Universidad Externado de Colombia

Las Asociaciones PúblicoPrivadas (APP) en el

Sector Minero-Energético:Experiencia Nacional e Internacional

Luis Ferney Moreno CastilloDirector

Luis BustosCoordinador

ISBN 978-958-790-473-4

© 2020, LUIS FERNEY MORENO CASTILLO (DIRECTOR)© 2020, UNIVERSIDAD EXTERNADO DE COLOMBIA Calle 12 n.º 1-17 este, Bogotá Teléfono (57-1) 342 0288 publicaciones@uexternado.edu.co www.uexternado.edu.co

Primera edición: diciembre de 2020

Diseño de cubierta: Departamento de PublicacionesCorrección de estilo: Aureliano Pedraza Castillo Composición: Álvaro RodríguezImpresión y encuadernación: Panamericana, formas e impresos S.A.Tiraje de 1 a 1.000 ejemplares

Impreso en ColombiaPrinted in Colombia

Prohibida la reproducción o cita impresa o electrónica total o parcial de esta obra sin autorización expresa y por escrito del Departamento de Publica-ciones de la Universidad Externado de Colombia. Las opiniones expresadas en esta obra son responsabilidad de los autores.

Las asociaciones público privadas (APP) en el sector minero-energético : experiencia nacional e internacional / Luis Ferney Moreno Castillo (director) ; Luis Bustos (coordinador) ; Víctor Manuel Armero Osorio [y otros]. -- Bogotá : Universidad Externado de Colombia. 2020.

328 páginas : gráficos, mapas ; 21 cm.

Incluye referencias bibliográficas.

ISBN: 9789587904734

1. Industria del petróleo -- Aspectos económicos – Colombia 2. Sector eléctrico -- Aspectos económicos – Colombia 3. Sector energético -- Aspectos económicos – Turquía 4. Sector energético -- Aspectos económicos – Mozambique 5. Derecho minero -- Aspectos económicos -- Colombia I. Moreno Castillo, Luis Ferney, director II. Universidad Externado de Colombia III. Título

348.3 SCDD 15

Catalogación en la fuente -- Universidad Externado de Colombia. Biblioteca. EAP. Noviembre de 2020

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status of 3ps through the lens of infrastructure projects in latin america

By dr. JoaquíN r. FIgueroa gallardo

aBBreVIatIoNS

3P- Public Private Partnership3Ps- Public Private PartnershipseIa- Energy Information AdministrationeIu- Economic Intelligence Unitgdp- Gross Domestic ProductIea- International Energy AgencyNgo- Non Governmental OrganizationuSp- Unsolicited Proposal

aBStract

By 2040 the world’s population is expected to increase from 7.4 billion today to 9 billion people, with an economy growing at an average rate of 3.4% per year. This will require huge amounts of investment in order to satisfy the energy demand to accommodate the needs and satisfy the living standards of the population. According to the Iea, expecta-tions are that by 2040 electricity will represent half of the total energy supply investment. An expansion in trade and investment will be required to face the challenges of mee-ting this energy demand. Despite sizeable efforts to invest

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in transportation, power, water, and telecoms to satisfy the needs of a growing population, these efforts alone will not be sufficient. The world currently invests $2.5 trillion in these areas although the average investment required is $3.3 trillion a year. Public Private Partnerships present are alternative route to satisfy these needs, however, 3Ps currently account for only 5 - 10% of total investment. At the same time, there are doubts as to their efficiency and their cost of development. This paper looks at the rational to develop 3Ps, its meaning, performance, issues and suc-cess factors, and the progress made in this sector in Latin America. Governments have limited resources to invest, allocation is complex, and there are too many needs to be satisfied. Governments, therefore, need to allocate resources in the most efficient way possible. They need a very strong decision-making process to select the best project develop-ment alternative and thus more robust frameworks are nee-ded. 3Ps are one of a variety of modes of strategic alliances and as they can be interpreted differently it is important that all stakeholders share the same understanding of both the expectations and the performance of the alliance. The performance assessment of 3Ps is difficult to measure as it has the same issues as any strategic alliance. Some effort has been made to increase analyses that can shed light on the advantages of 3Ps. Among emerging regions, 3Ps in Latin America are above average; they perform well in the develo-pment of regulations, institutions, and financing. However, there is more work to be done to enhance investment and the business climate in general and as more 3P experience is accumulated, a generalized perception of expectations will emerge, Unsolicited proposals could drive more innovative and efficient projects, however, there are some areas which could improve, such as transparency and encouraging com-petition in order to increase reliability. As in any strategic alliance, the relationship among parties in 3Ps is complex. The only way to contribute in filling the investment gap and

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bringing better conditions to the population is by aligning visions and interests and creating win-win collaborative environments. This will develop efficient projects that can provide benefits to all stakeholders, as no one can do everything alone, collaboration is needed.

INtroductIoN

By 2040 the world’s population is expected to increase from 7.4 billion today to 9 billion people, with an economy growing at an average rate of 3.4% per year. This will require huge amounts of investment in order to satisfy the energy demand to accommodate the needs and satisfy the living standards of the population.

