REPORT on the operations of the Interministerial PPP Committee

MINISTRY OF TRANSPORT, TELECOMMUNICATION AND ENERGY REPORT on the operations of the Interministerial PPP Committee in 2008 CONTENTS 1. 2. 3. 4. 5. 6. The structure of PPP .....................................................................................2 The Interministerial PPP Committee and its duties........................................3 Inadequacies of the procedures for PPP-type projects..................................6 PPP projects in Hungary................................................................................7 PPP-type projects to be implemented in 2009 ...............................................9 Topics of the meetings of the Interministerial PPP Committee held in 2008 10 June 2009 Interministerial PPP Committee 1/11 1. The structure of PPP “Public Private Partnership” (PPP), i.e. the partnership of the public sector and the private sector, is a form of co-operation of the state and the private sector in which the parties jointly bear the responsibility and risk in the provision of public service. PPP is thus more than merely a form of funding: it is a long-term, contractual business agreement with mutual advantages. In the PPP model the state orders the provision of a public service in the long term, typically between 20 and 30 years, from the private sector. The private enterprise is responsible for planning, constructing and operating the infrastructure, and, at least in part, funding the project, while the state (and/or the actual user of the service) pays a service fee in proportion with use for its utilisation. The most frequent areas of application for the PPP structure are road and railway infrastructure (roads, bridges, tunnels, railway lines); utility and environmental protection (sewerage, water treatment) projects; stadiums, sports halls, other sports facilities; governmental and other official buildings; projects related to penal institutions; defence projects (training and logistics centres, airfields); health projects; public education, cultural projects (schools, dormitories, museums, congress centres). The number of investments and innovation projects employing the PPP model has grown worldwide because PPP offers a solution to the provision of duties with a public purpose by making the provision of the public duty more efficient and realising a development while not increasing the national debt (the budget deficit only grows by the service fee payable in the given year); through the involvement of the private sector the project and service can be more efficiently implemented than as a state project or assignment; the state’s risk (provided the contract is well executed) can be reduced, and the state pays a fee in proportion with the use (quality, quantity) of the service, thus making expected expenditures plannable. - Interministerial PPP Committee 2/11 Besides the advantages outlined above, the use of PPP conceals risks as well, usually due to inappropriate preparation or implementation: if a project is defined inappropriately, the Statistical Office of the European Union (Eurostat) may reclassify the project and thus it becomes a factor increasing the immediate budget deficit (according to ESA 95 the project is deemed hidden state borrowing and the full amount of the project appears among government expenditures); due to the lack of PPP specific professional experience during public procurement, the assertion of the state interest is not sufficiently strong, thus in the final analysis the state pays more than necessary or implementation will not be more efficient than if it were a state project; due to the imprecise definition and sharing of the risks, the state shoulders greater risks than necessary, and due to the lack of monitoring, the divergence from the optimal solution for the state is not noticed or corrected, or is only noticed or corrected slowly. - - To exploit the advantages and minimize the risks, it is important that the regulations and requirements relevant to PPPs and the professional experiences with PPPs are continually and quickly communicated within public administration and to the local government sector. 2. The Interministerial PPP Committee and its duties PPP (Public Private Partnership) is the co-operation of the private and public sectors in strategic development and in the provision of services. The remit of the Interministerial PPP Committee (IMPPPC, Committee), established by the Government in the middle of 2003 by Government Decision 2098/2003 (V. 29.), mainly covers developing the requisite legal environment and procedures for the implementation of PPP projects. Today the duties and composition of the Committee are regulated by Government Decision 2028/2007 (II. 28.) on the application of new forms of development and service co-operation between the public and private sectors (PPP) and Government Decree 24/2007 (II. 28.) on the rules of long-term commitments. The Interministerial PPP Committee has seven members, comprising representatives of the Ministry of Transport, Telecommunication and Energy, and the Ministry for National Development and Economy, as the legal successors of the Ministry of Economy and Transport, the Ministry of Finance, the Ministry of Justice and Law Enforcement, the Prime Minister’s Office, the Central Statistical Office and the National Development Agency. The chairman of the Committee is Interministerial PPP Committee 3/11 the minister of transport, telecommunication and energy, whose duties chairing the Committee are performed by the state secretary responsible for transport at the Ministry of Transport, Telecommunication and Energy. The members, Secretariat and chairman of the IMPPPC (Interministerial PPP Committee) perform their duties without separate remuneration alongside the duties concomitant with their other positions and professional assignments. Today the most important role of the Committee is to give preliminary opinions on government projects intended to be implemented in PPP, monitoring already functioning government projects, and developing the methodological and legal background. 