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					                PPP in the Czech Republic - challenge for the future?


    Author: Markéta Řežuchová, Department of Public Economics, Faculty of Economics and
                     Administration, Masaryk University, Czech Republic



Abstract:

Czech Republic is one of the countries which use Public Private Partnership as a standard
method while providing public services and infrastructure. The aim of this article is to
analyze the current situation in this field of public policy in the Czech Republic in the light of
foreign experiences and try to identify possible challenges for the Czech Republic.


Introduction

„Public-Private Partnership as a contractual agreement between a public entity (which can be
national, regional or local) and a private sector supplier. Through this agreement, the skills
and assets of each sector (public and private) are shared in delivering a service or facility for
the use of the general public. In addition to the sharing of resources, each party shares in the
risks and rewards arising from the delivery of the service and/or use of the facility. “1


PPP became an integral part of reform of public budgets in Czech Republic. PPP could be an
effective way how to bring additional financial sources to public budgets and how to realize
valuable projects in many fields. Generally, it seems to be an instrument increasing public
services quality. The entire lack of financial resources in public budgets evokes need for
reduced cost of public services. PPP can improve revenue collection, exploit private sector
management skills, provide new services and share risk with private sector.


In fact, PPP is just a different form of public procurement. It is one of several procurement
options opened to the public sector for modernizing infrastructure, with its own
characteristics, costs and benefits. It is one of a number of ways to involve the private sector
in improving public services. Of course, it should only be used where it is appropriate.


1
 Public-Private Partnership (PPP) – Policy Seminar, „Public-Private Partnerships – Future Directions“, Michael
Burnett, Project Leader, European Institute of Public Administration, December 2005


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Public Private Partnership or Private Finance Initiative, Public Sector Participation or
Participation in Infrastructure: there are many various kinds of cooperation between public
and private sector. Public private partnership projects can vary in the degree of risk allocated
between the partners, the amount of expertise required on the part of each partner to negotiate
contracts and the potential implications for ratepayers.
The number of PPP projects is increasing all around the world. The Great Britain has been the
first country, where these methods were introduced and realized many PPP project. In UK
there is a substantial number of closed projects and majority of them in operation.
PPP method is realized in transport (building roads and bridges, light rail, heavy rail, airport),
building schools, hospital, housing, prisons and other services (health, waste, water, etc.).
Great Britain is a “real pioneer”, but many other EU countries have similar experiences. For
example France is a very skilled country in using PPP methods too. There is substantial
number of closed projects in traffic analogous to UK. PPP is primarily used in traffic in EU
member countries. Many projects are procured and some projects are closed in education,
services in water systems, wastewater treatment plants, etc.


We can mention for example the road districts in Portsmouth. In this case there is a contract
between municipality and conglomerate of private firms. The aim of this contract was to shift
municipality’s responsibility for road districts to conglomerate. Partner from private sector
will provide public services for twenty five years. Related costs should be covered by the
governmental and municipal subsidies. But there are many project of PPP in other sectors as
well. There are many remarkable projects for example in education, justice, sport, water
system, etc.


Reconstruction and extension of a sport center in one of the London’s district represents one
of the largest projects in the field of sports and recreation. Financial amount of this project is
approximately 17 million pounds. Submitter signed a contract with private subject for 25
years.
Building-up a new justice area in Dublin is interesting PPP project, too. Submitter wants to
transfer all activities of courts into one facility. This object will consist of twenty-two
courtrooms, and administrative and technical facilities. The private partner has to design,
build, finance, operate service this courthouse.




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We know that there are many PPP projects in the world and many experience exist. Some of
those projects are successful and some other are not. But all of them have something
common: cooperation of public and private partner, long-term contract and so on. Each of
them is quite individual, different in risk, responsibilities, and conditions of contract and so
on.


Types of PPP

We can identify various types of PPP: Service Contracts, Concessions, BOT, DBFO, and
some others. Concessions are typical form of PPP. They are being used for huge
infrastructural projects in transportation. The roles and responsibilities of the partners may
vary from project to project. In some projects, the private sector partner will only have a
minor role, while in others, significant involvement in all aspects of service delivery is
suitable. “While the roles and responsibilities of the private sector partners may differ on
individual servicing initiatives, the overall role and responsibilities of government do not
change.” Each type of PPP has inherent strengths and weaknesses which need to be
recognized and integrated into project design. They differ in the terms of ownership, quality
of delivering public services, cost effectiveness, realization in time. It is also important
whether the project is able to supplement insufficient public finance resources.


