constructs, operates, and owns the facility. A BOO may provide a contractual arrangement to allow the public partner to use the facility. 8.2.5

Build–Own–Operate–Transfer (BOOT)

The private sector builds and owns the facility for the duration of the contract, with the primary goal of recouping construction costs (and more) during the operational phase. At the end of the contract, the facility

6 P. Ankoma (2019): Public–Private Partnership as a Tool to Increase Efficiency and Sustainable Development in the Road Transport Sector in the Russian Federation. Global Scientific Journals, Vol. 7, Issue 5, 978.

84

F. I. LESSAMBO

is handed back to the government.7 This structure is suitable when the government has a large infrastructure financing gap as the equity and commercial risk stays with the private sector for the length of the contract. This model is often used for school and hospital contracts.8 8.2.6

Design–Build

The contract is awarded to a private partner to both design and build a facility or a piece of infrastructure that delivers the performance specification in the PPP contract. This type of partnership can reduce time, save money, provide stronger guarantees (as the work is with a single entity rather than a consortium), and allocate additional project risk to the private sector. The design-build contractor serves as a single point of contact responsible for both the design and construction of the project.9 Design-Build contract is characterized by high levels of collaboration between the design and construction disciplines, input from multiple trades into the design, and a single entity bearing project risk.10 8.2.7

Design–Build–Finance

The private sector constructs an asset and finances the capital cost during the construction period only. The private sector designs, builds, finances, operates an asset, then leases it back to the government, typically over a 25–30-year period. Public sector long-term risk is reduced and the regular payments make it an attractive option to the private sector. Variants of DBF are: (i) Design–Build–Finance–Operate (DBFO); (ii) Design–Build–Finance–Maintain (DBFM), and (iii) Design–Build– Finance–Maintain–Operate (DBMFO).

7 Tony Merna and Cyrus Njiru (2015): Chapter 7: The Concession or Build-OwnOperate-Transfer (BOOT) Procurement Strategy. In Financing Infrastructure Projects. ICE Publishing. 8 Raphael Henry Arndt (2000): Is Build-Own-Operate-Transfer a Solution to Local

Governments Infrastructure Funding Problems? ResearchGate. 9 Jamie Peterson (2019): What Is Wrong with Design-Build Contracting? ABA, Forum on Construction Law, Winter 2019. 10 Beckgroup (2015): An Analysis of Design/Build vs. Design-Bid-Build. Journal of Construction Engineering and Management, Vol. 124. https://www.beckgroup.com/wpcontent/uploads/2015/06/DesignBuildVsDesignBidBuild.pdf.

8

8.2.8

THE PROJECT FINANCE CONTRACTUAL ARRANGEMENT

85

Design–Construct–Maintain–Finance (DCMF)

Design, Construct, Maintain, and Finance is very similar to DBFM. The private entity creates the facility based on specifications from the government body and leases it back to them. This is generally the convention for PPP prison projects. 8.2.9

O & M (Operation & Maintenance)

In an O&M contract, a private operator operates and maintains the asset for the public partner, usually to an agreed level with specified obligations. The work is often sub-contracted to specialist maintenance companies. The payment for this contract is either via a fixed fee, where a lump sum is given to the private partner, or more commonly a performance-based fee. In this situation, performance is incentivized using a pain share / gain share mechanism, which rewards the private partner for over-performance (according to the agreed SLAs) or induces a penalty payment for work, which has fallen short. 8.2.10

Lease-Purchase

In leasing agreements, the private party purchases the income streams generated by publicly owned assets in exchange for a fixed lease payment and the obligation to operate and maintain the asset. A Lease-Purchase implies installment purchase. That is, the private sector finances and builds the new facility. Then after, the public agency leases the facility, accrues equity during the lease term. At the end of the lease term, the public sector either owns or purchases the facility for remaining cost. 8.2.11

Turnkey Contract

In a Turnkey contract, the public agency contracts a private entity to design, build, and complete the facility to specific standards. The private agrees to build the facility for a fixed price and absorbs construction risks. However, the financing and ownership is flexible, depending on circumstances.

86

F. I. LESSAMBO

8.3

Bidding and Award Procedure

• Purposes The main purposes of bidding documents are to regulate the bidding process and to give bidders information about: (a) the project scope; (b) its objectives; (c) how bids shall be prepared and submitted; (d) how bids will be evaluated; and (e) the draft contract. • Procedures In general, once the relevant public authority has decided to procure a project under the PPP model, a public bidding process is required under the applicable legislation. The most commonly used process involves a solicitation for expressions of interest together with a submission of qualification. An open competitive bidding procedure must be also followed by the borrower to select the service provider need not be carried out. Public authorities are sometimes approached directly by private companies, which submit proposals for the development of projects in respect of which no selection procedures have been opened. That often occurs when the private sector identifies an infrastructure need that may be met by a privately financed project. Unsolicited bids can involve innovative proposals for infrastructure management and offer the potential for transfer of new technology to the host country. • Evaluation Bids are typically required to include two separate proposals, a technical proposal and an economic proposal. After confirming that a responsive technical proposal has been submitted, the procuring authority reviews and evaluates the economic proposals. During bid analysis and evaluation, information relating to the examination, clarification, and evaluation of bids and recommendations concerning awards shall not be disclosed to bidders or other persons not officially concerned with the process until the successful bidder is notified of the result of the bid evaluation. This is important especially if the information submitted by the bidders contain proprietary aspects. In some cases, the evaluation criteria provide that a number of points will be allocated to different aspects of

8

THE PROJECT FINANCE CONTRACTUAL ARRANGEMENT

87

the proposal, based on objective or subjective criteria, and the aggregate amount of allocated points will serve to compare all bids. Furthermore, in some cases, a proposal must satisfy a minimum of points to be deemed responsive.

8.4

PPP Contract Clauses

PPP transactions are typically based on a network of complex legal agreements, at the center of each such transaction there is normally a form of contract between a public authority (the “Contracting Authority”) and a private company (the “Private Partner”). Providing a one-size fits all PPP contract on an international basis is likely an unrealistic goal. Nevertheless, there is merit in focusing on certain contractual provisions dealing with particular legal issues encountered in virtually every PPP Contract/structure, such as, for example, the issues of force majeure, termination rights or dispute resolution 8.4.1

PPP Contracts Under Various Legal Systems

Regardless of the parties involved in a PPP, the contracts thereof are drafted under either the civil system (the most prevalent), the common law system, or very recently, the Islamic law system. Nevertheless, some countries are using a mix of common law and civil law systems. • Common Law System In a common law system, parties typically enjoy extensive freedom of contract and few provisions are implied into a contract by law judicial decisions set precedents, which will be followed in the determination of contractual disputes and therefore influence contractual drafting. Therefore, any contractual arrangements must be expressly set out in the relevant contract. That is, all arrangements governing the relationship between the parties therefore need to be expressly set out in the PPP contract itself. • Civil Law System A civil law system is a codified system of law, which is generally more prescriptive than a common law system. In general, legislative enactments are considered binding for all, as opposed to judicial decisions

88

F. I. LESSAMBO

as in common law jurisdictions (although case law may be relevant, for example, with regard to financial hardship concepts and force majeure). Codified provisions and underlying principles are implied into civil law contracts without being expressly included or spelled out in the contrast (i.e., good faith). Therefore, there is almost no need for the parties to spell-out all the terms governing contractual parties’ relationships, because gaps or ambiguities can be remedied or resolved by operation of law. Consequently, a civil law contract is often less detailed than an equivalent common law contract. In general, PPP contracts fall under the administrative law umbrella, and the parties will have to take into account underlying administrative law principles, which apply to contractual relationships. It is not legally possible for parties in a PPP to alter or override these administrative principles, unless a special treatment or derogation is provided. • Islamic law In some countries with increasingly active PPP programs, Islamic law (shariah) provides the substance of the legal system. These jurisdictions can be organized as common law or (more often) civil law systems. In these countries, no legal instrument—whether legislation, regulation, court ruling, private, or public contract—may contravene Islamic principles. This means that projects in these jurisdictions must be structured in such a way that they do not violate Islamic law’s prohibitions against riba (interest) and gharar (uncertainty). 8.4.2

PPP Key Contractual Terms

8.4.2.1 Force Majeure • The Concept of Force majeure The concept of force majeure originated in French civil law and is an accepted standard in many jurisdictions that derive their legal systems from the Napoleonic Code. Force majeure is a French term that literally means “greater force.” It is related to the concept of an act of God, an event for which no party can be held accountable, such as a hurricane or a tornado. Force majeure also encompasses human actions, however, such as armed conflict. For events

8

THE PROJECT FINANCE CONTRACTUAL ARRANGEMENT

89

to constitute force majeure, they must be unforeseeable, external to the parties of the contract, and unavoidable. French courts have deemed an event “foreseeable” because a similar event had occurred half a century before. Similarly, a war in a conflict-ridden zone might not be “unforeseeable,” nor capital controls in a struggling economy or a flood in a frequently affected area. In common law systems, such as those of the United States and the United Kingdom, force majeure clauses are acceptable but must be more explicit about the events that would trigger the clause. The Islamic Law System (i.e., Saudi courts) generally recognize force majeure concept for events that make performance impossible, for example, political instability or natural disasters. However, events that make the contract more expensive or burdensome will not generally be accepted. In the case of public works contracts, Article 51 of the Procurement Law 2006 permits extension of a contract period with no penalty for delay “if the delay is due to unforeseen circumstances or for reasons beyond the contractor’s control, provided that the period of delay is proportionate to these reasons.” The International Chamber of Commerce has attempted to clarify the meaning of force majeure (although it is not included in the organization’s Incoterms) by applying a standard of “impracticability,” meaning that it would be, if not impossible, unreasonably burdensome and expensive to carry out the terms of the contract. The event that brings this situation about must be external to both parties, unforeseeable, and unavoidable. It can be very difficult to prove these conditions, however, and most force majeure defenses fail in international tribunals. Regardless of the legal system, in general, the following events would need to be established: – war (whether declared or not), hostilities, invasion, act of foreign enemies, extensive military mobilization; – civil war, riot, rebellion and revolution, military or usurped power, insurrection, act of terrorism, sabotage or piracy; – currency and trade restriction, embargo, sanction; – act of authority whether lawful or unlawful, compliance with any law or governmental order, expropriation, seizure of works, requisition, nationalization; – plague, epidemic, natural disaster, or extreme natural event;

90

F. I. LESSAMBO

– explosion, re, destruction of equipment, prolonged break-down of transport, telecommunication, information system or energy; – general labor disturbance such as boycott, strike and lockout, goslow, occupation of factories and premises. • Force majeure and hardship clause A party to a contract is bound to perform its contractual duties even if events have rendered performance more onerous than could reasonably have been anticipated at the time of the conclusion of the contract. The concept of force majeure shall not be confused with the “hardship clause”. Hardship clause is a clause in a contract that is intended to cover cases in which unforeseen events occur that fundamentally alter the equilibrium of a contract resulting in an excessive burden being placed on one of the parties involved. A party alleging hardship must prove: (a) The continued performance of its contractual duties has become excessively onerous due to an event beyond its reasonable control, which it could not reasonably have been expected to take into account at the time of the conclusion of the contract; and that (b) It could not reasonably have avoided or overcome the event or its consequences, the parties are bound, within a reasonable time of the invocation of this Clause, to negotiate alternative contractual terms, which reasonably allow overcoming the consequences of the event. • Consequences of Force Majeure A party successfully invoking the “Force Majeure” clause is relieved from its duty to perform its obligations under the contract and from any liability in damages or from any other contractual remedy for breach of contract, from the time at which the impediment causes inability to perform, if the notice thereof is given immediately. If notice thereof is not given immediately, the relief is effective from the time at which notice thereof reaches the other party. The other party may suspend the performance of its obligations, if applicable, from the date of the notice. In general, reliefs include:

8

THE PROJECT FINANCE CONTRACTUAL ARRANGEMENT

91

– Relief from breach of contract A force majeure provision typically relieves a party from what would otherwise be a breach of contract. The party alleging “force majeure” must establish the causal link between the event and its inability to perform. Moreover, he needs to show that he has taken reasonable steps to avoid or mitigate the event and its consequences, and that there are no alternate means for performing under the contract. Last, but not least, the affected party’s right to relief for force majeure under the contract will be conditional upon the issuance of a notice by it to the other party, supported by the required evidence. Thus, the occurrence of a force majeure event affecting the private partner’s ability to fulfill its contractual obligations will generally allow it relief from its obligations under the PPP contract so that it is not in breach of contract, but the Contracting Authority should ensure that relief is given only to the extent that the private partner’s inability to perform its obligations is directly caused by the force majeure event. – Liquidated damages relief Liquidated damages are damages, which are agreed during the formation of a contract to compensate an innocent party following a defaulting party’s breach of contract. They are often included in supply contracts to compensate a customer for a supplier’s late delivery or technical performance shortfalls. Delay liquidated damages are usually expressed as a specified rate per day which represents the estimated extra costs incurred and losses suffered for each day of delay. If the private partner is liable to pay liquidated damages to the Contracting Authority if it fails to meet certain construction phase milestones (such as the scheduled date for commencing operations), it will typically want to be expressly relieved from such liability to the extent it relates to the obligations it is unable to fulfill due to the force majeure event Market practice is to expressly provide for such relief upfront in the PPP contract by granting the private partner entitlement to apply to extend the milestone dates (by the period of delay caused by the force majeure event). – Extension of time for performance A contracting party is entitled to a time extension when facing force majeure and/ or other causes beyond his control. The Contracting

92

F. I. LESSAMBO

Authority usually expressly grants the private partner an extension of time in respect of delays to the commencement of operations that are attributable to force majeure events during the construction phase. This will include postponing the date on which the private Paprtner should have completed the construction of the PPP Project and the date on which any corresponding liability for liquidated damages arises. – Increased finance costs pre-completion Whenever force majeure delays the completion of the PPP Project, and the private partner is not able to commence service operations and start earning revenue to meet its debt service obligations, the PPP contract may provide for certain compensation in this regard, with mechanics distinguishing between different types of debt and lengths of delay. – Continued availability payment The availability payment is typically sized and structured with the intention to cover the costs incurred by the concessionaire in performing its obligations, as well as some level of profit. For assets or services that may not generate significant revenues (i.e., a courthouse), the concessionaire’s compensation may be based exclusively on availability payments. Under this structure, the government sponsor will be obligated to make periodic payments to the concessionaire so long as the concessionaire (i) makes the asset and related services available to the government sponsor and/or end users, as applicable, and (ii) the asset and related services satisfy the minimum performance standards. For assets that are intended to produce a certain output (i.e., a water facility), the availability payment may be coupled with a production payment that may compensate the concessionaire for additional costs incurred if the asset is operating and producing its intended output. – Tariff increases Where the PPP contract has a “user pays” model, the Contracting Authority may allow the private partner to be compensated for increased costs and lost revenues by increasing the relevant toll payments or tariffs if the PPP contract resumes. One of the more effective ways to protect

8

THE PROJECT FINANCE CONTRACTUAL ARRANGEMENT

93

against drastic price fluctuations due to tariffs or other unforeseen events is to include a price adjustment clause in the contract. A price adjustment or “escalator” clause, as it is more commonly known, is a mechanism used to protect against unpredictable or unforeseen cost increases. The PPP contract may provide upfront that any restrictions on the private partner’s ability to set the relevant tolls or tariffs are to be lifted as necessary to take account of relevant costs arising from force majeure events. However, where tariff increases are subject to an overarching regulatory regime or where such measures would imply a high political risk, it may not always be possible to achieve an increase even if justifiable under the PPP contract. – Extension to the operating period PPP contractual remedies for force majeure typically include an extension of time to perform those obligations or suspension of contractual performance for the duration of the force majeure event. The Contracting Authority, often, grants an extension to the operating period if it considers it appropriate to compensate the private partner in this way in respect of lost revenues (or costs incurred) due to force majeure. – Interim costs/lump sum compensation In the event of force majeure, the PPP contract provides that “the contract sum and contract time” shall be adjusted for increases in the costs and time caused by suspension, delay, or interruption. Adjustment of the contract sum shall include profit. One way for Contracting Authorities to address this, which is not uncommon in certain developed jurisdictions, is for the private partner to have an obligation to seek financing for such additional costs on the best possible terms. If such financing is not available or the Contracting Authority rejects the terms, the Contracting Authority either becomes the lender of last resort or is required to make an upfront payment, typically on a lump sum reimbursement basis. – Performance regime relief Under Anglo-American law, as readers know, specific performance is an exceptional remedy, employed mainly for contracts to convey property

94

F. I. LESSAMBO

with unique or hard-to-evaluate aspects, but occasionally for contracts to produce things. Likewise, under the French Civil Code, the remedy for contracts to produce things is damages, whereas the remedy for contracts to convey property is specific performance. French courts, though, sometimes employ a type of penalty to achieve effective specific enforcement of contracts to produce things. Where the PPP contract includes a bonus/penalty (or penalty only) regime based on the achievement of certain key performance indicators, it may be appropriate to grant the private partner certain relief in this regard. – Termination When the impact of a force majeure event is significant and has lasted for a defined period (typically 6 or 12 months), either party may terminate the contract unless specific agreement is reached. 8.4.2.2 Material Adverse Government Action The concept of Material Adverse Government Action (or MAGA), which is also sometimes referred to as “political force majeure,” is typically only found in contracts where one of the parties is a public entity, or government. The purpose of MAGA clauses is to allocate certain types of “political” risk to the Contracting Authority. Material Adverse Government Action means any action of competent authority of whatsoever nature, including but not limited to the introduction, application, or change of any law, order, regulation, or by law after the effective date, the effect of which is to discriminate against or has a material adverse effect on the rights, interest, or obligations of the WSI under the contract and results in any actual or prospective change in the WSIs costs and/or revenues, provided that there shall not be deemed to be a material adverse government action to the extent that the WSA’s or competent authority’s action is required following a vis major event provided that such action is reasonable in relation thereto. 8.4.2.3 Change of Law • Concept of Change in Law For agreements that are short in duration there usually is not a problem when laws change. The longer the duration of the contract the more

8

THE PROJECT FINANCE CONTRACTUAL ARRANGEMENT

95

a change in a law can have an impact. An unexpected change in law may make the private partner’s performance of its contractual obligations easier or less costly or may make it wholly or partially impossible, delayed, or more expensive. Given the long-term nature of most PPP arrangements, the operator may not be capable of including in the price specific costs arising from changes in law, which are not foreseeable at the time of entering into the contract. In PPP arrangements involving third-party financing, the lenders are also going to be concerned that the contract provides for the possibility of a change in law. The contract needs to address who should be responsible for the costs arising from changes in law and how such costs should be funded. Change in law provisions generally provide the private partner with relief from contractual breach to the extent compliance with the new law affects the private partner’s ability to perform its obligations and set out how any resulting costs of compliance or necessary changes to the PPP contract scope are treated. • Relief and Compensation In general, t he private partner is protected from breach of contract to the extent: (a) Its performance is prevented or delayed by a change in law it does not bear the risk of and (b) A variation in PPP Project scope is required in order to comply with a change in law (in which case the PPP contract needs to include a mechanism for implementing such variation.) 8.4.2.4 Termination of Contract • The concept of contractual termination A PPP contract can be terminated either at the end of the contract period or early. When a PPP contract terminates at the end of its term. In general, a PPP contract sets out when and how the Contracting Authority is entitled to serve a termination notice and what such notice should contain. The most important element of termination is the handing over project assets and services back to the contracting authority. Typically, the PPP

96

F. I. LESSAMBO

contract will include quality standards that the assets and facilities are required to meet at the end of the contract period. • Early Termination by the Public Authority A PPP contract can also be terminated ahead of the agreed upon time. Either the public authority or the private party can trigger early termination, if one party defaults on one of its key obligations. However, in some jurisdictions, such as France, the private partner is not entitled to terminate the PPP contract following an Authority failure. The only redress available to it in this case is to bring a legal action before an administrative court that is then able to rule on whether the breach by the Authority is sufficiently material to justify termination (and a compensation payment). The below events are considered as defaults: – Expropriation or confiscation of assets or shares of the Private Partner; – Non-payment of sums due to the private partner (e.g., availability fee); – Transfer by the Authority of its rights under the PPP contract in violation of the relevant provisions; – Breach of a contractual obligation by the Authority in a manner or to a degree that frustrates the ability of the private partner to perform; and – Failure by the Authority to grant relevant project authorizations. [F.N: idem].

Example Denver International Airport termination of its contract with Great Hall Partners for the Denver Airport Great Hall (Jeppesen Terminal) PPP project. Following a seven-month breakup, the contract gone awry between Denver International Airport and the contractor hired to renovate the

8

THE PROJECT FINANCE CONTRACTUAL ARRANGEMENT

97

airport’s Great Hall is officially terminated—at the price tag of $183.6 million. Background Denver International Airport (DEN) has embarked on a renovation of the Great Hall, which is the area under the tents of the airport’s Jeppesen Terminal. The terminal encompasses 1.5 million square feet. Its objective is to enhance safety and security, improve passenger flow and increase capacity. When complete, the project will deliver a safer, more efficient Great Hall that serves as a warm welcome to Denver, keeps up with passenger demand, and leaves a lasting impression for all passengers and visitors. DEN was built 25 years ago for an anticipated 50 million annual passengers. In 2019, over 69 million passengers traveled through DEN. DEN is expecting to hit 80 million passengers by 2025 and 110 million passengers by 2040. When the airport opened in 1995, 60% of the passengers connected through DEN. Today, nearly 65% originate from DEN, only 35% connect, and that puts much more stress on the terminal facility than ever anticipated. DEN officials said the airport paid Great Hall $55.5 million to settle almost $290 million of submitted claims plus another $121.8 million last December. The airport did not have to pay a contract termination penalty, and the total amount falls within the $170 million to $210 million that DEN expected parting ways with Great Hall would cost. The final payment covers Great Hall’s equity investment, work completed prior to its termination and work performed during the project’s transition back to the airport. DEN said that reimbursing a developer for these “transition and contract breakage costs” are not unusual when terminating a construction contract for convenience. In addition, the payments were required under the development agreement that the airport had with Great Hall.

• Early Termination by the Private Party In general, a PPP contract sets out the grounds on which the Authority can invoke termination for fault of the Private Partner. The below events are constitutive of breach susceptible to trigger early termination:

98

F. I. LESSAMBO

– Insolvency/bankruptcy of the Private Partner; – Failure of the private partner to reach certain construction milestones or project completion; – Failure of the private partner to deliver the services according to the agreed specifications; – Penalty points (awarded for intermittent failures to deliver services) that exceed specified thresholds; – Change of ownership of the private partner without the consent of the Authority; and – Failure to insure the PPP project assets/business as required. 8.4.2.5 Governing Law and Dispute Resolution The governing law provision determines what system of law governs any dispute arising out of the PPP contract, whereas a dispute resolution clause specifies which forum will then apply that law to resolve any such dispute and, in the case of arbitration, the procedure pursuant to which such dispute will be heard and resolved. • The PPP Governing Law The choice of governing law determines the substantive law that will be applied to determine the rights and obligations of the parties under the PPP contract. This includes resolution of disputes arising out of the PPP contract. However, the choice of governing law does not determine the means by which any dispute will be resolved; for example, whether this is by a court of a particular country, or by arbitration. This must be specified in the dispute resolution clause in the PPP contract. • The PPP Dispute Resolution In general, a PPP contract contains a dispute resolution clause that sets out a pre-agreed mechanism for the resolution of any disputes that may arise out of the PPP contract. A dispute resolution clause aims to ensure that the PPT parties stick to the agreed mechanism and helps reduce the risk of their wasting time and costs arguing about where a claim can be heard. A good dispute resolution clause also reduces the risk of duplicative proceedings and irreconcilable decisions by different courts or tribunals.

CHAPTER 9

Alternative Dispute Resolution

9.1

General

Alternative Dispute Resolution (ADR) refers to any means of settling disputes outside of the courtroom or without litigation. Alternative dispute resolution, or external dispute resolution, typically denotes a wide range of dispute resolution processes and techniques that parties can use to settle disputes, with the help of a third party. The US Department of Labor defines ADR as: Any procedure, agreed to by the parties of a dispute, in which they use the services of a neutral party to assist them in reaching agreement and avoiding litigation.1

ADR is increasingly being utilized in disputes that would otherwise result in lengthy litigation as they allow the parties to come up with solutions that are more creative, including high-profile labor disputes, divorce actions, and personal injury claims. ADR typically includes early neutral evaluation, facilitation, negotiation, conciliation, mediation, and arbitration. The aim, therefore, of all Alternative Dispute Resolution processes is to reach an accommodation, which may not necessarily reflect the exact legal standing of the parties but is a solution, which the parties 1 https://www.dol.gov › Labor Relations.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_9

99

100

F. I. LESSAMBO

can accept. Alternative Dispute Resolution (ADR) in the common law tradition has its origins rooted in English legal development. As early as the Norman Conquest, legal charters and documents indicate that English citizenry instituted actions concerning private wrongs, officiated by highly respected male members of a community, in informal, quasiadjudicatory settings. Despites its propensity to litigation, the United States embraced ADR earlier on. While these early attempts at ADR were essential to its development in the United States, ADR did not receive formal institutionalization until the late-nineteenth century.