According to the Iea, expectations are that by 2040, electricity will represent half of the total energy supply investment from the $60 trillion in cumulative investment and two-thirds from the $69 trillion investment under new policies and sustainable scenarios respectively.

An expansion in trade and investment will be required in order to face the challenges of meeting the energy demand and providing a satisfactory living standard for the growing population. These needs must be met in a safe, reliable and affordable way, minimizing environmental impacts at the same time. This cannot be achieved without innovation, technology and cooperation among stakeholders (1; 2), therefore alliances will be needed.

The sizeable global effort being made to invest in trans-portation, power, water, and telecom to meet the needs of a growing population is not enough. Currently the world invests $2.5 trillion in these areas, emerging economies account for 60% of the investment, and Latin America and Africa represent 7% and 2% respectively. The required world investment should be on average $3.3 trillion a year, therefore, an infrastructure gap of $0.8 trillion a year exists.

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According to the McKinsey Global Institute, there are re-sources valuing $120 trillion that are under management by banks and institutional investors which could contribute to alleviating the infrastructure gap. However, some challen-ges need to be addressed in order to secure these resources, such as: changes to regulation and pension rules, a better pipeline of well-developed projects, a solid cross-border investment principle, and a real-market transparency and standardization.

Public Private Partnership is an alternative route to meeting these needs, however 3Ps currently account for just 5% to 10% of the total investment, doubts exist as to their efficiency and developmental cost. (3)

From a government perspective, resources are limited, and budget allocations decisions are complex as there are many needs to be satisfied. The primary challenge/dilem-ma, therefore, is how to use resources in a more efficient and effective way; in this context, 3Ps are an off-budget alternative which do not require an immediate spend.

3Ps have the potential to increase resources, develop infrastructure and help alleviate governments’ capital cons-traints (4), however if they are not managed properly, they can be negative for public finances, inefficient and might not achieve expectations. (5)

3Ps are not new concept, they are a form of strategic alliance. There are various definitions of the meaning of a Public Private Partnership; these definitions vary from cou-ntry to country and industry to industry which is common in a strategic alliance (6).

It is difficult to measure the performance of 3Ps as they experience the same issues as any strategic alliance (6); there are, therefore, polarized views on how successful 3Ps actually are. There are some issues with 3Ps related to the public sector capacity to manage them, their administrati-ve and approval process, and possible unfavorable policy, legal, and regulatory environments.

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The purpose of this paper is to explore the context for the development of 3Ps, with particular emphasis on the energy sector, to look at the rational to develop 3Ps, to consider their meaning, to highlight concerns around performance, to look at issues and success factors, and to compare the current status of the countries of Latin America, bringing particular focus to Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Following this, I will then present the conclusions.

According to the World Bank, the Energy sector is com-prised of two different industries, the oil and gas sector and the power sector. Its Public-Private-Partnership Infrastruc-ture Resource Center focuses only on the power sector. The analysis conducted in this paper, therefore, is based prima-rily on the power sector, firstly because of data availability and secondly due to the amount of investment required for power projects in the incoming years; according to the Iea, this investment could account for half of the total energy supply investment by 2040.

coNtext

By 2040 world’s population is expected to reach 9 billion people from 7.4 billion today with an economy growing at an average rate of 3.4% per year. This will require huge amounts of investment in order to satisfy the energy de-mand to accommodate the needs and satisfy the living standards of the population. Demand growth will primarily come from India which will raise its global energy use to 11% by 2040, demand growth in Southeast Asia will be at twice the pace of China. Demand growth in Asian develo-ping countries will account for two-thirds of global energy growth, while the remaining growth will come from Middle East, Africa and Latin America. (1) (2) (7)

According to Iea expectations are that by 2040, electricity will represent half of total energy supply investment from the $60 trillion in cumulative investment and two-thirds

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from the $69 trillion investment under the new policies and sustainable scenarios respectively. Two-thirds of global investment in power plants will be allocated to renewable energy as it is considered to be the least-cost source. Des-pite the increase in supply from renewables, fossil fuels will continue to be the main source of satisfying energy demands. (2)

An expansion in trade and investment will be required to meet the energy demand in providing a satisfactory living standard to the growing population. The commitment will be to satisfy those needs in a safe, reliable and affordable way, and at the same time minimizing environmental impacts, this will not be achievable without innovation, technology and cooperation among stakeholders (1; 2), meaning that alliances will be needed.

Around $9.6 trillion was invested globally in infrastruc-ture in different asset classes in 2013. This represented 14% of global gdp, from the $9.6 trillion oil & gas accounted for 9%, power 8%, mining 4% and water 2%.

Despite global investment in transportation, power, water, and telecoms in an attempt to meet the needs of a growing population, these efforts have not been enough. Currently, the world invests $2.5 trillion in these areas, emerging economies account for 60% of the investment, where Latin America and Africa represent 7% and 2% res-pectively. The level of world investment required on ave-rage would be $3.3 trillion a year, leaving an infrastructure gap, therefore, of $0.8 trillion a year.

