Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

CLASSIFICATION OF PPPSThere are many possible ways of classifying PPPs. According to the World Bank 127 it is possible to group them into the following fourcategories.- Divestitures or asset sales, contracts are used to transfer ownership of the firm to the private sector, leading to the ‘privatisation’ of all risks.This type of PPP can take many forms, such as initial public offerings of shares, or private sales of the assets themselves;- Greenfield Projects, projects that are awarded to the private sector. Design-Build-Finance-Operate-Transfer (DBFOT), Operate-Build-Operateand Transfer or Own (BOT or BOO) (see below) are among the most common contractual forms. The associated commercial risks tend to beassumed by the private constructor, while other risks such as exchange rate or political risks can be shared to varying degrees with the publicsector through various types of legal instruments such as guarantees or explicit subsidies;- Brownfield Projects are contracts that give the private operator the right to manage (i.e. operate and maintain) the service but do not includemajor investment obligations. These contracts are typically of short to medium duration (2-5 years) and generally the government continues totake on all risks involved in the project except for the management risks;- Concessions/licenses/franchises are typically long term contracts of 10-30 years, which pass on the responsibility for O&M (operation andmaintenance) to a private operator and include detailed lists of investment and service obligations. There is no transfer of public asset ownershipto the private sector, and the operator takes the commercial risks.RiskAccording to the European System of Accounts (ESA 95) 128 the assets involved in a public-private partnershipshould be classified as non-government assets, and therefore recorded off-balance sheet for the government if:- the private partner bears the construction risk and;- the private partner bears at least one of either availability or demand risk.Thus, the type of risk borne by the contractual parties is the core element for the accounting of the impact on thegovernment deficit of public-private partnerships.According to the ESA manual, if the construction risk is borne by government, or if the private partner bears onlythe construction risk and no other risks, the assets should be classified as government assets. This decision on theaccounting treatment also specifies the main categories of ‘generic’ risks 129 .Risk distribution among the different project phases is likely to vary depending on the nature of the project. Howrisk is priced is closely related to what extent the party that bears the risk is able to control it. If a party has to bear arisk, which it is not able to control, it will then ask for a compensation price (high risk premium). On the other hand,if the partner considers the risk manageable, it will not require a high risk premium. Through the financialinstruments that are used in PPPs, risks are distributed and priced. This then influences interest rates, financial termsand insurances and also how the financing model is built up for each project in terms of types of loans and lenders.Public Sector Comparator PSCAs mentioned before, one of the principal arguments in favour of private sector involvement is that the profitmotive increases cost-effectiveness and market awareness. Companies will do their best to ensure that their capital atrisk is used effectively and produces adequate returns. Although the cost of private capital is greater then the cost offinance raised by the public sector, it is thought that this is offset by the greater efficiency of the private sector.In order to check the advantages of having the private sector provide an infrastructure, private bids should beassessed objectively against a publicly managed and financed benchmark to demonstrate value for money. One wayof assessing the Value for Money is through the Public Sector Comparator (PSC), which estimates the hypotheticalrisk-adjusted cost if a project were to be financed, owned and operated by the government. It therefore representsthe most efficient public procurement cost (including all capital and operating costs and share of overheads) after127Estache, A. and Serebrisky, T. 2004: Where do we stand on transport infrastructure deregulation and public-private partnership? in PolicyResearch Working Paper Series 3356. The World Bank. Available online at: [http://ideas.repec.org/p/wbk/wbrwps/3356.html]128ESA95 Manual on Government Debt and Deficit – Long term contracts between government units and non-governmental partners (Public-Private Partnerships) (Part IV), 30 August 2004. Available online at [http://epp.eurostat.cec.eu.int/cacheITY_OFFPUB/KS-BE-04-004/ENKS-BE-04-004-EN.PDF].129Three categories were selected: a) construction risk - covering events such as late delivery, non-respect of specified standards, additional costs,technical deficiency, and external negative effects; b) availability risk - the partner may not be in a position to deliver the volume that wascontractually agreed or to meet safety or public certification standards relating to the provision of services to final users, as specified in thecontract and c) Demand risk - bearing the variability of demand (higher or lower than expected when the contract was signed) irrespective of thebehaviour (management) of the private partner. This risk should only cover a shift of demand not resulting from inadequate or low quality of theservices provided by the partner or any action that changes the quantity/quality of services provided.231