9.2

Advantages and Disadvantages of ADR 9.2.1

Benefits of ADR

ADR processes have a number of advantages. They are flexible, costefficient, time-effective, and give the parties more control over the process and the results. • Flexibility ADR processes are more flexible and permit parties to participate more fully and in a wider range of ways. They give parties more control by providing opportunities to: Customize the resolution process. Arbitration and litigation is based upon the rights and obligations of the parties to the dispute. On the other hand, a mediated settlement focuses on the parties’ interests and needs. The mediator encourages the parties to search for a commercial solution, which meets with both parties’ needs. • Cost efficiency Clearly, a short mediation, for instance, is a cheaper event than a trial or arbitration. Some argue that lawyers are unnecessary in the process (and therefore a further cost saving is made) while other consider lawyers a valuable addition. • Time Effectiveness The anxiety of long waits in the due process/litigation system can be relieved through ADR. The average mediation lasts 1–2 days. The proponents of ADR frequently compare this to a trial lasting years. It is however

9

ALTERNATIVE DISPUTE RESOLUTION

101

important to remember that the parties may not be in a position to forge a settlement early on in the dispute process, and it may in fact take many months or even years before they are in a position to mediate effectively. • Confidentiality The proceedings, in most ADR, are confidential. Contrastingly, litigation is in the public domain and ADR may become public if there is an appeal. Confidentiality is a critical component of a successful ADR process. Thus, disputes can be settled discretely and business secrets will remain confidential. Additionally, because both parties as well as the conciliator have agreed upon confidentiality, both parties can be assured of discretion no matter what the outcome of the process. More, ADR allows parties to speak openly without the fear that statements made during the ADR process will be disclosed to others. Confidentiality is an advantage as some clients wish to keep their disputes from the public domain. • Control over the process and the results Many proponents of ADR argue that the ADR process and the outcomes are more satisfying for the parties than a trial. Apparently, the reaching of a settlement by consensus is viewed as producing high levels of satisfaction for the parties. Research has suggested that high levels of satisfaction are not attained. However, a mediated outcome is still more satisfactory than other forms of imposed decisions such as litigation, or adjudication. 9.2.2

Disadvantages of ADR

• Unfairness The biggest downside is that they may not always be fair. For example, there can be bias in the arbitration process as each party hires its own arbitrator. In negotiation, the party with the most advantage usually gets its way. There are alternative dispute resolution cases where one side wins in an unjust manner. Making sure that everything is fair lies in hiring impartial neutral parties that are competent.

102

F. I. LESSAMBO

• I will disclose my hand Parties are frequently concerned that they may disclose some important aspect of their argument, which will then aid the other side in the event that the ADR is not successful and the matter proceeds to trial. Karl J. Mackie argued that this belief is more perceived than real and notes three points. First, if a party has a strong case then disclosure of the strengths is likely to assist in settlement. Second, if the party has a weak case then there is perhaps little advantage in “prolonging the agony.” Third, if as in the majority of instances the case is not particularly strong or weak then surely it is best to consider ADR.2 • There is pressure to settle It is also a fact that sometimes, parties participating in a settlement conference or mediation feel pressured to settle. Many times, the pressure springs from legitimate considerations—such as the desire to liquidate the risks of an adverse outcome, eliminate the expense of future litigation, or prioritize other business interests. • The impression of weakness or liability Some have argued that to suggest ADR or mediation demonstrates a weakness in the case. While this may have been true at the start of the 1990’s, it is arguably less of a disadvantage today.

9.3

Forms and Types of ADR 9.3.1

Adjudicative ADR

Adjudication involves an independent third party considering the claims of both sides and making a decision. In an adjudicative ADR proceeding, a quasi-judicial facilitator, called the “neutral,” serves as the adjudicator or decision maker. Additionally, while adjudication though the US judicial system “always results in a binding decision,” adjudicative ADR can provide various results, whether “binding, non-binding, or advisory.”

2 Karl J.Mackie (2007): ADR Practical Guide, Tottel Publishing.

9

ALTERNATIVE DISPUTE RESOLUTION

103

• Arbitration Arbitration is a private process where disputing parties agree that one or several individuals can make a decision about the dispute after receiving evidence and hearing arguments. In arbitration, a trained professional and neutral arbitrator acts as a judge to render a decision to end a dispute.3 The arbitration process is similar to a trial in that the parties make opening statements and present evidence to the arbitrator.4 As a form of adjudicative ADR, arbitration is conducted either by a single arbitrator or by a panel of three. Arbitration proceedings are often much more formal than other forms of ADR, mirroring adversarial, court-like proceedings. Parties to arbitration must agree on applicable rules of procedure, and the amount of discovery allowable. Upon completion of the arbitration hearing, the arbitrator reviews the evidence, testimony, and the collective bargaining agreement, considers principles of arbitration, and makes a decision. The arbitrator’s decision is generally rendered within 60 days. Arbitration can take different variants, including: – Expedited arbitration, which aims to provide a speed up process with an informal hearing. Under this process, decisions are generally rendered within five days. – Interest arbitration, which consists of using an arbitrator or arbitrator’s board to render a binding decision in resolving a dispute over new contract terms. – Final offer selection arbitration, which is an interest arbitration process wherein the arbitrator or arbitrator’s board selects either the union or the management proposal to the solution. There can be no compromised decisions. – Tripartite arbitration, which is a process wherein a three-member panel of arbitrators is used to reach a decision.

3 Katie Shonk (2021): What Is an Arbitration Agreement? Harvard Law SchoolProgram on Negotiation, https://www.pon.harvard.edu/tag/arbitration-agreement/. 4 Katie Shink (2022): What is an Arbitration Agreement? The ins and outs of contractual agreements to engage in arbitration, Harvard Law School- Program on Negotiation, https://www.pon.harvard.edu/daily/conflict-resolution/what-is-an-arbitration-agr eement/. .

104

F. I. LESSAMBO

• Neutral Fact-Finding Another form of adjudicative ADR is neutral fact-finding. In neutral evaluations, a neutral individual listens to each party give its version of events. After their perspectives have been considered, the neutral evaluator offers his/her opinion on the disagreement. That is, neutral fact-finding is used in situations where the parties to a dispute cannot agree on the facts or/and technical expertise is essential to their determination. However, the neutral fact-finding determination is not binding in any way, but if the neutral party is respected and trusted by both sides, it can help the parties reassess their negotiating positions with an eye toward finding common ground. The process is not only used in international dispute. Neutral fact-finder has been used in many public policy disputes, including those involving acid disputes and other scientific environmental issues.5 9.3.2

Evaluative ADR

The second category of ADR, evaluative ADR, is a process in which lawyers and litigants present their version of a particular case and receive feedback on the strengths and weaknesses of their claims and arguments. In many of these proceedings, the parties are not yet willing to discuss a settlement and an evaluation serves to provide context as to each party’s bargaining power, both to reaffirm particular beliefs and to dispel unreasonable expectations. • Peer Evaluation Peer-based approaches are cheaper than arbitration and the experts involved have knowledge or are expert in the subject matter of the dispute. In many instances, the panel may offer recommendations for argument development, or point the parties to issues not previously considered, and provide recommendations for settlement. Decisions by knowledgeable and neutral experts reduce bias, have greater authority, and could be appealed.

5 Alexander S. Polsky (2007): Neutral Fact-Finding as a Tool to Resolve Employment, Corporate Counsel, https://www.jamsadr.com/files/uploads/documents/articles/polskyneutral-fact-finding-cc-2007-07.pdf.

9

ALTERNATIVE DISPUTE RESOLUTION

105

• Specialist or Expert Evaluation This proceeding is often employed where the conflict raises highly technical issues, requiring opinions from experts in the field, such as in construction, computer design, or biomedical technology matters. The parties may agree beforehand that the expert’s determination of the issues is definitive and this may be used as common ground in a settlement discussion or trial. The informality of the proceeding may engender open dialogue between the parties and the experts, without the pressure to “one up” one another. 9.3.3

Facilitative ADR

Facilitative ADR is processes in which an independent third person with experience in dispute resolution helps the parties to identify the issues in dispute, develop options to overcome them, evaluate the alternatives and hopefully reach a mutually acceptable agreement Facilitative ADR describes procedures such as mediation, conciliation, facilitation or facilitated negotiation. In facilitative ADR, the third person does not render a binding decision nor does he or she actually “reach the merits” of a dispute. Rather, he/she serves more as a referee or advisor to the parties, to encourage discussion, dialogue, and settlement. The three most common forms of facilitative ADR is mediation, conciliation, and consensus building. • Mediation Mediation is a process whereby the parties involved utilize an outside party to help them reach a mutually agreeable settlement. Put differently, mediation is assistance to two or more interacting parties by a third party.6 The mediator—who maintains scrupulous neutrality throughout suggests various proposals to help the two parties reach a mutually agreeable solution. Mediation is the least adversarial form of ADR. The mediator helps the parties identify real issues, frame the discussion, and generate options

6 James A. Wall, Jr; John B. Stark; and Rhetta L. Standifer (2001): Mediation—A Current Review and Theory Development, Journal of Conflict Resolution, p. 370.

106

F. I. LESSAMBO

for settlement. The goal of mediation is to provide a “win–win” resolution, enabling both parties to obtain a satisfactory remedy. Mediators come from a number of different backgrounds, but are people familiar with the underlying subject matter of a conflict. • Conciliation Conciliation is an alternative dispute resolution (ADR) process whereby a third party (the conciliator) is appointed as a neutral and unbiased person to help parties involved in a dispute to achieve a settlement by steering negotiations toward an amicable conclusion. Conciliation is very similar to mediation, with much less formality. While mediation may entail regular meetings between the parties, conciliation may be as informal as a telephone call. Moreover, conciliation usually assumes that the parties have already achieved some form of reconciliation and that the relationship has been mended, requiring only that the details of the matter be resolved. • Consensus Building Consensus building may be thought of as mediation on a large scale where a large number of parties are involved and representatives may be charged to appear and obtain decisions on behalf of their constituencies. Consensus building may proceed over an extended period. In these situations, because of the sheer number of parties involved, individuals may not attend the actual deliberations, but send a representative.

9.4

International Platforms

The parties to a PPP can select from a variety of institutional institutions to settle their disputes. The main institutions include: The ICSID, the International Chamber of Commerce (“ICC Rules”), the London Court of International Arbitration rules (“LCIA Rules”), the Arbitration Institute of the Stockholm Chamber of Commerce rules (“SCC Rules”), the Hong Kong International Arbitration Centre rules (“HKIAC Rules”), the Singapore International Arbitration Centre rules (“SIAC Rules”), and the Cairo Regional Centre for International Commercial Arbitration rules (“CRCICA Rules”).

9

9.4.1

ALTERNATIVE DISPUTE RESOLUTION

107

The ICSID

ICSID was established in 1966 by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). The ICSID Convention is a multilateral treaty formulated by the Executive Directors of the World Bank to further the bank’s objective of promoting international investment. ICSID is an independent, depoliticized, and effective dispute-settlement institution. Its availability to investors and States helps to promote international investment by providing confidence in the dispute resolution process. It is also available for state-state disputes under investment treaties and free trade agreements, and as an administrative registry.7 9.4.1.1 Functions ICSID provides for settlement of disputes by conciliation, arbitration, or fact-finding. The ICSID process is designed to take account of the special characteristics of international investment disputes and the parties involved, maintaining a careful balance between the interests of investors and host States. ICSID offers services for the resolution of international disputes, primarily between investors and States, but also in State-to-State disputes. In addition, it offers fact-finding proceedings to examine and report on facts before a dispute arises. The procedural rules for arbitration under the ICSID Convention may be used to settle disputes between an ICSID Contracting State—the term given to States that have ratified the ICSID Convention—and nationals of another Contracting State. The rules benefit from a robust enforcement mechanism, as Contracting States agree that an ICSID Convention award will be treated as a final judgment of their courts. 9.4.1.2 Composition of Arbitral Tribunal The Arbitral Tribunal is constituted as soon as possible after registration of a request pursuant to Article 36. The Tribunal consists of a sole arbitrator or any uneven number of arbitrators appointed as the parties shall agree. Where the parties do not agree upon the number of arbitrators and the method of their appointment, the Tribunal consists of

7 ICSID/ World Bank Group, https://icsid.worldbank.org/About/ICSID.

108

F. I. LESSAMBO

three arbitrators, one arbitrator appointed by each party and the third— the president of the Tribunal—is appointed by agreement of the parties.8 In general, the majority of the arbitrators are nationals of States other than the Contracting State party to the dispute and the Contracting State whose national is a party to the dispute; provided, however, that the foregoing provisions of this Article shall not apply if the sole arbitrator or each individual member of the Tribunal has been appointed by agreement of the parties.9 9.4.1.3 Applicable Rules of Law and Conduct of the Arbitration The Tribunal decides the parties may agree a dispute in accordance with such rules of law as. In the absence of such agreement, the Tribunal applies the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.10 Failure of a party to appear or to present his case is not deemed an admission of the other party’s assertions. The other party may request the Tribunal to deal with the questions submitted to it and to render an award. Nonetheless, before rendering an award, the Tribunal notifies, and grants a period of grace to, the party failing to appear or to present its case, unless it is satisfied that that party does not intend to do so.11 Except as the parties otherwise agree, the Tribunal, if requested by a party, determines any incidental or additional claims or counterclaims arising directly out of the subject matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.12 9.4.1.4 Arbitration Award The Tribunal decides questions by a majority of the votes of all its members. The award of the Tribunal is in writing and signed by the members of the Tribunal who voted for it. The award deals with every question submitted to the Tribunal and states the reasons upon which it is based. Any member of the Tribunal may attach his individual opinion 8 ICSID Convention, Article 37. 9 Article 39 of the ICSID Convention. 10 Article 42, ICSID Convention. 11 Article 45 of the ICSID Convention. 12 Article 46 of the ICSID Convention.

9

ALTERNATIVE DISPUTE RESOLUTION

109

to the award, whether he dissents from the majority or not, or a statement of his dissent. The ICSID does not publish the award without the consent of the parties.13 The Secretary-General promptly dispatches certified copies of the award to the parties. The award is deemed to have been rendered on the date on which the certified copies were dispatched.14 The Tribunal upon the request of a party made within 45 days after the date on which the award was rendered may after notice to the other party decide any question which it had omitted to decide in the award, and shall rectify any clerical, arithmetical or similar error in the award. Its decision becomes part of the award and is notified to the parties in the same manner as the award. 9.4.2

The International Chamber of Commerce

ICC was founded in the aftermath of the First World War when no world system of rules governed trade, investment, finance, or commercial relations. Without waiting for governments to fill the gap, ICC’s founders acted on their conviction that the private sector is best qualified to set global standards for business. In 1919, a handful of entrepreneurs decided to create an organization that would represent business everywhere, and in 1923, the aicc established the International Court of Arbitrage. 9.4.2.1 ICC Functions The function of the International Court of Arbitration of the International Chamber of Commerce is to ensure the application of the Rules of Arbitration of ICC, and it has all the necessary powers for that purpose. The Court does not itself resolve disputes. It administers the resolution of disputes by arbitral tribunals, in accordance with the Rules of Arbitration of ICC. The parties agreeing to submit to arbitration under the Rules are deemed to have submitted ipso facto to the Rules in effect on the date of commencement of the arbitration, unless they have agreed to submit to the Rules in effect on the date of their arbitration agreement. In order to have recourse to arbitration under the Rules, a party shall submit its Request for Arbitration to the Secretariat at any of the offices specified in the Internal Rules. The Secretariat notifies the claimant and

13 Article 48 of the ICSID Convention. 14 Article 49 of the ICSID Convention.

110

F. I. LESSAMBO

respondent of the receipt of the Request and the date of such receipt.15 Within 30 days from receipt of the Request from the Secretariat, the respondent is required to submit an Answer and such other documents or information with the Answer as it considers appropriate or as may contribute to the efficient resolution of the dispute.16 Every arbitrator must be and remain impartial and independent of the parties involved in the arbitration. To that end, a prospective arbitrator signs a statement of acceptance, availability, impartiality, and independence. The prospective arbitrator discloses in writing to the Secretariat any facts or circumstances that might be of such a nature as to call into question the arbitrator’s independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the arbitrator’s impartiality. The Secretariat shall provide such information to the parties in writing and fix a time limit for any comments from them.17 In confirming or appointing arbitrators, the Court considers the prospective arbitrator’s nationality, residence, and other relationships with the countries of which the parties or the other arbitrators are nationals and the prospective arbitrator’s availability and ability to conduct the arbitration in accordance with the Rules.18 9.4.2.2 Composition of Arbitral Tribunal Disputes are decided either by a sole arbitrator or by three arbitrators. • Sole arbitrator A sole arbitrator is appointed when: (i) The parties have not agreed upon the number of arbitrators, save where it appears to the Court that the dispute is such as to warrant the appointment of three arbitrators. In such a case, the claimant must nominate an arbitrator within 15 days from receipt of the notification of the decision of the Court, and the respondent must

15 Article 4 of the ICC Convention. 16 Article 5 of the ICC Convention. 17 Article 11 of the ICC Convention. 18 Article 13 of the ICC Convention.

9

ALTERNATIVE DISPUTE RESOLUTION

111

nominate an arbitrator within 15 days from receipt of the notification of the nomination made by the claimant. If a party fails to nominate an arbitrator, the Court shall make the appointment. (ii) The parties have agreed that the dispute has to be resolved by a sole arbitrator and nominate the sole arbitrator for confirmation. If the parties fail to nominate a sole arbitrator within 30 days from the date when the other party or parties have received the claimant’s Request for Arbitration, or within such additional time as may be allowed by the Secretariat, the Court appoints the sole arbitrator. • Three Arbitrators The parties can agree that three arbitrators must resolve the dispute. In such a case, each party nominates in the Request and the Answer, respectively, one arbitrator for confirmation. If a party fails to nominate an arbitrator, the Court makes the appointment. The third arbitrator, who acts as president of the arbitral tribunal, is appointed by the Court, unless the parties have agreed upon another procedure for such appointment, in which case the nomination is subject to confirmation pursuant to Article 13. Nonetheless, in exceptional circumstances, the Court can appoint each member of the arbitral tribunal to avoid a significant risk of unequal treatment and unfairness that may affect the validity of the award.19 9.4.2.3 Applicable Rules of Law and Conduct of the Arbitration The parties are free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal applies the rules of law, which it determines to be appropriate. The arbitral tribunal can take account of the provisions of the contract, if any, between the parties and of any relevant trade usages. The arbitral tribunal and the parties make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute. When a hearing is to be held, the arbitral tribunal summons the parties to appear before it on the day and at the place fixed by it. The arbitral tribunal may decide, after consulting the parties, and based on the relevant facts and circumstances of the case, that any hearing will be conducted by physical 19 Article 12 of the ICC Convention.

112

F. I. LESSAMBO

attendance or remotely by videoconference, telephone, or other appropriate means of communication.20 The Arbitral Court can also hold an emergency, or an expedite proceedings. The emergency arbitrator’s decision shall take the form of an order. The parties undertake to comply with any order made by the emergency arbitrator. However, the emergency arbitrator’s order does not bind the arbitral tribunal with respect to any question, issue, or dispute determined in the order. The arbitral tribunal may modify, terminate, or annul the order or any modification thereto made by the emergency arbitrator21 Likewise, an expedite proceeding is allowed under certain circumstances.22 9.4.2.4 Arbitration Award When the arbitral tribunal is composed of more than one arbitrator, an award is made by a majority decision. If there is no majority, the award is made by the president of the arbitral tribunal alone. The award states the reasons upon which it is based.23 In very rare situations, if the parties reach a settlement after the file has been transmitted to the arbitral tribunal in accordance with Article 16, the settlement is recorded in the form of an award made by consent of the parties, if so requested by the parties and if the arbitral tribunal agrees to do so.24 Before signing any award, the arbitral tribunal submits it in draft form to the Court. The Court may lay down modifications as to the form of the award and, without affecting the arbitral tribunal’s liberty of decision, may also draw its attention to points of substance. The arbitral tribunal renders no award until the Court as to its form has approved it. Once an award has been made, the Secretariat notifies the parties the text signed by the arbitral tribunal, provided always that the costs of the arbitration have been fully paid to ICC by the parties or by one of them. Every award shall be binding on the parties.

20 Article 26 of the ICC Convention. 21 Article 29 of the ICC Convention. 22 Article 30 of the ICC Convention. 23 Article 32 of the ICC Convention. 24 Article 33 of the ICC Convention.

9

9.4.3

ALTERNATIVE DISPUTE RESOLUTION

113

The Arbitration Institute of the Stockholm Chamber of Commerce (SCC)

The SCC was established in 1917 and is part of, but independent from, the Stockholm Chamber of Commerce. The SCC consists of a Board and a Secretariat and provides efficient dispute resolution services for both Swedish and international parties. The SCC was recognized in the 1970’s by the United States and the Soviet Union as a neutral center for the resolution of East West trade disputes. In addition, China recognized the SCC as a forum for resolving international disputes around the same time. The SCC has since expanded its services in international commercial arbitration and emerged as one of the most important and frequently used arbitration institutions worldwide. In recent years, the number of cases filed with the SCC—both domestic and international—has increased considerably. The high number of international cases—nearly 50%—clearly evidence the strong position of the SCC as a preferred venue for dispute resolution among the international business community. Every year parties from as many as 30–40 countries use the services of the SCC. Sweden and the SCC also play a unique role in the international system developed for bilateral and multilateral investment protection worldwide. In at least 120 of the current bilateral investment treaties (BITs) Sweden or the SCC is cited as the forum for resolving disputes between investors and the state. Today, the SCC is the world’s second largest institution for investment disputes.25 Cases are administered in English, Swedish, or Russian and allotted to one of three divisions, each consisting of a legal counsel and a case administrator. Any other agreed language may be used in the arbitral proceedings before the tribunal, once it has been constituted. The total value in dispute for all cases commenced in 2018 amounted to e13.3 billion. A total of 152 cases were registered, of which half (76) were international disputes, involving parties from 43 countries. Of the registered cases, 89 were filed under the SCC Arbitration Rules and 52 under the SCC Rules for Expedited Arbitrations. In 2018, there was a notable increase in gender diversity among the appointed arbitrators: 27% of all appointments were women, compared to 18% in 2017.26

25 SCC website, https://sccinstitute.com/. 26 SCC website, https://sccinstitute.com/.

114

F. I. LESSAMBO

9.4.3.1 The SCC Functions The function of the SCC consists of: (i) administering domestic and international disputes in accordance with the SCC Rules and other procedures or rules agreed upon by the parties; and (ii) Providing information concerning arbitration and mediation matters.27 9.4.3.2 Composition of Arbitral Tribunal The arbitral tribunal can be made of a sole or multiple arbitrators. • Sole arbitrator Where the Arbitral Tribunal is to consist of a sole arbitrator, the parties are given 10 days to jointly appoint the arbitrator. If the parties fail to appoint the arbitrator within this time, the Board makes the appointment. • Multiple arbitrators Where the Arbitral Tribunal is to consist of more than one arbitrator, each party appoints an equal number of arbitrators and the Board appoints the Chairperson. Where a party fails to appoint arbitrator(s) within the stipulated period, the Board shall make the appointment.28 Every arbitrator must be impartial and independent. Before being appointed, a prospective arbitrator must disclose any circumstances that may give rise to justifiable doubts as to the prospective arbitrator’s impartiality or independence. Once appointed, an arbitrator submits the Secretariat a signed statement of acceptance, availability, impartiality and independence, disclosing any circumstances that may give rise to justifiable doubts as to the arbitrator’s impartiality or independence. The Secretariat sends a copy of the statement of acceptance, availability, impartiality, and independence to the parties and the other arbitrators. An arbitrator must immediately inform the parties and the other arbitrators in writing if any circumstances that

27 Article 2, Appendix I. 28 Article 17 of the SCC.

9

ALTERNATIVE DISPUTE RESOLUTION

115

may give rise to justifiable doubts as to the arbitrator’s impartiality or independence arise during the course of the arbitration.29 9.4.3.3 Applicable Rules of Law and Conduct of the Arbitration • Arbitration is deemed to commence on the date the SCC receives the Request for Arbitration. The Secretariat sends a copy of the Request for Arbitration and any attached documents to the Respondent. The Secretariat shall set a time within which the Respondent shall submit an Answer to the SCC. • The Arbitral Tribunal decides the merits of the dispute based on the law(s) or rules of law agreed upon by the parties. In the absence of such agreement, the Arbitral Tribunal applies the law or rules of law that it considers most appropriate. Any designation by the parties of the law of a given state is deemed to refer to the substantive law of that state, not to its conflict of laws. The Arbitral Tribunal decides the dispute aequo et bono or as amiable compositeur only if the parties have expressly authorized it to do so.30 • Within the period determined by the Arbitral Tribunal, the Claimant submits a Statement of Claim which includes: (i) the specific relief sought; (ii) the factual and legal basis the Claimant relies on; and (iii) Any evidence the Claimant relies on. • Within the period determined by the Arbitral Tribunal, the Respondent submits a Statement of Defense.31 The Arbitral Tribunal declares the proceedings closed when it is satisfied that the parties have had a reasonable opportunity to present their cases. In exceptional circumstances, prior to the making of the final award, the Arbitral Tribunal may reopen the proceedings on its own motion, or on the application of a party.32 A party may request that the Arbitral Tribunal decide one or more issues of fact or law by way of summary procedure, without necessarily undertaking every procedural step that might otherwise be adopted for the arbitration. A request for summary procedure may concern issues of jurisdiction,

