This document discusses lessons learned from OECD countries' use of public-private partnerships (PPPs) for infrastructure investment. Key points include: - PPPs are used to take advantage of private sector expertise, share risks, and introduce competitive pressures, but require higher transaction costs. - Countries establish frameworks for deciding when PPPs are appropriate, conduct cost-benefit analyses, and account for fiscal implications. - Contracts focus on output specifications, set minimum project values, allow international bidding, and specify risk allocation and quality standards. - Risks like demand are borne by governments, while design and availability risks are borne by the private sector. Contracts establish conditions for review. - Ensuring investment and

1. PUBLIC-PRIVATE-PARTNERSHIPS AND
INVESTMENT IN INFRASTRUCTURE:
LESSONS FROM OECD COUNTRIES
Sónia Araújo and Douglas Sutherland
OECD Economics Department
June 16, 2014
OECD Working Party No. 2 on Competition and Regulation

2. PPPs and Investment in
Infrastructure
 2008 WP1 project on “Infrastructure
Investment: Links to Growth and the Role of
Public Policies”
 Infrastructure:
- Energy: electricity and gas
- Water
- Transport: rail, road, air, water
- Telecommunications
 Information sources:
- Dealogic Projectware database - Literature
- OECD Questionnaire - Dedicated websites 2

3. Motivations for private sector
participation
 Financial expertise
 Risk sharing
 Innovative solutions
 Increasing cost effectiveness
 Managerial abilities to coordinate several
stages
 Introduction of competitive pressures
 Budgetary pressures
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4. Specific Features of PPPs
 Decision making framework
 Minimising the costs of PPPs
 Tendering
 Contract design
 Risk allocation
 Ensuring investment and quality 4

5. Decision Making Framework
 Bundling construction and operation phases
 Robust methodology for deciding whether PPPs
are the appropriate investment structure
- Most OECD countries compare PPPs vs traditional
procurement
- Net benefits calculated using a whole-life cycle
approach
- Consult an independent body and ex post evaluation
 Fiscal implications of PPPs accounted as
contingent liabilities in government accounts
- Only in 9 out of 19 OECD countries
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6. Minimising the costs of PPPs
 PPPs entail higher transaction costs
independent of project size
- PPPs are inappropriate for low-value projects
 Solutions:
- Set minimum project value requirements (AUT,
BEL, IRL, PRT, GBR)
- Allow bundling of small projects (AUT, BEL)
- Obtain planning permissions and environmental
approvals prior to tendering (8 and 10 OECD
countries out of 19, respectively) 6

7. Tendering
 Higher complexity of PPPs limits competition
– Collusion a likelier outcome
 Solutions:
- Allowing international competition (only 2 OECD
impose restrictions)
- Transparency in awarding criteria
- Allow the decision to be challenged in court
- PPPs units as vehicles of information dissemination
and provision of expertise
 Caution when quality is poorly observable but a
key determinant of cost
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8. Issues in Contract Design (1)
 Focus on output specifications
– 12 OECD countries set input specifications
– 16 OECD countries set output specifications
 Contract length
- PPPs are less suitable in sectors where technology
and demand conditions change fast
- Higher where demand risk is low (water sector)
- Lower in sectors where demand conditions can be
hard to forecast (transport sector)
- “Typical” contract length of 30 years but there is
great variability across countries within sectors 8

9. Issues in Contract Design (2)
 Managing a long-term relationship:
- Opportunistic behaviour of the contract
winner
- Regulatory uncertainty or opportunism:
PPPs call for a stable institutional
environment
- Capture
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10. Risk Sharing
 General rule: government should hold the risks that the
private sector cannot control or affect
- Demand risk is ultimately borne by the government
- Design, construction, availability risks should be borne by the
private sector
 Specify the events that may justify a revision of contractual
clauses
- 11 (out of 16) countries it is possible to review PPP contracts
before established deadline for renegotiation/end of the contract
- In only 8 countries do contracts contain clauses specifying the
conditions under which they can be reviewed
 Specify clauses related to risks
- Most countries contracts impose limits on private sector debt
- In 9 countries PPP contracts contain revenue sharing clauses
- In 7 countries PPP contracts specify minimum revenue from sales 10

11. Ensuring Investment and Quality
in Infrastructure Services (1)
 Extend contracts for a long period
 Set no-compete clauses (8/20 countries)
 Set geographical exclusivity rights (18/20)
- More pervasive in electricity and water sectors
 Pricing policies
- Compensate the private operator without
incentivising overinvestment
 Monitoring performance
- Quality standards, performance indicators,
benchmark competition, bonuses and penalties
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12. Ensuring Investment and Quality in
Infrastructure Services (2)
 Under-investment when contract is
approaching renewal
– Bias renewal in favour of the incumbent
– Compensate the private sector for the
residual value of the asset (only in 1/3 of
countries that transfer assets to the public
sector)
– Profit reinvestment requirements (2 out of
OECD countries)
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13. Thank you!
sonia.araujo@oecd.org
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