2.1. Preliminary opinion According to the effective provisions, the principal task of the Committee is to give an opinion on projects to be implemented in PPP accepted by the government – featured in the Priority Ranking of Long-term Developments defined in Government Decree 24/2007 (II.28.) on the rules of long-term commitments – before the proposals for actual realisation are submitted to the government or parliament, primarily from the aspect of whether the planned PPP implementation is likely to be really the most effective means of finance. The Committee performs this function in two ways: 1. by adopting a position in principle based on brief introductory material about the project regarding the expedience of the application of the PPP scheme and its proposed method; it is, however, the proposing project manager’s responsibility to interpret the position and act thereon accordingly; 2. by expressing an expert opinion based on the documents submitted (contracts, proposals, detailed calculations) as to which points of the planned project in the PPP scheme contain risks for the state and how these may be handled. The audits currently being conducted by the State Audit Office of Hungary (SAO) and Eurostat from time to time confirm inadequacies in the projects that have been indicated by the IMPPPC but not remedied. The main reason for these is that the projects are presented to the Committee for an opinion at such an advanced stage of preparation (e.g. the financing scheme has already been assembled) that the Committee has little possibility of making significant changes. (In view of the fact that the Committee only has an opinion-giving role and has no room for manoeuvre in enforcing the handling of problems revealed.) If project managers turned to the IMPPPC at an earlier stage of preparation Interministerial PPP Committee 4/11 (before the financing scheme is assembled), this could better guarantee an increase in the effectiveness of the projects to be implemented. Projects continue to regularly come before the Committee for an opinion for which the body preparing the decision or the Government prescribes the obligation of preliminary consultation with the IMPPPC, using the Committee as a form of first professional screening. At the same time, inasmuch as the Government and decision makers continue to require this preliminary “professional screening” to be used in the near future, strengthening the Committee’s professional background is indispensable. A solution may be to set up a PPP expert knowledge centre co-operating in preparation which can indicate the problems and potential solutions still in the course of preparatory work. In this regard the Committee examined the models of the British Partnership UK and the Spanish PPP Government Consultation Centre, which in the long term may be used in Hungary as well. Strengthening the Secretariat of the Committee with experts may provide a shorter term solution. 2.2. Monitoring operating projects In the course of 2008 the IMPPPC drew up a monitoring plan based on the NAO methodology, established the order for monitoring projects, and conducted the first examinations of the National Office for Sport (NOS) projects, the prison projects and the Debrecen University project of the Ministry of Education and Culture (MEC). The opinions formed in the course of the examinations were made known to the submitters in the form of an IMPPPC report or recommendation. (The Committee informs project managers of the result of the monitoring by letter, asking them to deal with the problems.) The Interministerial PPP Committee (as an interdepartmental working party) does not have the authority to ensure the handling of inadequacies revealed in the course of monitoring and has no means at its disposal of influencing the method or level at which state interests are realised in operating projects. The Committee advises the body responsible for the project of problems revealed but has no competence to examine whether its proposals have been implemented or not. The Committee uses the statements and proposals contained in the audit reports of the State Audit Office of Hungary in the course of its monitoring activity. Problems revealed typically are preparation: deficiencies in the PSC calculation, lack of comparative data, failure to price risks, exaggeratedly high construction and operating costs; Interministerial PPP Committee 5/11 - construction: problems obtaining permits, changes in the state’s order make the construction risks undertaken difficult to follow, implementation of additional investments, functions not linked to the provision of the public duty; operation: transfer of operation to a third party, low rate of use for public purposes, revenue from charges for non-public use being due to the private partner only, no real sanctions regarding operation, operational risk assumed by the governmental (local governmental) party. - Performing inspections and ensuring the handling of problems revealed are indispensable in order to a) ensure that state interests and the assumption of risk by the private partner are asserted in the long term and that payments made to the service provider are proportionate with real performance; b) avoid potential reclassification in accordance with ESA 95 (although the individual size of the majority of projects is small but in case of recurrent errors reclassification is probable for the whole programme package). To deal with the problems described above, appropriate expert resources need to be provided for the IMPPPC and it is important that the governmental organs concerned take note of the Committee’s proposals. Furthermore, within the scope of other governmental organisations, ensuring the inspection of the finances and efficiency of PPP-type contracts at a heightened level, and making the eradication of inadequacies compulsory are necessary. The IMPPPC as an interdepartmental working party has no authority under public law to perform tasks relating to the inspection of the full project or to make follow-up inspections. 