29 Article 18 of the SCC. 30 Article 27 of the SCC. 31 Article 20 of the SCC. 32 Article 40 of the SCC.

116

F. I. LESSAMBO

admissibility or the merits. It may include, for example, an assertion that: (i) An allegation of fact or law material to the outcome of the case is manifestly unsustainable; (ii) even if the facts alleged by the other party are assumed to be true, no award could be rendered in favor of that party under the applicable law; or (iii) any issue of factor law material to the outcome of the case is, for any other reason, suitable to determination by way of summary procedure.33 9.4.3.4 Arbitration Award Where the Arbitral Tribunal consists of more than one arbitrator, any award or other decision is made by a majority of the arbitrators or, failing a majority, by the Chairperson. The Arbitral Tribunal may decide that the Chairperson alone may make procedural rulings [Article 41]. The Arbitral Tribunal makes its award in writing, and, unless otherwise agreed by the parties, must state the reasons upon which the award is based. An award includes the date of the award and the seat of arbitration in accordance with Article 25, and be signed by the arbitrators. If An Arbitrator fails to sign an award, the signatures of the majority of the arbitrators or, failing a majority, of the Chairperson is deemed sufficient, if the reason for the omission of the signature is stated in the award. The Arbitral Tribunal delivers a copy of the award to each of the parties and to the SCC immediately. If any arbitrator fails, without good cause, to participate in the deliberations of the Arbitral Tribunal on any issue, such failure will not preclude a decision being taken by the other arbitrators [Article 42]. The final award is made no later than six months from the date the case was referred to the Arbitral Tribunal pursuant to Article 22. The Board may extend this time limit upon a reasoned request from the Arbitral Tribunal or if otherwise deemed necessary [Article 43]. The Arbitral Tribunal may decide a separate issue or part of the dispute in a separate award.34

33 Article 39 of the SCC. 34 Article 44 of the SCC.

9

9.4.4

ALTERNATIVE DISPUTE RESOLUTION

117

The Hong Kong International Arbitration Centre (HKIAC)

The Centre was established in 1985 to promote the use of arbitration and other forms of alternative dispute resolution services in Asia. Formed as a non-profit making company limited by guarantee under Hong Kong law, HKIAC was originally funded with assistance from the business community and the Hong Kong Government. The Centre’s success as an arbitration center is in large part due to its UNCITRAL-based international arbitration law, its impartial and experienced courts and the availability of well-trained and experienced local lawyers. 9.4.4.1 The HKIAC Missions The mission of the HKIAC is to serve as a regional and international hub for arbitration and to support the development, promotion and implementation of alternative dispute resolution within Hong Kong and abroad. With its independent legal system, pro-enforcement judiciary, and a body of experienced legal and technical professionals outnumbering any jurisdiction in the region, Hong Kong benefits from a long-standing tradition of servicing parties engaging in alternative dispute resolution.35 The Hong Kong International Arbitration Centre (“HKIAC”) has promulgated a new set of Administered Arbitration Rules (“AAR”), effective November 1, 2018. Among those rules are Articles 27–30 concerning the HKIAC’s powers to join additional parties in an arbitration, to consolidate arbitrations, to consolidate related claims in a single arbitration, and to coordinate related unconsolidated arbitral proceedings. Those powers, which the HKIAC can exercise without the consent of the parties to any bilateral arbitration agreement, are not trivial; among other things, they arguably institutionalize pathways to collective or opt-in class arbitration proceedings. 9.4.4.2 Composition of Arbitral Tribunal Before confirmation or appointment, a prospective arbitrator signs a statement confirming his or her availability to decide the dispute and his or her impartiality and independence; and (b) disclose any circumstances likely to give rise to justifiable doubts as to his or her impartiality or independence. An arbitrator once confirmed or appointed and throughout the arbitration, must disclose without delay any such circumstances to the 35 https://www.hkiac.org.

118

F. I. LESSAMBO

parties unless they have already been informed by him or her of these circumstances. If the parties have not agreed upon the number of arbitrators before the arbitration commences or within 30 days from the date the Respondent receives the Notice of Arbitration, HKIAC decides whether the case shall be referred to a sole arbitrator or to three arbitrators, taking into account the circumstances of the case.36 At an early stage of the arbitration and in consultation with the parties, the arbitral tribunal shall prepare a provisional timetable for the arbitration, which shall be provided to the parties and HKIAC. • A Sole Arbitrator The parties may agree before the arbitration commences that the dispute is to be referred to a sole arbitrator. In such a case, they must jointly designate the sole arbitrator within 30 days from the date the Notice of Arbitration was received by the Respondent. However, where the parties have agreed after the arbitration commences to refer the dispute to a sole arbitrator, they must jointly designate the sole arbitrator within 15 days from the date of that agreement.37 In certain situations, the HKIAC may decide that the dispute shall be referred to a sole arbitrator. If so, the parties must jointly designate the sole arbitrator within 15 days from the date HKIAC’s decision was received by the last of them. If the parties fail to designate the sole arbitrator within the applicable time limit, HKIAC shall appoint the sole arbitrator.38 • Three Arbitrators Where the parties have agreed before the arbitration commences that the dispute must be referred to three arbitrators, each party designates in the Notice of Arbitration and the Answer to the Notice of Arbitration, respectively, one arbitrator. If either party fails to designate an arbitrator, HKIAC appoints the arbitrator. The Claimant designates an arbitrator within 15 days from the date of that agreement, and the Respondent designates an arbitrator within 15 days from receiving notice of the 36 Article 6- HKIAC. 37 Article 6-HKIAC. 38 Article 7-HKIAC.

9

ALTERNATIVE DISPUTE RESOLUTION

119

Claimant’s designation. If a party fails to designate an arbitrator, HKIAC appoints the arbitrator. The two arbitrators so appointed designate a third arbitrator, who acts as the presiding arbitrator. Failing such designation within 30 days from the confirmation or appointment of the second arbitrator, HKIAC appoints the presiding arbitrator. The rules are the same where there are more than two parties to the arbitration and the dispute is to be referred to three arbitrators. 9.4.4.3 Applicable Rules of Law and Conduct of the Arbitration Parties are free to agree on the procedural rules. If the parties fail to agree, the arbitral tribunal can conduct the arbitration in the manner that it considers appropriate, subject to the provisions of the Arbitration Ordinance and in particular the duty of the arbitral tribunal to act fairly and impartially, which cannot be overridden. The arbitral tribunal and the parties must do everything necessary to ensure the fair and efficient conduct of the arbitration. After the arbitral tribunal is constituted, any change or addition by a party to its legal representatives must be communicated promptly to all other parties, the arbitral tribunal and HKIAC. Where the parties agree to pursue other means of settling their dispute after the arbitration commences, HKIAC, the arbitral tribunal or emergency arbitrator may, at the request of any party, suspend the arbitration or Emergency Arbitrator Procedure, as applicable, on such terms, as it considers appropriate. 4 Arbitration Award Once the proceedings are declared closed, the arbitral tribunal informs HKIAC and the parties of the anticipated date by which an award will be communicated to the parties. The award is rendered within three months from the date when the arbitral tribunal declares the entire proceedings or the relevant phase of the proceedings closed. This time limit may be extended by agreement of the parties or, in appropriate circumstances, by HKIAC. The arbitral tribunal may, if it considers it necessary, decide, on its own initiative or upon application of a party, to reopen the proceedings at any time before the award is made.

120

F. I. LESSAMBO

9.4.5

The Singapore International Arbitration Centre

Established on July 1, 1991, Singapore International Arbitration Centre (SIAC) is a not-for-profit international arbitration organization based in Singapore, which administers arbitrations under its own rules of arbitration and the UNCITRAL Arbitration. SIAC arbitration awards have been enforced in many jurisdictions including Australia, China, Hong Kong SAR, India, Indonesia, Jordan, Thailand, UK, United States, and Vietnam, among other New York Convention signatories. The Singapore International Arbitration Centre (SIAC) has opened an office in New York, reflecting its popularity as a center for dispute resolution among US parties. 9.4.5.1 Functions The SIAC mission is to provide excellent quality and efficient service, promoting arbitration as a preferred mode of dispute resolution. 9.4.5.2 Composition of Arbitral Tribunal The Arbitral Tribunal can be composed of a sole or multiple arbitrators. • Sole arbitrator For a tribunal consisting of a sole arbitrator, the parties appoint the sole arbitrator by mutual agreement, failing which; the appointing authority appoints an arbitrator on a request by a party. • Three Arbitrators For a tribunal consisting of three arbitrators, (i) each party appoints one arbitrator and the third arbitrator is appointed by mutual agreement of the parties; (ii) if the parties fail to appoint the third arbitrator within 30 days of receiving a request to appoint, the appointing authority appoints the third arbitrator. A party wishing to commence an arbitration under these Rules (the “Claimant”) shall file with the Registrar a Notice of Arbitration. 9.4.5.3 Applicable Rules of Law and Conduct of the Arbitration The principle behind the International Arbitrage Act (IAA) is that the rules of arbitration adopted by the parties are applicable to the extent that

9

ALTERNATIVE DISPUTE RESOLUTION

121

they are “not inconsistent with a provision of the UNCITRAL Model Law. Arbitrators are bound by the procedural rules agreed to by the parties. Subject to the provisions of the IAA and UNCITRAL Model Law, the parties are free to agree on the procedural rules for the arbitration. However, there are a limited number of legislative provisions that are fundamental to Singapore arbitration law and that parties generally cannot derogate from, such as: • The courts’ power to stay proceedings relating to a matter covered by an arbitration agreement [Sect. 6, IAA]. • The grounds for setting aside an arbitral award [Sect. 24, IAA; Article 34, UNCITRAL Model Law]. • The grounds for challenging an arbitrator [Article 13, UNCITRAL Model Law] A party wishing to commence an arbitration under these Rules must file with the Registrar a Notice of Arbitration. The date of receipt of the complete Notice of Arbitration by the Registrar is deemed the date of commencement of the arbitration. Then the Respondent files a Response with the Registrar within 14 days of receipt of the Notice of Arbitration.39 At the same time of filing the Response with the Registrar, the Respondent sends a copy of the Response to the Claimant, and notifies the Registrar that it has done so, specifying the mode of service employed and the date of service [Article 4.3]. No one can serve, as arbitrator if there is justifiable doubts as to his/her impartiality and independence. Other than that, there are no legal requirements as to qualifications, characteristics, nationality or admission to serve as an arbitrator in Singapore. The Tribunal conducts the arbitration in such manner, as it considers appropriate, after consulting with the parties, to ensure the fair, expeditious, economical, and final resolution of the dispute. It determines the relevance, materiality, and admissibility of all evidence. However, the Tribunal is not required to apply the rules of evidence of any applicable law in making such determination.40 The president may, at any stage of the proceedings, request the parties and the Tribunal to convene a

39 Article 4-SIAC. 40 Article 19- SIAC.

122

F. I. LESSAMBO

meeting to discuss the procedures that are most appropriate and efficient for the case. 9.4.5.4 Arbitration Award After consulting with the parties and upon being satisfied that the parties have no further relevant and material evidence to produce or submission to make with respect to the matters to be decided in the Award, the tribunal declares the proceedings closed. The Tribunal’s declaration that the proceedings are closed is communicated to the parties and to the Registrar. Before making any Award, the Tribunal submits such award in draft form to the Registrar. Unless the Registrar extends the period or unless otherwise agreed by the parties, the Tribunal submits the draft award to the Registrar not later than 45 days from the date on which the Tribunal declares the proceedings closed. The Registrar may, as soon as practicable, suggest modifications as to the form of the award and, without affecting the Tribunal’s liberty to decide the dispute, draw the Tribunal’s attention to points of substance. The Tribunal makes no award until the Registrar as to its form has approved it. The award must be in writing and shall state the reasons upon which it is based unless the parties have agreed that no reasons are to be given. An award made in Singapore is enforceable in the Singapore courts. In practice, a party will first request that the other party comply with the award. If the other party does not comply, an application can be made to enforce the award as an order or a judgment of the court (Sect. 19, IAA). 9.4.6

The Cairo Regional Centre for International Commercial Arbitration

CRCICA41 is the oldest arbitration center in Africa and the Middle East established in 1979 under the auspices of the Asian-African Legal Consultative Organization (AALCO).The Headquarters Agreement concluded in 1987 between AALCO and the Egyptian government recognized CRCICA’s status as an independent non-profit international organization and conferred upon the center, its director and staff all necessary privileges

41 CRIRCA, https://crcica.org/.

9

ALTERNATIVE DISPUTE RESOLUTION

123

and immunities ensuring its independent functioning. Since its establishment, CRCICA adopted, with minor modifications, the Arbitration Rules of the United Nations Commission on International Trade Law (the “UNCITRAL”), approved by the General Assembly of the United Nations by resolution No. 31/98 on December 15, 1976. 9.4.6.1 Functions The CRCICA missions consist of: • Administering domestic and international arbitrations as well as ADR techniques; • Providing institutional arbitration services according to its Rules or any other rules agreed upon by the parties; • Promoting arbitration and other ADR techniques in the Afro-Asian region through the organization of international conferences and seminars as well as the publication of researches serving both the business and legal communities; • Providing ad hoc arbitration with necessary technical and administrative assistance at the request of the parties; • Providing advice and assistance for the enforcement and translation of arbitral awards. 9.4.6.2 Composition of Arbitral Tribunal Under Article 7, the Arbitral Tribunal can be composed of a sole or three arbitrators. • Sole Arbitrator If no other parties have responded to a party’s proposal to appoint a sole arbitrator within the time limit provided for and the party(s) concerned has failed to appoint a second arbitrator in accordance with Articles 9 or 10, the Centre may, at the request of a party, appoint a sole arbitrator pursuant to the procedure provided for in article 8, paragraph 3 if it determines that, in view of the circumstances of the case, this is more appropriate.

124

F. I. LESSAMBO

• Three arbitrators If three arbitrators are to be appointed, each party appoints one arbitrator, and the two arbitrators appoint the third arbitrator who acts as the presiding arbitrator of the arbitral tribunal. If within 30 days after the receipt of a party’s notification of the appointment of an arbitrator the other party has not notified the first party of the arbitrator it has appointed, the second arbitrator is, at the request of the first party, be appointed by the Centre. Alternatively, if within 30 days after the appointment of the second arbitrator the two arbitrators have not agreed on the appointment of the presiding arbitrator, the presiding arbitrator is appointed by the Centre. 9.4.6.3 Applicable Rules of Law and Conduct of the Arbitration The arbitral tribunal applies the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal applies the law, which has the closest connection to the dispute. In all cases, the arbitral tribunal decides in accordance with the terms of the contract, if any, and takes into account any usage of trade applicable to the transaction.42 The arbitral tribunal may conduct the arbitration in such manner, as it considers appropriate, if the parties are treated with equality and that at an appropriate stage of the proceedings, each party is given an equal and full opportunity of presenting its case. Any notice, pleadings or other communication sent or led by a party, as well as all documents annexed thereto, is submitted in a number of copies equal to the number required to provide one copy for each arbitrator, one copy for each of the remaining parties and two copies for the Centre.43 9.4.6.4 Arbitration Award When there is more than one arbitrator, any award or other decision of the arbitral tribunal is made by a majority of the arbitrators. In the case of questions of procedure, when there is no majority or when the

42 Article 35-CRCICA. 43 Article 17-CRCICA.

9

ALTERNATIVE DISPUTE RESOLUTION

125

arbitral tribunal so authorizes, the presiding arbitrator may decide alone, subject to revision, if any, by the arbitral tribunal [Article 33]. The arbitral tribunal may make separate awards on different issues at different times. All awards are made in writing and are final and binding on the parties. The arbitral tribunal states the reasons upon which the award is based, unless the parties have agreed that no reasons are to be given. An award must be signed by the arbitrators and it contains the date on which the award was made as well as the place of arbitration. Where there is more than one arbitrator and any of them fails to sign, the award must state the reason for the absence of the signature. The originals of the award signed by the arbitrators are communicated to each of the parties.44

44 Article 34-CRCICA.

CHAPTER 10

Project Finance Governance

10.1

General

Infrastructure investment requires effective governance over the life cycle of the project to ensure long-term cost-effectiveness, accountability, transparency, and integrity of infrastructure investment. To that end, countries must put in place clear rules, robust institutions, and good governance in the public and the private sector, reflecting countries’ relevant international commitments, which will mitigate various risks related to investment decision-making, thus encouraging private sector participation.

10.2 OECD Principles for Public Governance of PPP In 2012, the OECD Committee on Governance set up key principles that member states shall take into consideration while entering in any public-private partnership.1 These principles are as follows:

1 OECD (2012): Recommendation of the Council on Regulatory Policy and Governance, 1–38. https://www.oecd-ilibrary.org/governance/recommendation-of-the-councilon-regulatory-policy-and-governance_9789264209022-en.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_10

127

128

F. I. LESSAMBO

1. Establishing a clear, predictable, and legitimate institutional framework supported by competent and well-resourced authorities. To that end, the political leadership must ensure public awareness of the relative costs, benefits, and risks of public-private partnerships and conventional procurement. Such awareness requires active consultation and engagement with stakeholders as well as involving end-users in defining the project and subsequently in monitoring service quality. Key institutional roles and responsibilities must be maintained. This requires that procuring authorities, public-private partnerships units, the Central Budget Authority, the Supreme Audit Institution, and sector regulators be entrusted with clear mandates and sufficient resources to ensure a prudent procurement process and clear lines of accountability. All significant regulation affecting the operation of public-private partnerships must be clear, transparent, and enforced. 2. Grounding the selection of public-private partnerships in Value for Money This means that the decision to invest must be based on a whole of government perspective and be separate from how to procure and finance the project. In addition, a careful investigation as to which investment method is likely to yield most value for money must be conducted. Key risk factors and characteristics of specific projects must be evaluated by conducting a procurement option pre-test. Risk needs to be transferred to those skilled to manage them best. They must be defined, identified, measured, and carried by the party for whom it costs the least to prevent the risk from realizing or for whom realized risk costs the least. Securing value for money requires vigilance and effort of the same intensity as that necessary during the pre-operational phase. 3. Using the budgetary process transparently to minimize fiscal risks and ensure the integrity of the procurement process The Central Budget Authority must ensure that the project is affordable and the overall investment envelope is sustainable. The budget documentation must disclose all costs and contingent liabilities. Government must guard against waste and corruption by ensuring the integrity of the procurement process, and the necessary procurement skills and powers should be made available to the relevant authorities.

10

10.3

PROJECT FINANCE GOVERNANCE

129

Quality Infrastructure Investment Principles

The G20 has highlighted the importance of the quality of infrastructure investment, in the Leaders’ Communiqué at the 2016 Hangzhou Summit.2 These principles are voluntary, non-binding, and reflect the common strategic direction and aspiration for quality infrastructure investment. They are: 1. Maximizing the positive impact of infrastructure to achieve sustainable growth and development That is, infrastructure investment must take into account economic, environmental and social, and governance aspects, and be guided by a sense of shared, long-term responsibility for the planet consistent with the 2030 Agenda for Sustainable Development, national and local development strategies, and relevant international commitments, and in the spirit of extensive consultation, joint efforts, and shared benefits. 2. Raising Economic Efficiency in View of Life-Cycle Cost Quality infrastructure investment must attain value for money and remain affordable with respect to life-cycle costs, by taking into account the total cost over its life-cycle (planning, design, finance, construction, operation and maintenance (O&M), and possible disposal), compared to the value of the asset as well as its economic, environmental, and social benefits. 3. Integrating Environmental Considerations in Infrastructure Investments The whole impacts of infrastructure projects on ecosystems, biodiversity, climate, weather, and the use of resources must be internalized by incorporating these environmental considerations over the entire process of infrastructure investment, including by improving disclosure of these

2 EU Commission (2016): G20 Leaders’ Communique Hangzhou Summit, 1–6. https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_16_2967.

130

F. I. LESSAMBO

environment related information, and thereby enabling the use of green finance instruments. 4. Building Resilience against Natural Disasters and Other Risks A comprehensive disaster risk management plan must influence the design of infrastructure, the ongoing maintenance and consider the reestablishment of essential services. Both natural and human-made risks must be addressed. 5. Integrating Social Considerations in Infrastructure Investment The economic and social impacts of the infrastructure investment must be considered as an important component when assessing the quality of infrastructure investment, and need to be managed systematically throughout the project life cycle. A particular consideration must be given to how infrastructure facilitates women’s economic empowerment through equal access to jobs, including well-paying jobs, and opportunities created by infrastructure investments. Women’s rights must be respected in labor market participation and workplace requirements, including skills training and occupational safety and health policies. 6. Strengthening Infrastructure Governance Transparent, fair, informed and inclusive decision-making, bidding and execution processes are the cornerstone of good infrastructure governance. Real transparency on the terms and conditions of financing and official support will help ensure equal footing in the procurement process, given the large number of stakeholders. Likewise, anti-corruption efforts combined with enhanced transparency must continue to safeguard the integrity of infrastructure investments. Infrastructure projects should have measures in place to mitigate corruption risks at all project stages.

10

10.4

PROJECT FINANCE GOVERNANCE

131

PPP Governance Paradigm

Both academics and practitioners in looking at PPP governance have recognized four paradigms.3 10.4.1

Traditional Public Administration

Traditional Public Administration (TPA) focuses on governance as safeguarding public values and achieving political goals. This implies that democratically elected politicians take political decisions and that the administration is under the formal control of the political leadership. In democracies, officials are elected in accordance with established rules of participation but once in office, they must be answerable to those who elected them.4 The presence of impersonal and stable rules shields citizens from arbitrariness and power abuse. Vis-a-vis the private partners involved in a PPP, the traditional public administration approach is assuring as it provides clear regulations known to the private partners. 10.4.2

New Public Management

The New Public Management (NPM) paradigm focuses on efficiency and effectiveness using (performance) management and competition.5 The New Public Management approach focuses on analyzing the tools or instruments through which public interests are pursued rather than the structure of public agencies themselves.6

3 Rianne Warsen, Carsten Greve, Erik Hans Klijn, Joop F. M. Koppenjan, and Matti Siemiatycki (2019): How Do Professionals Perceive the Governance of Public-Private Partnerships? Evidence from Canada, the Netherlands and Denmark, Journal of Public Administration. 4 Carter B. Casady, Kent Eriksson, Raymond E. Levittc, and W. Richard Scott (2017): A “New Governance” Approach to Public-Private Partnerships: Lessons for the Public Sector, GPC.stanford.edu, and p. 7. 5 Rianne Warsen, Carsten Greve, Erik Hans Klijn, Joop F. M. Koppenjan, and Matti Siemiatycki (2019): How Do Professionals Perceive the Governance of Public-Private Partnerships? Evidence from Canada, the Netherlands and Denmark, Journal of Public Administration. 6 Carter B. Casady, Kent Eriksson, Raymond E. Levittc, and W. Richard Scott (2017): A “New Governance” Approach to Public-Private Partnerships: Lessons for the Public Sector, GPC.stanford.edu, p. 17.

132

F. I. LESSAMBO

The New Public Management implies that governments engage in a process of PPP institutionalization,” which requires the formation of a standardized PPP model promoted by a central or regional government and carried out in the form of a broad spectrum of activities at various levels of decision-making and in various public sector bodies.7 10.4.3

Collaborative Governance

The Collaborative Governance Approach emphasizes on the importance of interdependencies, collaboration, and coordination in the public decision-making and service delivery in networks of mutually dependent actors. To that end, public goals are defined and implemented through a process of interaction and negotiation, aimed at resulting in win-win situations.8 The Relationships between the public government and the private sectors are not deemed as “principal–agent” relationships. Rather as partnerships and stewardship relations, in which private actors have a mind-set that encourages them to collaborate.9 Therefore, during the cooperation period, both public and private sectors should share their risks and benefits to achieve their mutual goals. 10.4.4

Private Governance Approach

The Private Governance Approach requires that government’s leave the daily management of the PPP project to the private companies so that they can use their expertise, skills, and creativity to determine the best outcomes.10 That is, once the framework conditions of the project have been agreed on, the private sector must take the leadership role and governments back off. 7 Carter B. Casady, Kent Eriksson, Raymond E. Levitt, and W. Richard Scott (2018): Examining the State of Public-Private Partnership (PPP)—Institutionalization in the United States, the Engineering Project Organization Journal (December 2018) Volume 8. 8 E. H. Klijn and J. Koppenjan (2016): Governance Networks in the Public Sector. Governance and Management Review, Vol. 1, Issue 1, December, 96–100. 9 J. Koppenjan (2012): The New Public Governance in Public Service Delivery. The Hague: Eleven, 1–30. https://www.academia.edu/69327342/The_New_Public_Govern ance_in_public_service_delivery. 10 T. Bovaird and S. Sharifi (1998): Partnerships and Networks as Self-Organizing Systems: An Antidote to Principal-Agent Theory. In A. Halachmi and P. B. Boorsma (Eds.) Inter and Intra Government Arrangements for Productivity (pp. 31–44). Boston, MA: Springer.

