Private Sector Participation in Infrastructure in the

Balkans- Experiences and Lessons Learned -

September 25, 2009

Dr Vojislav Kandić

IFC Advisory Services in Infrastructure

International Finance Corporation

IFC is a member of the World Bank Group

International Bank for Reconstruction and Development1945

Lends to governments of middle income developing countries.

International Finance Corporation1956

International Development Association1960

Provides concessional loans togovernments of the poorest countries.

Multilateral Investment Guarantee Agency1988

Provides guarantees to foreign investorsagainst non-commercial risk

International Centre for Settlement of Investment Disputes1966

Settles investment disputes between foreign investors and host countries.

General Benefits of PPPs

Well structured PPPs provide following general benefits:

1.performance enhancement through higher efficiency;

2.transfer of know-how and management expertise;

3.development of facilities and customer service;

4.easier access to capital;

5.performance-based compensation for the private operator/investor; and

6.concession/tax income for governments

•It is important to understand that PPP structure should always be tailored to suit the specific economic, political, environmental, social and other conditions, and that it does not necessary have to fit one of the models

IFC’s Approach to PPPs in Emerging Markets

•Combining the commercial realities acquired from its financing activities with the developmental mandate of a multilateral financial institution, IFC has developed a unique approach to advising governments on PPP transactions.

•Emerging markets are in many ways different from the developed markets and are characterized by a number of specific conditions which requires application of distinctive PPP structures

Types of PPPs according to Risk Handling Abilities

PPP should be structured in a manner which allocates specific risks to the parties which are best positioned to handle them.

Technical Assistance Management Contracts Lease Agreements Build-Transfer (BT) Build-Own-Transfer (BOT) Build-Own-Operate (BOO) Build-Own-Operate-Transfer (BOOT) Build-Operate-Renewal of concession (BOR) Build-Lease-Transfer (BRT) Rehabilitate-Own-Transfer (ROT) Rehabilitate-Own-Operate (ROO) Divestiture

•Private capital is at risk, and should be engaged by the party that is best able to attract private capital

•Commercial Banks as key partners – providing financing and putting discipline in the process

Types of PPPs and Risk Handling

Full Divestiture – often not an option

•By minimizing project risk and involvement of the Government, full divestitures generates maximum amount of revenue for government (or minimize subsidies). Some sectors, airports and ports in particular, tend to face less public resistance to full divestiture compared to water, waste, road, and rail sectors, as the latter are considered a “social service” in the emerging countries

IFC - advisor sensitive to the specifics of emerging markets

Specific forms of PPPs that are often applied in the emerging markets are different form PPP structures typically found in the developed countries:

1) Projects require definition—and sometimes redefinition

2) The advisor has to help the client understand what is realistic

3) Understanding the concerns of the bidders and working with the client to address possible issues

4) It is extremely difficult to pre-negotiate a perfect contract that will fit all possible scenarios

5) Important issues not addressed in the early stages of the tender can have a potentially devastating effect later

The advisor often needs to start with creating a legislative framework that would be conducive to PPPs and reflect best international practice, and help establish a PPP unit/agency

IMF Study - IFC by far the most experienced IFI in PPPs

•Ashta Run-on-River Hydro Power Plant, Albania – Verbund, 2008

•KESH Power Distribution, Albania – CEZ, 2009

•Bar-Boljare Full Motorway, Montenegro - Konstruktor, 2009

•Moraca Hydro Cascade Power Plants, Montenegro

IFC Infrastructure Advisory in the Balkans

PPP – Challenges for Financing in the Balkans TODAY

“...after living 20 years in the most advanced nations, I have come to the conclusion that civilization consists of having security in regard to life, honor and goods. That, and only

that, is what we call civilization...” Juan B. Alberdi,

father of the Argentine Constitution of 1853

•Foreign government as the newest party for direct financing infrastructure projects in the Balkans – through direct bilateral arrangements, no tender process involved

•Ability of the Government to pay Availability Payments becomes to be questioned

•PPP Comparator

•Prices of inputs (materials, energy, labor) and outputs (tariffs and charges), as key for bankability, are changing dramatically

•International Finance Institutions (IFIs) as new key partners on both public and private side in a PPP

New - PPPs in Educational, Health, Sports and Culture Facilities

Municipal Infrastructure – Subnational Level PPPs

IFC as Lead Advisor for PPP Transactions

• IFC can make a special contribution, as Lead Advisor, for the following reasons: 1. Experience in Sector Transactions2. Balancing Private and Public Sector Interests3. Transparency and Investor Confidence4. Exceptional commitment to the Balkan region – Regional Office in Belgrade5. Multi-Skilled and Experienced Team6. Pursuit of sustainable economic and social benefits7. Synergies within the World Bank Group8. Ties with the Global Investment Community9. Willingness to go “the extra mile”

Thank you for your attention…