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*** « Conditions for success of Concessions and other PPPs in developing countries : *** « Conditions for success of Concessions and other PPPs in developing countries : How to make it work ? » Marc Frilet Managing Partner « Frilet – Société d’Avocats » Secretary general of the French Institute of International legal Expert (IFEJI) Global Construction and Infrastructure Legal Alliance (GCILA) – Founding Law firm Frilet - Société d'Avocats *** Head of the PPP Working Group « IFEJI/Paris Bar Head of the drafting committee CICA PPP Working Group 1 G 531_B_UNECE

Introductory remarks (1) What is the relevance of our topic? Without massive investments in Introductory remarks (1) What is the relevance of our topic? Without massive investments in the public infrastructure service sector many countries will continue to lose several percentage point of GDP. Nowhere in the world the public budgets permit to finance such massive investments. ü Example in Africa: The gap which cannot be filled by the international community and donors is S$ 40 billion per year. If the gap is not bridged the millennium goals will not be reached. The industry and PPP champions are losing appetite. Frilet - Société d'Avocats § The financial crisis further limit the capacity of the industry to consider PPP. Ø Nevertheless, under precise and inclusive conditions innovative for most stakeholders, there is a promising future virtually in any country in the world. 2

Introductory remarks (2) What are we talking about and why: focus on Concessions and Introductory remarks (2) What are we talking about and why: focus on Concessions and other PPPs for public infrastructures services in developing countries Ø Delivery of public infrastructure services having a strong element of general interest (or public interest) : In most countries in the world, general interest triggers similar consequences that the parties cannot modify by contract. Examples in water : Source Michael Klein (former vice-president of the Private sector World Bank) ü Can a private operator actually turn off the tap because he owns the water? ü Can a water service provider take the pipeline and dig it out and take it at Frilet - Société d'Avocats § home or throw it away? ü What happens at the end of the Concession of the license period? ü How the pricing arrangements are regulated? 3

Introductory remarks (3) § Reasons for cautious optimism if innovative approaches are promoted in Introductory remarks (3) § Reasons for cautious optimism if innovative approaches are promoted in an inclusive manner in three directions: A minimum level of conductive investments climate is necessary. ü Identification and promotion of « Gold standards » and related best practices ü Promotion of an inclusive institutional, legal, regulatory and contractual framework. Frilet - Société d'Avocats ü Improvement of the overall governance and investment climate (by region or by country) 4

Outline of the lessons learnt on the conditions of success Why it is both Outline of the lessons learnt on the conditions of success Why it is both necessary and simple to distinguish two families: Concession and assimilated schemes vs PFI and assimilated schemes: ü The socio-economic rationale ü Illustrative chart outlining the various forms of private participation in public infrastructure ü Statistics on Concessions and PPP projects (number and investment value) Frilet - Société d'Avocats § 5

Frilet - Société d'Avocats Illustrative chart outlining the various forms of private participation in Frilet - Société d'Avocats Illustrative chart outlining the various forms of private participation in public infrastructure 6

Frilet - Société d'Avocats Statistics: number and investment value of Concessions and PFI 7 Frilet - Société d'Avocats Statistics: number and investment value of Concessions and PFI 7

Proposed definition : Concession- PPP vs PFI-PPP (1) PFI – PPP “A physical infrastructure Proposed definition : Concession- PPP vs PFI-PPP (1) PFI – PPP “A physical infrastructure based on public functional requirements is designed, financed, built and operated by a commercial company in accordance with the terms of a contract concluded with the public authority in charge of delivering the service under agreed conditions including performance parameters and providing for the compensation of the commercial company by the public authority […] § Concession – PPP “A physical infrastructure which is the basis of a public service is designed, financed, built or rehabilitated or maintained and always operated by a commercial company in accordance with the terms of a contract concluded with the public authority in charge of delivering the service which the commercial company to deliver the service on its behalf based on performance parameters and providing for the compensation entirely or mainly of the commercial company by the end users […] Frilet - Société d'Avocats § 8

Definition : Concession- PPP vs PFI-PPP (2) PFI – PPP § Concession – PPP Definition : Concession- PPP vs PFI-PPP (2) PFI – PPP § Concession – PPP […] upon the delivery of the service to the public authority for a time period calculated in such a way that the private company is able to fully recover all its costs including financial costs and make a reasonable profit. […] upon the delivery of the service to the end users for a time period calculated in such a way that the private company is able to fully recover all its costs including financial costs and make a reasonable profit. At the expiry of period, the infrastructure is transferred to the Public Authority in good operating conditions, generally without consideration or with a consideration agreed at the outset” At the expiry of period, the infrastructure is transferred to the Public Authority in good operating conditions, without”. Frilet - Société d'Avocats § 9

The main practical conditions of success: a composite chain comprising more or less 20 The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (1) Compliance index in developing countries 1. PPP preparation evaluation Preliminary business case Prefeasibility studies Eco-fin. scenario Final evaluation Average? 2. PPP procurement Preselection RFP (Functional) (To be discussed) First evaluation Tunnel exchanges Final evaluation 3. PPP contract conditions Public service obligations Business case transparency Adaptation to changes Frilet - Société d'Avocats Conceptual Average? Early termination Partnering ADR 10 Low?

The main practical conditions of success: a composite chain comprising more or less 20 The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (2) 1. PPP underlying principles Public Sovereign service interference To be discussed) priority Economic equilibrium Effective compensation rights Low? 2. Central level institutions Governance Integrity Efficiency Planning infrastructure General PPP promotion Ownership Security rights (To be discussed) Project monitoring Choice of outside advisers 3. Project level institutions Governance Integrity Efficiency Project unit Procurement Committees Monitoring Committee Choice of outside advisers Frilet - Société d'Avocats Compliance index in developing countries Low? 11 Average?