Infrastructure (roads, railways, airports, ports) is nee-ded to improve the living standard of the world’s growing population, to transport products, and people, and to provide water, electricity and gas pipelines to households and companies (4) ‘Roads, ports, airports, rail, and telecom networks are the conduits of trade and mobility. Electricity fuels production, and clean water underpins public health. Investment that modernizes and maintains these systems

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can propel economic growth’ (3). A dollar invested in in-frastructure can raise gdp by 20 cents in the long term; in the short term the construction phase is beneficial in itself as it creates jobs.

According to the McKinsey Global Institute, there are 120 trillion US Dollars under the management of banks and institutional investors that can contribute to alleviate the infrastructure gap. However, there are a variety of challenges that need to be addressed in order to attract these resources, such as: changes to regulation and pen-sion rules, a better pipeline of well-developed projects, a solid cross-border investment principle, and a real-market transparency and standardization. There is an opportunity to manage infrastructure spending in a more effective way to improve project selection, delivery, and management of existing assets.

Governments are challenged with making decisions as to how to fill this infrastructure gap, considering economic, political, and social factors, and to assess the options avai-lable to structure 3P relationships to develop projects, from public works, concessions or intermediate or alternative schemes. (8)Public Private Partnerships offer an alternative contribution to satisfying these needs, however 3Ps currently accounts for just 5% to 10% of the total investment, and at the same time there are certain doubts on how efficient they are, and if the cost to develop them is low. (3)

Some oecd countries, such as Australia, Canada, and the United Kingdom, have begun to use 3Ps, and have attracted attention, especially in developing economies where institu-tions such as the World Bank has been promoting them as a way to fill the infrastructure gap. Other institutions, such as the European Commission, eIB (the European Investment Bank), and the eBrd (the European Bank for Reconstruction and Development), have joined these efforts. (4)

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FIgure 2-poteNtIal FINaNcINg FroM INStItutIoNal INVeStorS ($120t)

Banks Investment companiesInsurance companies and private pensions

Public pensions and superannuation plans

Sovereign wealth funds Infrastrucutre operators and developersInfrastructure and private equity

funds Endowments and foundations

Source: Built from McKinsey Global Institute analysis

ratIoNal For 3pS

3Ps are not a new phenomenon, the first efforts at coopera-tion between government and private enterprises are rooted in the 17th century, and occurred in infrastructure projects in Europe and uSa. Private companies have participated in the development of the transportation sector in canal and road concessions. Also, scientific societies have been encouraged to develop knowledge advancement. For instance, in the United States, Samuel Morse was granted $30,000 from the Government in 1838 to build an experimental line for his electric telegraph, the first instance of support from Gover-nment to a private researcher for applied research purposes. In 1900, General Electric (GE) founded a Research Labora-

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tory to face competition in the electric business considering the expiration of the Edison patents. (9) (10)

During the 19th century, the participation of the private sector was fundamental in the development of infras-tructure in other parts of the world, for instance in Indian railway development. During the 1900’s, collaboration was grounded in science and technology and could provide a long-term strategy to increase competition and achieve economic growth. (9) (10)

From a government perspective resources are limited, and decisions where to allocate budgets are complex, be-cause there are too many needs to be satisfied, therefore, the main challenge/dilemma is how to use resources in a more efficient and effective way, 3Ps are an off-budget alternative, that does not require spending cash immedia-tely. On the other hand, the private sector is perceived as a potential source of resources that could help to fill the infrastructure gap, 3Ps are being attractive as they could offer long maturities and stable returns (4) (9).

From a political perspective, 3Ps can be regarded as a tool for government in order to improve public transparency, mitigating potential controversy arising from private in- volvement in infrastructure projects. Under 3Ps, private investors participate in the development of infrastructure by offering an optimal alternative to develop the whole cost cycle of a project, financing the projects in exchange for payments to be funded by the public sector and/or service users. This could represent better value for money from a government viewpoint. (4; 9)

It is expected that the private sector will: improve investment decision-making by enhancing the identifica-tion, planning, selection and prioritization of projects with analysis and innovation; improve efficiencies and delivery with experience in and incentives to develop infrastructure; and provide better infrastructure maintenance by having a more long-term investment perspective (4) (9).

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3Ps present the advantages of having the public and pri-vate sector working together, the private sector contributing with innovation, technical and managerial knowledge and skill, and entrepreneurial spirit, the public sector seeking to accomplish its endeavor to develop the infrastructure and provide the services needed for a growing population by using the available resources in the most efficient way. The responsibility of providing infrastructure services could govern the infrastructure projects at different governmental levels (local, provincial, and national) depending on the country’s political and administrative structure. (9) (11)

3Ps could increase resources to develop infrastructure and help alleviate governments’ capital constraints (4), but if they are not conducted in a proper way, they can have a negative effect on public finances and can be inefficient and might not achieve expectations. (5)

Some oecd countries started to use 3Ps, such as Australia, Canada, and the United Kingdom, and later on the use of 3Ps has attracted the attention of other countries, especially in developing economies where institutions such as the World Bank has been promoting 3Ps as a way to fill the infrastructure gap in these economies. Other institutions have joined these efforts, such as the European Commis-sion, eIB (the European Investment Bank), and the eBrd (the European Bank for Reconstruction and Development) (4)

The assessment as to whether or not a 3P should be undertaken/utilized necessitates we look at some of their characteristics considered myth, such as: perception of privatization, government control, size of the project, go-vernmental level, 3Ps as a panacea for any project, cost and finance of a project, and social and economic benefit for the population (9).

