PPP MONGOLIA: FUNDAMENTALS Mongolia Projects & Investment Summit, Hong Kong, N ovember 2014

IFC: A Member of World Bank Group

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Conciliation and

arbitration of investment disputes

Guarantees of foreign

direct investment’s

non-commercial

risks

Interest-free loans and grants to

governments of poorestcountries

Loans to middle-

income and credit-worthy low-income

country governments

Solutions in

private sector

development

IBRD

International Bank for

Reconstruction and

Development

IDA

International Development Association

IFC

International Finance

Corporation

MIGA

Multilateral Investment

and Guarantee Agency

ICSID

International Centre for

Settlement of Investment Disputes

� Wholly owned subsidiary of IFC

� Private equity fund manager

� Invests third-party capital alongside IFC

� Firm-level advice

� PPP transaction advice

� In partnership w/World Bank, advice on broader market development and enabling environment for private sector

� Loans

� Equity

� Trade finance

� Syndications

� Securitized finance

� Risk management

� Blended finance

What We Do

Integrated Solutions, Increased Impact

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IFC ASSET MANAGEMENT

COMPANY

$6.4 bn under mgmt (FY14)

INVESTMENT

$51.7 bn portfolio (FY14)

ADVICE

720 projects valued at $1.1 bn (FY14)

� Ensure consumer approval through affordability (setting right tariffs!)

� Investor interest: Adequate risk / return profile (bankability)� Financial viability: Availability of commercial debt

� Sustained political will and support over time� Clear and predictable environment (regulation, licenses, etc.)� Government capacity to regulate/manage contracts

� Technical capacity to prioritize, develop and deliver projects� Transparent and objective procurement processes

� Embracing each party’s key motivation: - Public sector “Value for Money” - Private sector “appetite” (upfront risk/long-term reward)

Key success factors for sustainable PPPs

1. Establish project need – examine project costs & benefits in the context of government strategic objectives, budget, legal and regulatory environment• Feasibility study / due diligence to define the project’s viability and

cost/benefit � What are the fundamental economics of the project? What are the project externalities? What are the social benefits/costs? Are all stakeholders accounted for?

2. What are the benefits of private sector participation? Is there private sector interest?

3. Optimal allocation of project risks – identify project risks, determine how best to mitigate these, and determine who is in a better position to bear them

4. Will a PPP match needs with requirements? Will it deliver Value for Money and the best use of resources?

Roadmap to successful PPPs

Does the project give Value for Money??

Whole life cycle costs (LCC)

Transaction costs

Whole life cycle costs (LCC)

Public sector risk

VfM

Value/“price”

Conventional Procurement

PPPProcurement Value for Money (VfM)

Transaction costs

However: � Value for Money (VfM) does NOT mean ‘lowest cost’ in absolute terms.

VfM is defined as the optimum combination of whole Life Cycle Cost and quality (or ‘fitness for purpose’) to meet user service requirements.

� Driven by public sector ability to enable true competition at bidding stage and to monitor and incentivize long-term performance.

Risks retained by public sector

Control costs

Reduce subsidies

Leverage public funding

Reach specified service outputs

Factor in life cycle costs

Allocate risks more efficiently

Transfer private sector know-how

Economic Viability � Affordability and willingness of the end-consumers to pay� Realistic tariffs and subsequent subsidy requirements� Foreign exchange risks need to be mitigated

Government Capacity � Government support imperative (Project “Champion” to lead the process)� Dedicated PPP Unit (Focus on implementation from government side)� Capacity on both parties to manage their side of the contract required

Procurement� Transparency and fair bidding procedures� Promote competition� Bidding structure should provide the framework to lead to the selection of the

right partner (expertise, capacity, commitment etc)

PPP Key Challenges (1/2)

Structuring issues� Support by experienced advisors can help ensure best practice� Balance needed between fast implementation and taking the appropriate time to

study all available options for structuring � Long term partnership: appropriateness of risk sharing is fundamental

Supporting legal and regulatory framework � Good governance essential� Adequate dispute resolution mechanisms have to be in place� Elimination of legal uncertainties and impediments to PPPs reduces risks and

therefore costs� In the absence of dedicated laws, governance by contract emphasizes the

importance of adequate structuring procedures

PPP Key Challenges (2/2)

Where to start? Projects must be Doable, Demonstrable, Simple

� Simple, demonstrable structure

� Public Sector commitment

� Private Sector needs incentives

� Robustness & degree of flexibility in the contract

� Requirement for private risk capital, not simply private capital

o only possible if risk transfer shapes incentives to motivate efficiency gains:� Construction and operations

� Life-cycle approach to financial management

� Need to surmount the costs of:

o Transaction (project preparation, contracting, execution)

o Renegotiation

o Loss of Control on both parties

o Moral hazard of any implicit government guarantee

World Bank Group Support for PPPs

PPP Project

Financing

Enabling Environment

Well Prepared Transactions

� Sound economic fundamentals

� Sustainability: Meet public objectives & private sector needs

� Bankability � Proper Risk Allocation

& Management� Open, competitive

tender process

� IFC PPP Advisory (Structuring & Tendering)

� World Bank / MIGA (Risk Management)

� World Bank

� Legislation� Regulatory

Framework (including use charges/tariffs)

� Institutional Capacity (screening, preparation, implementation and contract management)

� Defined revenue stream

� Private Equity� Private Debt� Public Sector

Contribution (including subsidies), if required

� IFC Investment & Lending (Private Component)

� World Bank (Public Component)