3. Inadequacies of the procedures for PPP-type projects Based on the Committee’s experiences, the procedures for PPP projects are wrestling with the problems below: a) The communication of government strategy related to PPP projects intended to be implemented in the future towards project managers is not solved and in consequence of this countless project plans are under elaboration which are likely to result in no commitment being undertaken. Such projects are submitted and proposed at various decision-making forums and frequently are submitted for an opinion to the IMPPPC. This preliminary opinion – despite the fact that it does not satisfy the requirements of the procedures – is sometimes used by project managers as an opinion preceding undertaking Interministerial PPP Committee 6/11 the commitment, which is incorporated into the proposal relating to the commitment, thereby avoiding the effective procedures. b) The process of compiling the priority ranking and the method of announcing its elements are prescribed by the Government Decree to this end. However, implementation in practice diverges from this significantly. For this reason achieving consistency between the current practice and the law is absolutely necessary. (If it is laid down that, contrary to the earlier concept, the priority ranking is not a system based on applications building from below but a governmental commitment in principle decided from above in the knowledge of the development policy goals and the resources, it is not necessary to devote further capacities to devising a methodology for project applications and preliminary project plans.) 4. PPP projects in Hungary At the end of February 2009 the following can be regarded as operating PPP projects or PPP projects being implemented in Hungary: the Palace of Arts (MEC), 1st-3rd sections of the M5 motorway and 1st-3rd phases of the M6 motorway (Ministry of Economy and Transport (MET)/Ministry of Transport, Telecommunication and Energy (MTTE)), the Hungarian Prison Service’s prisons in Tiszalök and Szombathely (Ministry of Justice and Law Enforcement (MoJ)), the reconstruction of 37 dormitories (MEC), and 16 gymnasiums, 17 teaching swimming pools and the Sports Hall project in Kiskunfélegyháza (Ministry of Local Government and Regional Development, MLG)) (a total of 104 projects). Information on the payment of annual charges related to PPP projects is summarised below: Name 2008 “Sport XXI” gymnasiums, teaching swimming pools, sports hall Szombathely prison Tiszalök prison M5 Budapest - Röszke 1 363.9 2 671.0 1 639.0 2009 1 430.0 2 240.0 2 261.0 Annual charges (HUF million) 2010 1 699.0 2 307.0 2 329.0 2011 1 796.0 2 372.0 2 394.0 2012 1 849.0 2 438.0 2 461.0 2013 1 899.0 2 506.3 2 529.9 2025 2022 2023 Contract expires 39 091.6 40 331.3 40 436.3 40 484.0 40 531.1 40 557.2 2031 M6 1st section érdi tetı - Dunaújváros 13 984.3 14 247.1 14 506.2 14 704.6 14 869.4 15 555.6 2026 M6 3rd section Szekszárd-Bóly, M60 BólyPécs 0.0 0.0 13 761.1 23 967.6 24 379.1 24 535.9 2038 Palace of Arts 9 152.0 9 472.0 9 757.0 10 000.0 10 150.0 10 434.2 Universitas 4 899.0 6 048.0 6 061.0 6 076.0 6 091.0 6 112.2 2023-2028 Operating PPP 72 800.8 76 029.4 90 856.6 101 794.2 102 768.7 104 130.3 Source: Ministry of Finance Long-term Commitment records as on 21 February 2009 7/11 Interministerial PPP Committee The operating PPP projects made up about 46% of the Long-term Commitment Fund at the beginning of 2009. Motorway projects represent the largest share in terms of both investment value and obligation to pay charges. The Universitas Framework Programme of the MEC and the Sport XXI Framework Programme of the MLG contain a large number of PPP projects (23 and 37, respectively), but they are of low value. 4.1. General evaluation of PPP projects In Hungary due to the scarcity of budgetary resources a PPP financing scheme may represent the only possibility of realising certain projects. At the same time, due to this – if this is the primary reason – efficiency requirements in accordance with international methodology are not always enforced in the practical implementation of projects. Based on the analysis of already realised PPP projects, the experience is that when providing domestic public services by PPP projects the above efficiency can be ensured with large investments. With smaller scale projects (e.g. NOS and MEC projects) implemented as packages, the IMPPPC places special emphasis on the examination of model projects as well as the existence of programme level and individual PSC/PPP analyses as several earlier examinations have established that the lack of model projects, the small project size, the low competition during requests for tenders, and the lack or inappropriate elaboration of the PSC/PPP calculation can jeopardize the success of projects and make projects relatively expensive. Regarding implementation in the PPP scheme, experience shows that the advantage appears in abiding by construction deadlines, the application of energy saving technical solutions and, due to this, lower specific operating costs than those of traditionally operated dormitories compared to other forms of financing. Experiences of large projects – typically motorway constructions – confirm that due to the restricted budgetary resources available the application of alternative