From a process theoretical perspective, assessment of the development of a 3P should be based on a deep analysis and understanding of the alternatives to develop a project, considering various modes and alternatives, considering the

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unique context of each case in order to take the best option (12). Following the analysis, 3Ps may well not end up being the best alternative due limitations falling subject to social, political, legal, administrative, and commercial aspects (9).

MeaNINg oF 3pS

As with the definition of strategic alliances, there are various definitions on the meaning of a Public Private Partnership from country to country and in different industrial contexts (6). Commonly, the meaning can be considered as a com-mercial transaction between the public and private sectors, where the private sector (5):

• Provides a service for a substantial period of time; • Normally takes on construction, operational and com-

mercial risk; and • Gets paid, by the public authority, or through user fees,

or a combination of both.Some authors define 3Ps as a form of collaboration bet-

ween the public and private sectors, but also acknowledge the involvement of voluntary organizations (Ngos, trade unions) or knowledge institutes with the aim of achieving common goals. They share risk and responsibility, resour-ces and competences (12). In the energy sector particularly, the level of involvement and engagement of stakeholders during the development of a strategic alliance is key to its performance (6). There is little research on stakeholder involvement in infrastructure 3Ps (13).

Even within the energy sector, the meaning of a public-private partnership varies according to country. In some countries, this model is regulated by specific law, but it seems that this is applied in the development of infras-tructure projects, for instance hydrocarbons are regulated by their own set of laws. Many countries have developed special-purpose 3P legislation in order to provide better

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understanding and reduce the level of uncertainty from a legal and regulatory perspective, and by doing so to increase the level of confidence from the private sector (9). However, legislation applies only in certain segments of industry, as in the energy sector.

For instance, Mexico has associated historically with various forms of Public Private Partnerships, such as: pIdI-regaS, ppS (Proyectos de Prestación de Servicios), Esquema de Concesiones, and ppa (Asociación Pública Privada). In general terms these contracts were structured to develop infrastructure and provide public services, in circumstan-ces where the private sector develops the project and at the same time provides the financing (14). However in practical terms, Mexico specifies that 3Ps do not operate for exploration and extraction contracts. The Ministry of Energy determines the contractual areas to be released for tender (15).

According to the World Bank, the Energy sector compri-ses of two different industries, the oil and gas sector and the power sector, its Public-Private-Partnership Infrastruc-ture Resource Center focus primarily on the power sector. The analysis conducted in this paper is based mainly on the power sector, firstly due to data availability and secondly because of the amount of investment needed for power projects in incoming years. According to the Iea, by 2040 this could be half of the total energy supply investment. Data availability for 3Ps to develop cross-country comparisons is a major challenge (16).

Departing from the general rule that the accessory fo-llows the principle, if 3Ps are considered to be a strategic alliance, then different meanings in defining the concept will result in different understandings, therefore, it is vital that all stakeholders share the same understanding of the expectations and performance of the alliance. (6)

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perForMaNce

Performance assessment of 3Ps encounters the same issues as any strategic alliance (6), it is difficult to measure and there are polarized views on their success. There are some cases that demonstrate 3Ps are able to successfully develop efficient infrastructure projects when they are examined before and after the project. Efficiency gains vary according to the type, size of projects, regulatory and governance context, and it also depends on the sector, for instance in electricity projects results can be mixed.

A 3P has a long cycle of development. The phase of project construction is particularly critical in the same way that the performance of a strategic alliance is critical, time, cost and quality are associated with the perception of success (17).

Due to a lack of availability of data and details for Latin American projects, the following analysis was developed using some of the 3P projects that are considered successful in what they have achieved, according to the World Bank. These are:

• Albania: Ashta Hydropower Project• Cameroon: Société Nationale d’Electricité • Ghana: West African Gas Pipeline Project• Kenya: Kenya Power and Lighting Company• Liberia: Liberia Electricity Corporation

taBle 1-SucceSSFul 3p proJectS

Project Description BenefitsAlbania: Ashta Hydro-power Project

Albania government sig-ned a 35-year concession with Verbund (Austria’s largest electricity company) to build and operate a new hydropower plant in 2008.

High construction quality, electricity cost below the im-port prices, increase of power generation capacity by 53 MW, improved service for 170,000 people (5% of popu-lation)

(Continued)

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Project Description BenefitsCame-roon: Société Natio-nale d’Elec-tricité

aeS Corporation, a global power company, acquired 56 percent of Cameroon sta-te owned power utility So-ciété Nationale d’Electricité (SoNel)’s equity and entered into a 20-year concession to generate, transmit and distribute electricity in Ca-meroon.

Connections increased by 75%, up to 792,000. Total ca-pacity grew to 1,033 MW

Ghana: West African Gas Pipeline Project

The West African Gas Pipe-line (wagp) project compri-ses about 678 kilometers of onshore and offshore pipe-lines to transport gas from Nigeria to power generation plants in Benin, Togo, and Ghana, and associated pro-cessing/receiving facilities. The wagp connected power plants in Ghana, Togo, and Benin to large gas resources in Nigeria.

