Professional Documents
Culture Documents
DIRECTORATE-GENERAL
REGIONAL POLICY
MARCH 2003
Guidelines for Successful Public – Private Partnerships
DG Marché intérieur
DG Concurrence
DG Transport & Energie
DG Office de Coopération EUROPEAID
EIB
EBRD
et tient compte des résultats du Séminaire qui a réuni 100 opérateurs nationaux de 18 pays à
Bruxelles le 4 juillet 2002.
Disclaimer : These Guidelines are funded by the European Commission. They are the result of
independent review and do not necessarily reflect the views and opinions of the European Commission
nor attempt to define current or future policy.
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Guidelines for Successful Public – Private Partnerships
Preface
Dans ce cadre, les interventions des Fonds communautaires doivent, dans la mesure du possible,
jouer un rôle de levier en attirant les investissements et le savoir-faire du secteur privé.
L’intégration territoriale des pays candidats à l’Union européenne est marquée par des besoins
accrus en équipements publics, notamment d’infrastructures dans les domaines des transports et
de l’environnement (eau et déchets solides). La réalisation de ces infrastructures est indispensable
afin d’assurer un développement économique durable des pays candidats à l’adhésion. Leur
financement est, et restera l’une des priorités de la politique régionale de l’Union européenne.
Déjà utilisé dans le contexte actuel d’ISPA, le PPP est appelé à jouer un rôle important dans les
nouveaux Etats membres.
Conscient des difficultés à associer le secteur privé, tout en assurant une bonne application des
directives européennes en matière de marchés publics et d’aides d’Etat, j’ai demandé à mes
services de préparer un guide «Guidelines for Successful Public-Private-Partnerships» qui
devrait faciliter l’analyse des risques inhérents à ces types de financement ainsi que les
négociations entre les autorités publiques et le secteur privé.
J’espère que ce guide sera utile pour tous les opérateurs publics et privés des Etats membres
actuels et futurs.
Michel Barnier
Commissaire européen responsable de la politique régionale
et de la réforme des institutions
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Guidelines for Successful Public – Private Partnerships
EUROPEAN COMMISSION
DIRECTORATE-GENERAL
REGIONAL POLICY
Introduction
Recent years have seen a marked increase in cooperation between the public and private sectors
for the development and operation of infrastructure for a wide range of economic activities. Such
Public-Private Partnerships (PPP) arrangements were driven by limitations in public funds to
cover investments needs but also by efforts to increase the quality and efficiency of public
services.
PPPs have a long history in some Member States of the EU while being a more recent
development in others. PPPs have received a boost in various countries undergoing process of
significant economic growth.
The efforts of the Accession Countries to reform and upgrade infrastructure and services could
potentially benefit from the PPP approach. This is particularly true, given the enormous financing
requirements to bring these infrastructures up to the standards. The Commission has identified
four principal roles for the private sector in PPP schemes:
However, while PPPs can present a number of advantages, it must be remembered that these
schemes are also complex to design, implement and manage. They are by no means the only or
the preferred option and should only be considered if it can be demonstrated that they will
achieve additional value compared with other approaches, if there is an effective implementation
structure and if the objectives of all parties can be met within the partnership.
The Services of the European Commission have a particular interest in PPPs within the
framework of the grants that it provides, both within the context of Cohesion and Structural
Funds as well as ISPA. The use of grants in PPPs imposes constraints on projects, given the
Commission’s, over-riding requirement to protect the public interest.
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Guidelines for Successful Public – Private Partnerships
In order to profit from the advantages of PPP all potential participants must enhance their
understanding of the different approaches and the optimal methods to structure such
arrangements. To this end, DG Regional Policy has undertaken a wide consultation process
within the Commission, involving the EIB, EBRD, PPP units and task forces of the Member
States and Candidate Countries. The Commission has attempted to integrate the views of all
parties and will continue to draw upon their experience and skills in further promoting
understanding and the development of PPP. This process has yielded valuable information on the
strengths and weaknesses of PPP and importantly on how to integrate grant financing while also
respecting the requirements of EU and national legislation.