CHAPTER 11

International Project Finance and Corruption

11.1

General

The term corruption comes from Latin—com, meaning “with, together,” and rumpere, meaning, “to break.” Thus, engaging in corruption can “break” or destroy someone’s trustworthiness and good reputation with others. Corruption refers to dishonest behavior by those in positions of power, such as managers or government officials. It includes giving or accepting bribes or inappropriate gifts, double-dealing, under-the-table transactions, manipulating elections, diverting funds, laundering money, and defrauding investors. Corruption erodes trust in government and undermines the social contract. This is cause for concern across the globe, but particularly in contexts of fragility and violence, as corruption fuels and perpetuates the inequalities and discontent that lead to fragility, violent extremism, and conflict. Corruption impedes investment, with consequent effects on growth and jobs. Countries capable of confronting corruption use their human and financial resources more efficiently, attract more investment, and grow more rapidly.

11.2

Forms of Corruption

In developing countries, large capital projects (i.e., PPP) provide opportunities for corruption. Governments will often undertake projects of a larger scope than necessary or of greater complexity than warranted by the © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_11

133

134

F. I. LESSAMBO

needs of the country.1 The World Bank Group recognizes that corruption comes in different forms. It might affect service delivery, such as when an official asks for bribes to perform routine services. However, the general attitude toward corruption differs substantially across countries. In most countries worldwide bribery is illegal and perceived as unethical behavior.2 The World Bank Group recognizes that corruption comes in different forms. It might affect service delivery, such as when an official asks for bribes to perform routine services. Many developing countries in need to attract PPP face the greatest obstacles of dictatorship, crony capitalism and crony NGOs, and cultures of bribery.3 Corruption might unfairly determine the winners of government contracts, with awards favoring friends, relatives, or business associates of government officials. Or it might come in the form of state capture, distorting how institutions work and who controls them, a form of corruption that is often the costliest in terms of overall economic impact. Forms of corruption vary, but can include bribery, lobbying, extortion, cronyism, nepotism, parochialism, patronage, influence peddling, graft, and embezzlement.4 • Bribery In the business world, stories of bribery are all too common. The term bribery means to give money, or gifts, in cash or kind to someone in order to persuade them to make favorable and biased decisions for business gains. In the United States, bribery is considered an unfair business practice and is therefore illegal.5 Bribery constitutes a crime and both

1 Augusto López Claros (2013): Removing Impediments to Sustainable Economic Development, the Case of Corruption, the World Bank Financial and Private Sector Development, p. 21. 2 Rahel M. Schomaker (2020): Conceptualizing Corruption in Public Private Partnerships. Public Organization Review, Vol. 20, 807–820. 3 Robert Klitgaard (2012): Public-Private Collaboration and Corruption, Collective Action on Anti-Corruption. Basel: Basel Institute on Governance, Prepared for the CBSSauder-Monash Conference on Public–Private Partnerships, Copenhagen Business School, 26–27 September 2012. 4 Diana C. Robertson and Philip M. Nichols (2017): Introduction and Overview: Bribery and the Study of Decision Making. Cambridge University Press. 5 Rachel M. Schomaker (2020): Conceptualizing Corruption in Public Private Partnerships. Public Organization Review, Vol. 20, 807–820.

11

INTERNATIONAL PROJECT FINANCE AND CORRUPTION

135

the offeror and the recipient can be criminally charged. However, in many countries, bribery may not be considered corrupt and is viewed as the normal way business is conducted. Proof of bribery requires demonstrating a “quid pro quo” relationship in which the recipient directly alters behavior in exchange for the gift. Another element of proving bribery includes proving intent to influence the discharging of another’s official duties.6 • Lubrication A bribe or extorted money, usually relatively small in amount, provided to a low-level government official or business person, in order to expedite a business decision, shipment, or other transaction, especially in a country where such payments are not unusual. • Subornation Subornation, which involves a larger sum of unaccounted money. Since the bribe was paid to a government official, it becomes an illegal act. • Lobbying Conventional wisdom holds that bribery is the preferred means of influencing government policy in less developed countries, while lobbying is more common in developed countries.7 Lobbying means influencing or attempting to influence legislative action or non-action through oral or written communication or an attempt to obtain the goodwill of a member or employee of the Legislature. The term lobbying first appeared in print in 1820 describing members of the Senate “lobbying” members of the House of Representatives to take up a piece of legislation they passed. In the US, lobbying is legal under the First Amendment of the US Constitution, which states:

6 Bribery: Cornell Law School, Legal Information Institute. 7 Mohammad Amin (2010): The “L” Word: Is Lobbying Actually a Sign of Progress in

Developing Countries? World Bank Blogs.

136

F. I. LESSAMBO

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof, or abridging the freedom of speech, or of the press, or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.

That is, people, corporations, trade associations, nonprofits, and even local state and county governments have the right to make a complaint to or seek the assistance of the government—in other words; they have the right to lobby Congress. • Extortion The United States Federal Law defines extortion as “the seizure of property with the knowledge and consent of the owner through the use of violence or the threat of violence8 .” Extortion refers to the act of obtaining something, especially money, through force, threats, or blackmail. Extortion is a crime, i.e. illegal use of one’s official position or powers to obtain property, funds, or patronage. Another common extortion crime is offering “protection” to a businessperson to keep his business safe from burglary or vandalism. • Cronyism In some developed and developing countries, government officials and business leaders involved in PPP maintain close ties, for their own “reciprocal financial benefit,” in granting PPP. Such a situation is sometimes called “crony capitalism9 .” Crony capitalism is marked by favoritism when it comes to handing out legal permits, government grants, business contracts, and special tax breaks. Put differently, Cronyism refers to the situation in which someone important gives jobs to friends rather than to independent people who have the necessary skills and experience. In France, for instance, cronyism between government and business 8 Rachel Sabates-Wheele and Philip Verwimp (2005): Extortion with Protection: Understanding the Effect of Rebel Taxation on Civilian Welfare in Burundi (p. 5). 9 Michael Kleen and Rock River Times (2012): Keepin’ It Kleen: Public–Private Partnerships, or Just Crony Capitalism? TURF. https://www.texasturf.org/2012-06-0103-09-30/latest-news/public-private-partnerships/174-public-private-partnerships-capita lism-or-cronyism.

11

INTERNATIONAL PROJECT FINANCE AND CORRUPTION

137

continues to be an issue. Most politicians, business leaders of the stateowned enterprises come from the same schools (i.e., Ecole Nationale d’Administration, Ponts & Chaussees, Centrale X, Mines,). Business skills and knowledge tend to be sacrificed. • Patronage Patronage is the support, encouragement, privilege, or financial aid that an organization or individual bestows on another.10 The term was used particularly in politics of the United States, where the federal government operated on a spoils system until the Pendleton Act was passed in 1883 due to a civil service reform movement. Thereafter the spoils system was largely replaced by nonpartisan merit at the federal level of the United States. • Influence peddling Influence peddling consists in offering an undue benefit to a person or yielding to a person’s solicitations (to provide him with an undue benefit), in order that the latter misuses his influence to obtain, to the advantage of the person providing this benefit, a favorable decision from a public authority or administration.11 Corporate influence peddling occurs when corporate agents or their designees use their influence with persons in political authority to obtain favors or preferential treatment for their corporations, usually in return for payment. Within the United States, examples of corporate influence peddling include illegal campaign contributions to office seekers and domestic commercial bribery, both of which have a long and sordid history. Corporations have also made payments

10 UK Department for International Development (2015): Why Corruption Matters: Understanding Causes, Effects and How to Address Them (p. 12). https://www.gov.uk/ government/publications/why-corruption-matters-understanding-causes-effects-and-howto-address-them. 11 Societe Generale (2018): Code Governing the Fight Against Corruption and Influence Peddling (p. 6). https://societegenerale.com.gh/fileadmin/user_upload/Ghana/Legal_ notice/SG_GROUP_ANTI_BRIBERY_AND_CORRUPTION_CODE_1_.PDF.

138

F. I. LESSAMBO

to foreign government officials in order to obtain or to retain business, reduce political risks, avoid harassment, reduce taxes, and induce official action. Innovative payment methods were justified as normal practices in the country where the business was being transacted. • Graft A colloquial term is referring to the unlawful acquisition of public money through questionable and improper transactions with public officials. Graft is the personal gain or advantage earned by an individual at the expense of others as a result of the exploitation of the singular status of, or an influential relationship with, another who has a position of public trust or confidence. The advantage or gain is accrued without any exchange of legitimate compensatory services. High levels of graft could be evidence of both the state’s inadequate enforcement capacity or indicate a shadowy mechanism of state control.12 Graft usually implies the existence of theft, corruption, Fraud, and the lack of integrity that is expected in any transaction involving a public official. Each type of corruption is important and tackling all of them is critical to achieving progress and sustainable change.

11.3 Fighting Corruption Within World Bank Group-Financed Projects The World Bank Group’s approach to fighting corruption combines a proactive policy of anticipating and managing risks in its own projects. The Bank Group subjects all potential projects to rigorous scrutiny and works with clients to reduce possible corruption risks that have been identified.13 The Bank Group’s independent Sanctions System includes the Integrity vice Presidency, which is responsible for investigating allegations of fraud and corruption in World Bank-funded projects. Public complaint mechanisms are built into projects to encourage and empower oversight, 12 Keith Darden (2002): Graft and Governance- Corruption as an Informal Mechanism of State Control, Graft and Governance. Yale University, Department of Political Science. https://leitner.yale.edu/sites/default/files/files/resources/docs/2002. 13 World Bank (2018): Tackling Fraud and Corruption in World Bank Projects. https://www.worldbank.org/en/news/feature/2018/12/06/tackling-fraud-and-corrup tion-in-world-bank-projects.

11

INTERNATIONAL PROJECT FINANCE AND CORRUPTION

139

and projects are actively supervised during implementation. When allegations of fraud and corruption are substantiated, companies involved in misconduct are debarred from engaging in any new World Bank Groupfinanced activity. Concerned governments receive the findings of World Bank Group investigations. To date, the World Bank Group has publicly debarred or otherwise sanctioned more than 1,000 firms and individuals. In fiscal year 2020, the World Bank Group debarred or otherwise sanctioned 49 firms and individuals and recognized 72 cross-debarments from other multilateral development banks. At the end of fiscal year 2020, 372 entities have been sanctioned with conditional release, a process by which firms are afforded the opportunity to improve their internal compliance programs as part of their sanction. 11.3.1

Effects of Corruption on Projects Finance

Corruption continues to have a disproportionate impact on the poor and most vulnerable, increasing the cost of, and reducing access to, health, education, justice, electricity, and other basic services, thereby exacerbating inequality. It reduces private investment as it increases risks for investors, with consequent effects on growth and jobs. It distorts public spending decisions and weakens the quality of public investments as substandard infrastructure is built and the regulatory systems for quality control and safety are bypassed. It erodes public trust in governments, undermining their legitimacy and posing a threat to peace and stability. This paper draws on these lessons and proposes a new approach, both in terms of what we work on and how we work, focusing on initiatives to be led by the Bank’s EFI vice presidency to reaffirm the Bank’s commitment to anti-corruption. The initiatives refresh approaches that are showing results, scale up those that are emerging and show promise, or experiment and innovate where fresh thinking is needed in our support to client countries to help them control corruption. In this note, corruption is seen as both a symptom of underlying governance challenges and a problem in and of itself. For practical purposes, and to keep the focus on corruption, the initiatives do not expound on the many aspects of governance that influence corruption. The paper also does not focus on efforts to control corruption risk in World Bank operations, but rather focus on the support that the EFI vice Presidency will provide to countries in their efforts to control corruption.

140

F. I. LESSAMBO

11.3.2

Corruption in the Extractive Industries

From across the developing world, countries rich in natural resources tend to be highly corrupt and poorly governed. That is due, in part, because of the dynamics and incentives extractive resources tend to generate for the ruling elites.14 Well managed, countries rich in minerals, metals, natural gas, and oil have the potential to catapult economic growth and contribute to poverty reduction. However, resource-rich developing countries face a range of challenges such as corruption. For the natural resources and extractives sectors, corruption in management and governance is particularly challenging and difficult to mitigate. In resource-rich Africa, for instance, regulatory mismanagement, corruption, and theft of natural resource and extractive commodities have contributed to illicit financial flows, poverty, instability and in some cases financed civil wars linked to conflicts over control of state assets. For instance, the Democratic Republic of Congo, a country with abundant natural wealth, including a multitude of minerals such as diamonds, gold, copper, cobalt, cassiterite (tin ore) and coltan, as well as timber, coffee, and oil has been a theater of unending wars around these vast resources.15 The World Bank, for instance, is assisting developing countries manage oil, gas, and mining in a way that contributes to sustainable growth and development, protects communities, and reduces carbon emissions. The World Bank contributions include strengthening the transparency, governance, institutional capacity, and regulatory environment in a way beneficial to their constituents. 11.3.3

Example: Extractive Industries Transparency Initiative

The Extractive Industries Transparency Initiative (EITI) implements the global standard to promote the open and accountable management of oil, gas, and mineral resources. By becoming a member of the EITI, countries commit to disclose information along the extractive industry value

14 D. Acemoglu and S. Johnson (2005): Unbundling Institutions. Journal of Political Economy, Vol. 113, Issue 5, 949–995. 15 Marie Chêne (2013): Overview of Corruption and Anti-corruption in the Democratic Republic of Congo, Transparency International, [email protected].

11

INTERNATIONAL PROJECT FINANCE AND CORRUPTION

141

chain—from how extraction rights are awarded, to how revenues make their way through the government and how they benefit the public.16 Through participation in the EITI, 55 countries have agreed to a common set of rules governing what has to be disclosed and when—the EITI Standard. In each country that has joined the EITI, a multistakeholder group, composed of government, companies, and civil society supports implementation of the EITI Standard.

16 Extractive Industries Transparency Initiative—The Global Standard for the Good Governance of Oil, Gas, and Mineral Resources, at https://eiti.org.

CHAPTER 12

Infrastructure Projects Finance

12.1

General

Today, most countries are placing unprecedented pressure on water resources. Given the global population growth, it is estimated that the world will face a 40% shortfall between forecast demand and available supply of water by 2030. Furthermore, chronic water scarcity, hydrological uncertainty, and extreme weather events (floods and droughts) are perceived as some of the biggest threats to global prosperity and stability.1

12.2

Substantial Project Financing 12.2.1

Water and Sanitation Project

Water is at the center of economic and social development; it is vital to maintain health, grow food, generate energy, manage the environment, and create jobs. Water availability and management affect whether poor girls are educated, whether cities are healthy places to live, and whether growing industries or poor villages can withstand the impacts of floods or droughts.2 A project finance structure allows water projects with attractive cash flow and risk profiles to secure long-term private capital. 1 Water Resource Management—World Bank, https://www.worldbank.org/en/topic/ waterresourcesmanagement#1. 2 Water Overview—World Bank, https://www.worldbank.org/en/topic/water.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_12

143

144

F. I. LESSAMBO

The needs are real. It is estimated that 790 million people (11% of the world’s population) live without access to an improved water supply. The mismanagement of a scarce resource—water—adds to the gloomy reality. Public utility companies provide around 93% of water and sanitation services in cities worldwide (i.e., Regideso in the Democratic Republic of Congo). For several reasons, those public utility companies have failed to deliver to the population. Some countries are reaching out to the Regional Development Banks, the World Bank, and the International Finance Corporation to bring private investors in their water projects. The World Bank offers loans, grants, and technical assistance to governments to support expanding or improving water infrastructure, improving management practices, and ensuring community engagement. 12.2.1.1 Human Right to Water and Sanitation On July 28, 2010, United Nation General Assembly resolution A/RES/64/292 clearly recognizes the right to water and sanitation.3 It also acknowledges that clean drinking water and sanitation are essential to the realization of all human rights. The 2010 UN Human Rights Council resolution A/HRC/RES/15/9 affirms that the rights to water and sanitation are part of existing international law and confirms that these rights are legally binding upon States. The commonly accepted criteria for the effectiveness of water and sanitation services require that they be affordable; accessible to all (including children, the elderly, and persons with disabilities); acceptable (addressing considerations arising from culture, religion, and privacy requirements); available at home and at work, and in sufficient quantity); and of good quality (meaning that water must be free of harmful contaminants and that services must be safe to use). In every country, governments have the leading role in seeking to make these goals a reality, in building consensus and political will, mobilizing support, and creating an enabling environment for the provision of a minimum core level of access to water and sanitation for all with equity. Key elements of this enabling environment include4 : • National legislation, as the essential starting point for all operationalization of rights. • Appropriate policies establishing national standards. 3 https://www.un.org/waterforlifedecade/human_right_to_water.shtml. 4 UNICEF (2014): Rights to Safe Water and Sanitation, https://www.unicef.org/wash.

12

INFRASTRUCTURE PROJECTS FINANCE

145

• Strategies, plans of action, and programs that target deprived sectors of the population and make clear the accountabilities for delivering sustained services. • Strong accountability and regulatory frameworks among the government, service providers, and consumers, to protect consumers’ rights, and to support and facilitate well-regulated private sector provision of services, where appropriate. • Funds and sound fiscal management, covering capital costs of water and sanitation systems and long-term operational costs. • Availability of appropriate information to all, including the general population and anyone involved in service delivery. • Social norms that support healthy sanitation and hygiene • Practices. • Implementation capacity (public, private, or a mix) to deliver services, emphasizing opportunities for community participation. • Comprehensive monitoring of service and quality levels. 12.2.1.2 Water and Sanitation PPP In many countries, the water sector is chronically under-funded and inefficient. Many governments have reformed their utilities without private participation through restructuring, technical assistance, appointment of new board members and managers, development-agency assistance, and so forth. These efforts have not delivered. Public–private partnerships (PPPs) can be a mechanism to help governments fund much needed investment and bring technology and efficiency that can improve the performance and financial sustainability of the water sector. Governments turn to PPPs to introduce new technology and innovation where traditional sources are scarce, such as in desalination and water reuse.5 Utilities are drawing on specific expertise, such as non-revenue water reduction and pressure management, to bring efficiencies and service improvements. Private investors and providers are increasingly local and regional, increasing competition and bringing down prices. A key challenge in sustainability of the sector is customer tariffs. Water utilities have difficulty investing in infrastructure and maintaining it when they cannot rely on revenue streams that cover the costs of operation and investment. While

5 World Bank (2021): Water & Sanitation PPPs, https://ppp.worldbank.org/publicprivate-partnership/water-and-sanitation/water-sanitation-ppps.

146

F. I. LESSAMBO

subsidies and grants from government continue to play an important role in financing water and wastewater infrastructure, a stable revenue stream is more dependable and allows utilities to carry out business and asset planning. Best Practices in Water Contracts When a country decides to open up to private investors, the World Bank Group can assist to ensure an open and transparent selection process, and that appropriate oversight arrangements are in place to manage the private entity. The World Bank Group also helps governments assess and strengthen regulatory frameworks to ensure accountability and manage risks. There is a variety of PPP contracts for water and sanitation projects: • Concessions Typically, water concessions are granted to a private concessionaire to supply water and/or wastewater services to customers in a city or defined service area. While these could involve Greenfield new build systems, they have typically been concessions for existing systems, with obligations to upgrade and improve facilities and expand access. A Concession gives a concessionaire the long-term right to use all utility assets conferred on the concessionaire, including responsibility for operations and some investment. Asset ownership remains with the authority and the authority is typically responsible for replacement of larger assets. Assets revert to the authority at the end of the concession period, including assets purchased by the concessionaire. In a concession, the concessionaire typically obtains most of its revenues directly from the consumer and so it has a direct relationship with the consumers. A concession covers an entire infrastructure system (so may include the concessionaire taking over existing assets as well as building and operating new assets). The concessionaire will pay a concession fee to the authority, which will usually be ring-fenced and put toward asset replacement and expansion. A concession is a specific term in civil law countries. To make it confusing, in common law countries, projects that are more closely described as BOT projects are called concessions.

12

INFRASTRUCTURE PROJECTS FINANCE

147

Example 1: Water and Sanitation Concession

Concession agreement for concessionaire to run water and wastewater services previously run by a municipality. Long-term concession. Prepared by international law firm. Prepared for African country and contains provisions covering formalization of informal connections, extension of service to new areas, failure of authority to increase tariffs in accordance with assumptions. Suitable for common law or civil law jurisdictions, subject to modification and local legal advice. English language.

Example 2: Wastewater Concession

Concession agreement for concessionaire to establish and operate wastewater services in country where existing arrangements consisted of private septage and haulers. Long-term concession. Prepared by operator with input from international law firm and adapted by World Bank staff. Suitable for common law or civil law jurisdictions, subject to modification and local legal advice.

• BOT Project A Build-Operate-Transfer (BOT) Project is typically used to develop a discrete asset rather than a whole network and is generally entirely new or Greenfield in nature (although refurbishment may be involved). In a BOT Project, the project company or operator generally obtains its revenues through a fee charged to the utility/government rather than tariffs charged to consumers. In common law countries, a number of projects are called concessions, such as toll road projects, which are new build and have a number of similarities to BOTs.

148

F. I. LESSAMBO

Example

Municipalities are turning increasingly to the private sector for turnkey solutions to design, build and operate water and wastewater treatment plants, and in some cases provide financing. With new technologies such as desalination and in wastewater treatment, municipalities and utilities have faced challenges in finding the capacity to operate and maintain these facilities, and in selecting the appropriate technology.

• DBO Project In a Design-Build-Operate (DBO) Project, the public sector owns and finances the construction of new assets. The private sector designs, builds, and operates the assets to meet certain agreed outputs. The documentation for a DBO is typically simpler than a BOT or Concession as there are no financing documents and will typically consist of a turnkey construction contract plus an operating contract, or a section added to the turnkey contract covering operations. The Operator is taking no or minimal financing risk on the capital and will typically be paid a sum for the design-build of the plant, payable in installments on completion of construction milestones, and then an operating fee for the operating period. The operator is responsible for the design and the construction as well as operations and so if parts need to be replaced during the operations period prior to its assumed life span the operator is likely to be responsible for replacement.

Example

Where a municipality or utility has the funds or obtaining financing to develop a water or wastewater treatment plant but wishes to draw on the private sector to design, build and operate a facility, then a DBO approach is used. IFIs are being asked to finance such approaches. In response, the World Bank has recently developed a suite of documents for DBO in water and wastewater

12

INFRASTRUCTURE PROJECTS FINANCE

149

projects, including an initial selection document, an RFP with DBO document based on FIDIC Gold Book and a guidance note with guidance on when the DBO approach is appropriate and how to approach such projects, draft framework for Employer Requirements and draft terms of reference for consultancy support to carry out the requisite studies and develop the documents.

12.2.2

Transportation and Telecommunications Projects

The human population of Earth is growing and moving into urban areas exponentially. Today, 55% of the world’s population lives in urban areas, a proportion that is expected to increase by 68% by 2050.6 The urban population of the world has grown from 751 million in 1950 to 4.2 billion in 2018.Travel on roadways designed 20, 50, or even over 100 years ago cannot sustain the demand for modern mobility needs.7 Infrastructure needs in energy, transport, and telecommunications are substantial, estimated at USD 6.3 trillion per year between 2016 and 2030.8 12.2.2.1 Transportation The future of transportation involves moving into new, smarter sources of energy, modes of transport, and physical and technological infrastructure to support these transportation innovations. Three common themes in transportation innovation are smart technology, electrification, and autonomy. For instance, electric car deployment has been growing rapidly over the past ten years, with the global stock of electric passenger cars passing 5 million in 2018, an increase of 63% from the previous year. Around 45% of electric cars on the road in 2018 were in China—2.3 million—compared to 39% in 2017. In comparison, Europe accounted 6 UN Department of Economics and Social Affairs (2018). 7 Conrad Galambos (2019): The Future of Transportation: Where We Will Go, https://

www.geotab.com/blog/future-of-transportation/. 8 OECD (2018): Subnational Public–Private Partnerships—Meeting Infrastructure Challenges, https://www.oecd.org/governance/responding-to-the-infrastructure-cha llenge-9789264304864-en.htm.