Operations and Maintenance
- Public partner contracts with a private partner to operate and maintain a publicly owed
facility. This type of PPP can save costs and bring potential service quality and efficiency
improvements. Ownership vests with public sector.


Design-Build
- Public partner contracts with a private partner to design and build a facility that conforms to
the standards and performance requirements of the public sector. This contract can access to
private sector experience. It can bring opportunities for innovation and cost savings, it can
reduce construction time, increase risk placed on private sector.


Lease – Develop – Operate or Buy – Develop – Operate
- Private partner leases or buys a facility from the public partner. He modernizes it and
operates the facility under a contract. This type of PPP is used mostly in infrastructure and for


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other public facilities, for example roads, water systems, wastewater treatment plants,
government buildings, recreation facilities (swimming pools), etc.


Build – Transfer – Operate
- The public partner contracts with a private partner to finance and build a facility. Private
partner transfers ownership of the facility to public sector. The public partner then leases the
facility back to the private partner under a long - term leases. During this time private partner
recovers its investment and a reasonable rate of return. This type of PPP is applicated in the
similar situation in which is LDO or BDO used.


Build-Own-Operate-Transfer
- the partner obtains exclusive franchise to finance, build, operate, maintain, manage and
collect user fees for a fixed period to amortize investment. At the end of the agreed time, title
reverts to a public partner. This type of PPP is used most in infrastructure and for other public
facilities, for example roads, water systems, wastewater treatment plants, government
buildings, recreation facilities (swimming pools), etc.




Design – Build – Finance - Operate
Concessions – is a form of PPP. Works concessions are not as fully regulated as public works
contracts in Public Procurement Directives. “It is a contract similar to a standard works
contract except for the fact that the consideration for the works to be carried out consists
either solely in the right to exploit the construction or in this right together with payment.”




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Table 1: The Effectiveness of Alternative PPP structures
                    Improved      Enhanced      Enhanced    Life       Accelerated   Leveraging   Implementation
                    Service       Operational   Risk        Cycle      Implement     of Public    Constraints
                                  Efficiency    Sharing     Costing    ation         Funds
Private Outsourcing
Service Contracts    Possible     Yes           No          No         No            No           Low
Management           Yes          Yes           No          No         No            No           Moderate
Contracts
Leasing              Possible     Yes           Some        Possible   No            No           Moderate
Integrated Private Development
BOT                  Yes          Yes           Some        Yes                                   High
Private investment
DBFO Concessions Yes              Yes           Yes         Yes        Yes           Yes          Very High

Source: Guidelines for successful public-private partnership, European commission, directorate-general
regional policy, March 2003



Table 2: Public and private sectors´ function in the different type of PPP
                                                                                                   Delivering
Type of PPP     Designing        Building   Financing      Ownership     Operating    Servicing
                                                                                                    services
Contract           PUS             PUS          PUS          PUS             PUS       PRS/PUS        PRS
serveces
Leasing            PUS             PUS          PUS          PUS             PRS           PRS           PRS
BOT                PRS             PRS          PUS          PUS             PRS           PRS           PRS
DBFO               PRS             PRS          PRS          PUS             PRS           PRS           PRS
Concession         PRS             PRS          PRS        PRS than          PRS           PRS           PRS
                                                             PUS

Source: Let me introduce PPP. PPP Centrum, 2005, available at:
http://www.pppcentrum.cz/res/data/002/000400.pdf



Advantages and risks of PPP

The quality of service achieved under PPP is often better than that achieved by traditional
procurement. A core principle of any PPP is the allocation of risk to the subject, which is able
to manage it better. The allocation of design and construction responsibility to the private
sector and payments linked to the availability of a service, provides could guarantee shorter
construction timeframes. The private sector provides operational and maintenance service
provision and the private partner has strong incentives to minimize costs over the whole life
of a PPP project.
In many countries there is an urgent need for new social infrastructure (hospitals, healthcare
equipment, prisons, education facilities and so on) and thanks the PPP it could be realized
more quickly.




