International and CEE experience with PPP

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					International and CEE
 experience with PPP
         Evaluations of PPP

• Many different resources available, like:

  – EC Resource book on PPP studies
  – Other books
  – Web pages – international and national
           Different results
• Mainly positive experience: f.e. France –
  building of highways [about 35 %
  constructed via concessions]
• Mixed experience: f.e. UK – health care or
  school infrastructure
• Negative experience: f.e UK/France:
EU PPP cases
                   General Issues
• The examination of case studies enables the confirmation of a
  number of key principles governing PPP development and
• Foremost it is important to stress that PPP structures come in many
  forms and are still an evolving concept which must be adapted to the
  individual needs and characteristics of each sector, project and
  project partner.
• Successful PPPs require an effective legislative and control
  framework and for each partner to recognize the objectives and
  needs of the other.
• Guaranteeing benefit from PPP requires recognition of the relative
  strengths and weaknesses of each type of structure and the aims
  and objectives of each party. Of particular importance is the role of
  the public sector, which may transform itself from a service provider
  to an overseer of service contracts.
        Value of Investment
• The water and transport sectors
  represented the largest capital
  investments. This is to be expected given
  the scale of projects and the investment
• The smallest financial consequence was
  presented by the solid waste sector.
     Transfer of Responsibility
• The solid waste cases demonstrate the
  highest degree of transfer of responsibility
  onto the private party. This is often in
  relation to the more speculative and
  commercial nature of investments in solid
  waste operations, which the private
  developer is expected to finance and
  assume market risk.
          Contract Duration
• Again the water and transport sectors
  represented the longest project /contract
  durations often over 20 years. This is
  inherent of the relationship between the
  size of capital invested, degree of private
  sector involvement and length of time
  required to ensure investment and profit
• Demand Risk.
    – As with the previous criteria, the solid waste sector generally has the
      highest degree of transfer of risk onto the private party. This includes
      demand risk but this may again be indicative of the type of projects
      selected, which on the whole are more speculative as opposed to those
      requiring the building and operation of large infrastructure. On the whole
      the cases, within the same sector, demonstrate a relatively even
      distribution of demand risk between the parties. This may indicate an
      understanding that the public sector is also, in part, responsible for
      ensuring the financial viability of a project.
• Availability Risk.
    – The general pattern suggests that risks under this category are
      distributed in relation to the characteristics of the project and the parties.
      This would tend to confirm the principle that risk should be adopted by
      the party best able to manage it.

    A number of cases demonstrate ineffective risk distribution and also the
       consequences resulting from it.
• Risk transfer lies at the heart of effective PPP design. If a good
  balance is not achieved it will result in increased costs and the
  inability of one or both parties to fully realize their potential.
• The need for sustained political support and commitment is clearly
  demonstrated particularly for large projects and ones representing a
  first attempt at developing and implementing a PPP project.
• Associated to this is the need to demonstrate clear value for money
  from the project.
• Equally important is the need for an enabling and well defined
  legislative and regulatory environment.
• Given the complex interactions between service provision and
  financial viability, it is crucial for all sides to correctly estimate project
                        SWA Scottland
•   SWA has responsibility for delivering a capital investment programme covering the
    period from 2002 to 2006 and amounts to some £1.8 billion.
•   It decided that the best way of making this investment was to create a subsidiary
    company, Scottish Water Solutions (SWS) to deliver the investment required in the
    most cost-efficient way.
•   Scottish Water Solutions, SWS, is a unique joint venture. SWS was formed by SWA
    and two consortia in one of the largest partnering agreements of its kind and a first for
    the UK’s water industry.
•   SWS is also set apart as there are eight partners with equity in the business – making
    it a PPP partnership within a company structure.
•   SWA owns 51% of SWS with the rest split equally between the two consortia: Stirling
    Water, comprising Thames Water, KBR, Alfred McAlpine and MJ Gleeson and
    UUGM which is formed by United Utilities, Galliford Try and Morgan Est. Today, SWS
    brings together some of the most experienced figures in the UK water industry with
    global experience of asset management, engineering, programme management,
    construction skills and delivering major capital investment programmes.
•   Results: SWA is now significantly more efficient, running at around 20% less than it
    cost two years ago. The quality of drinking water is improved and the delivery of the
    £1.8 billion investment programme to modernise the infrastructure is now gathering
    pace, moving towards the implementation of at least £40 million worth of investment
    every month.
          BerlinWasser, Germany
• The Berlin Wasserbetriebe was privatised through a European wide
  tendering process, which resulted in the constitution of a PPP in the
  form of a joint venture between an international consortium and
  Berlin City. The international consortium comprises RWE Aqua
  GmbH, Allianz Capital Partners GmbH, both German companies
  and Veolia Deutshland GmbH (formerly Vivendi of France). The
  newly created company is the BerlinWasser Holding AG. Berlin
  maintains control of the company with a 50.1% stake.

