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									Public sector implications as
a condition for PPP success

Twinning project
Public Agency for Rail Transport
of Republic Slovenia

                                   Daniel Loschacoff
                                    19 January 2005
Ø       Dealing with 8 major constraints:

    –     The public sector decision making process
    –     Public sector culture and lack of quality of public procurement
    –     The private sector counterpart
    –     Lack of inside in the true costs of public works/investments
    –     Public sector segregated funding for capex and opex
    –     VfM proof: PPC and PSC
    –     Budget restrictions
    –     Transaction costs

Ø       Conclusions
Typical PPP project areas are:

•   Road & Rail infrastructure (big majority)
•   (Waste) water treatment (& solid waste)
•   Accommodation
•   Education
•   Health
•   Custodial services
•   Defence
    What sectors are best ? (I)
→ Evaluation based on contracting theory

Ø Conventional provision is good if the quality of the
  investment can be well specified, whereas the quality
  of the service cannot be
Ø PPP is good if the quality of the service can be well
  specified in the initial contract, whereas the quality of
  the investment cannot be

Source: Contracting model of Oliver Hart, Harvard University 2003
 What sectors are best ? (II)

→Evaluation based on VfM (PSC)

üHSL (High Speed Railway) 5%
üA59 (motorway) 15%
üAHR Delfland (waste water treatment)
What sectors are best ? (III)

 “if complete contracts can be
 written, if transaction costs are
    low, and there is plenty of

   Source: Tim Jenkinson, Oxford University 2003
What progress is made in
dealing with constraints ?
  Why are there so few PPP-
    projects signed yet?
   The public sector decision
        making process
 Get your house in order before inviting
 the private sector

èPublic-public agreements manual
Traditional public sector culture…

ü Top-down change instigated by the Cabinet to
  focus more on policy development, professional
  procurement and control of agreed service
  quality levels (output instead of input)
ü It means back to core business and has huge
  organisational impact on traditional “everything in
  -house” departments such as Ministry of
  Transport, State Buildings Agency and MoD
 … and the lack of innovative
  procurement knowledge
üBottom-up approach to develop
 innovative procurement and control skills
üThe PPP Knowledge Centre and
 departmental PPP-centres lead in
 knowledge dissemination on the PPP-
 process, procurement quality
 improvement, monitoring, etc.
  Development of private sector
  It takes two to tango

Ø Regular dialogue of Ministers of Finance, Economical
  Affairs and Transport with representatives of the
  private sector
Ø Dutch banks and construction companies are very
  international and bid on other European PPP-projects
  as well
Ø Emphasis is now focussed on smaller companies
  (such as in facility management) for which PPP could
  be an opportunity to develop new business
  What are we currently paying ?

Ø No cost recording
Ø No benchmarking
Ø Hidden costs
Ø Huge risk exposure/maintenance backlog
Ø No relation to performance

èPut it on the political agenda
Results from Prof. Flyvbjerg’s research
Underestimating Costs in Public Works Projects, Error or Lie?
(APA Journal, Summer 2002)

• In 9 out of 10 transportation infrastructure projects,
  costs are underestimated
• For rail projects, actual costs are on average 45%
  higher than estimated costs
• Cost estimation exists across 20 nations and 5
  continents; it appears to be a global phenomenon
• Cost underestimation has not decreased over the
  past 70 years. No learning that would improve cost
  estimate accuracy seems to take place
• Cost underestimation cannot be explained by error
  and seems tot be best explained by strategic
  misrepresentation, i.e. lying
Segregated funding for Capex
         and Opex
                 School example:
      Initial investment (Capex) from the
   Operating cost (Opex) from the Ministry of

  èDecentralise accommodation responsibility
                to the schools
Public procurement unless…

→The approach is VfM-driven: but how to
 measure this ?
→Two financial comparators (and manuals)
 were developed:
  Ø Public Private Comparator (PPC)
  Ø Public Sector Comparator (PSC)

 The Netherlands Court of Audit is carefully
 monitoring the PPC & PSC reports
State budgeting system
    (Cash system)
focus on initial investments and ignores
project life cycle costs and risk valuation
            Leading to:

→Selection of bad projects
→Distortion in the comparison public-PPP
→Sub-optimal investments (HSL
 superstructure versus substructure)
      Policy implications (I)

èAn accrual accounting system (for
 investments) could change the current
 cash system.
       Policy implications (II)
Ø Currently, all public investments are considered
  financial leases and effect the EMU balance at the
  time of investment

Ø Through well structured PPP-contracts real risks are
  transferred to the private sector, Eurostat will treat
  these investments as operational leases whereby the
  EMU impact is spread over the project duration (and
  based on actual performance payments)

èEurostat was convinced to treat the HSL-South super
 structure as an operational lease
         High transaction costs
Ø 1st phase: Pilot projects suffer because of typical high PPP
  transaction costs

è The PPP-facility

Ø 2nd phase: Search ways to reduce transaction costs:

è Three programs running for manuals on standardisation of PPP-
  projects in Roads, (Waste) water treatment and Schools.
  They include the contract, output spec’s, adviser procurement,
  bidding process and monitoring system

è Bundling entire projects or bundling financing of schools and of
  waste water treatment plants is being analysed

PPP’s can only flourish if you are willing
  to look at current distorting factors.

If you do, you will deliver better policies,
     sometimes even without a PPP

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