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Risks affect fruitfulness of PPP projects, time keeping, cost excess and quality of delivering
public services. The choice of Private Sector Partner, Revenue risk, Construction Risk,
Regulatory/contractual risk, revenue risk, environmental risk, political risk belong to the most
important risk, which must be manage.
For example: poor project definition, unknown geological conditions or loosely defined safety
specifications can have dramatic affects on capital construction costs. Potential problems can
be mitigated with the completion of careful engineering studies before a concession contract
is actually signed.


One of the advantages of PPP is risk sharing. Risk should be transferred to the party best able
to manage it in the most cost effective manner. For example legislative risk is often shared by
government, which is often best placed to control regulatory and legislative risks.
Planning risk, design and construction risk and operating risk are transferred to Contractor.
The effective allocation of risk has a direct financial impact on the project costs and will
therefore provide enhanced value for money if compared to traditional procurement methods.



PPP in the Czech Republic


PPP became part of the public budgetary reform. The main objective of the reform is to create
conditions for the long-term sustainability and stability of public budgets in the Czech
Republic. PPP can carry losing finance in public budgets and help to realize value for
example infrastructural projects.


The PPP phenomenon has developed in many European and overseas countries. But it is
problem to applicate all the foreign experience in the Czech Republic’s conditions. We cannot
accept all methods used in the countries with different legal rules and different historical
background. We know that the cooperation between the public and private sectors can offer
economic benefits, carry out projects providing value for money. On the basis of our
experience it is necessary to evaluate each project to determine whether the PPP approach or a
more traditional contract should be used in order to get the added value.




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Legal framework


There is no special definition and no special modification of PPP in European Union, but in
this time there is a strong endeavor for some change. European commission expressed an
opinion that PPP is just a special form of public procurement. Commission also edited “Green
Paper on Public-Private Partnerships and community law on public contracts and
concessions”. In this document PPP is defined like a “long-term contract with quite difficult
financing, important economical role of entrepreneur and risk sharing”.


In some EU countries exists special “PPP law” and in some of them doesn’t. In such case, the
PPP can be for example implemented into some other law (like Public procurement law, etc.).
Special laws exist especially in Eastern European countries.
Up to now, Czech legal environment hasn’t been very favorable for PPPs yet. However, the
projects initiation could be already realized. In any case, changes in appropriate legislation
had to be enforced, especially in Public Procurement Act, Public Property, Budgetary
Rules as well as a new Concessions Act, which is being drafted at the moment. PPP Center
cooperated with the Ministry for Regional Development and the Ministry of Finance on
implementation of the PPP related legislation.


European commission appealed to Czech Republic to change its legislation, especially the
Public Procurement Act and Concessions Act. Czech government passed a new law
governing Concession Contracts and Concession Proceedings (Concessions Act).
The aim of this act is preparing conditions for PPP projects’ realization in Czech Republic.


Institutional framework of PPP


In most EU countries some “PPP Unit” exists or it is in progress. The same situation is in
Czech Republic. Comprehensive legislation is drafted in some countries of EU or exist some
sector specific legislation in place. But some of them have no PPP law, for example UK,
Denmark and so on.


Ministry of finance and PPP Centrum
In the Czech Republic the model of institutional setting has been discussed with World Bank
and the European Bank for Reconstruction and Development. It means that we really tried to


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use international experience. The Department for Regulation of PPP projects and the PPP
Center have been set up to manage the PPP implementation. PPP Center was founded by the
government and Ministry of finance in July 2004. PPP Centrum is Joint Stock Company and
its objective is PPP projects implementation, preparing the implementation of PPP programs
into the sectors, in which pilot PPP projects are in progress and creating the methodology of
PPP project generally. PPP Centrum serves like support for public sector. It was elaborated
“Code of operating PPP projects”, “Risk management of PPP”, “Ethics code for PPP projects”
and in this time PPP Centrum is preparing a handbook which will survey PPP process in the
whole.

PPP Association Proclamation

In accord with the intentions of Czech government and the core of PPP projects, assuming
the public and private sectors partnerships, the Association for the support of public and
private sector was established in the Czech Republic in 2004 (thereinafter “PPP
Association”), under the terms stipulated by Act No. 83/1990 Coll. on citizens associating
as the association of natural and juristic persons, active in the area of investments and
services supplied for the public sector, in its effective version. The main aims of PPP
Association are the support and development of investments and services by means of PPP
in the Czech Republic. PPP Association will actively participate in forming the conditions
and rules, helping to achieve transparent principles of these kinds of investments and
services. It will also advance protection of good morals and strengthening of general
confidence in effective forms of the public and private sector co-operation. For this purpose
and in accord with generally binding legal rules, PPP Association directives and methodical
EU strategies, PPP Association will help its members and the public sector to create a file
of rules, principles and steps directed at the successful implementation of the PPP projects.