150

F. I. LESSAMBO

for 24% of the global fleet, and the United States 22%.9 Public–private partnerships (PPPs) can be an effective way to build and implement new infrastructure or to renovate, operate, maintain or manage existing transport infrastructure facilities. Transportation includes: • Airports Airports provide access to and interlink regional, national, and international markets. Therefore, investment in existing or new airport infrastructure is essential to economic development. According to certain studies, approximately US$1.2–1.5 trillion must be invested in order to support global airport infrastructure development by 2030.10 The International Air Transport Association (IATA) works with airports and government authorities on major airport development projects across the globe and seeks to ensure that they result in adequate infrastructure for airlines. Traditionally, airports were owned, managed, and operated by governments but there has been a worldwide trend toward private sector involvement with varying degrees of private ownership and responsibilities, including the use of public–private partnership (PPP) models. • Ports With the majority of global trade carried by sea, developing strong, well-functioning maritime transport infrastructure is a key element of economic growth for many developing and emerging countries. Public– private partnerships (PPPs) in ports have become a means to manage port operations more effectively, traditionally an exclusively government function. Different port management structures are used worldwide but in the majority of large and medium sized ports, the property owner port model is used. In this model, management responsibilities are delegated to the private sector, while the title in the land and assets remains with the government. For instance, in the property owner port model, the public sector is responsible for port planning, acts as a regulatory body, and owns port-related land and basic infrastructure. The infrastructure is 9 International Energy Agency (2019): https://www.iea.org/reports/world-energy-out look-2019. 10 https://www.iata.org/en/programs/ops-infra/airport-infrastructure/.

12

INFRASTRUCTURE PROJECTS FINANCE

151

typically leased to the private operating companies or to industries such as refineries, tank terminals, and chemical plants. The private port operators provide and maintain their own superstructure (i.e., terminals) including buildings. They also purchase and install their own equipment on the terminal grounds and are responsible for the terminal operations.

By the Maritime Executive March 30, 2021

The US Maritime Administration announced that it would begin accepting applications for its annual Port Infrastructure Development Program, which provides grant funding for port and intermodal infrastructure-related projects. This year’s program, which will make a total of $230 million available to states and port authorities, will include a focus on climate change related initiatives and seeking to enhance support for the development of projects related to wind energy. US Secretary of Transportation Pete Buttigieg announced this opening of this year’s funding at yesterday’s White House event focused on the development of offshore wind energy programs. Buttigieg said that over the past two years, 12% of the grants under the Port Infrastructure Development Program included the anticipated development of wind energy facilities and the movement of wind energy components as part of their project proposals. This year’s grant funding the secretary said would bolster those efforts with an increased focus on climate considerations in the applications. “Our nation’s ports are a key part of our critical infrastructure. They create jobs and make our economy more resilient and sustainable,” said Buttigieg. “This funding will build upon local investments in infrastructure to deliver long-term economic benefits to American workers and communities, while also addressing climate and equity.”

The Port Infrastructure Development Program supports the efficient movement of commerce upon which our economy relies. The grants are awarded on a competitive basis to support projects that strengthen and modernize port infrastructure and support the nation’s long-term economic vitality.

152

F. I. LESSAMBO

Fund for the 2021 grant program was part of the National Defense Authorization Act and the Consolidated Appropriations Act, which authorized a total of $230 million for the program. At least $205 million of the appropriated funds are to be directed to coastal seaports or Great Lakes ports, with all of the appropriated monies to go to improve facilities within, or outside of and directly related to operations or an intermodal connection of coastal seaports, inland river ports, and Great Lakes ports. Funds are to be awarded as discretionary grants on a competitive basis for projects that will improve the safety, efficiency, or reliability of the movement of goods into, out of, around, or within a port.

• Roads An underdeveloped road network is likely to be associated with suboptimal economic performance and quality of life. Therefore, governments are constantly looking for ways to develop their road networks and other transport links to meet their economic, political, and social needs. In some countries, this will mean building brand new roads, in others it will mean focusing on refurbishing, widening, and extending existing roads. The nature of road projects varies considerably from project to project and is driven by the local, national, or even international factors that make the project a necessity in the first place. New roads are expensive and governments are often unable or unwilling to commit fiscal spending to roads. This is an area where project financing and BOT projects are becoming more and more common. • Railways Efficient rail transport is an important catalyst for economic growth and development. Rail transport stimulates trade, links production sites to regional and international markets, promotes the national and crossborder integration of regions, and facilitates access to the labor market,

12

INFRASTRUCTURE PROJECTS FINANCE

153

education and health services. Rail transport is generally more energy efficient than road or air transport. Investment in rail transport is therefore an important element of a low-carbon transport strategy. Rail transport is also an energy efficient means to move high volumes of bulk commodities from the centers of production, such as mining and agricultural areas, to ports and airports. PPPs in railways can bring opportunities for investment, operating efficiency and modern and clean technology. PPP railway projects providing for shared use of rail tracks may lead to efficiency gains and an increased revenue basis for states and private investors and make investment in PPP schemes more attractive. Concessions and BOT are the most used agreement in this sector.

Example 1

France/United Kingdom—Channel Tunnel Fixed Link—Concession agreement between the United Kingdom and France and the Concessionaires (The Channel Tunnel Group Limited and FranceManche S.A.) regarding the development, financing, construction, and operation of a fixed link across the English Channel between the United Kingdom and France. The website of the Channel Tunnel Intergovernmental Commission (IGC) provides more information on the legal framework for the Channel Tunnel. United Kingdom—Channel Tunnel Railway Link (High Speed 1)—Concession agreement between the Secretary of State for Transport and High Speed 1 Limited (HS 1 Limited). The agreement regards the design, construction, financing, operation, repair, and maintenance of the high-speed railway link from St. Pancras Station in London to the Channel Tunnel that connects with the international high-speed routes between London and Paris, and London and Brussels.

154

F. I. LESSAMBO

Example 2

The Montpellier—Perpignan TGV in France Type: High-Speed France is set to launch a public inquiry in autumn 2021 into the construction of the 150 km high-speed line between Montpellier and Perpignan, after construction of the line was confirmed as a priority. The missing link in the Paris-Spain high-speed corridor was shelved after president, Mr Emmanuel Macron, came to power. France opened the LGV Méditerranée line from Manduel, east of Nîmes, to Lattes, west of Montpellier, in 2017. The line will be mixed use and will remove around 50 freight trains a day from the conventional route, allowing increases in local passenger services. The estimated cost of the project amounts to $US 6.7 billion, for a 150 km.

• Urban Passenger Transport As cities grow and traffic congestion increases, governments are looking increasingly for alternatives to encourage a shift from private to public transport. Light rail, tram, and metro transit systems as well as bus rapid transit (BRT) projects are alternatives to carbon intense urban individual transport. In all these areas, PPPs can be a mutually beneficial way to solve critical transportation problems. The World Bank, as well as other organizations, has developed a number of toolkits related to evaluating and creating public–private infrastructure partnerships. 12.2.2.2 Telecommunications Telecommunication is a way of communication using electro-magnetic equipment to transmit information by wire, radio, or light. The applications of wireless telegraphy, broadcasting, television, satellite communications, data communications, fiber communication, and the Internet, and others have a considerable impact in our society, today. Innovations in information and communication technologies (ICT) and a rise in market demand have had strong implications for government-owned telecom utilities and ICT infrastructure.

12

INFRASTRUCTURE PROJECTS FINANCE

155

Example 1

ECFiber Initiative to Buildout Fiber Infrastructure in 22 towns in Central Vermont. – The ECFiber initiative is an effort by 22 towns in central Vermont to join together to accelerate access to high-speed fiber infrastructure in communities in which only moderate speed connectivity is available only in several larger towns from cable companies with dial up connectivity the only option in other locations; and the incumbent telephone company, FairPoint which acquired the copper wire network of Verizon in Northern New England, is in the midst of Chapter 11 bankruptcy and has been severely hobbled in its ability to provide high-speed connectivity. FairPoint’s situation may be similar to other incumbent, wire line telephone companies around the world that face severe financial and organizational constraints in providing Next Generation fiber infrastructure. – ECFiber is an example of grass roots level push from local communities for much higher speed connectivity than is likely in the near term to be provided by existing service providers. It is example of user-driven potential competitive pressure on traditional inter-model competitors—cable operators and incumbent providers with little impetus to ratch up the pace and speed of fiber connectivity. – ECFiber is structured to operate based on an Inter-Local Agreement among the participating towns, rather than through a single separate operating entity; and service would be offered based on a Design-Build-Operate contract with a nonprofit service provider known as Valley Net. – In face of adverse financial market conditions, EC Fiber was unable to complete in the fall of 2008 a public offering of certificates of participation (COPs) in a capital lease that would have financed the build out of the system. Subsequently, ECFiber attempted unsuccessfully to obtain highly leveraged low interest financing from the Rural Utility Service of the Department of Agriculture in Round 1 of broadband stimulus

156

F. I. LESSAMBO

applications. It would have obtained access to required equity and start-up capital through a private placement – However, the ARRA stimulus funding procedures appear to have significantly disfavored start-up community-based entrants; and thus ECFiber may have to return to private markets in another effort to access the COPs market once financial markets further stabilize. – Many aspects of the ECFiber initiative provide fascinating case study for a bottom up, community driven approach to utilizing a public–private partnership model.

Example 2

The New Hampshire Fiber Network Consortium as Model for Public–Private Partnership – The fiber infrastructure of the rural State of New Hampshire is significantly underdeveloped—a legacy in part of Verizon’s reluctance to prioritize investment in upgrading its Northern New England copper wire network and its decision to sell all its wire line telephone assets to a small North Carolina telephone company, FairPoint Communications. The New Hampshire Fiber Network Consortium (NHFNC) is a public– private partnership established by the University System of New Hampshire, together with the Community Development Finance Authority in NH and a newly created fiber build out entity known as FastRoads New Hampshire, to apply for broadband stimulus grant funding together with two or more private sector providers of fiber network capacity who would provide private matching funding for the federal grant. – NHFNC will be structured in a similar manner to a “fiber condominium.” The public participants will each be allocated a block of fiber strands and will have an equity stake, the size

12

INFRASTRUCTURE PROJECTS FINANCE

157

of which is yet to be determined, along with private participants in NHFNC, who will be assigned a block of fiber to offer to users on a commercial basis. The new fiber infrastructure will be designed with off-ramps for anchor institutions as well as nodes for town-by-town Last Mile fiber connections that would be made available on a wholesale basis by FastRoads New Hampshire and others to retail service providers in return for payment for use of the local infrastructure.

Example 3

FastRoads NH as Model for Public–Private Partnership in Last Mile Buildouts in New Hampshire – The New Hampshire FastRoads business model has been developed with support from Community Development Finance Authority in NH, which has traditionally been involved in housing and community development projects. It has close working ties with towns, other local communities, and an established record of accomplishment of aggregating public and private sources of financing. In implementing the FastRoads model, CDFA has worked closely with regional economic development commissions and with a state entity known as the Business Finance Authority, which, in the past, has acted as a financial advisor and agent for the State of New Hampshire in accessing private capital markets to finance community development projects at the state and local level. On an ad hoc basis, both CDFA and BFA have been involved as a project incubator for local broadband initiatives on the basis that the rapid evolution of high-speed infrastructure is a key policy instrument for catalyzing community development and economic growth strategies at a local and regional level. – As the FastRoads model is evolved, it will rely heavily on private partners for the construction and management of fiber

158

F. I. LESSAMBO

infrastructure at the local level and on retail service providers (including cable operators or incumbent telecom operators) to generate cash flow to sustain a sequenced build out program. This program will rely on town-by-town or project segmentby-project segment (e.g., tranches of 100 miles of local build out) build out projects that would be packaged and financed with local financial resources. These financing debt instruments would then be syndicated upstream to larger and more diversified financial institutions as part of an overall strategy of developing mechanisms for community development finance institutions (CDFIs). – FastRoads has significant similarities to public–private partnership structures currently in use in Sweden and the Netherlands. Like those public–private structures, it is intended to be an “access neutral” model for high-speed connectivity; however, it also potentially represents a significant model for “overbuilding” a legacy “copper wire” network by offering new sources of financing for new fiber to the home network architectures as well as a transition path for legacy telephone operators to migrate toward new business arrangements. – These grass roots, user-driven business models that focus on overbuilds in response to intense community demand may offer a useful paradigm for rural or other local communities in market setting outside the United States, both in operational and financing terms.

12.2.3

Climate and Energy

12.2.3.1 Climate Change Reducing climate impact-related service interruptions requires significant investments in climate-resilient infrastructure upgrades, as well as maintenance and operation plans enabling climate change adaptation of infrastructure PPPs. By 2030, the cost for this adaptation alone in developing countries could be as high as $140–300 billion per year. Today, annual investment for climate change adaptation in those countries lies at about $26.5 billion, leaving a funding gap of at least $115 billion per year by 2030. Public funds will be largely unable to cover

12

INFRASTRUCTURE PROJECTS FINANCE

159

the gap, so private sector financing of climate adaptation investments is increasingly urgent.11 Climate-resilient infrastructure is an infrastructure that is planned, designed, built, and operated in a way that anticipates, prepares for, and adapts to changing climate conditions. It can also withstand, respond to, and recover rapidly from disruptions caused by these climate conditions. Incentives for private operators to invest in climate change adaptation and mitigation can be included in PPP request for proposals (RfPs) and other bidding documents, guidance documents on project selection and evaluation of proposals, as well as PPP policies and legislation. • Procurement Incentives Many IFIs as well as and other national financial institutions address climate change risk and adaptation in their environmental and social safeguards policies, which apply to projects that they finance. PPP/procurement legislation for private operators to invest in climate change adaptation and disaster risk management as well as low-carbon infrastructure: (1) Minimum qualifying criteria that require potential bidders to: – Demonstrate sufficient financial and technical capacity to develop innovative low-carbon solutions and to respond to disaster events; – Provide evidence for sufficient knowledge to identify and assess carbon impacts, alternative low-carbon solutions as well as climate change events (e.g., experience in the construction of “green” buildings as demonstrated by relevant certifications); – Prove sufficient insurance coverage with regard to potential climate-related risks; – Submit appropriate environmental [and social] management plans as well as disaster prevention and risk response plans; 11 Khafi Weekes, and Guillermo Diaz-Fanas (2021): How Do We Link Private Sector Participation and Climate Resilient Infrastructure Right Now? Some Ideas from PPIAF , https://blogs.worldbank.org/ppps/how-do-we-link-private-sector-participa tion-and-climate-resilient-infrastructure-right-now.

160

F. I. LESSAMBO

(2) Technical specifications on better life-cycle performance, including reducing greenhouse gas emissions and mitigating identified climate change risks; and (3) Bid evaluation criteria that is not solely based on price, but that also assesses bidders’ low-carbon performance and competence to address climate change (for example with additional points given to bids that include innovative efforts related to greenhouse gas reduction or disaster risk management). • Climate-Smart PPP Contracts There are various ways to deal with risk related to climate change and potential for carbon reduction in PPP contracts. The following are some examples: – Design specifications that reduce greenhouse gas emissions and minimize vulnerability to climate change; – Clauses that allocate risks associated with unpredictable changes and increased costs caused by or connected with climate change (e.g., force majeure clauses, change in law clauses); – KPIs that contain appropriate indicators, reporting obligations, and inspection rights regarding climate change mitigation and adaptation obligations; – Contractual payment mechanisms that connect (non-)compliance with climate change mitigation and adaptation obligations with bonuses, penalties, and/or payment deductions during construction and operation and maintenance (O&M) phases.12 12.2.3.2 Energy Power Energy is a broad sector that holds two important yet very different industries: the oil and gas sector, and the power sector. The focus of the PPPLRC website is on public–private partnerships (PPPs) that take place in the power sector. PPPs in the energy sector come in different shapes, sizes, and structures and are used mainly in generation and transmission. 12 World Bank (2020): Preparing, Procuring and Implementing Climate-Smart PPPs, https://ppp.worldbank.org/public-private-partnership/climate-smart/climate-smartclean-technology-ppps/preparing-procuring-and-implementing-climate-smart-ppps.

12

INFRASTRUCTURE PROJECTS FINANCE

161

The methodology used varies, depending on the place, the government and the specifics of the operation; therefore each one is tailored to the needs and circumstances given at the time when the partnership is created. Many countries have adapted energy policies and laws to encourage investment in renewable energy (RE) sources. They are also looking to different financing, legal and commercial frameworks, including public– private partnerships (PPPs) to leverage private capital and expertise to support the development of renewable energy projects. • Renewable Energy Sample Project Documents and Contracts Renewable energy projects rely on a number of legal contracts. One central contract is the power purchase agreement (PPA), which governs the sale and purchase of power: – The seller’s primary responsibilities under a PPA developed for an independent power producer (IPP) are to build, operate and maintain a power generation facility in accordance with the requirements of the PPA and applicable law, and to deliver the agreed amount of power. – In turn, the buyer is obliged to purchase the energy produced and to pay the agreed tariff. – Various elements of the renewable energy PPA depend on the underlying incentive scheme. Typically, one price component in RE PPAs is a fixed price per kWh for electricity delivered for a certain number of years. – Risk allocation between the parties may be influenced by the limited ability of the seller to control the output of some RE resources. The lack of output predictability may call for some flexibility with regard to the minimum capacity to be delivered or require the off-taker to pay to some extent for delivered excess electricity. – Energy Contracts Public–private partnerships in energy require a number of agreements to set out the relationships between the different stakeholders. The most used contracts are Concessions, Build-Operate-Transfer, and DesignBuild-Operate. Specific energy projects include:

162

F. I. LESSAMBO

(i) Power Purchase Agreements (PPAs) and Energy Purchase Agreements (EPAs) A Power Purchase Agreement (PPA) secures the payment stream for a Build-Own Transfer (BOT) or concession project for an independent power plant (IPP). It is between the purchaser “off taker” (often a stateowned electricity utility) and a privately owned power producer. The PPA outlined here is not appropriate for electricity sold on the world spot markets. Power purchase agreements (PPAs) are used for power projects where: – the projected revenues of the project would otherwise be uncertain and so some guarantee as to quantities purchased and price paid are required to make the project viable; – there is a possibility of competition from cheaper or subsidized domestic or international competition (e.g., where a neighboring power plant is producing cheaper power)—the PPA provides some certainty of being protected from such competition; – Once or a few major customers will be taking the bulk of the product. For example, a government utility may be purchasing the power generated by a power plant. The government will want to understand how much it will be paying for its power and that it has the first call on that power. The project company will want certainty of revenue; and, – The purchaser wishes to secure security of supply. Sample Power Purchase Agreements (PPAs) (ii) Implementation Agreements Implementation agreements provide for direct contractual obligations and undertakings between the government and the supplier or project company: the government is not usually a party to the power purchase agreement. The installation of a power plant often requires inputs from the government in the form of assistance in obtaining required consents, undertaking to ensure that the utility performs its obligations (sometimes in the form of a guarantee) where there is a concern on the part of the supplier that the utility might not or may not have the financial standing to fulfill its obligations. The implementation will also typically

12

INFRASTRUCTURE PROJECTS FINANCE

163

include undertakings from the government on export and import duties and taxation of the supplier. The implementation agreement will typically also include undertakings by the supplier to the government regarding, for example, compliance with environmental laws, dumping of fuel in the domestic fuel markets, etc.13 (iii) Grid Connection/Power Pooling Arrangements Public–private partnerships in power require also an Interconnection, Grid Connection of Power Pooling Agreement. This kind of contracts outlines the responsibilities and fees for connecting the power generated by an independent power producer to the owner of grid system, generally a public entity. (iv) Fuel Supply/Bulk Supply Agreements The project company (and the lenders) in a power project will be anxious to ensure it has a secure affordable source of fuel. It will often enter into a bulk supply agreement for fuel, and the supplier may be the same entity as the power purchaser under the Power Purchase Agreement, namely the state power company. (v) Land Lease Agreements Land Lease Agreements are used whenever the government owns the land of the site of a project and leases it to the operating company or concessionaire for the period of the concession contract. In an independent power project, the Land Lease Agreement could be a stand-alone agreement, or its main provisions can also be included in the Power Purchase Agreement or Implementation Agreement.

13 World Bank (2019): Implementation Agreements for Power PPPs, https://ppp.wor ldbank.org/public-private-partnership/agreements.

CHAPTER 13

Public Fiscal Risk Assessment Model

13.1

General

The Public Fiscal Risk Assessment Model (PFRAM) is an analytical tool to assess fiscal costs and risks arising from public-private partnership (PPP) projects. It is developed by the WB and the IMF and aims to assist governments in assessing fiscal implications of PPPs, as well as in managing these projects in a proactive manner. Thus, assessing these fiscal implications before entering into a PPP and managing the fiscal implications throughout the PPP contract are essential to safeguard the sustainability of public finances.1 Assessing both fiscal costs and risks in PPPs—using PFRAM 2.0—allows the government to make informed decisions on public investment, as (i) the fiscal impacts of existing PPPs are well understood and appropriately managed; and (ii) new PPPs are only awarded if they do not undermine the long-term sustainability of public finances.2 It should be noted that PFRAM 2.0 is also not suitable for assessing contracts with a flexible duration. That is because the logic of PFRAM 2.0 builds on determining the interest rate, that is, the financing costs for the government, at which the payments received by the project company cover the cost for investment, operation and maintenance, and 1 Word Bank (2019): PPP Fiscal Risk Assessment Model, p. 6. https://www.imf.org/ external/np/fad/publicinvestment/pdf/PFRAM2.pdf. 2 Idem, p. 7.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_13

165

166

F. I. LESSAMBO

financing. If the contract is open ended or has a flexible duration, this interest rate and the financing cost cannot be calculated, and the model cannot operate.3

13.2

Understanding the Fiscal Metrics

PFRAM 2.0 allows governments (or any user) to estimate the annual cash flows of each project, its internal rate of return, and the value of the project’s related assets and liabilities for the entire life cycle. More, it allows the user to check whether the project makes sense financially. The forecasted project cash flows will allow the private partner to operate and manage the project in the long-term and to realize a reasonable rate of return. Further, it can be used to assess the fiscal implications of a project at any stage of the project life cycle: (i) the design and procurement stage, (ii) the project selection stage, and (iii) the implementation stage. Finally, yet importantly, it allows the user to estimate the impact of macroeconomic shocks on the PPP portfolio: – A macroeconomic shock can be designed as a temporary or permanent deviation of (1) GDP growth, (2) inflation, or (3) the nominal exchange rate from the baseline projection. – PFRAM 2.0 presents and compares the baseline and shock-based projections for (i) net lending and borrowing, (ii) the cash balance, (iii) gross debt, (iv) the stock of contingent liabilities that is, the debt and MRGs, and (v) expected payments under MRGs. – PFRAM 2.0 can also be used to assess the sensitivity of fiscal indicators to alternative project design options.

13.3

PPP Accounting and Reporting

There are three main sets of public sector accounts that use information at different stages of the fiscal cycle: budgeting, accounting, and statistics.

3 Idem, p. 12.

13

PUBLIC FISCAL RISK ASSESSMENT MODEL

13.3.1

167

Budgeting

In general, the treatment of PPPs must be consistent among the three sets of public sector accounts; budgeting, accounting, and the statistical reporting standards of PPPs should result in similar impacts on the main fiscal aggregates of deficit and debt.4 It is good practice that PPPs should be included on budget, on-balance sheet, and be included in government finance statistics. That is, if the PPP creates a public asset that is controlled by the government, the budget implications should be the same as when the public asset is procured traditionally, except when the case when the government’s budget is on a cash basis. In general, the government does not face any cash flows related to the PPP during the construction phase. Only when the asset becomes operational, and if it is a government-funded PPP, then, the government would need to make regular payments, recording the corresponding cash outflows from the budget as expenses. If it were a user-funded PPP, such as a concession, the government’s cash flows would typically be zero, since the private partner constructs the asset and the user pays it back directly through fees or tariffs. Therefore, nothing is recorded when the government’s budget is on a cash basis and PPPs are user-funded, hampering budget discipline and transparency.5 13.3.2

Accounting

International Public Sector Accounting Standard—IPSAS 32—governs accounting of PPP contracts “Service Concession Agreements: The Grantor.” IPSAS 32 prescribes the rules for accounting PPP contracts in the public sector accounts, including government-funded and userfunded PPPs. According to IPSAS 32, if the government has the control of the PPPrelated asset, the asset, and related liability are regarded as belonging to the government, whether the government or users fund it. The government controls the asset (i) if it controls or regulates what services the private partner must provide with the asset, to whom it must provide

4 Idem, p. 18. 5 Idem, pp. 18–19.

168

F. I. LESSAMBO

them, and at what price; and (ii) if it controls—through ownership, beneficial entitlement, or other means—any significant residual interest in the asset at the end of the term of the arrangement. Once it has been decided that the PPP asset is to be treated on— balance sheet, all expenditures, and revenues related to the asset, as well as the corresponding liabilities, must be accounted for in the government accounts. However, the cost of the project, other than regular payments made from the government budget to the private provider, may not be recorded in the government accounts, as prescribed by IPSAS. Whether a PPP is on- or off-balance sheet depends on the characteristics of the PPP asset—the extent to which the government controls it—and on the national accounting standards followed by a specific country. 13.3.3

Reporting PPPs in Public Deficit and Debt

If the government is the economic owner of the asset, all transactions related to this asset would impact the government finance statistics: net lending/borrowing, gross and net debt, and cash balance. However, if the private partner bears most of the risks and reaps most of the benefits of the PPP project, then PPP-related assets are regarded as private. There is no impact on the government finance statistics, until the asset reverts to the public sector at the end of the PPP contract. Only at that point, the government would recognize the transfer of the asset from the private partner to its own balance sheet, recording a capital transfer with the counterpart being a change in other economic flows (Fig. 13.1).