Wholesale generation cost has been decreasing in Ghana (14%), Benin (12%), and Togo (12%). The thermal genera-tion cost using natural gas is about 40% compared to use the Light Crude Oil in the three countries.

Kenya: Kenya Power and Lighting Com-pany

In May 2006, Kenya Power and Lighting Company (kplc) management service contract was successfully completed with the prefe-rred bidder for two-year contract period.

New customer connections increased from 67,000 to 120,000 in the first year, fo-llowed by a further 25% in-crease to 150,000 connections in the second year. System losses were reduced signifi-cantly from 19.6% to 17.6% by June 2007, and voltage fluctuations were reduced by 130.2%.

Liberia: Liberia Elec-tricity Corpora-tion

Manitoba Hydro Interna-tional (MhI) of Canada was awarded a five-year mana-gement contract for Libe-ria Electricity Corporation (lec), the electricity utility

The post-completion evalua-tion shows that 6,000 new electricity connections have been set up and 32,420 people have benefited from new or improved access to power.

(Continued)

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Project Description Benefitsin the capital city of Monro-via in 2010.

The improved operational efficiencies resulting from the contract have led to an increase in revenue collection by lec of 160 percent, and a reduction in losses of 21 percent.

These cases demonstrate a positive impact in terms of ac-cess, quality of services, labor productivity, and reduction in technical losses. There are certain projects, however, that are difficult to assess, there are some doubts on their efficiency in lowering prices, increasing jobs, and reducing poverty. In electricity projects for instance, it is sometimes difficult to see efficiencies when looking at reduction of tariffs, mainly because initial prices are below cost due subsidies that are in place. There are some efforts to increase analyses that can shed light on the benefits of 3Ps (18).

ISSueS aNd SucceSS FactorS

Issues

Issues with infrastructure projects arise due to insufficient funds, poor planning and project selection, inefficient de-livery, and an inadequate perspective. These all result in low coverage, low quality, and low reliability. 3Ps can assist by providing additional sources of funding and financing. Private sector analysis and innovation can improve the planning and project selection, and enhance efficiencies with their experience and incentives. There are also some complementary actions that can be taken by increasing fiscal resources and improving public sector capacity and governance to help achieve a better infrastructure. (5)

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The pace of 3P development is considered to be slow, currently accounting for just 5% to 10% of total investment. The main reasons for this lethargy revolve around a lack of clear understanding about private sector requirements and public sector capacity constraints, experience and knowled-ge in developing 3Ps, uncertainties in the administrative and approval processes, and unfavorable policy, legal and regulatory environments. (9)

Due to quality issues with infrastructure services, such as roads, electricity, telecoms, and water supply, these have been transferred to the Private sector having been traditionally provided by the government. Risk transfer is conducted under the rationale of allocating the risk to the party that has more control over it. Construction, com-mercial and operational risks are transferred to the Private sector, and in doing so there is a better chance of reducing the overall cost of the project. The Public sector normally bears political and regulatory risks. (5) (9)

Sometimes governments use the allocation of risk as a strategy to attract the participation of the private sector. By retaining some of the risks that would usually be borne by the private sector, this could potentially create the wrong incentive to the private investor (19) and thus increase capital costs (3). In emerging markets, alliances present a variety of risks such as: country risk, strategic issues, part-nership economics, cultural issues, human resources, and governance and controls (17).

Stability is an important factor for investors seeking to enter 3P projects, it offers confidence in terms of legal pro-tection. More challenging in emerging economies, Argen-tina is one of the countries in Latin America that has been struggling to gain the confidence of private investors (8).

Despite the fact that, according to key indicators or goals, the World bank seems to be successful, there are some op-portunities to enhance 3Ps processes. The supervision of projects is one such area which requires more attention. The

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focus of attention needs to be more on project preparation and less on the construction phase; the planning stage is important but the implementation stage also requires more attention and the development of a mechanism to ensure that follow up is carried out. More resources need to be allocated in order to mitigate emerging problems, field presence in particular becomes more relevant in complex regional projects.

While assessing potential partners, choice is based on technical experience. However, experience in management, supervision of a project and understanding of WB policies and procedures are important too in order to increase the chances of success. Experience in handling complex social issues is a skill that needs to be considered mainly when dealing with natural resource projects. When promoting a project, it is fundamental not to raise expectations of secon-dary benefits and to be careful of communicating these in a transparent manner. Stakeholders are more interested in secondary benefits; therefore, political expectations need to be handled cautiously in order to prevent future issues (20). Due to the length of the projects, stakeholders may vary in different phases, this variation brings diverse motivations, experiences, and interests which results in a complex rela-tionship in the stakeholder network (13).

Unsolicited proposals provide a huge opportunity whe-re innovation can flourish. This challenges the role of the state; as Joseph A. Schumpeter stated ‘the engine of long-term development is innovation’ (21), However, as there are concerns about not having sufficient competition and transparency, the challenge is to encourage the development of innovative proposals without losing either transparency or efficiency (17). If this were to occur, it could allow private investors to enjoy windfall profit margins (3).

