Quality of regulatory framework

Quality of regulatory framework is the single most important issue for private infrastructure projects in all countries, particularly developing countries. The principal objectives of regulators tend to be:
a. to prevent the exploitation of consumers by monopoly providers, and
b. to prevent the exploitation of private investors by government .
Accordingly, investors will want to satisfy themselves that the regulators will strike the optimum balance between these objectives and all matters that are capable of impacting on project cash flows, such as pricing or service levels. At the same time, investor will wish to ensure that there is an effective regulatory system to protect the project from political interference. They will expect to see clarity and precision in the regulator's powers and approach, together with effective independent review and appeal procedures from the regulator's decisions. Investor will also wish to assess the cost of compliance, in particular with the regulator's information requirements.
Economic environment:   A BOT/ BOO BOT/BOO (Build, Operate and Transfer/Build, Own and Operate) project will normally call for some proportion of local equity investor and local lenders. Finding such lenders and investors will be easier in a country having developed banking system and organised financial market. Most BOT/BOO projects derive revenues in local currency which need to be used for importing raw-materials as well as for debt service and equity reimbursements. An economic environment free of excessive inflation and unduly rapid exchange rate fluctuation would, therefore, be more attractive for such projects.
Host country credit rating:  The host country's credit-worthiness is a major factor that influences both private and public lender to finance a project in a particular country. The more host government support and guarantees are needed to make a project viable, the more lenders will be looking to the credit worthiness of the host country as well as to the project for eventual repayment.
Political environment:  Another major consideration for investors in BOT/BOO projects is the political stability of the host country. The extensive governmental support, needed for such projects, over a fairly long period of time (20 to 30 years) may not be possible without political stability. Even if promised, the promise would not be credible. Investors would be discouraged if they can not count on political stability and continuity over such period.
Unsolicited proposals: Occasionally, governments have to deal with unsolicited proposals for BOT/BOO projects. Given the large amount of investment typically involved and the extensive range of government support needed in such projects, it would be politically dangerous as well as unwise as a matter of economic policy, for the host government to accept such unsolicited proposals from a single sponsor without any evaluation or review of competitive alternatives. Such proposals can sometimes be evaluated on the basis of whether or not the proposed cost of construction, for instance in a power or toll road project, is lower than the cost of similar government-owned projects. Occasionally, the cost might also be measured against the cost of existing BOT projects which themselves were selected by competitive bidding. In general, however, some form of initial competitive selection is probably preferable. In some countries, for example, in Philippines 'Swiss Challenge' is used as a tool for screening unsolicited proposals. Clear prescribed guidelines as to how unsolicited proposals will be dealt with needs to be provided and such proposals have to be handled in a transparent manner.
Competitive bids: The normal procedure for awarding BOT projects would be similar to that for awarding public works projects. Ideally, a host government would itself identify the projects to be implemented on BOT/BOO basis rather than simply responding to proposals. The government would define the project specifications, the level and nature of government support to be given, the proposed method for calculating the tariff, tolls or whatever the source of revenue for the project may be, the debt/equity ratio required and other parameters for the transaction. The government would then invite preliminary proposals. A preliminary winner would be selected on the basis of normal competitive criteria - price, experience, track record of sponsor, benefits for the host country etc. A letter of intent would be issued in favour of the preliminary winner and negotiations would proceed to finalise the financing and the various agreements among the parties.
Integrity of the process: Another crucial factor needed to be taken care of in BOT /BOO ventures is the integrity of the bidding process. There will always be some tension between the need to preserve the integrity of the competitive bidding process and the host government's desire to get the best possible deal for any given project. If the bidding process lacks credibility, some potential investors might not be interested to participate in the bidding. The formal processes pursuant to which a PPP project is sought to be implemented (whether on public or private sector initiative) must be transparent, fair, clear, orderly and credible. Confidence in the procedures involved is essential.
Risk Allocation:  One of the key issues in any BOT/BOO financing is the allocation of the various risks associated with the project between the public and private sectors and after that, among the individual parties involved. Although the specific risks in any project will vary case by case, certain risks will be common to most BOT/BOO projects. In PPP structure, considerable cooperation between the host government and the private sector is essential since each of the project participants should bear the risks they are best suited commercially and politically to assume. It is crucial that the government is willing to assume certain project-specific risks without which the project will not go ahead. These may include guarantees against political risks such as indemnities against expropriation, assured permits and consents, guarantees of foreign exchange availability and currency convertibility, appropriate protection of the interests of the lenders, underwriting of minimum toll levels and protection against certain force majeure events, etc. The government may have to assume some commercial risks itself if the project is not entirely commercially free-standing. The identification, analysis, mitigation and allocation of risks are crucial to the planning and success of every PPP (Public-Private Partnership) project.