These Guidelines are designed as a practical tool for PPP practitioners in the public sector faced
with the opportunity of structuring a PPP scheme and of integrating grant financing. They do not
attempt to provide a complete methodology or to define current or future policy. They should be
regarded as a guide to the identification and development of key issues affecting the development
of successful PPP schemes.
• defining the optimal level of grant financing both to realize a viable and sustainable project
but also to avoid any opportunity for windfall profits from grants;
The services of the European Commission recognize the evolving nature of the PPP concept but
also the need for further debate and above for the expansion of knowledge and implementation
capacity. The Guidelines could contribute positively to this process.
I hope that the Guidelines will assist public officials, financial institutions and the private sector
in our common efforts to better implement ISPA measures as well as those to be implemented in
the near future under the Cohesion and Structural Funds.
Guy Crauser
Director General
DG Regional Policy
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Guidelines for Successful Public – Private Partnerships
Executive Summary
Introduction
Recent years have seen a marked increase in cooperation between the public and private
sectors for the development and operation of environmental and transport infrastructure.
In the European Member States this is a direct result of efforts to increase the quality and
efficiency of public services, insufficient public sector financial resources to cover
investment needs coupled with spending restrictions and a desire to access private sector
efficiencies.
A long experience of private participation in the road and water sector now exists and
there is a growing acceptance that Public – Private Partnerships (PPP) arrangements can
be used as an additional and complementary [to others] instrument to meet infrastructure
and service needs in a wide range of sectors ranging from environmental services to
health care provision or education.
PPPs present a number of recognized advantages for the public sector to exploit. These
include the ability to raise additional finance in an environment of budgetary restrictions,
make the best use of private sector operational efficiencies to reduce cost and increase
quality to the public and the ability to speed up infrastructure development.
PPP arrangements come in many forms and are still an evolving concept which must be
adapted to the individual needs and characteristics of each project and project partners.
Successful PPPs require an effective legislative and control framework and for each
partner to recognize the objectives and needs of the other. The European Commission
has recognised the importance of PPPs and the need for an effective legal framework to
ensure the application of the rules and principles of the Treaty. For this reason it has
recently issued a declaration to the Internal Market Council1 in line with the proposals to
modify procurement regulations and an Interpretative Communication on Concessions2.
These Guidelines have been developed to integrate these important documents and are
fully based on them.
While the benefits of partnering with the private sector in PPPs are clear, such
relationships should not be seen as the only possible course of action and are indeed
complex to design, implement and operate. Many alternative sources of financing are
available, including “public-public” institutional arrangements which should not be
discounted in the hope that PPPs offer a miracle solution. Therefore PPPs should be
carefully assessed in the context of the project, the public benefit and the relative gains to
be achieved under various approaches. Not least the national characteristics, individual
1
COM(2000)275 final
2
JOCE C/121 of 29 April 2000
6
Guidelines for Successful Public – Private Partnerships
macro-economic situations and the local policy framework must also allow and facilitate
PPPs.
The European Commission has a particular interest in promoting and developing PPPs
within the framework of the grants that it provides. It has expressed its willingness to
assist in the development and implementation of PPP projects and use grant financing to
leverage such arrangements. However the use of grants will impose additional
conditionalities on projects particularly given the Commission’s financing objectives,
constraints and over-riding requirement to protect the public interest.
The Guidelines are designed to assist the project designer to match the objectives of the
public and private sectors.
These Guidelines seek to address the issue of developing successful PPP projects in the
CC’s on a general level with specific reference to grant financing of transport and
environmental infrastructure projects. They present a brief introduction to PPP concepts,
discuss key conceptual issues and present a working guide to PPP development. Above
all they are an attempt to bridge a perceived gap in our understanding of the practicalities
of implementing PPPs in the Candidate Countries.