3Ps could help to solve some common issues in infras-tructure projects, such as insufficient funds, poor planning, inefficiencies that result in poor quality and low reliability of

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the projects, however, it is necessary to improve both fiscal resources and public sector capacity by better understan-ding private sector requirements. It is important to assess the policy, legal, and regulatory environment of the country to find opportunity and areas for improvement.

Allocation of risk is key to preventing issues, and there is a need to follow the principle of allocating the risk to the party that has more control of it. Stability is critical for potential backers to be willing to support projects with ac-tual investment, this is a particular challenge in emerging economies. Due the duration of projects, supervision is an area that could alleviate problems by enhancing the follow-up process. Partner assessment has to go beyond technical experience, management of social factors requires different skills, mainly when involved in natural resources projects. Unsolicited proposals could fuel more innovative and effi-cient projects, however, there is work to be done in terms of improving transparency and encouraging competition.

Energy

In terms of the energy sector, and specifically in power, the challenge is to be able to have enough electricity available, which is reliable and of a sufficient quality to be offered at competitive prices to industrial, commercial and domestic consumers. Open access to promote competition in order to increase availability, reliability, and quality of electricity, all need to be considered in a 3P project (9).

Electricity generation has received more investment than distribution as it has fewer political and economic issues and it is a business-to-business transaction. The cost under-recovery in distribution is a major issue; this loss has an important effect along the value chain as money comes into the chain through the distribution segment, thus reducing the investment appeal to financial institutions (5).

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Aggregate Technical and Commercial losses (at&c) is another issue for electricity. Many developing economies face high losses which provides a picture of energy & re-venue losses, and negative healthiness in the distribution, billing and vigilance systems. Some countries face issues due to inadequate transmission capacity increasing at&c losses. (5)

The major issues in electricity are (9): • Market structure• Unbundling of the sector• Mandatory standards on security, quality and relia-

bility • Non-discriminating, open access to common infras-

tructure facilities• Source of energy, method of exploration, extraction, etc.• Choice of technology• Waste heat recovery and cogeneration• Waste and waste water treatment and disposal• Safety and environmental issues

Success factors

There are fundamental differences between conventional projects and 3Ps. 3Ps are focused on delivering services and not on the procurement of assets. Allocation of risk is com-plex due to the time frame and the involvement of various parties with different interests, and the management of the relationship between the public and the private sectors over a long period of time is challenging. All of these elements play a critical role in the success of a project. Therefore, is important to have a clear framework of the decision-making process to select and design a 3P project that shows the rationale of choosing it instead of another alternative (12).

There are nominal characteristics to consider when re-viewing success factors for 3Ps. Among these are politics,

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financial resources, and management capacity to administer the processes involved in developing and executing 3Ps.

From an institutional perspective, it is fundamental to have a strong legal foundation and administrative govern-mental structure in order to provide an effective mechanism to develop and implement 3P projects due their complexity, requiring a diversity of knowledge and skill. Administrati-ve units are created to deal with these functions, however approaches vary from country to country. The roles of these units range from a wide span of functions to very specific and very limited (9).

The public sector is a critical factor in the success of 3Ps. The Public Sector has to be strong in terms of being able to identify, develop, negotiate, procure and manage projects following a rigorous transparent process during every step (9).

The preferred model to implement a 3P is the creation of Special Purpose Vehicles (SpV). This helps deal with the complexity of the contractual agreement and the number of parties involved. The level of participation from the Go-vernment in the SpV is determined by strategic, social, and political factors (9)

Some other critical success factors (12):• Standard setting and permanent involvement of public

agencies, • Clear formation requirements (goals, inputs and ex-

pectations), • Sound regulatory framework regarding costs recovery

and benefit distribution, • Adequate partner selection arrangements (based on

compatibility, capability, commitment and control), com-mon vision and mutual trustful relationships and

• Transparent negotiation on multiple interests of key participants.

Research has focused on developing conceptual studies looking at the principal and potential of 3Ps, however, there

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is a need for further study to shed more light on the rationale and outcomes for stakeholders. There is currently insuffi-cient evidence on the cost effectiveness and environmental benefit of 3Ps. For instance, there are some 3P electricity and water projects that brought an increase in tariffs which adversely affected poorer households. There is a need to develop a more systematic analysis of the performance of 3Ps to enhance the understanding of success and failure factors from an effectiveness perspective (12). Different perspectives on the performance of a 3P, which depart from considering it as a strategic alliance, are complex as they involve understanding the soft aspects of the alliance (6).

3p latIN aMerIcaN deVelopMeNt

This section purposes to assess the capacity of countries in the development of public private partnerships (3P). This is achieved through the index developed by the Economic Intelligence Unit in its annual report ̀ Infrascope´ (22). Spe-cial emphasis is given to Latin American countries including Argentina, Brazil, Chile, Colombia, Mexico, and Peru. The index is measured in the following categories: regulations, institutions, maturity, investment and business climate, financing, and it is qualified in an overall category.