forms of funding – such as the involvement of private capital and establishing long-term partnership agreements – primarily becomes necessary in projects with such a large capital requirement. It is important to point out that the experience gained in connection with motorway projects is well integrated into the preparatory work of the next similar project, thus serving as practical evidence for the importance of model projects. Interministerial PPP Committee 8/11 5. PPP-type projects to be implemented in 2009 At the beginning of 2007, Government Decree 24/2007 (II. 28.) on the rules of long-term commitments, initiated by the Ministry of Finance and drafted with the support of the IMPPPC, was promulgated. At the moment this statutory instrument and the Act on Public Finance together contain the procedures for commitments related to PPP-type projects. PPP-type projects are recorded and analysed within long-term public commitments. New PPP projects or programmes can only be undertaken with Government approval. The Government – or, in the case stipulated in the Act on Public Finance, Parliament – grants the final governmental approval for the start of the public procurement procedure with the proviso that no material element may be subsequently altered (or only by a new decision). The amount of the payment fund in a specific budgetary year is fixed by the Budget Act for that year, and its maximum value is 3% of the total amount of revenues. The limit for 2009 is HUF 249 billion. In addition to existing commitments (listed and described in earlier IMPPPC reports), new long-term commitments may only be assumed to the debit of the free fund limit whose value is determined by the Ministry of Finance based on the Hungarian State Treasury’s records. Project managers may apply for the annual free fund in accordance with the Priority Ranking approved by the Government. Government decree 24/2007 (II.28.) on the rules of long-term commitments makes provision for establishing the Priority Ranking and allocates the duty of drafting a proposal about this to the minister responsible for development, development planning and programming. Government decision 1085/2008 (XII.20.) on the first three elements of the Priority Ranking, which came into force on 1 January 2009, names the first three elements of the Ranking pursuant to Government Decree 24/2007 (II. 28.), § 2, which are three motorway projects under preparation: Project Estimated maximum annual charge (HUF million) 15 927 13 528 3 491 Operational period 2011-2039 2012-2040 2013-2038 1. 2. 3. M3 high-speed road NyíregyházaVásárosnamény section M44 high-speed road TiszakürtKondoros section M60 high-speed road upgradable to motorway Pécs South junctionSzentlırinc section Interministerial PPP Committee 9/11 6. Topics of the meetings of the Interministerial PPP Committee held in 2008 Date of meeting 10.01.2008 Items on agenda Operational issues PPP’s domestic legal framework (EBRD co-operation) Preparation of Franco-Hungarian (National Development Agency) PPP conference Ranking of long-term commitments (Priority Ranking) M6 motorway contract – Central Statistical Office monitoring PPP Guidelines Creation of interministerial fund for the professional support of the IMPPPC State Audit Office of Hungary discussion on PPP public procurement experiences State Audit Office of Hungary preliminary discussion National Office for Sport projects Chairman’s annual review (Balázs Felsmann) Presentation of ESS (European Spallation Source) project EPPPC presentation about DG TREN PPP discussions 2007 annual report of the IMPPPC Close of NOS/MLG project contract conclusion phase (first monitoring) Report on completion of building phase of MoJ prison projects (second monitoring) Presentation of interministerial committee preparing the concessionary projects of the Ministry of Environment and Water Forming legal working party Amendment of IMPPPC rules Forming IMPPPC 2008 monitoring plan concept Report on priority ranking Debate on State Audit Office of Hungary report on public procurements Participation in preparation of “Perfect Local Government PPP conference” Project report on National Museum underground garage Operational changes originating from organisational changes Acceptance of the order of the 2008 project monitoring Project report on National Museum underground garage (progress) Consultation on the Perfect Local Government Conference 24.01.2008 31.01.2008 07.02.2008 13.03.2008 10.04.2008 08.05.2008 Interministerial PPP Committee 10/11 02.06.2008 23.07.2008 M3 Nyíregyháza-Vásárosnamény section PPP projects planned by MEC 2008 2nd half year (3 programme packages) Consultation on monitoring questionnaire M3 Nyíregyháza-Vásárosnamény section Opinion on proposal by Parliament M3 Nyíregyháza-Vásárosnamény section PPP projects planned by MEC 2008 2nd half year (questions, schedule) Report on priority ranking SAO Sport XXI Programme 1st section audit Opinion on National Dormitory Public Foundation project documentation Consultation on request for new data for the ranking and the LTC fund Report on the SAO Sport XXI Programme audit Debrecen University project first monitoring National Dormitory Public Foundation project questions about the PSC calculation Strategic questions concerning the future of the IMPPPC/ministerial letter Debrecen University project second monitoring Consultation on request for new data for the ranking and the LTC fund Strategic questions concerning the future of the IMPPPC Preparation for the chairman’s meeting in December 2008 Chairman’s meeting - report on the IMPPPC’s activity and results - legal environment of long-term commitments - practical experiences and development options - agreements for elaborating the action plan 29.08.2008 20.09.2008 17.10.2008 29.10.2008 03.12.2008 12.12.2008 Interministerial PPP Committee 11/11