13.4

Assessment of Fiscal Risk

The overall assessment of fiscal risks of a PPP project follows a six-step approach. The user provides required information to proceed through the first three steps of identifying the risk, determining the likelihood of the risk, and assessing its potential fiscal impact. Based on this information, in the fourth step, PFRAM 2.0 automatically generates a risk rating. Based on the risk rating and with the user providing information on mitigation measures in the fifth step (blue), PFRAM 2.0 provides a sense of the priority of required actions.

13

PUBLIC FISCAL RISK ASSESSMENT MODEL

169

Fig. 13.1 GFS—Government Finance Statistics (Source Fact Sheet, Government Finance Statistics [GFS], Statistics Department, IMF [2009]. http://www. imf.org/external/pubs/ft/gfs/manual/comp.htm)

(i) Identification and Assessment of Risks PFRAM 2.0 looks into both contractual risks and other risks not allocated directly by contract, such as, risks arising from the governance structure, legal framework, or government institutional capacity. After identifying the relevant risks for a PPP project, PFRAM 2.0 requires the user to assess the following: – The likelihood of such risks materializing in future. – Fiscal impact, focusing on the macro fiscal implications of risks such as, the government’s deficit and gross debt. The fiscal implications of governance risk materializing would be reflected also in terms of the government’s loss of reputation, efficiency, availability, and transparency. The user is required to evaluate the potential fiscal impact of a particular risk in a holistic manner, providing as much information as possible to support the assessment of low, medium, or high. Risks assessed as having a high likelihood and a high fiscal impact, would be regarded as “critical.”

170

F. I. LESSAMBO

Table 13.1 Risk category

Main risk category

Number of risks subcategories

1. 2. 3. 4. 5. 6.

3 detailed risks 19 detailed risks 10 detailed risks 7 detailed risks 4 detailed risks No subcategories No subcategories No subcategories 3 detailed risks No subcategories 2 detailed risks

Government risks Construction risks Demand risks Operation & performance risks Financial risks Force majeure risks

7. Material Adverse Government Actions (MAGA) 8. Change in law 9. Rebalancing of financial equilibrium 10. Renegotiation risks 11. Contract termination risks Source World Bank (2019)

(ii) Mitigating factors For each risk identified, PFRAM 2.0 asks the user to assess whether the government has mitigation measures in place. These mitigation measures vary with the risk, and PFRAM 2.0 provides some indication of possible measures for each given risk. Depending on the stage of the project cycle, risks identified as areas for priority actions can be addressed (i) by changing the design of the project to avoid the risk—this is only relevant before the PPP is contracted; (ii) by introducing additional mitigation measures in place; or (iii) by creating fiscal space to absorb the potential fiscal cost if the risk materializes (Table 13.1).

13.5

Performing the Sensitivity Analysis

The purpose of the sensitivity analysis consists of simulating a shock, or shocks. For each of the shocks, the user will set the deviation from the baseline projection (percentage change) and the start and end year for the shock. For example, a GDP shock of -2% would reduce the projected real GDP growth rate by 2 percentage points for each of the years to which

13

PUBLIC FISCAL RISK ASSESSMENT MODEL

171

the shock applies (in the example, these would be 2020 to 2023). Below are the most used shocks: • GDP shock A GDP shock has two effects: (1) it affects the denominator of the main aggregates expressed as a proportion of GDP; (2) it affects the PPP fiscal impact if the flows related to the PPP are linked to GDP. • Exchange rate shock Changes in the nominal exchange rate affect the PPP fiscal implication if the PPP constructions costs have an import component, and whether fees and expenses are linked to the nominal exchange rate, which varies on a contract-by-contract basis. If the construction of the PPP asset depends largely on import components, then the total cost of the project increases with the value of government liabilities and related assets. The nominal exchange rate can also affect the operational period of the PPP contract, for example, if government payments or user fees are set in foreign currency. • Inflation shock Changes in inflation will affect PPP fiscal implications if project flows are linked to inflation. Example: Country X plans to create a new hospital using a build, operate, and transfer (BOT) contract signed in 2015. The private partner finances, designs, and constructs a hospital building and then operates and maintains it and provides additional services, including medical imaging. The government will provide all other medical services directly, because the government prefers to retain control to their quality. A mix of debt (70%) and equity (30%), with no government support, finances the construction, which will take three years. The private company will be remunerated directly by the government through budget payments. Although the useful life of a hospital is estimated to be 30 years, the government has decided to award the contract for only half that time, given the rapidly evolving needs and technologies in the health sector.

CHAPTER 14

Cases Study

14.1

General

These case studies aim to assess the relevance of PPP by comparing the expectations of the country and the real outcomes. However, it shall be noted that the gap between expectations and results does not mean that significant progress has not been made. To the contrary, it does suggest that some of the original targets set may have been unrealistic, and that the requisite financial resources—or the financial sector policies that could have generated those resources—may have been lacking.

14.2 14.2.1

Successful Stories

Breaking New Ground: Lesotho Hospital Public-Private Partnership—A Model for Integrated Health Services Delivery

Lesotho Hospital case is about a public-private partnership (PPP) between the Health Ministry for the Government of Lesotho and a private consortium headed up by Netcare, a South African company, to build and operate a new referral hospital and four feeder clinics in Maseru, the nation’s capital. The project was one of the first efforts to design a PPP

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3_14

173

174

F. I. LESSAMBO

in Africa for the construction and the operation of a major hospital plus the clinical services.1 • Leading facts For many years, Lesotho has urgently needed to replace its main public hospital, Queen Elizabeth II. In 2006, to maximize the use of limited resources and ensure long-term improvement in facilities and services, the government adopted the public-private partnership (PPP) approach for a new hospital. IFC’s Advisory Services in Public-Private Partnerships advised the government in structuring a PPP for the design and construction of a new 425-bed hospital and adjacent gateway clinic, the renovation of three strategic lter clinics, and the management of facilities, equipment, and delivery of all clinical care services for 18 years.2 The project had a capital value of over $100 million, and the private operator—the Tsepong consortium headed by Netcare, a leading South African health care provider—has significant local ownership: 40% of shares held by Lesotho-owned businesses, increasing to 55% during the project term. • Government Goals The government’s goal for the PPP was to achieve better health outcomes by contracting out the building and operation of an integrated health network, increase accountability for service delivery and quality of care through a performance-based contract, while maintaining the government’s important role as steward of the health sector.3 The project is considered as one of the successful by the IFC for several reasons:

1 Carla M.N Faustino Coelho and Catherine O’Farrell (2009): Lesotho Hospital HHP— A Model for Integrated Healthcare Delivery, IFC, 1–29. 2 World Bank (2012): Africa-Lesotho, http://akb.africa-union.org/auc/handle/AKB/ 15707. 3 Ministry of Health and Social Welfare of Lesotho. http://www.lesotho.gov.ls/mnh ealth.htm.

14

CASES STUDY

175

Reason 1: The baseline study was important throughout the project The International Finance Corporation (IFC) undertook extensive technical, legal, and financial due diligence and advised the government on the feasibility, structuring, tendering, and implementation of the PPP. As part of this process, IFC commissioned a baseline study of healthcare costs and services at the existing Queen Elizabeth II hospital and the related clinics. The study provided the basis for future evaluation and comparison and gave potential bidders realistic operating data to use in preparing their bids. IFC also worked closely with the government to improve its understanding of PPPs and build its implementation capacity. Finally, IFC developed the bidding documents and the PPP agreement, and supported the government through the tender process. The baseline study will also be useful for IFC’s own monitoring and evaluation work on the project going forward.4 Reason 2: Evaluation of bids serves to enhance outcomes and affordability In December 2007, after an open and competitive bid process, Netcare (South Africa) was awarded the contract. Netcare formed a consortium with local companies, and in October 2008, an 18-year PPP agreement was signed between the Government of Lesotho and the new company, Tsepong. The three refurbished primary care clinics opened in May 2010. The challenge was to come up with a bid evaluation structure to accommodate three competing objectives: – to procure as many services for as many people at the hospital and lter clinics as possible; – to improve the quality of services; and – to do so within the government’s affordability limit. The best structure to balance these objectives involved dividing the technical evaluation into three areas:

4 World Bank (2016): Lesotho Health Network Public-Private Partnership (PPP). https://www.worldbank.org/en/country/lesotho/brief/lesotho-health-network-ppp.

176

F. I. LESSAMBO

• Service Coverage Bidders were required to confirm which services they could feasibly provide within the service payment, taking into consideration patient volumes. Services listed by the government in the bidding documents included “mandatory” and “optional.” For example, orthopedic surgery (general and trauma) was a minimum requirement, but bidders who also or area hip-joint replacements within the service payment received additional points. Similarly, diagnostic imaging (radiology, digital X-ray, CT, mammography) was a minimum requirement, but bidders who offered magnetic resonance imaging (MRI) services received additional points. The winning bidder agreed to provide all mandatory services, plus 95% of all additional optional services, within the service payment. • Patient volumes The government stipulated services to a minimum of 16,500 inpatients and 258,000 outpatients at the hospital and clinics. Bidders had to commit to a maximum number of inpatient and outpatient visits, and the bidder offering the highest number of patients received the maximum points. The winning bidder committed to delivery of services to 20,000 inpatients and 310,000 outpatients per annum. • Service delivery plan Bidders were evaluated on their approach to quality, effectiveness, and efficiency of the services to be provided; compliance with service standards; and how realistic their plans were. is element was evaluated by a multidisciplinary team from the Ministry of Health and Social Welfare, the Ministry of Finance and Development Planning, and IFC.5 The technical and financial offers were submitted separately, with the financial offers opened only after the technical evaluation was completed.

5 Ministry of Health and Social Welfare of Lesotho. http://www.lesotho.gov.ls/mnh ealth.htm.

14

CASES STUDY

177

Reason 3: Defining clinical services is necessary, even if it has to be a highly consultative process. The service coverage list developed for the bidding documents was a key element of the bid evaluation, but the definition of that list was a consultative process, including Ministry of Health staff, clinicians at the Queen Elizabeth II hospital, private practitioners in Lesotho, and IFC’s technical experts. These discussions were complicated by the inevitable need to balance affordability and expansion of services currently not provided in Lesotho. The parties eventually reached agreement on the minimum types of services believed to be deliverable within the affordability limit by any private operator. To progress smoothly, such a highly visible, important national project had to be seen as having the support of all key stakeholders. Wide support would not have been possible without the consultative process. A key to getting agreement was finding a balance between services perceived to be essential versus services that would be good to have but not essential—plus a constant reference to affordability. A bidding structure that allowed bidders to include optional extras was also helpful in reaching agreement.6 Reason 4: Integrated service delivery is essential at every level Since the private operator was responsible for complete healthcare service delivery at the hospital and clinics, it was important to ensure that it could actually deliver all services—pharmaceuticals, for example. The current national referral hospital was a significant client of the National Drug Supply Organization (NDSO), the central pharmaceutical and medical supplies procurement entity for the government. On the one hand, if the private operator were no longer required to use NDSO as a pharmaceuticals supplier, NDSO would lose significant bargaining advantage for the country. On the other hand, if the government forced the private operator to use NDSO, and NDSO failed to deliver the right drugs on time, the private operator could claim cause for failure to treat a patient. Solution: The private operator entered into a service-level agreement with NDSO, as well as a capacity-building initiative that will enhance 6 World Bank (2016): Lesotho Health Network Public-Private Partnership (PPP). https://www.worldbank.org/en/country/lesotho/brief/lesotho-health-network-ppp.

178

F. I. LESSAMBO

NDSO supply and logistics capability, thereby ensuring better service delivery not only to the PPP but also to the broader public health system. Reason 5: Value for money is about more than just project cost and risk transfer PPPs generally focus on the concept of value for money, which typically assesses the affordability and risk transfer of a project. By this standard, the Lesotho project is affordable for the government. On an operational cost comparison, the government did not pay much more for the PPP than it currently spends on the Queen Elizabeth II, yet it received vastly improved facilities, medical services, and patient care. From a patient perspective, services at the new hospital and clinics are affordable and costed the same as at any other public health facility in Lesotho. The project has also ensured maximum risk transfer to the private operator, protecting the government from most of the financial, operational, and legal risks inherent in a project of this nature. Reason 6: Performance monitoring The Lesotho PPP agreement included typical performance monitoring— such as payment and penalty mechanisms related to facilities management, equipment, and other nonclinical service outcomes—as well as independent certification of delivery of facilities and equipment. Nevertheless, it also required additional monitoring: The Lesotho agreement included a detailed list of both clinical and facilities performance indicators that the private operator must meet in order to receive full payment from the government. Failure to meet a performance indicator resulted in a severe penalty deduction (a percentage of the total service payment). The relative importance of clinical versus facilities performance indicators was reflected in the percentages deducted. For example, failure to comply with the infectioncontrol measures (clinical indicator) draws a 1.00% penalty, whereas failure to comply with linen and laundry service standards (facilities indicator) brings only a 0.25% penalty. A ratchet mechanism for repeated service failure for the same problem increases the penalty deduction for each repeated failure, and service failure that was not remedied can result in termination of the agreement.

14

CASES STUDY

179

The Lesotho project had an independent monitor—a unique role specifically created for this project and jointly appointed by the government and the private operator—to perform a quarterly audit of the private operator’s performance against the contractual performance indicators (clinical and nonclinical) and, where performance had not been achieved, determine the penalty deduction that applies an independent monitor was a consortium of companies with specialized experience in PPPs, clinical services, hospital operation and management, medical and nonmedical equipment, information management and technology, and soft and hard facilities management. The private operator was required to obtain and maintain accreditation from the Council for Health Services Accreditation of Southern Africa; failure to do so can result in termination of the agreement. The project provides for a Joint Services Committee, established by the government and the private operator, to review performance, discuss, and develop mechanisms, procedures, or protocols to improve the services at the hospital and lter clinics. Given the long-term nature of the project, this committee provided a mechanism for altering the hospital’s services, by agreement, to address new disease patterns, new technologies, or new national priorities, thereby ensuring that the project remains relevant for the country. • Results Through this health network, the Ministry of Health in Lesotho is providing much better quality of care.7 It is achieving better health outcomes for a larger number of patients, including providing more advanced medical technologies than were previously available in Lesotho.8 Evidence from the 2007 baseline study and 2012 end line study

7 Sadeghi Ahmad, Omid Barati, Peivand Bastani, Davood Danesh Jafari, Masoud Etemadian (2016): Experiences of Selected Countries in the Use of Public-Private Partnership in Hospital Services Provision. Journal of Pakistan Medical Association, November, Vol. 66, Issue 11, 1401–1406. 8 Nathalie McIntosh, Aria Grabowski, Brian Jack, Elizabeth Limakatso NkabaneNkholongo, and Taryn Vian (2015): A Public-Private Partnership Improves Clinical Performance in a Hospital Network in Lesotho. Health Affairs, Vol. 34, 959.

180

F. I. LESSAMBO

conducted by Boston University’s Center for Global Health and Development documented the changes. Improvements highlighted by the Boston University study included: (i) Maternal and child health results have dramatically improved through the QMMH PPP network, which has greatly surpassed the health outcomes provided by the previous facilities. – The overall death rate at the PPP facilities fell by 41% compared to QEII. – Maternal deaths at the facilities fell by 10%. – There has been a 17% decline in hospital deaths within 24 hours indicating better access to life saving medicines, surgery, and emergency care. – The pediatric pneumonia death rate at the new facilities dropped by 65% between 2007 (before the PPP) and 2012. – Still births were down 22%. – 70% of extremely low birth weight babies survived, while virtually all died before the PPP was initiated. (ii) The health network is treating far more people than previous facilities: – 30% increase in the number of patients seen every day – 110% increase in total annual outpatient visits – 45% increase in deliveries (iii) The health network is operating more efficiently and caring for more patients at less cost per patient. – Boston University estimates that in comparison with the previous facilities, the new health network is 22% more cost efficient on a per patient basis.9 (iv) The clinics and the hospital are fully accredited by the Council for Health Service Accreditation of Southern Africa (COHSASA)—a globally recognized accreditation body—joining a small group of

9 Lisa Chedekel (2015): Public-Private Partnership Improves Health Care in Lesotho. Boston University, and School of Public Health. https://www.bu.edu/sph/news/articles/ 2015/public-private-partnership-improves-health-care-in-lesotho/.

14

CASES STUDY

181

public healthcare facilities in sub-Saharan Africa that have achieved this recognition. Other considerable improvements include: – Availability of most laboratory results within 1 hour – 84% of patients are triaged within 5 minutes of their arrival at the casualty department – Improved cleanliness of facilities for less infection-risk to the patients, staff, and visitors – Better and adequate equipment for staff, which results in, improved diagnosis. (v) Other significant value-added elements include – Development of human resources The private operator was responsible for recruitment of all staff at the new hospital and lter clinics and has greater freedom to pay the staff salaries that reflect the scarcity of their skills, without being constrained by government salary policies. Furthermore, the private operator was allowed to create a platform for doctors to serve both the private and public sectors in a controlled manner. – training The new referral hospital was to be the country’s main teaching hospital for physicians undergoing postgraduate training, medical students, nurses and other health professionals, and staff from other public health facilities. These students would have access to equipment and facilities not previously available in Lesotho. – referrals The government currently refers most complicated cases outside the country, since the prior facilities at Queen Elizabeth II cannot accommodate them. The new hospital addresses many of these cases. Human resources (HR) and training costs are built into the financial model, and the private operator commits to spending the amounts allocated to HR and training annually—making these elements part of the overall cost of the project.

182

F. I. LESSAMBO

14.2.1.1 Conclusion The Lesotho Hospital PPP has demonstrated that it is possible, in a lowincome country, to embark on a very ambitious project that is affordable for the country and patients, is attractive to top-quality private investors, expands services to more people, and has the potential to deliver highquality health services that address MDGs and the critical shortage of health professionals—key constraints for many developing countries. The key factor for the success of the project is the commitment and support of the government demonstrated throughout the project process, from procurement, during negotiations, and to financial close. The Lesotho government firmly believes this project will deliver meaningful results for the country. 14.2.2

Ukraine: Providing Safe Harbors for Ukraine’s Economic Growth

Ports are key hubs of economic development. New projects in Ukraine are helping the country keep maritime commerce moving, with a major payoff for sustainable growth. The Ukrainian Sea Ports Authority and QTerminals, the leading Qatari port operator, signed today a 35-year concession agreement to upgrade the port’s facilities and increase its efficiency. A leading world operator with extensive experience in Qatar— the Qatari company QTerminals, which operates Qatar’s largest trading port—Hamad, developed the project. The company agreed to invest around 3.4 billion Ukrainian hryvnia in the development of the port of Olvia and guaranteed that the jobs are preserved. IFC, in cooperation with the European Bank for Reconstruction and Development (EBRD), and the Global Infrastructure Facility, was the lead transaction advisor, helping the government competitively tender the project and bring it to commercial close. • Government goals The projects were expected to contribute to Ukraine’s economic development by attracting private investments and boosting trade competitiveness.10 More specifically to revitalize the country’s shipping sector, 10 Ministry of Infrastructure of Ukraine. https://mtu.gov.ua/en/.

14

CASES STUDY

183

facilitating cleaner transport up and down the river to save time and costs while benefiting the environment. Enable Ukraine to attract more global shipping operators and to help mid-size companies grow by offering them easier access to port services. Furthermore, the PPP projects would boost shipping volumes, increase tax revenues, and provide the government with concession fees over the course of the 30- and 35-year contracts. The government plans to double cargo turnover in seaports by 2038.11 • Key facts – Ukraine is a major exporter of agricultural commodities and metals—the world’s second largest exporter of grain and fifth largest exporter of iron ore—while its imports totaled $59.3 billion in 2020. Yet, even though the country is strategically located on the Black and Azov Seas, several of its shipping ports operate at only a fraction of their potential, as more investments are needed to upgrade equipment and install technology that will increase efficiency. – Ukrainian infrastructure requires billions in investment by 2030, with $8–10 billion of private investment annually over the next 10 years, since on its own Ukraine is only able to finance about $1.5 billion of infrastructure projects annually. – Realizing the port sector is crucial to economic development, the Ukrainian government engaged IFC, the European Bank for Development and Reconstruction (EBRD) and the Global Infrastructure Facility (GIF) in 2017 to help structure its firstever PPPs based on best international practices. – The government started by offering concessions to private companies to upgrade two smaller ports, Kherson and the Black Sea port of Olvia, a mid-sized port that specializes in shipments of grain. – Following the successful completion of these pilot concessions in 2020, with support from IFC and EBRD in partnership with the GIF, the government launched a third PPP to overhaul

11 Ministry of Infrastructure of Ukraine. https://mtu.gov.ua/en/.

184

F. I. LESSAMBO

parts of Chornomorsk, one of the largest deep-sea ports in the country.12 – The EBRD and IFC helped the Ukrainian government to prepare a comprehensive contractual framework, set bidding criteria and tender rules, and liaise with potential investors, paving the way for a successful tender. – IFC, in partnership with the Federal Ministry of Finance of Austria and the Swiss State Secretariat for Economic Affairs SECO, supported Ukraine’s Ministry of Infrastructure with structuring a comprehensive contractual framework and determining bidding criteria for the Olvia and Kherson concessions. – The first two concessions in Kherson and Olvia ports have resulted in $137 million of private investment commitments. Under the terms of the PPPs, the private investors were committed to upgrade the ports with new infrastructure and technologies, while also introducing climate-smart practices that use renewable energy and greater use of rail and water transport, replacing diesel trucks. The projects have significantly exceeded expectations in terms of investment and concession fees for mainly two reasons: Reason #1: Thorough project preparation and a well-run PPP tender. IFC and the EBRD will help the government prepare a comprehensive contractual framework, define bidding criteria and tender rules, as well as liaise with potential investors until commercial closing of the transactions. Reason #2: A Continuum project support The GIF’s value addition was its ability to provide a continuum of project support going from the pre-feasibility stage to its convening role among the multilateral development banks to help bring it to a successful commercial close.

12 IFC (2021): IFC and EBRD to Help Modernize Chornomorsk Port, Boosting Ukraine’s Trade Competitiveness. https://pressroom.ifc.org/all/pages/PressDetail.aspx? ID=26673.

14

14.2.3

CASES STUDY

185

Senegal—A Road Leads to Economic Opportunities

The highway—the first public-private partnership (PPP) for a Greenfield toll road in West Africa—was completed in two phases, both supported by IFC. The first section, a 24-km stretch from Dakar to Diamniadio that was inaugurated in 2013, slashed commuting time between the two cities from more than two hours to about 30 minutes.13 The success of the first section led to an extension of the toll road, also structured as a PPP. The second stretch, commissioned in 2016, extended access from Dakar to the newly inaugurated international airport in the region of Thiess and created a faster route from the capital to seaside resorts in Saly, an important source of employment and income for the country. IFC investments in the two phases of the toll road—part of a broader World Bank-led project in Senegal—amounted to e26 million. An additional e50 million was arranged and mobilized by IFC from the Western African Development Bank, the African Development Bank, and CBAO, one of the main Senegalese commercial banks. • Government goals Improving urban mobility for economic growth. Better urban mobility is crucial to local as well as national prosperity. Regional growth projections show that the urban center’s population may double to 5 million by 2030, and most of the expansion is expected to take place in the outer suburbs of Dakar. The area is already home to more than a quarter of the country’s population and contributes to about 60% of its GDP. • IFC objectives Easing traffic congestion and stimulating development on the outskirts of Dakar were among IFC’s initial objectives for the PPP. IFC acted as the lead arranger and global coordinator for the two debt packages provided to SENAC, the Senegalese concession company set up by Eiffage.

13 World Bank Group (2015): Senegal: Dakar Toll Road Extension. https://www.wor ldbank.org/en/news/loans-credits/2009/06/02/senegal-dakar-toll-highway-project.

