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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: Eurotunnel EU PPP cases General Issues • The examination of case studies enables the confirmation of a number of key principles governing PPP development and application. • 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 requirements. • 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 recovery. Risks • 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. Lessons • 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 parameters. 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. Mülheimer Entsorgungsgesellschaft mbH, Germany • 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 evaluation). Local Airport Kassel-Calden, Germany • 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 Netherlands • 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 missing. • 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), UK • 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 systems. • 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 committed. Delivery of local services: CZE and SVK • The structure of forms of delivery of selected local public services. • The decision-making processes, concerning selection of the form of delivery. • 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 Local used Waste Public green Public lighting communicati Cemeteries ons 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 provide information 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 countries • “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 administration • 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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