Latin American & Caribbean, and Millennium Cha-llenge corporation groups have the highest overall index, followed by Asia, and these groups are above the average of all countries.1

1 Eastern Europe, Central Asia and the Southern and Eastern Mediterranean (eeca-SeMed) (13 countries), Latin America and the Caribbean (lac) (19 coun-tries), Countries commissioned by the Millennium Challenge Corporation (Mcc) (8 countries), Asia (not a representation of Asia as a whole) (3 countries), Europe (not a representation of Europe as a whole) (10 countries), Middle East and North Africa (not a representation of Middle East and North Africa as a whole) (3 countries), Sub-Saharan Africa (not a representation of Sub-Saharan Africa as a whole (5 countries).

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FIgure 3-oVerall INdex eIu

5758

5554

59

56

59

54

Source: Infrascope workbook 2017

Latin America is above average for the regulations, insti-tutions, and financing categories, however it is below the average for maturity, investment and business climate.

3Ps are a method by which the development and growth of infrastructure, including electricity, can be helped. Infrastructure investment in Latin America and the Ca-ribbean averaged 3.5% of gdp in the 1980s, but declined in the following decades to 2% - 3% of gdp. For the region to grow and develop, there is a need to increase the level and quality of infrastructure.

The environment for 3Ps in the Latin American and Ca-ribbean region has been progressing. New legislation has been implemented (Argentina, El Salvador and Nicaragua), and some other countries have opened 3Ps in other areas beyond the conventional ones (Chile, Brazil and Mexico). Contemporary influences, such as climate change and di-saster risk management, have been incorporated and at the same time social factors, such as community consultations and gender goals, are works in progress. Governments are interested in improving transparency and accountability.

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In the area of financing, countries rely heavily on interna-tional financial institutions and so there is an opportunity to incorporate local institutional lenders (private funds), issuing impact development bonds and green bonds, and accessing project development funds.

FIgure 4-regIoN coMparISoN eIu INdex

01020304050607080Overall

Regulations

Institutions

Maturity

Investment and business climate

Financing

All countries

Asia

EECA-SEMED

Europe

LAC

MCC

Middle East and North AfricaSub-Saharan Africa

Source: Infrascope workbook 2017

Chile, Colombia and Brazil are the top three countries in the Infrascope ranking. Colombia distinguishes itself as having a strong regulatory framework, although there is room for improvement in the efficiency and coordination

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of the process. Brazil is the biggest developer of 3Ps in the region. It accounts for almost half of all projects and they have a strong institutional framework at the national level. Challenges will revolve around developing 3Ps at a local level, as in the incipient technical capacity finance instru-ments are more developed than in other countries. Its capital markets, however, need to be reinforced to secure funding for future projects.

Argentina is becoming a more conducive environment and thus attracting a greater number of investors. The restoration of investor confidence has played a key role. Some countries of the region have promoted new legal frameworks but they still require to be tested. The maturity gap in the legislation will be important in order to ensure that what has been written, has been implemented.

Recent corruption scandals in the region have affected public perception in terms of the private sector involvement in 3Ps. Governments will need to prevent this happening through new legislation and enforcement.

Category findings

The stage of development for the selected countries are demonstrated by the figure 5.

Argentina is the only country that does not have a category in a mature stage, while Chile and Colombia are mature in terms of regulations and maturity, Brazil in institutions, Mexico in regulations and Peru in maturity.

Regulations

Latin America has made some progress in developing and strengthening its 3P legal framework. This has been moti-vated by a variety of needs in terms of infrastructure deve-lopment or, as in the case of Argentina, to restore investor

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: Inf

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2017

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confidence. The region is doing well in terms of environ-mental impact assessments; however, community consulta-tions are not always conducted. The adoption of economic analysis in project selection is on the rise, and countries are increasingly requiring cost-benefit analysis.

Institutions

National infrastructure plans that go beyond political cycles will support the development and implementation of 3Ps, and there is an opportunity to establish priorities within these plans. The creation of agencies taking charge of the administration of 3Ps will be important. Some countries, for example Brazil and Argentina, have been promoting this, but currently they are not operational. Improvement in transparency and accountability is needed and the co-llection and public availability of information will be part of the maturity process. Colombia publishes the assessment through the project cycle while Brazil collects information on delays and changes of projects. Six countries in the region publish evaluations on project completion; this information will enhance the learning cycle for future projects.

Maturity

Brazil, Colombia, Mexico and Peru ranked highly in this category due their volume and experience in 3Ps. The re-gion, except for Argentina and Venezuela, is doing well in terms of project exit and contract termination in general.

Investment and business climate

Political support for 3Ps is high with the desire to have pri-vate sector participation. There is some public opposition to 3Ps but Colombia and Mexico have robust support. More

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competition is needed as the region has a high industry concentration.

Financing

This category has the lowest score in all categories within Latin America, indicating that it remains a challenge. Brazil and Peru have a higher index because they are considered to have strong and liquid capital markets, free traded local currency bonds, and a low sovereign risk. Argentina is performing well after its return to international markets. There is significant reliability on multilateral institutions to fund 3Ps, institutional investors are therefore needed through adapting existing legislation. Pension funds could be a good source of funding if conditions are in place, along with green bonds and the development of impact bonds. In the end, the challenge is to expand the sources of funding.