• Unfortunately Berlin Wasser experienced a liquidity crisis due to the
  large amount of new investments required, a 9% interest rate on
  contracted debts and the weight of the concession fee. This was
  resolved through an agreement between the Berlin State and the
  company for a debt guarantee of € 361 million, shared in equal part
  between the public and the private counterpart.
    Entsorgungsgesellschaft mbH,
•   The city of Mülheim in 1994 invited two private partners to found the public-
    private MSWM enterprise MEG limited. 25.1% of the shares belonged to the
    city. The 74.9% of private shares were divided equally between one
    international (Trienekens AG) and one domestic waste enterprise. In 1997
    all private shares were transferred to Trienekens AG.
•   In 1998 the city council asked the city management, the management of
    MEG I and Trienekens AG to develop a PPP concept for all municipal solid
    waste services. The political idea was to concentrate in one organization
    again and to mobilize additional private capital and know how. The majority
    of the shares – 51% – of the new PPP should be held by the city to keep
    political control in a sector with controversial public discussions. Trienekens
    AG accepted this proposal, which meant resigning its majority in MEG I,
•   After two years of preparation and negotiations the new “MEG II” started
    work in October 2000.
•   Problem: ECJ!
    Beiras Litoral and Alta Shadow
          Toll Road, Portugal
•   Shadow tolls present some adverse aspects to the public sector that must
    be evaluated against the benefits. In first place, the regime implies the
    transfer of costs from users to the public purse and ultimately to the
    taxpayer. In second place, the regime provides some guarantees to
    concessionaires, in order to reduce the traffic risk or to create additional
    sources of profit.
•   In Portugal they implied the granting of some local “monopoly” to
    concessionaires: the government agreed contractually to freeze the Road
    Plan as it was in 2000, in the vicinity of road concessions, for 30 years,
    abstaining from increasing the level of service of those roads beyond the
    stipulated in the Plan.
•   The dramatic increase in projected costs of Beiras Litoral e Alta concession
    to the public purse occurred also in other road concessions, creating a
    significant burden to public accounts. The expected amount of shadow tolls
    in 2007 is higher than the current highways agency budget for construction
    and maintenance of national roads in all country. That, and the fact that
    traffic prospects are very good in this concession, prompted the government
    to announce in May 2004 that this highway (as well as several other SCUT
    roads) will have real tolls when completed.
  Beiras Litoral and Alta Shadow
        Toll Road, Portugal
• In 2002, the environmental appraisal of the project resulted in the
  refusal of the project and the requirement of enlargement of all
  existing sections regardless of their gradient or sinuosity (that should
  be, nevertheless, corrected).
• As this represents a deviation of more than 200 metres away from
  preferred alignment, the concessionaire is entitled to compensation
  for any additional costs or for delays in relation to the baseline of the
  submitted variant.
• As the environmentally accepted alternative (of just enlarging the
  existing road) was not accepted by government, construction works
  were stopped, and work schedule is delayed several years, waiting
  for an agreement between concessonaire, government and local
  authorities (and for the result of its ulterior environmental
    Local Airport Kassel-Calden,
• The “Flughafen GmbH Kassel” (FGK) since 1991
  operated as a joint stock company equally shared as a
  public-private joint venture between the city of Kassel
  and changing “silent” private partners. In 1995 the
  municipality of Calden and the rural district of Kassel
  started to participate in the FGK GmbH.
• Between 1991 and 2003, facing investments of €7,5m,
  the annual deficit could be reduced from€0,25m in 1991
  to an almost balanced budget, but a positive return on
  investment has not been realised.
• In spite of two official and one private partner feasibility
  studies, a diligent and sophisticated cost-benefit and
  competition analysis has not been conducted so far.
        Wijkertunnel Randstad,The
•   While the project partly transferred design and construction risk to the private party,
    demand risk was borne by the public party and resulted in substantial costs to the
    State as maximum revenues were not capped. Additionally no provision was made
    for including project life cycle costs in the contract
•   A competitive tendering process contributes to the creation of real value for money
    [only one bid].
•   The development of a national PPP competence centre is a clear advantage for the
    development and application of analytical methodology, development of national
    know-how, provision of assistance to local authorities and the general dissemination
    of experience and support.
•   The project clearly demonstrates that project costs and overall value for money are
    affected by the effectiveness of the procurement process in identifying the most cost
    effective solution. Also the public party should clearly identify the financial and
    economic case for a PPP option beforehand by comparing it to traditional public
    sector methods. Only if it clearly provides better value for money should a PPP option
    be selected (as is now the case in most EU Member States).
•   A modified toll model for public-private tunnel projects can be more expensive for the
    taxpayer than a public solution if PPP experiences in transportation projects are
•   General opinion in the Netherlands suggests that such a project would not be
    repeated given the overly generous terms accorded to the private party in an attempt
    to attract the required financing.
Channel Tunnel Rail Link (CTRL),
• This case highlights the importance of understanding the skills
  and motivations of private sector partners and the impact that
  they can have on the long term development of transport
• The CTRL was promoted by engineering and construction
  companies whose primary interest is in designing and building
  the infrastructure (a task they are completing successfully) but
  are less skilled in the operational and commercial aspect of
  railway systems.
• The development of passenger and freight services may
  therefore have been less successful. This case also
  demonstrates that on a project of national significance it is
  almost impossible to transfer the overall risk of the project to
  the private sector and that the Government must remain
Delivery of local services: CZE and
•   The structure of forms of delivery of
    selected local public services.
•   The decision-making processes,
    concerning selection of the form of
•   The costs of delivery of respective
    service for all existing forms of delivery
  Table 2 Use of procurement methods in selection of external suppliers