Pilot PPP projects – the first phase of application PPP


The commencement of preparation of these pilot PPP project was approved by Government
last year. The overall objective of these projects is to provide necessary infrastructure while
fully exploring the benefits of Public Private Partnerships. Three pilot PPP projects were
passed in the first season of PPP application in the Czech Republic.




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Preliminary PPP pilot projects description


1) Central military hospital
The DBFO project involves the provision of hotel-type accommodation with a flexible
capacity of approximately 250 to 300 beds, including selected auxiliary services, a restaurant
and a parking area in the grounds Central Military Hospital. The realization of the project is a
top priority as its completion is necessary for the provision of one-day surgery not requiring
in-patient treatment, and should provide accommodation for non-Prague patients for one or
several days. The estimated capital value of the project is EUR 15 million.


2) State Prison and Justice Areas
Among the Ministry of Justice’s pilot PPP projects are a new prison with capacity for 500
inmates and court buildings in Usti nad Labem and Karlovy Vary. The Project Board
anticipates responses from consortia comprising financial, technical and legal advisers with
practical experience of PPP project preparation. The main selection criteria were defined in
order to evaluate the quality and level of experience of individual members of the proposed
teams. The Czech Ministry of Justice, in co-operation with the PPP Centrum, has taken the
first step in the implementation of pilot PPP projects in the Czech Republic and believes that
it has gained experience which can be shared with other procuring authorities.


The prison project involves the provision of infrastructure and related services in respect of a
prison with capacity for 500 inmates with the following allocation of activities: the private
partner will design, build, finance and operate the prison for a defined period of time. The
Prison Service will determine the service specifications and provide for the guarding of
inmates. The estimated capital value of the project is EUR 37 million. The courts project
involves the provision of infrastructure and other auxiliary services with the following
allocation of activities: the private partner will design, build, finance and operate the buildings
for a defined period of time. The estimated total capital value is EUR 27 million.




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Table 3: Pilot Projects in a Preparation Phase

Title           Description of         Public        Sector              Costs             Type of PPP   Period
                Project                Sponsor
Central         Construction,          Central       Accommodation       15,6 mil EUR      DBFO          20 – 30 years
military        maintenance and        military
hospital        operation of a         hospital
                hotel-type lodging     Prague
                house and a parking
                site in the Central
                Military Hospital in
                Prague
Guarded         Construction,          Ministry of   Accommodation - 39 mil EUR            DBFO/BOT      25 – 30 years
Prison          maintenance and        Justice       prisons
                operation of a new
                guarded prison with
                the capacity of 500
                inmates that will
                meet European
                standards.
Justice areas   construction,          Ministry of   Accommodation       Not set a price   DBFO/BOT      25 –30 years
                service, and           Justice       capacity - courts
                operate two
                facilities
Source: http://www.pppcentrum.cz/index.php?lang=en&cmd=page&id=1152

Pilot Projects in an Inception Phase


1) Sport Centrum Ponava
To build a modern, well maintained and accessible sports, cultural and leisure centre where
top-class sportsand cultural events will take place, but which will also be partly used by the
general public. At the same time the aim of the project is to regenerate the brownfield site of
Ponava. The estimated capital value of the projectis EUR 67 million. A partner from the
private sector will design, build, finance, maintain and operate the infrastructure.




2) Hospital
DBFO of a new building providing extension of health service operation capacity and a new
car parking facility in NNH. The project involves construction and maintenance (hard facility
services only) of a new-built seven floor building in which a health care service would be
provided (flooring approximately 6 500 m2) and a new-built car parking facility with 300
slots. The estimated capital value of the project is EUR 21 million. NNH provides high
quality specialized care and specializes in acute care medicine focused on Neurology,
Cardiology and General Medical Care Program. The Project should be a pilot project to
introduce PPP into Czech health sector and from Czech MoH perspective it shall prove PPP
projects can be successfully delivered.