Among emerging regions, 3Ps Latin America rate is above average, performing well in the development of regulations, institutions, and financing, however, there is more work to be done to enhance investment and business climate, and, as more 3P experience is accumulated, matu-rity must improve.

Food For thought (lIMItatIoNS & Further reSearch)

More holistic frameworks are needed that can help Gover-nments select the best model to pursue when investing in a project, this decision-making process is fundamental to implementing a more efficient use of resources.

3Ps information for the energy sector is scarce and when reviewing available databases some inconsistencies were found. Available data is focused mainly on power projects, information for oil and gas is not readily available. This li-mits the opportunity to develop analyses that can shed more light on the performance of alliances. Some countries began

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to be more transparent and build information regarding farmouts with National Oil Companies, for instance Mexico progressed in this area. However, it will be interesting to see whether or not continuity is maintained with the new administration in place.

There is an opportunity to work with oil, gas, and mi-ning 3Ps. Experiences from other sectors can be applied to implement and utilize a larger number of 3Ps, for instance unsolicited proposals. Unsolicited proposals will require Governments with a strong capacity and innovative ap-proach to assess opportunities presented by the private sector to encourage creative and efficient projects; transpa-rency and completion need to be enhanced.

The stakeholders’ relationship is an area which requires more research to better understand their needs, motives and how to manage the relationship to accommodate the interests of the parties involved in order to prevent issues that negatively impact the development of 3P projects.

Electricity will demand 50% of the investment needs for energy, for example electric vehicles will increase their part in the transportation equation meaning that some fossil resources will be liberated if the electricity needed comes from other sources, such as renewables. Oil and gas will be increasingly available to produce petrochemicals with a rising demand in application, mainly in plastics. This will prompt other areas to consider 3Ps regulatory changes and applications. There are questions that will need to be addressed, for instance how does an increasing use for elec-tricity for transportation promote a change in the way 3Ps are developed and regulated. Offshore power production will gain more importance.

coNcluSIoNS

Population is growing and the current pace of investment to provide a satisfactory living standard is insufficient. There

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is an infrastructure gap which acts as a break in enhancing trade, mobility, production, and population health. This gap will require significant investment in order to satisfy the energy demand to accommodate the population needs.

Governments have limited resources to invest, and allo-cation of these is complex. There are too many needs to be satisfied, therefore, governments need to allocate resources in the most efficient way and they need to have a strong decision-making process to select the best alternative to develop a project; thus, more robust decision-making fra-meworks are needed. On the other hand, there are resources available in the private sector that can contribute to the alleviation of the infrastructure gap, but investors need clear regulatory frameworks and investment conditions to devote resources.

3Ps, a form of strategic alliance between the public and private sector, seem to offer an alternative that can be used to contribute to alleviating the investment gap. So far, their participation, as seen in the total investment in projects, is relatively low (5-10%). There are also doubts as to how efficient they are. Meanings and understandings of 3Ps, legislation, government capacities to manage them, among others, varies from country to country. As in any strategic alliance, the performance assessment of 3Ps is difficult and complex. There are some 3P projects that demonstrate benefits, however for most of the project’s performance is not certain, there are also doubts as to whether they will be efficient and beneficial to the population. Therefore, more analysis is needed on performance. Data availability for 3Ps is a major challenge to develop cross-country comparisons.

3Ps could help to solve common issues in infrastructure projects, such as insufficient funds, poor planning, and inefficiencies that result in poor quality and low reliability of the projects. However, it is necessary to improve fiscal resources and public sector capacity by better understan-ding private sector requirement. It is important to assess the

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policy, legal, and regulatory environment of the country to identify areas of opportunity for improvement.

Allocation of risks is key to preventing issues, and there is a need to follow the principle of allocating the risk to the party that has more control of it. Stability is critical for investors to be willing to support projects; supervision is one area that could alleviate problems by enhancing the follow up process. Partner assessment has to go beyond technical experience, management of social factors requires different skills, primarily when dealing with natural resou-rce projects. Unsolicited proposals could drive increased innovative and efficient projects, however, there is work to be done in terms of improving transparency and encou-raging competition.

Among emerging regions, 3Ps Latin America rate is above the average, performing well in the development of regulations, institutions, and financing. However, there is more work to be done to enhance investment and the busi-ness climate, and as more 3P experience is accumulated ma-turity must improve. In terms of regulation, communities’ consultation can be improved by encouraging this as good practice. As for institutions, national infrastructure plans need to reach beyond political cycles, and the creation of agencies in charge of administration cycles will strengthen this. Regarding maturity, as more 3Ps projects are developed this will bring more experience to the region. Investment and the business climate could be improved by gaining public support; this will require communicating the benefits of 3Ps in a clear and transparent manner. More competition among private participation is needed to reduce industry concentration. The challenge for financing is to expand the sources of funding by setting the right conditions in place for institutional investors.

As in any strategic alliance, the relationship among parties in 3Ps is complex. The only way to fill the inves-tment gap and bring better conditions to the population is

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by aligning vision and interests, and by creating win-win collaborative environments to develop efficient projects that can bring benefits to all stakeholders. In the end, no one entity can do everything, collaboration is needed.

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