Risk allocation - points to remember: Some very important points are required to be borne in mind while designing a risk allocation strategy.
a. All technical risks have financial and commercial consequences. Hence commercial and financial risk allocation can not be separated from the technical risk allocation.
b. Risk analysis, financial analysis and sensitivity analysis to the occurrence of the risks needs to be handled in an integrated manner.
c. A combination of risk analysis, financial analysis and sensitivity analysis of the project to the occurrence of the risks needs to be undertaken first.
d. Full knowledge of the financial implications of risks is necessary in order to assess proper risk allocation.
What the private sector looks for in projects and partnerships?
First: A reasonable rate of return on investment- which is the primary yardstick the private sector uses to evaluate a PPP project. The motivation for the private sector to get involved in a PPP to deliver a project for a public sector sponsor is profit, and without the potential for a reasonable return on their investment, prospective private sector sponsors will lose interest in a project.
Second: Manageable and shared risks that mitigate as much as possible potential political, real estate, environmental, permitting, and timing risks. Private sector partners want as much certainty as possible going into a PPP, and will avoid engagements in which unmitigated risk could derail the project.
Third: A publicly supported project that has a genuine and pressing need - as with the public sector, private partners will avoid projects that are controversial or have strong opposition from the general public because of the risks and uncertainty involved.
Fourth: Broad stakeholder support - from all groups with interest in the project, including public sector employees, private sector parties, labour unions, end users, and competing interests. Political, public, and agency support should span the project life cycle.
Fifth: Statutory permission - enabling legislation and a regulatory framework and timeline for PPPs must be in place, especially if unsolicited proposals are sought. Governing statutes and policies must be current and flexible to reflect market conditions-especially in regards to bonding and risk requirements if applicable to a project.
Sixth: Political leadership - the public sector should demonstrate a solid partnership philosophy. Political support should match a project's characteristics, especially for large or controversial projects; efforts involving new taxes, tolls, or fees or redistribution of existing revenues; and projects with chequered histories. The private sector needs to be able to count on the public sector as a full-fledged and responsible partner.
Seventh: A public sector project management structure committed to PPPs - The private sector will be encouraged to enter PPPs if they see an opportunity to work with a dedicated corps of public sector personnel who understand how to let the private sector do its job with a trained and dedicated corps of personnel to promote and monitor the implementation of PPPs on the agency's behalf.
Eighth: Timely project execution - since time is money to private sector partners who cannot afford to allow the duration of a project to drag out. Having strong leadership, a solid organisation structure, and clear lines of communication promote project timeliness. Time wasted is money lost for private sector partners, who simply cannot afford delays
Ninth: A detailed business plan or enforceable contract that is performance-goals oriented to allow for innovation. The contract or plan should include specific milestones and goals, reporting matrix and frequency, and dispute resolution procedures. The private sector will be looking to sign an enforceable, performance-oriented contract that allows for innovation.
Tenth: Early project development activities that are shared and supported by the public sector which is commensurate with the capability of the public sector to carry out these activities and manage their inherent risks. The private sector will look to the public sector to take a lead on those project elements that it is best able to handle, especially such activities as right-of-way acquisition and environmental clearance, which represent areas of high risk and uncertainty to the private sector.
Lastly: A pre-defined dispute resolution process - that lays out the roles, responsibilities, and procedures for addressing disputes that may arise during the project regarding contract compliance by all members of the partnership. PPPs are intended to minimise the need for such a process through on-going communication, close coordination, and mutual self-interest to resolve differences without having to resort to a dispute resolution process. However, having such a process in place before the project begins will reduce the risk of potential disputes negatively impacting the viability of the project and undermining the essential trust between members of the partnership.
While a PPP programme can not be a panacea for a country's infrastructure problems, it would in principle be a step in the right direction and consistent with the private sector policy and strategy initiatives that countries like Bangladesh are trying to adopt to support sustainable growth.
Although a demonstrated commitment for providing support to the private sector is critical, more important is a demonstrated commitment by the government to respect commercial agreements, adjudicate disputes without prejudice, and serve as a long-term reliable institutional and administrative partner with the private sector. By initiating a programme of Public-Private Partnerships and laying the foundation for managing the process through legal, institutional and administrative mechanism, a country can demonstrate commitment and determination.
The writer is a former Secretary, Ministry of Health and Family Welfare, Energy and Mineral Resources Division and Ministry of Information. [email protected]