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3) Motorway D3
Construction, finance and maintenance (BOT) of a four-lane motorway D3 of the D26,5/120
category between Tabor and Bosilec (D307 and D308) with the total length of 30km. The
estimated capital value of this pilot project is EUR 370 million. The planned length of the D3
motorway is 171 km in total, of which 8 km are already in full use, 18 km are in limited use
and 145 km are being prepared for construction. Other sections of D3 might follow as DBFO
projects later.
Table 4: Pilot Projects in an Inception Phase

Title         Description of        Submitter     Sector        Costs          Type of        Period    Stadium
              Project                                                          PPP
Sports-       Build, modern sport   Local         Sports-       71 mil euro    DBFO           -        Public
Leisure       – cultural and        government    Leisure                                              Procurement for
centre        relaxation centre                                                                        advisors
Ponava in                                                                                              selection for
Brno                                                                                                   Phase I. was
                                                                                                       approved by the
                                                                                                       Steering
                                                                                                       Committee and
                                                                                                       Brno City
                                                                                                       Council on 23rd
                                                                                                       March 2006
Hospital      Design, build,         Hospital     Accommodat    22 mil euro    DBFO           15 – 20 Preparation and
“na           financing and                       ion- Health                                 years    realization of the
Homolce”      operating facility for                                                                   PPP project was
              granting healthcare +                                                                    approved by the
              subterranean parking                                                                     Ministry of
              ( 300 parking places)                                                                    Health, Ministry
                                                                                                       of Finance and
                                                                                                       PPP Centrum
Sections of   Build, servicing,     Transport     Transport-    390 mil euro   BOT            30 years Preparation and
D3            and operating         Department    Roads                                       +6       realization of the
Motorway      highroad , stage                                                                years    PPP project was
              length 30 km                                                                    for      approved by the
                                                                                              building Czech
                                                                                                       Government reso
                                                                                                       lution
                                                                                                       No.1017/ 17 Aug
                                                                                                       ust 2005
AirCon      Transport               Transport     Transport-    532 – 639      BOT /          30 – 40 Preparation and
(Airport    Modernization and       Department    Railways      mil euro       DBFO and       years    realization of the
Connection) connection with                                                    contract for            PPP project was
            airport                                                            operating               approved by the
                                                                                                       Czech
                                                                                                       Government
                                                                                                       resolution No.
                                                                                                       76 / 19 January
                                                                                                       2005
Source: http://www.pppcentrum.cz/index.php?lang=en&cmd=page&id=1152

Note: costs, type of PPP and period are assumed




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Conclusion


The need for public-private partnerships is going to grow much more in the future. In the
Czech Republic there is an urgent need for new social and transfer infrastructure but the
current financial resources in public budgets are not sufficient. PPP arrangements are growing
in use and acceptance as an alternative and effective method to mobilize additional financial
resources and benefits from private sector efficiencies, but it should be used only if they
provide better value for money than traditional methods. PPP is a sophisticated method of
procurement, and quality control needs to be at the heart of government planning. As PPP is a
developing concept the first stage must be to create a supporting institutional structure. In
Czech Republic there is PPP Centrum, which cooperate with the Department of Finance
Ministry and they are able to develop, guide and manage PPPs on behalf of the public sector.
That one, who want to used PPP method to provide public services must know what are the
capacities needed, what infrastructure – services are needed, what is the private sector
interest, what are the risks and who takes them, what are the costs and benefits and what type
of PPP is suitable. PPP is a challenge especially for the local governments.




Bibliography:

Public-Private Partnership (PPP) – Policy Seminar, „Public-Private Partnerships – Future
Directions“, Michael Burnett, Project Leader, European Institute of Public Administration,
December 2005

The 5 th Annual Public Private Partnerships Global Summit, Hilton Prague, The Czech
Republic, 2004

Report to congress on Public-Private Partnerships, United States Department of
Transportation, 2004, http://fhwa.dot.gov/reports/pppdec2004


Resource Book of PPP Case Studies, European Commission, Directorate-General Regional
Policy, 2004, http://www.pppcentrum.cz/res/data/001/000228.pdf

Let me introduce PPP,PPP Centrum, 2005, available at:
http://www.pppcentrum.cz/res/data/002/000400.pdf

http://www.mcaws.gov.bc.ca/lgd/pol_research/MAR/PPP/pppl.html
http://www.pppcentrum.cz



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http://www.mfcr.cz
http://www.asociaceppp.cz




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