The main practical conditions of success: a composite chain comprising more or less 20 The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (3) q Preliminary business case q Prefeasibility studies Frilet - Société d'Avocats 1) Underlying economic conditions and Project preparation by the public sector q Conceptual evaluation q Economic and financial scenario q Final evaluation 12

The main practical conditions of success: a composite chain comprising more or less 20 The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (4) 2) Project procurement : distinctive features and innovative approaches The possible scope of unsolicited proposals: limits and consequences q The main rule: competitive bidding q Pre-selection q How to design Request for Proposal and bidding documents (how to identify and draft some key contractual conditions) q How to identify the appropriate awarding criteria and how to choose the best procurement road: ü two stages procedure ? ü competitive dialogue? ü competitive negotiation ? q The preferred bidder status: misprocurement issues and efficient challenging procedures Frilet - Société d'Avocats q 13

The main practical conditions of success: a composite chain comprising more or less 20 The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (5) 3) Project contract conditions and underlying legal framework The particular nature of the contractual relationships: a long term venture where the two contracting parties have a common obligation: to render a service satisfactory and affordable to the public. q Consequences in term of contract nature: ü Incomplete contract subject to adjustments ü Adjustment must be organized in a simple and clear manner without giving rise to hazardous negotiations (a set of ad hoc clauses and related legal principles, including ADR and partnering techniques and/or with the help of outside regulators) ü Reference to some important conditions for the delivery of public infrastructure services: v v Continuity of the service Non discrimination between the users Adaptability of the service Transparency of the financial and operating condition Frilet - Société d'Avocats q 14

The main practical conditions of success: a composite chain comprising more or less 20 The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (6) q The key role of an agreed baseline economic scenario for concession PPP q Outline of some particular contractual rights and obligations in case of concession-PPP v to terminate: how? v to impose changes: how? v to use the equipment and workforce of the concessionaire even when dispute arises for continuing the operation of the service: how? ü Rights of the Concessionaire: v full indemnification when the Public Authority exercises sovereign rights : how? v adequate compensation when an unforeseen impediment (“sujétions imprévues”) occurs: how? v right to reinstate the equilibrium of the contract conditions when a hardship (“imprévision”) situation arises: how? Frilet - Société d'Avocats ü Rights of the conceding Authority: 15

The main practical conditions of success: a composite chain comprising more or less 20 The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (7) 4) Project adaptation and regulation options q Regulation by contract: is it desirable? how can it work? The case of simple and well known public contracts laws Regulation through renegotiation: is it desirable? how can it work? q Regulation by an outside regulator: is it desirable? How can it work? 5) Project financing q The project financing techniques: Among others: ü ü ü Diverting the project income flow for the ownership of the lenders, Transferring the ownership of the project to the lenders Collateral guarantees : sovereign guarantees, political insurances Their desirability, Their consequences on project delivery and sustainability: how can it work? Frilet - Société d'Avocats q 16

The main practical conditions of success: a composite chain comprising more or less 20 The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (8) 6) Institutional framework q Central level: ü Central PPP Unit: v Center of expertise v Planning infrastructure v General PPP promotion v Project monitoring Frilet - Société d'Avocats Prerequisite : Design and promotion of reinforced principles on Governance, Integrity and Efficiency and related procedures (including improved procurement rules for outside consultants and experts) ü Regulatory bodies and special courts 17

The main practical conditions of success: a composite chain comprising more or less 20 The main practical conditions of success: a composite chain comprising more or less 20 to 30 links (9) q Line ministries level : ü Project development committee q Project level (contracting authority) ü Project PPP Unit: preparation and monitoring ü Procurement committees Frilet - Société d'Avocats ü Sector PPP Unit v Monitoring project preparation v Monitoring project implementation 18

Conclusions, take-away and further exchanges (1) 1) IMMEDIATE ACTION: Better information to public sector Conclusions, take-away and further exchanges (1) 1) IMMEDIATE ACTION: Better information to public sector and private sector on the inclusive conditions of success for existing projects Disseminating conditions of success around the world for securing existing projects or projects in a pipeline. q How to accelerate the process? Reference documentation q The Vademecum and other international efforts q The blueprint of a PPP Evaluation Index q How to proceed efficiently in a coordinated and integrated international effort? ü the organization ü the resources Frilet - Société d'Avocats q 19

Conclusions, take-away and further exchanges (2) q Need of aggressive actions for design, adoption Conclusions, take-away and further exchanges (2) q Need of aggressive actions for design, adoption and effective implementation of an appropriate institutional, legal, regulatory and contractual framework on a country or regional basis. ü Additional reference to lessons having given raised to the emergence of innovative and efficient methodological approach based on a new science: « the legistic » . ü Main questions to adress: v How to design and promote efficient methodology in line with the real need and expectation of the stakeholders? v How to identify the best expertise? v What are the costs and how to finance the process? Frilet - Société d'Avocats 2) Six month horizon: innovative approaches for designing appropriate regulations 20

Marc Frilet - Société d’Avocats 91, rue du Faubourg Saint Honoré 75008 Paris – Marc Frilet - Société d’Avocats 91, rue du Faubourg Saint Honoré 75008 Paris – France Frilet - Société d'Avocats Thank you ! Tel : + 33 1 56 26 00 40 e-mail : [email protected] com 21