                        Number of municipalities
Procurement method
                                 Waste          Public green      Public lighting            communicati        Cemeteries
                        SR           CR    SR          CR       SR         CR       SR           CR        SR         CR
a) open tender               2       4          1      0             1     0             3       2              1     0
b) price bid                 0       8          0      4             0     3             0       8              0     3
c) restricted tender         1       7          0      1             0     0             1       1              2     1
d) negotiations              0       4          0      1             0     1             0       2              0     1
e) direct purchase           2       19         1      22            8     29            1       35             5     25
f) municipality not                  9                 13                  9                     7                    0
      willing to
                          15                    4                    4                   3                      1
Table 3 Average costs of waste collection and refusal according to respective forms of service delivery: Slovakia

                                                                        Number of municipalities             Average yearly costs per inhabitant
Form of delivery
1. Municipal employees                                                              2                                      136,29
2. Brutto budgetary organization                                                    2                                      295,34
3. Netto budgetary organization                                                     7                                      420,36
4. Municipal limited company                                                        9                                      538,35
5. Municipal joint stock company                                                    2                                      701,35

Average for internal forms                                                         22                                      398,34

Contracting 1                                                                      11                                      351,14
Contracting 2                                                                       9                                      251,44

Contracting total                                                                  20                                      301,29
Contracting 1 – citizen pay fees only to the municipality
Contracting 2 – citizen pay fees both to municipality and to supplier
Table 6 Relative costs for different forms of delivery of local public services in Czechia – sample 2004 (in house production = 100)

                                                                   Waste collection              Public lighting
                                    Local communications

In house production                 100                            100                           100

Municipal firm                      221                            154                           164

Municipal firms selected by
competition                         172                            112                           102

Direct purchase                     141                            134                           120

Tendering                           192                            135                           116

    Source: Pavel, 2006
       CEE specific issues

• Level of market competiveness in CEE
• “Quality” of public administration
• “Quality of democracy”
• “Regulatory market”
 Level of market competiveness
        in CEE countries
• Potentially competitive markets in CEE are in
  many cases still not well developed, but
  characterized by monopolistic or oligopolistic
  structures and behavior. With this it is rather
  optimistic to expect comprehensive supply of
  competing effective bids. Under these
  circumstances the argument of possible unit
  costs savings is far more controversial than in
  developed countries, and the use of PPP has to
  be more carefully evaluated.
                “Quality” of public
• Current systems of public sector controlling/auditing use in most if
  not all CEE countries dominantly the old-fashioned administrative
  procedural type of control. New laws on financial control were
  passed by national parliaments under the pressure from Brussels,
  but in reality effective mechanism to control/audit real efficiency,
  economy and effectiveness (nor quality) of public sector institutions
  and processes are still not in place (see 2004 EC reports).
• Most of public sector organizations run old-type financial
  management schemes, based on ”pre-historical” budgetary rules,
  creating incentives to spend and not to save. Modern cost-centre,
  outcomes based financial management is more than rare (if exists),
  capital budgeting/accrual accounting methods the same. There do
  not exist tools to calculate real costs of provision of any service.
• Contract management skills of public officials are more than limited.
• Corruption.
         “Quality of democracy”
• The “quality of democracy”, comparing developed
  Western countries and CEE countries in transition,
  differs still much. Democratic institutions cannot be fully
  developed during still short period available for CEE
  countries. Citizens are not able, but many of them are
  also not willing really to control political processes in the
  country. Media and non-profit sector just start to exercise
  their crucial role in supporting of democratic processes.
• Under these circumstances the current non-responsive
  (rent-seeking) behavior of politicians is fully effective,
  exercising the simplest way to maximize individual
  benefits (see data on corruption), at least in short-term
  point of view. Voters are in this system these who loose,
  but really they are not only victims, but also accomplices.
          “Regulatory market”

• The possible success of PPP, competition and
  contracting is built also on high quality legislation
  and regulations. However, normally the only
  existing legislation in CEE countries is existing
  [too complicated] public procurement laws,
  defining just the procedure of awarding the
  contract. High quality regulations and guidelines
  are not available at all.
• The general situation of “the state of law” is not
  supportive, too. Legal side of “business
  environment” is very weak; there are real
  problems to enforce the law.

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