186

F. I. LESSAMBO

• Results – The PPP—which created more than 300 permanent jobs and 1,000 during construction—has benefited public transportation, with positive outcomes for users and for the government.14 Living conditions for residents have also improved as middle-income families gained access to affordable housing options outside of Dakar’s costly urban market. Other much-needed public works programs, such as anti-flooding initiatives, were developed alongside the toll road. Knowledge sharing between Eiffage’s staff in France and Senegal has been another plus. Four years after French highway experts first visited the project to train local workers on toll road operation—a profession that did not exist in the country—Senegalese engineers recently traveled to train French employees on how to use a software system they developed. 14.2.4

China (1997): The Greenfield Project to Install Modern Medium-Density Fiberboard Plants

Aim: to support China fast growing construction industry. MDF, due to its superior grade, is considered more stable than solid wood. MDF has better resistivity toward changes in heat and humidity and is hence preferred for furniture, cabinetry, and flooring. Medium-density fibreboard (MDF) is an engineered wood product made by breaking down hardwood or softwood residuals into wood fibers, often in a defibrator, combining it with wax and a resin binder, and forming it into panels by applying high temperature and pressure. … It is stronger, and denser, than particleboard. As part of the limited-recourse financing for the project, IFC helped arrange $26 million in syndicated loans, at a time when foreign commercial banks remained cautious about project financing in China’s interior provinces. Plantation Timber Products (Hubei) Ltd. launched a $57 million Greenfield project to install modern medium-density fiberboard

14 Laurence Carter (2015): Five Secrets of Success of Sub-Saharan Africa’s First Road PPP, IFC. https://blogs.worldbank.org/ppps/five-secrets-success-sub-saharan-afr ica-s-first-road-ppp.

14

CASES STUDY

187

plants in interior China, using timber plantations developed over the past decade.15 Medium-density fiberboard is currently produced and utilized worldwide. MDF represents approximately 88.77% of the fiberboard industry, with a total production of 59.04 million m3 in 2016. MDF is widely used in furniture, construction, packaging, flooring, and other industries, with the furniture industry consuming approximately 65% of the total production. In addition, China has become one of the largest powers in trading MDF products. MDF is mainly exported to the United States, Saudi Arabia, and Canada and imported from New Zealand, Germany, Australia, and other countries. The demand for MDF in China remains strong, and the proportion of MDF in the wood-based panel industry is expected to increase further. However, the comprehensive energy consumption per unit of MDF in China is 4.8 times that of the average level in the world. Moreover, MDF production yields relatively higher GHG emissions compared with other panels.16 Result: Medium-density fiberboard mills have become more frequent in all regions of the world, in industrialized nations as well as in developing ones. The success of the Greenfield project to install modern medium-density fiberboard plants has propelled China in this specific industry. China accounted for almost more than 55% of the global share of MDF. The rapid growth in consumption of medium-density fiberboard in China has been majorly driven by the ample developments in the residential and commercial construction sectors, which are being supported by the growing economy. China’s real estate sector has been growing rapidly with increased investment by the government. Recently, property prices in China rose by about 30.0% due to increased activity in the real estate space.

15 IFC (1999): Lessons of Experience No. 7: Project Finance in Developing Countries, Chapter 1. https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_ external_publication_site/publications_listing_page/lessonsofexperienceno7. 16 Shanshan Wang, Weifeng Wang, and Hongqiang Yang (2018): Comparison of Product Carbon Footprint Protocols: Case Study on Medium-Density Fiberboard in China. International Journal of Environmental Research and Public Health, Vol. 15, Issue 10, 2060. https://doi.org/10.3390/ijerph15102060.

188

F. I. LESSAMBO

14.3 14.3.1

Unsuccessful PPP

Liberia Education Advancement Programme (LEAP)

In January 2016, the Liberian Ministry of Education announced its intention to outsource its public pre-primary and primary schools to Bridge International Academies (BIA) for a one-year pilot program. This plan provoked significant public outcry and criticisms from different stakeholders. As a result, the Government of Liberia reviewed the plan, introducing an additional seven private providers selected through a competitive selection process. However, despite these changes, external assessments of its impact have not been good. The outsourcing of the Liberian public pre-primary and primary schools to Bridge International Academies for a one-year pilot program through a PPP contract was the first step in what was known as the Partnership Schools for Liberia (PSL), recently renamed Liberia Education Advancement Programme (LEAP). BIA is a for-profit, American-based company operating a commercial, private chain of nursery and primary schools. It has received funding from several large corporations, investors, and development partners including the WBG’s International Finance Corporation (IFC), the UK’s Commonwealth Development Corporation, with funds from the Department for International Development (DFID), and the Overseas Private Investment Corporation (OPIC). Launched in September 2016, the first phase of the PSL pilot consisted of 93 schools with estimated 20,000–40,000 children, which were operated by eight private actors. BIA received the largest number of schools (25) without a competitive selection process. The pilot was to run for three years and it was to be externally evaluated13 through a randomized controlled trial (RCT) by independent evaluators measuring the performance of schools run by the private partners against control schools under government management. The Coalition for Transparency and Accountability in Education (COTAE) raised questions in relation to the lack of information about how the “independent evaluators” of the program were selected.17 This was particularly problematic because the findings of their report were to determine the expansion of the pilot project. The funding formula for PSL in year one provides a subsidy of US$50 per child to operators, philanthropically funded, in

17 Coalition for Transparency and Accountability in Education (2018): Monitoring Report-Public-Private Partnership in Education, 9–19. https://www.gi-escr.org.

14

CASES STUDY

189

addition to the state’s investment of US$50 per child. This is the same financial obligation the government has to every other public school, which aligns with the projected increase in state per-child expenditure to US$101 by 2020. The cost of the PSL pilot in year one was US$3.9 million, of which US$2.5 million required external funding. The balance comes from government funding. This is inclusive of operator subsidies, the evaluation and capacity building, but exclusive of operator research and development costs and costs related to lack of economies of scale. Initially, a decision to expand the PSL was dependent on the findings of the RCT conducted during year one. However, in February 2017 the Minister of Education announced 100 new PSL schools for year two beginning in September 2017. This has concerned PSL advisers, who warned against scaling up before the release of evidence from the evaluation in August 2017. The Minister also proceeded to allocate BIA the highest number of new schools (43) in the second year of the PSL program, giving it 68 schools, while the next biggest operator (BRAC) has 33 schools in total. Several project documents were publicly available. However, according to the National Teachers’ Association of Liberia (NTAL), in addition to lack of independent evidence supporting the government’s actions, the PSL was also plagued with a lack of transparency. To date, for example, none of the eight Memoranda of Understanding between the service providers and the Ministry of Education (MoE) has been made public. • Excessive costs and poor value for money The project ended up being too expensive for the government to maintain. Research by the University of Columbia showed that, as teachers in PSL schools receive higher than average salaries, the government had to spend an estimated US$20 extra per student, adding another US$600,000 per year. Running the RCT itself came to about US$900,000 over its three-year life, which did not include costs of the analysis. Then there were the expenditures added by the contractors: BIA alone spent over US$6 million in the first year. The other contractors likely put in another US$3 million. Thus, in total, the PSL is likely to have cost more than US$25 million for the three-year period. The preliminary results from the first-year evaluation highlight that: “the program is yet to demonstrate it can work in average Liberian schools,

190

F. I. LESSAMBO

with sustainable budgets and staffing levels and without negative sideeffects on other schools.” Further, the evaluators observed that the costs of the PSL were higher than advertized and were anticipated to rise even higher in year two. That evaluation demonstrated that, on average, PSL schools improved teaching and learning, but in its first year it was not a cost-effective program for raising learning outcomes.18 COTAE’s research also highlights funding challenges that corroborate critics’ assertions about the dangers of relying on donors to introduce programs with serious financial implications and questions about sustainability. For instance, salaries for teachers in the BIA schools were delayed, while at the same time resources for charging electronic devices used in these schools were not provided.19 As a result, school authorities and teachers were sometimes compelled to manage this. Already challenged by lack of pay, these teachers were incurring extra expenses to ensure that BIA’s schools remained open and functional. Similar challenges were noted in relation to the crucial school feeding program. COTAE reported that the meals provided under the feeding program for the extended learning hours proposed by BIA was irregular, as some schools fed students only twice weekly. The extension was implemented without adequate planning, which has had a negative impact on pupil retention. • Lack of transparency and accountability The monitoring report by COTAE mentions that “all providers under the pilot, including BIA, were not recruited through transparent and competitive procurement processes.” Contrary to the government’s assertions, the Liberian Public Procurement and Concession department had no records of any transparent and competitive process carried out by MoE in recruiting BIA and those operating the pilot project. The COTAE report cited very limited community participation in, and access to, information regarding the program. In the majority of the counties involved, most citizens—and even some local MoE officials—were uninformed about the 18 Sophie Edwards (2017): Early Results: Did Private Outsourcing Improve Liberia’s Schools? International Development. https://www.devex.com/news/early-results-did-pri vate-outsourcing-improve-liberia-s-schools-90943. 19 Coalition for Transparency and Accountability in Education (2018): Monitoring Report-Public-Private Partnership in Education, 9–19. https://www.gi-escr.org.

14

CASES STUDY

191

pilot and unable to clearly articulate what it hoped to achieve. The opacity was further demonstrated in the MoE’s refusal to allow parallel independent research of the PSL pilot program. The then Minister of Education, George Werner, initially blocked an independent research team from the University of Wisconsin—commissioned by Education International and Action Aid—citing concerns about a lack of objectivity due to both organizations’ work on PPPs. However, the Ministry welcomed assessments released by PSL providers themselves. This triggered a group of over 30 academics to publish an open letter to Minister Werner expressing deep concern. 14.3.2

The New Paris Courthouse

The project, designed by architect Renzo Piano, features a 160-m tower in the Batignolles neighborhood and was expected to accommodate more than 8,000 people a day. Bouygues won the order from the state over two years ago. The French government entered into a public-private partnership (PPP) under which Bouygues builds the complex for 575 million euros ($792 million) and maintains it for 27 years while the state pays rent. The contract was for a 27-year term as of the date of entry into possession of the buildings, with the total design/construction phase lasting 57 months. The choice to build a new Paris Courthouse as a PPP was questionable from the beginning, as the “public sector comparator” showed it would not be the cheapest option. However, French law allowed other criteria, including complexity and urgency, to be taken into account and a PPP was chosen nevertheless. The works budget of EUR 563 million (excluding borrowing costs and tax) and the forecast aggregate rent of around EUR 2.2 billion make this an exceptional project in every way. The partnership contract, signed in February 2012, was almost cast into doubt shortly afterward when the new Justice Minister, surprised that the contract should have been signed just a few months before presidential elections saw a change at the highest level of government, decided to ask the General Inspectorate of Judicial Services to carry out an audit of the project.20 The audit report concluded that the contract was fair and that it would be difficult to back away for both

20 Francois Bergere (2016): Ten Years of PPP Project: An Initial Assessment. OECD Journal on Budgeting, Vol. 2015/1.

192

F. I. LESSAMBO

financial and organizational reasons. The project was confirmed.21 Banks were extremely reluctant to authorize drawdowns of credit facilities as long as such risk remained, however unlikely, because of appeals to the administrative courts. In this particular case, work was halted for nearly eight months, from July 2013 to April 2014, before starting again after the Paris Administrative Appeal Court issued a judgment dismissing the appeal on April 8, 2014.22 Opponents to the project have denounced it as over-sized and ill fitted to the needs of staff who will have to work there. If they took the case to France’s highest administrative court, the Conseil d’ Etat that would leave the project in uncertainty for at least another year. The French Court of Auditors found that the interest rate for borrowing for the PPP was 6.4%, while in 2012 the weighted average rate for government bond financing in the medium-long term was 1.86%. Because of the ensuing scandal, the Ministry of Justice decided to stop using PPPs in future. • Criticism of the project The project lacked transparency of information from its inception. The 2017 report the real estate policy of the Ministry of Justice put an end to the fight forward was a damning condemnation of the courthouse PPP by the Court of Auditors. It looked both at prisons and the courthouse project and concluded that “the use of a PPP, prompted by short-term budgetary considerations, has led to average annual rental charges of e86 million that will weigh heavy on the Ministry of Justice’s budget” until 2044. In addition, the complexity and inflexibility of the PPP contract also caused great concern. The Paris terrorism attacks in November 2015 led to new security requirements and reforms to the justice system during the construction phase. Combined with new environmental standards, the building required a lot of adaptation, estimated at a total cost of e66.8 million to the public purse. As a result, additional construction was postponed until 2018 onwards.

21 Francois Bergere (2016): Ten Years of PPP Project: An Initial Assessment. OECD Journal on Budgeting, Vol. 2015/1. 22 Francois Bergere (2016): Ten Years of PPP Project: An Initial Assessment. OECD Journal on Budgeting, Vol. 2015/1.

14

CASES STUDY

193

• Excessive costs In the 2014 report of the French Senate PPPs, a ticking bomb, the Paris courthouse case was used as an example to underline shortcomings of the PPP model. The main criticism concerned the total cost, which amounted to e2.3 billion until 2044 for an investment of e725.5 million; the rest corresponded to e642.8 million of borrowing and e960 million of operating costs.23 The PPP option was costlier for the public purse than a traditional public procurement model because borrowing and maintenance costs were higher. In the case of the borrowing costs, the interest rates to which the Ministry was subject in this context were much higher than if it had used a public contract. For example, the fixed rate of the PPP cost of the Paris courthouse was 6.4%, while in 2012 (the date of the signing of the contract with Arélia), the weighted average rate of government financing in the medium-long term was 1.86% (up to 3% at 30 years-term). Moreover, maintenance costs were also higher under PPPs than public sector works, with outsourced maintenance. The construction costs of the PPP were also deemed “higher than those for public sector design-build contracts, partly because of additional costs incurred by delays due to the complexity of the contracts and the renegotiation process.” Other costs were incurred following the competition stage. For instance, those companies that participated in the tender process but lost their bid had a compensation fee. Project proposal fees awarded to the bid losers went up from e1.2 million (without taxes) to e2 million (without taxes) at the closure of the bidding process. • Excessive level of risks Furthermore, the PPP contract placed an excessive level of risk on the public sector, paving the way for possible additional costs. All of the costs linked to project-related risks beyond the threshold of e2 million would be borne by the public partner, from general strikes and national disasters to legal procedures of appeal against the PPP contract. One of these risks materialized in July 2013 when construction of the PPP was interrupted

23 Sibylle Vincendon (2018): In Paris, a New Courthouse is Very Fancy, Very Expensive, in Liberation. https://www.liberation.fr/france/2018/04/13/a-paris-un-nouveau-palaisde-justice-bon-chic-bien-cher_1643342/.

194

F. I. LESSAMBO

for eight months, as a result of the fact that the PPP was challenged in the Court by the association “La Justice dans la Cité.” This interrupted the construction until the court gave its judgment and led to a renegotiation of the costs associated with the construction interruption. 14.3.3

International Airport of Chinchero—Cuzco

• Devising the PPP24 The International Airport of Chinchero—Cuzco is a project promoted by the Peruvian Government, under the Law No27528 approved in 2001, which “declared the project of public necessity and utility and with the highest priority for the State.” In February 2010, the Ministry of Transport and Communications (MTC) ordered Proinversión—the state agency responsible for PPP-related processes—to release the call for tender to award a PPP contract co-financed by the state (also known as a concession contract).25 The project involves the design, financing, construction, operation, and maintenance of a new airport 29 km North from Cuzco, in an area that is at an altitude of 3,700 m above sea level. In April 2014, Proinversión awarded the project to the Kuntur Wasi consortium. The consortium included Argentina’s Corporación America Airports S.A.—a company running several airports in different Latin American countries, with headquarters located in Luxembourg. It also featured Peru’s Andino Investment Holding S.A.—which incorporates 13 companies that were active in sectors like infrastructure, logistics, and maritime services, and whose managers were linked to some of the most important companies in the country working on mining, insurance, logistics, and banking. The investment to start operations would be US$538 million, and the total investment, including future extensions, would be US$658 million. The airport would have capacity for 4.5 million passengers per year, with the possibility of further expansion to 5.7 million passengers per year. It would replace the current Cuzco Velazco Astete Airport upon its completion. Importantly, the decision to implement the

24 Ministerio de Transportes y Comunicaciones - Perú. 25 Ciro Salazar (2018): How Public-Private Partnerships Are Failing—International

Airport of Chinchero—Cuzco, History RePPPeated, 24–27.

14

CASES STUDY

195

project through a PPP was not based on an analysis of the costs and benefits in comparison with the potential costs of implementing the project through traditional public procurement. In Peru, the methodology of the public-private comparator (a quantitative analysis) is not applied to estimate the “value for money” (VfM) of a given project. Instead, the decision is made on the basis of a qualitative analysis, which gives an excessive margin of discretion. • The fiscal costs of the project Initial plans said the financing of the project would come from both Kuntur Wasi (71.4%) and the state (28.6%). Kuntur Wasi would cover the building and the operating phase, while the state would be in charge of the preparatory work (i.e., earth moving work). The financing provided by Kuntur Wasi (US$264.75 million) would be reimbursed by the state from the sixth year of the project onwards, with interest—once the airport was built and operational. The contract did not establish the interest rate that Kuntur Wasi would charge, but it gave to the state the power to refuse a financing plan. The project faced delays due to funding issues. Kuntur Wasi’s plan implied borrowing at an interest rate of 22%. Given the co-financing requirement, the plan implied a payment by the state that amounted to US$587 million in interest. On that basis, the proposal was rejected for being extremely high and against the public interest. As the state can borrow at an interest rate of 7%, it was considered that the interest rate that Kuntur Wasi should request could not be higher than 9– 10%. At that point, the state had the power to declare the expiration of the contract—it was explicitly established in the contract that this would imply unjustifiable delays in the implementation of the project. However, it did not do so. Kuntur Wasi asked for a renegotiation of the contract, which was signed in February 2017. It was agreed that 80.7% of the funding would come from the state, while 19.3% would come from the private partner. This changed the funding structure of the project, as the state became the main financing partner. In addition, the renegotiated contract obliged the state to make an initial contribution of US$40 million before the start of the construction phase, something not even seen in public works projects.159 Although this addendum violated several articles of the PPP law—for instance, one that requires that an addendum does not change the competition criteria of the contract—it was approved by the

196

F. I. LESSAMBO

Ministry of Economy and Finance (MEF) and the Supervisory Board for Investment in Public Transport Infrastructure (OSITRAN). It was also publicly backed by Ollanta Humala, the Peruvian President at the time. In addition, there have been allegations of possible conflict of interest. The then Vice Minister of Economy, Claudia Cooper, was previously an advisor to the private consortium, and one of the executives of the consortium was the sister of the Prime Minister. Several experts, former ministers, and the president of OSITRAN—who resigned her position as a result of this case—questioned the addendum, with some experts saying that the project turned into a “public work” project from a financial point of view. After a strong report from the Comptroller General referring to economic damages for the state, and in the midst of a national scandal over the project, the Peruvian government finally canceled the contract with Kuntur Wasi on the grounds of national interest. The then Minister of Transport and Communications Martin Vizcarra resigned his position. • Transparency and public consultation Both the contract and pre-investment studies were available on the Proinversión website, but there was no VfM analysis publicly available. This has been a critical question in relation to the evidence-based analysis that supports the decision to go for a PPP. Moreover, there was no prior consultation with communities in the area of direct impact of the project, even though the regulating norm of the Consultation Law (No29785) was approved in 2012.26 The peasant communities of Chinchero were included in the database of indigenous peoples of the Ministry of Culture, meaning they do have this right. The only consultation was during the preparation of a feasibility study, but it only involved community leaders. • The social impact of the project

26 Ciro Salazar (2018): How Public-Private Partnerships Are Failing—International Airport of Chinchero—Cuzco, History RePPPeated, 24–27.

14

CASES STUDY

197

Cuzco is one of the poorest cities in the country, with more than 25% of the inhabitants classed as living in poverty.27 The layout of the airport involved the disappearance of 15 roads that are currently used by the local population, as well as irrigation channels, which will result in longer trips for residents who want to stock up on certain products in Chinchero or sell their products. Three different local communities would be affected by the expropriation of land. Economic compensation was planned for them, but the distribution of money would be uneven because of the different amount of land expropriated to each of them. According to the feasibility study, the uneven distribution was likely to have consequences in terms of the economic activity of the communities in the short and medium term. However, there was still no evidence of this change in the economic activity of the people receiving the money. In addition, Chinchero is recognized in the circuit of the Sacred Valley of the Incas for its textile art, and women are the main artisans dedicated to this work. However, the need to include a gender focus in the project or in the environmental impact study was never identified. Thus, the project threatened to disrupt ancestral customs and lengthen the supply routes used by this population. • Would this airport be a “white elephant”? One of the reasons a new airport was planned was to better serve the development of the economy linked to the Archeologic Centre of Machu Picchu, the main tourist destination in the country, which was declared a World Heritage site by UNESCO in 1983. The maximum load of views to the citadel for sustainable use was estimated at 2,500 people per day (a capacity supported by UNESCO). However, it has been largely exceeded; in 2017, an average daily low of 3,800 people was reached. The feasibility study for the airport states that the real daily load capacity is 5,400 people and a saturation scenario, or maximum capacity, was 7,180 visits. As the reception capacity of the airport would greatly exceed the reception capacity of tourists to the Sanctuary of Machu Picchu, there is a high risk that it will work at half of its capacity, which could lead to insolvency of the private consortium, and therefore, the state would have to intervene.

27 Ciro Salazar (2018): How Public-Private Partnerships Are Failing—International Airport of Chinchero—Cuzco, History RePPPeated, 24–27.

198

F. I. LESSAMBO

Even more worryingly, as the report of the Office of the Comptroller of the Republic states, Reinversion has not adequately supported the viability of Chinchero as the location of the airport. • The way forward Because of the cancelation of the contract, the private consortium has introduced an arbitration claim against the Peruvian state before the WB’s International Centre of Settlement of Investment Disputes (ICSID). As of late July, it was not clear how much Kuntur Wasi was claiming in the case (some initial indications point to more than US$270 million in compensation for the cancelation of the contract). Since the government’s decision was based on an addendum that was illegal, it is possible that the state could win the claim. However, this process implies a cost that will have to be borne by all Peruvian citizens yet again. Finally, the state has confirmed its intention to continue with the project but under a different PPP model. This will be a “self- financed concession,” following questions about the value of the co-financed PPP model.

Glossary

Bidder Someone who responds to a request for Expression of Interest or an invitation to submit a bid in response to a Project Brief. A bidder could be a single party or a consortium of parties, each responsible for a specific element, such as constructing the infrastructure, supplying the equipment, or operating the business. BOOT (Build, Own, Operate, and Transfer) A PPP Mode under which the Concessionaire builds the assets, owns them, operates, and maintains them and at the end of the Concession, transfers the assets back to the Sponsoring Authority. BOT (Build, Operate, and Transfer) A PPP Mode under which the Concessionaire builds the assets, operates and maintains them and at the end of the Concession, transfers the assets back to the Sponsoring Authority. Concession A PPP modality in which the general public usually pays Service Fees in the form of tolls, fares or other charges for using the Facility. Cost–Benefit Analysis The ratio of the NPV of the benefits of a project to the NPV of its costs (from the public sector point of view). DBO Design-Build-Operate, a form of long-term contract for construction and operation of a Facility, in which funding is provided by the public authority. Environmental Risks Risks relating to the environmental effect of the construction or operation of the Facility. © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3

199

200

GLOSSARY

ERR (Economic Rate of Return) A method for the public sector to measure the net benefits of a project. Force majeure Acts of God and other specified risks (e.g., terrorism) which are beyond the control of the parties to the contract and as a result of which a party is prevented from or delayed in performing any of its non-financial obligations under the contract. Interest Rate Risks Risks resulting from changes in interest rates which affect the Project Company’s capex. Liquidated damages The agreed level of loss when a party does not perform under a contract. Mezzanine debt Subordinated debt provided by third parties other than the investors. Political Risks Risks related to government actions affecting the Project Company or its operations. PPP Public Private Partnership, in which the Government contracts a private sector enterprise for providing a public asset or a service (roads, water supply, etc.), usually at a user charge. Project Finance A method of raising long-term debt financing for major projects through “financial engineering,” based on lending against the cash flow generated by the project alone; it depends on a detailed evaluation of a project’s construction, operating, and revenue risks, and their allocation between investors, lenders, and other parties through contractual and other arrangements. Public Procurement The process of competitive bidding for a contract with the public sector. Risk The probability of an event occurring and the consequences of its occurrence. Risk Allocation The allocation of responsibility for dealing with the consequences of each risk to one of the parties to the contract, or agreeing to deal with the risk through a specified mechanism which may involve sharing the risk. Risk Assessment The determination of the likelihood of identified risks materializing and the magnitude of their consequences if they do materialize. Risk Management The identification, assessment, allocation, mitigation, and monitoring of risks associated with a project. The aim is to reduce their variability and impact. Risk Mitigation The attempt to reduce the likelihood of the risk occurring and the degree of its consequences for the risk-taker.

GLOSSARY

201

Senior Lenders Lenders whose debt service comes before debt service on mezzanine or subordinated debt or Distributions. Sovereign Risk The risk that there is no remedy available at law to prevent Government from legislating to affect the rights of the private party. Sovereign risk is a category of legislative and Government policy risk. Special Purpose Vehicle (SPV) An entity created to act as the legal manifestation of a project consortium, with no historical financial or operating record which government can assess. An SPV is a legal entity with no activity other than those connected with its borrowing. Sponsors The investors who bid for, develop, and lead the project through their investment in the Project Company. Subordinated debt Debt provided by investors whose debt service is paid after amounts due to Senior Lenders but before payment of dividends. Syndication The process by which the Lead Arrangers reduce their underwriting by placing part of the loan with other banks. Transferable Risks The risks that are likely to be allocated to the private party under a PPP arrangement. Turnkey Contract A contract with single-point responsibility for design, engineering, procurement of any equipment, and construction. Value for Money (VfM) The test of whether the PPP alternative is a supportable procurement mechanism, better than the traditional procurement mechanism. Working Capital The amount of funding required for operating and financing costs incurred before receipt of revenues.

Bibliography

Acemoglu, D., and Johnson, S. (2005): Unbundling Institutions. Journal of Political Economy, Vol. 113, Issue 5, 949–995. Ahadzi, Marcus, and Bowles, Graeme (2004): Public–Private Partnerships and Contract Negotiations: An Empirical Study. Construction Management and Economics, Vol. 22, Issue 9, 967–978. Alexander, James, Ackermann, Frank, Love, Peter E. D. (2019): Taking a Holistic Exploration of the Project Life Cycle in Public–Private Partnerships. Project Management Journal, Vol. 50, 673–685. Ankoma, P. (2019): Public-Private Partnership as a Tool to Increase Efficiency and Sustainable Development in the Road Transport Sector in the Russian Federation. Global Scientific Journals, Vol. 7, Issue 5, 965–978. Arndt, Raphael H. (2000): Is Build-Own-Operate-Transfer a Solution to Local Governments Infrastructure Funding Problems? ResearchGate. Bakhteyari, Karim (2007): Public Private Partnerships as a Public Infrastructure Optimizer. Nottingham Trent University, Department of Public Technology, 12–19. Beckgroup (2015): An Analysis of Design/Build vs. Design-Bid-Build. Journal of Construction Engineering and Management, Vol. 124. Bergere, Francois (2016): Ten Years of PPP Project: An Initial Assessment. OECD Journal on Budgeting, Vol. 2015/1. Bovaird, T., and Sharifi, S. (1998). Partnerships and Networks as Self-Organizing Systems: An Antidote to Principal–Agent Theory. In A. Halachmi and P. B. Boorsma (Eds.), Inter and Intra Government Arrangements for Productivity (pp. 31–44). Boston, MA: Springer.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3

203

204

BIBLIOGRAPHY

Bridges, Jennifer (2021): Risk Analysis 101: How to Analyze Project Risk. Projectmanager.com. Carter, Laurence (2015): Five Secrets of Success of Sub-Saharan Africa’s First Road PPP. IFC. Casady, Carter B., Eriksson, Kent, Levittc, Raymond, and Scott, W. Richard (2017): A ‘New Governance’ Approach to Public-Private Partnerships: Lessons for the Public Sector. GPC.stanford.edu, 1–28. Chao, Jenny, and Lu, Jason Zhengrong (2020): Using Government Guarantees Carefully as the Private Sector Redefines Bankability. World Bank Blogs. Chêne, Marie (2013): Overview of Corruption and Anti-corruption in the Democratic Republic of Congo. Transparency International, [email protected]. Coelho, F. Carla, O’Farrell, Catherine, and Taylor, Robert (2009): Lesotho Hospital Public-Private Partnership—A Model for Integrated Health Services Delivery. IMF. Darden, Keith (2002): Graft and Governance—Corruption as an Informal Mechanism of State Control. Graft and Governance, Yale University, Department of Political Science, https://leitner.yale.edu/sites/default/files/files/resources/ docs/2002. Domingues, S., Zlatkovic, D., and Roumboutsos, A. (2014): Contractual Flexibility in Transport Infrastructure PPP. In European transport conference 29 September 2014 (pp. 1–15). Frankfurt, Germany. Ebrahim, Jokar, Babak, Aminnejad, and Lork, Alireza (2021): Assessing and Prioritizing Risks in Public-Private Partnership (PPP) Projects Using the Integration of Fuzzy Multi-criteria Decision-Making Methods. Operations Research Perspectives, Vol. 8, 1–20. Edwards, Sophie (2017): Early Results: Did Private Outsourcing Improve Liberia’s Schools? International Development. https://www.devex.com/ news/early-results-did-private-outsourcing-improve-liberia-s-schools-90943. Eigen, Peter (2002): Transparency International. El Fathali, Hassan Ibrahim (2015): Private Partner Selection and Bankability Assessment of PPP in Infrastructure Projects. Thesis for the Degree of Doctor of Philosophy (Civil Engineering) at Concordia University. https://spectrum. library.concordia.ca/id/eprint/980650/. Erol Madan, Sebnem (2020): Is There a Tradeoff Between Debt Sustainability and Infrastructure Investment? World Bank Blogs. https://blogs.worldbank. org/ppps/there-tradeoff-between-debt-sustainability-and-infrastructure-inv estment. Esty, B., and Megginson, W. (2003): Creditor Rights, Enforcement, and Debt Ownership Structure—Evidence from the Global Syndicated Loan Market. Journal of Financial and Quantitative Analysis, Vol. 38, Issue 1, 37–59.

BIBLIOGRAPHY

205

Eversheds & Sutherland (2017): Openness in Public Procurement—A Worthy Cause Facing New Challenges. Faustino Coelho, Carla M.N., O’Farrell, Catherine (2009): Lesotho Hospital HHP—A Model for Integrated Healthcare Delivery. IFC, 1–29. Finnerty, J.D. (2007): Project Financing: Asset-Based Financial Engineering. New York: Wiley. Galambos, Conrad (2019): The Future of Transportation: Where We Will Go. Giddy, Ian, and Dufey, Gunter (2001): Managing Foreign Exchange Risk. NYU Stern. IFC (2009): Chapter 1—Importance of Project Finance. In Lessons of Experience No. 7: Project Finance in Developing Countries. Kaleel, Tareq A., and Kareem, Muntadher (2019): Determine the Factors That Affect the Applicability of Build Operate Transfer Contracts for Infrastructure in Iraq. IOP Conference Series: Materials Science and Engineering, Vol. 518, 022079. Kensinger, John W., and Martin, John D. (1993): Project Finance—Raising Money the Old fashion Way. McGrawhill, The Wharton School of Business, Project Finance Teaching Notes-21. Kensinger, W. John, and Martin, John D. (1993): Project Finance: Raising Money the Old-Fashioned Way. In Donald H. Chew, Jr. (Ed.), The New Corporate Finance: Where Theory Meets Practice (p. 326). New York: McGrawHill. Kleen, Michael, and Rock River Times (2012): Keepin’ It Kleen: PublicPrivate Partnerships, or Just Crony Capitalism? Texans Uniting for Reform & Freedom. https://www.texasturf.org/2012-06-01-03-09-30/latest-news. Klijn, E. H., & Koppenjan, J. (2016). Governance Networks in the Public Sector. Oxford: Routledge. Klitgaard, Robert (2012): Public-Private Collaboration and Corruption, Collective Action on Anti-corruption. Basel: Basel Institute on Governance, Prepared for the CBS-Sauder-Monash conference on public-private partnerships, Copenhagen Business School, 26–27 September 2012. Kodwo, A. A., and Allotey, S. (2014): Cost Overruns in Building Construction Projects: A Case Study of a Government of Ghana Project in Accra. International Knowledge Sharing Platform, Vol. 4, Issue 24, 54–64. Koppenjan, J. (2012): The New Public Governance in Public Service Delivery— Reconciling Efficiency and Quality. Eleven International Publishing. Kumar, Anjali, Nair, Arvind, and Piecha, Juliane (2015): Measuring Efficiency in International Public Procurement. Journal of Public Procurement, Vol. 15, Issue 3, 365–389. Liu, Henry J., and Love, Peter E. D. (2018): Evaluation of Public–Private Partnerships: A Life Cycle Performance Prism for Ensuring Value for Money. Sage Journal, Vol. 36, Issue 6, 1133–1153.

206

BIBLIOGRAPHY

Lopes, M. D. S., and Flavell, R. (1998): Project Appraisal—A Framework to Assess Non-financial Aspects of Projects During the Project Life Cycle. International Journal of Project Management, Vol. 16, Issue 4, 223–233. López Claros, Augusto (2013): Removing Impediments to Sustainable Economic Development, the Case of Corruption. The World Bank Financial and Private Sector Development, 1–49. Lynch, Jorge (2014): Public Procurement: Principles, Categories, and Methods. Procurement Classroom Series, Vol. 2. Lysons, K., and Farrington, B. (2006): Purchasing and Supply Chain Management, 7th edition. London, UK: FT Prentice Hall. Mackie, Karl, J. (2007): ADR Practical Guide. Tottel Publishing. Magina, Paulo (2017): Enhancing integrity in Public Procurement—The OECD Holistic Approach (pp. 1–26). https://www.procurementinet.org/wp-con tent/themes/inet/img/presentation/document/2017/PauloMaginaOECD 13thPRIMOForum.pdf. Marcelo, Darwin, Mandri-Perrot, Cledan, et al. (2016): An Alternative Approach to Project Selection: The Infrastructure Prioritization Framework. World Bank PPP. McCarthy, S. C., and Tiong, R. L. K. (1991): Financial and Contractual Aspects of Build-Operate-Transfer Projects. International Journal of Project Management, Vol. 9, Issue 4, 222–227. McIntosh, Nathalie, Grabowski, Aria, Jack, Brian, Nkabane-Nkholongo, Elizabeth Limakatso, and Vian, Taryn (2015): A Public-Private Partnership Improves Clinical Performance in a Hospital Network in Lesotho. Health Affairs, Vol. 34, Issue 6, 954–962. Merna, Tony, and Njiru, Cyrus (2015): Chapter 7: The Concession or Build-Own-Operate-Transfer (BOOT) Procurement Strategy. In Financing Infrastructure Projects. ICE Publishing. OECD (2012): Recommendation of the Council on Principles for Public Governance of Public-Private Partnerships (pp. 1–14). https://legalinstruments. oecd.org/public/doc/275/275.en.pdf. OECD (2015): Infrastructure Financing Instruments and Incentives (pp. 1– 74). https://www.oecd.org/finance/private-pensions/Infrastructure-Financ ing-Instruments-and-Incentives.pdf. OECD (2018): Subnational Public-Private Partnerships—Meeting Infrastructure Challenges (pp. 1–136). https://www.oecd.org/governance/responding-tothe-infrastructure-challenge-9789264304864-en.htm. Perera, Oshani, Uzsoki, David, and Rana, Fida (2017): Project Preparation Facility: Enabling Local Governments Access to Private Finance (pp. 1–4). International Institute for Sustainable Development. https://www.iisd.org/ system/files/publications/project-preparation-facility-government-access-pri vate-finance.pdf.

BIBLIOGRAPHY

207

Peterson, Jamie (2019): What Is Wrong with Design-Build Contracting? ABA, Construction Law. www.americanbar.org/groups/construction_industry/pub lications/under_construction. Pinto, João M., and Alves, Paulo P. (2016): The Choice Between Project Financing and Corporate Financing: Evidence from the Corporate Syndicated Loan Market. EFMA, 2017, Working Papers de Gestão (Management Working Papers) 01, Católica Porto Business School, Universidade Católica Portuguesa. Platon, Victor, Frone, Simona, Constantinescu, Andrea (2014): Financial and Economic Risks to Public Projects. Procedia Economics and Finance, Vol. 8, 204–210. Plsky, Alexander S. (2007): Neutral Fact-Finding as a Tool to Resolve Employment, Corporate Counsel (pp. 1–2). https://www.jamsadr.com/files/uploads/doc uments/articles/polsky-neutral-fact-finding-cc-2007-07.pdf. Price, A. D., and Chahal, K. (2006): A Strategic Framework for Change Management. Construction Management and Economics, Vol. 24, Issue 3, 237–251. Prior, Jon (2021): Participating in PPP Increased Banks’ Risk Appetite, Study Finds. American Bankers. https://www.americanbanker.com/news/participa ting-in-ppp-increased-banks-risk-appetite-study-finds. Rana, Fida (2017): Preparing Bankable Infrastructure Projects. The World Bank Blogs. https://blogs.worldbank.org/ppps/preparing-bankable-infrastructureprojects. Renda, Andrea, and Schrefler, Loma (2006): Public–Private Partnerships: Models and Trends in the European Union. European Parliament. https://www.eur oparl.europa.eu/thinktank/en/document/IPOL-IMCO_NT(2006)369859. Rivera, Daniel (1996): Private Sector Participation in the Water Supply and Wastewater Sector. Lessons from Six Developing Countries (pp. 1–104). World bank.org. https://digitallibrary.un.org/record/195228?ln=en. Robertson, Diana C., and Nichols, Philip M. (2017): Introduction and Overview: Bribery and the Study of Decision Making. Cambridge University Press. Rothballer, Christoph, and Gerbert, P. (2015): Preparing and Structuring Bankable PPP Projects. In Public Private Partnerships for Infrastructure and Business Development (pp. 57–80). Palgrave Macmillan Sabates-Wheele, Rachel, and Verwimp, Philip (2014): Extortion with Protection: Understanding the Effect of Rebel Taxation on Civilian Welfare in Burundi. Journal of Conflict Resolutions, Vol. 58, Issue 8, 1474–1499. Sachs, Tillmann, Tiong, Robert, and Wang, Shou Qing (2007): Analysis of Political Risks and Opportunities in Public Private Partnerships (PPP) in China and Selected Asian Countries. Chinese Management Studies, Vol. 1, Issue 2, 126–148. Researchgate.net.

208

BIBLIOGRAPHY

Sadeghi, Ahmad, Barati, Omid, Bastani, Peivand, Danesh Jafari, Davood, and Etemadian, Masoud (2016): Experiences of Selected Countries in the Use of Public-Private Partnership in Hospital Services Provision. Journal of Pakistan Medical Association, Vol. 66, Issue 11 (November), 1401–1406. Salazar, Ciro (2018): How Public-Private Partnerships Are Failing—International Airport of Chinchero—Cuzco. History RePPPeated, 24–27. Samsul, Alam (2016): Country Risk and Its Effect on International Finance Management. Daffodil International University Journal of Science and Technology, Vol. 10, Issue 2, 171–187. Saussier, Stéphane, and Tirole, Jean (2015): Strengthening the Efficiency of Public Procurement. Notes du conseil d’analyse économique, Vol. 22, Issue 3, 1–12. Schomaker, Rachel M. (2020): Conceptualizing Corruption in Public Private Partnerships. Public Organization Review, Vol. 20, 807–820. Shonk, Katie (2021): What Is an Arbitration Agreement? Harvard Law School— Program on Negotiation. https://www.pon.harvard.edu/tag/arbitration-agr eement/. Torbati, Yuval, and Bodek, David N. (2013): Direct Ratings—Methodology— Industry Risk. S&P. https://www.spratings.com/scenario-builder-portlet/ pdfs/IndustryRisk.pdf. United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) (2008): A Primer to Public-Private Partnerships in Infrastructure Development. Verweij, Stefa, Teisman, Geert R., and Gerrits, Lasse M. (2017): Implementing Public–Private Partnerships: How Management Responses to Events Produce (Un)Satisfactory Outcomes. Public Works Management & Policy, Vol. 22, Issue 2, 124. Vincendon, Sibylle (2018): In Paris, a New Courthouse Is Very Fancy, Very Expensive. Liberation. https://www.liberation.fr/france/2018/04/13/ a-paris-un-nouveau-palais-de-justice-bon-chic-bien-cher_1643342/. Votava, Cari L., Hauch, Jeanne M., and Clementucci, Francesco (2018): License to Drill—A Manual on Integrity Due Diligence for Licensing in Extractive Sectors (pp. 73–107). World Bank. Wall, James A., Stark, John B., and Standifer, Rhetta L. (2001): Mediation— A Current Review and Theory Development. Journal of Conflict Resolution, Vol. 45, Issue 3, 370–391. Wang, Shanshan, Wang, Weifeng, and Yang, Hongqiang (2018): Comparison of Product Carbon Footprint Protocols: Case Study on Medium-Density Fiberboard in China. International Journal of Environmental Research and Public Health, Vol. 15, Issue 10, 2060. https://doi.org/https://doi.org/10.3390/ ijerph15102060.

BIBLIOGRAPHY

209

Warsen, Rianne, Greve, Carsten, Klijn, Erik Hans, Koppenjan, Joop F. M., and Siemiatycki, Matti (2019): How Do Professionals Perceive the Governance of Public–Private Partnerships? Evidence from Canada, the Netherlands and Denmark. Journal of Public Administration, Vol. 98, Issue 1, 124–139. Weber, Barbara, Alfen, H. Wilhelm (2010): Infrastructure as an Asset Class: Investment Strategies Project Finance and PPP. Wiley Finance Series. Weekes, Khafi, and Diaz-Fanas, Guillermo (2021): How Do We Link Private Sector Participation and Climate Resilient Infrastructure Right Now? Some Ideas from PPIAF. World Bank (2016): Country Readiness Diagnostic for Public-Private Partnerships (pp. 1–51). https://thedocs.worldbank.org/en/doc/943711467733 900102-0100022016/original/CountryPPPReadinessDiagnosticTool.pdf. World Bank (2017): Public-Private Partnerships, Reference Guide (pp. 1–232). https://documents1.worldbank.org/curated/en/600511468336720455/ pdf/903840PPP0Refe0Box385311B000PUBLIC0.pdf. World Bank (2018a): Bankability in Highway PPP Projects (pp. 1–37).PPIAF. https://ppiaf.org/documents/3181/download. World Bank (2018b): Why Modern, Fair and Open Public Procurement Systems Matter for the Private Sector in Developing Countries. https://www.worldb ank.org/en/news/feature/2018/05/16/why-modern-fair-and-open-publicprocurement-systems-matter-for-developing-countries. Word Bank (2019a): PPP Fiscal Risk Assessment Model (pp. 1–90). https://www. imf.org/external/np/fad/publicinvestment/pdf/PFRAM2.pdf. World Bank (2019b): Implementation Agreements for Power PPPs. https://ppp. worldbank.org/public-private-partnership/agreements. World Bank (2020): Risk Allocation Bankability and Mitigation in Project Financed Transactions (pp. 1–4). https://ppp.worldbank.org/public-privatepartnership/financing/risk-allocation-mitigation. World Bank (2021a): Combating Corruption. https://www.worldbank.org/en/ topic/governance/brief/anti-corruption. World Bank (2021b): Regulation of Sectors and Regulatory Issues Impacting PPPs. https://ppp.worldbank.org/public-private-partnership/regulation-sec tors-and-regulatory-issues-impacting-ppps.

Index

A Accountability, 8, 45, 46, 48, 127, 128, 146, 174, 190 Airport, 96, 97, 150, 153, 185, 194, 195, 197, 198 Alternative dispute resolution (ADR), 99–106, 123 adjudicative, 102–104 evaluative, 104 facilitative analytical tools, 105 Appraisal, 15, 57–59, 61, 62, 67, 68 Arbitration, 37 award, 108, 112, 116 conduct, 103, 108, 110, 111, 115, 119–121, 124 B Bankability, 33, 34, 38, 40 assessment, 33, 34 tradeoff, 40, 41 Bidding, 45, 55, 56, 70, 86, 130, 159, 175–177, 184, 193, 200 competitive bidding bond, 86, 200 sealed bidding, 52

Bribery, 46, 134, 135, 137 Bridge finance, 22 Build-operate, 82, 148 Build-Own-Operate (BOO), 83 Buy-Build-Operate (BBO), 83 C Cairo Regional Centre for International Commercial Arbitration (CRCICA), 122, 123 Change of law compensation, 95, 96 concept, 94, 95 relief climate change, 151 Completion, 18, 29, 46, 69, 74, 78, 92, 98, 103, 148, 183, 194 Concessions, 44, 146, 147, 153, 161, 183, 184 Conciliation, 99, 105–107 Consensus building, 105, 106 Contractor, 5, 26–29, 31, 44, 45, 49–51, 72–74, 78, 84, 96, 189 Corporate finance, 4, 5, 11–13, 24 Corruption

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 F. I. Lessambo, International Project Finance, https://doi.org/10.1007/978-3-030-96390-3

211

212

INDEX

effects on PPP, 133, 139 forms, 133, 134 Cronyism, 134, 136 Customer, 27, 72, 73, 79, 145, 162

D Design-build, 84, 148, 193 Design–Build–Finance, 84 Dispute resolution, 9, 55, 87, 98, 99, 107, 113, 117, 120 Dispute resolution framework governance arrangement, 6, 8 policy, 6 rationale, 6 scope, 7, 37, 95 structuring, 9, 39, 69, 174

E Efficiency Equity finance, 23 Energy contract, 18, 78 power, 160, 161 Expropriation, 36, 40, 71, 89, 96, 197 Extortion, 134, 136

F Fairness, 47, 55 Force majeure, 29, 40, 87–94, 160, 200 concept, 88–90 consequence, 90, 91 hardship clause, 90

G Governance, 8, 61, 127, 129–131, 139, 140, 169 approach, 132 collaborative, 132

private, 132 Graft, 134, 138

H Hong Kong International Arbitration Centre (HKIAC), 117–119 Hybrid Instrument, 24

I Identification, 58, 66, 67, 70, 169, 200 Influence peddling, 134, 137 Infrastructure, 1–4, 12–14, 16, 19, 21, 23–25, 27, 29, 38, 40, 57, 66, 72 project financing, 1 International Centre of Settlement of Investment Disputes (ICSID), 106, 107, 109, 198

L Law system civil law, 37, 87, 88, 146, 147 common law, 37, 87–89, 100, 146, 147 Islamic law, 37, 87–89 Lease purchase, 85 Legal advisor, 28 Lesotho hospital, 173, 182 Liberia education, 188 Lobbying, 134, 135

M Material Adverse action, 94 Mediation, 99, 100, 102, 105, 106, 114 Multi-criteria decision analysis (MCDA), 63 Multilateral agencies, 27, 28

INDEX

O Operation and Maintenance (O&M), 18, 40, 85, 129, 160

P Paris courthouse, 191, 193 Patronage, 134, 136, 137 Pension fund, 19, 24, 25 Ports, 150–153, 182–184 Preparation, 50, 58, 59, 67, 184, 196 Procurement in China, 50, 55 in the EU, 53, 54 in the US, 50 legal framework, 44, 45 principles, 44–46, 49 regulations, 45, 51, 55 Project company, 4, 5, 14, 15, 25–27, 29–31, 38, 39, 73, 76, 78–80, 147, 162, 163, 165, 200, 201 Project cycle, 65, 170 Project finance, 1–5, 11–21, 24, 26, 28, 29, 71, 76, 79, 143, 200 advantages, 14, 21 disadvantages, 14, 15 evolution, 16 Project financing, 1–5, 12, 14, 15, 21, 26, 68, 75, 76, 152, 186 characteristics, 3, 30 Public Fiscal risk, 165 assessment, 168, 169 sensitivity analysis, 170 Public-private partnerships (PPP), 2, 6–8, 13, 14, 16–20, 25, 29, 30, 33, 34, 37–40, 52, 57–61, 69, 77, 81, 82, 85, 87, 88, 91–96, 98, 106, 127, 131–134, 136, 145, 146, 150, 153, 158–160, 165–169, 171, 173–175, 178–180, 183–186, 188, 191–196, 199, 201

213

R Railways, 152, 153 Recourse financing, 2, 4 Revenue stream, 16, 34, 35, 145, 146 Risk competitor, 75 contractor, 73 country, 5, 70, 71 currency, 76 customer, 72 environmental, 38, 75, 199 funding, 11, 75 industry, 71, 72, 75 interest rate, 76, 200 operating, 74, 200 political, 5, 29, 36, 71, 77, 93, 138, 200 product, 74 project, 17, 29, 33, 34, 65, 70, 72, 77, 84 sponsor, 73 supplier, 73

S Singapore International Arbitration Centre (SIAC), 120 Social cost-benefit, 62 Stapled financing, 23 Stockholm Chamber of Commerce (SCC), 113–116 Subornation, 135 Supplier, 27, 29, 31, 44, 45, 47, 48, 72, 73, 78, 91, 162, 163, 177 Syndicated Commercial loans, 20, 21

T Telecommunications, 90, 149, 154 Transportation, 27, 73, 79, 149–151, 154, 186 Trustee, 28

214

INDEX

Turnkey contract, 5, 74, 78, 85, 148, 201

U Ukraine Economic Growth, 182

W Water and Sanitation, 145 Water contract, 146 World Bank, 3, 13, 16, 17, 27, 30, 31, 34, 59, 65–69, 107, 134, 138–140, 144, 146–148, 154, 170