The Guidelines do not aim to provide a detailed guide to project design, appraisal and
implementation but rather to focus on a number of critical issues influencing the
successful integration of public grants, private funds, IFI loans (such as the EIB or
EBRD) and European Commission financing. Reference is made to a number of
analytical techniques which are well known and documented. These are not presented
with the objective of promoting a standard methodology but rather in an attempt to
highlight areas in which particular care and analysis needs to be observed. The
Guidelines are not designed to provide an exhaustive list of PPP structures nor present
any structures as having the endorsement of the Commission.
Part One “Alternative PPP Structures” presents four broad categories of PPP structures
each with increasing degrees of private sector involvement. It is stressed that while it is
generally recognised that PPP presents an effective alternative to mobilising and using
financial resources and that there are private sector efficiencies to be harnessed, they
remain an evolving concept and do not represent the only or preferred solution to project
financing. Indeed the terminology debate surrounding the definition of PPP categories
itself mirrors the evolution of PPP approaches and the evolving regulatory environment
defining PPP in Member States. As such PPPs must be carefully matched to the
individual project characteristics. Guaranteeing benefit from PPP requires recognition of
the relative strengths and weaknesses of each type of structure and the aims and
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Guidelines for Successful Public – Private Partnerships
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.
Part Two “Legal and Regulatory Structures” defines the legal environment for PPP
projects. The importance of effective legal structures is stressed together with the fact
that PPP implementation may require a review of existing legal provisions to ensure
compatibility. PPPs will operate in a complex legal environment characterised by the
interaction of the EU Acquis Communitaire, national, regional and municipal legislation,
detailed project contractual documents and importantly, specific, procurement
regulations. The legal situation in many CC’s is still evolving making careful legal due
diligence an absolute requirement.
Part Three “Financial and Economic Implications of PPP” addresses the topic of risk
management and its financial impact on a project. As the prime responsibility of the
public sector is to ensure value for money for society, several techniques and
considerations are presented for determining and assessing value. Grant financing is
recognised as a useful tool in project financing but carries certain risks. Grants should be
carefully matched to the actual needs of the project and beneficiary to minimise any
negative effects, ensure project viability and value for money.
Part Four “Integrating grant financing and PPP Characteristics” addresses the relative
strengths and weaknesses of grant financing and the opportunities offered. The ability to
use grants in a PPP depends on the ability to meet the conditionalities attached and the
ability to provide sufficient safeguards to protect the grant providers’ objectives. This
section will also include a specific discussion of integrating European Commission grants
into PPPs.
Part Five “PPP Conception, Planning and Implementation” considers the PPP project
cycle with the objective of providing a detailed discussion of the issues encountered and
possible solutions. It does not aim to provide a comprehensive guide but rather to focus
on key issues likely to impact on effective design and implementation. These issues are
considered separately below.
During the development of the Guidelines a number of key issues were identified as
influencing the design of projects and their implementation. These are characteristic of
grant financing in general and specific to cooperation with the European Commission.
Their recognition and integration at an early stage is designed to facilitate both readier
project acceptance by the Commission and more effective implementation.
Ensuring open market access and competition. A key requirement of Commission financing
and indeed as part of the Acquis Communitaire, is that PPPs should not impact negatively on
the operation of open markets nor on the clear and transparent rules of these markets. This
issue is particularly relevant with respect to tendering and selection procedures for private
partners, the use to which grants are put and the provisions made for renewing contracts
(with special reference to the length of concession agreements). While regard must be taken
to ensuring that private parties are able to realise financial returns by guaranteeing sufficient
opportunity to generate revenues, this must be matched with a concern to avoid the creation
of non competitive or closed markets. An impact is clearly on the designed duration of
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Guidelines for Successful Public – Private Partnerships
concession contracts but also procurement procedures must respect the current body of
Directives and above all the principles and rules of the Treaty setting out the need for open
and fair competition, transparency and proportionality.
Ensuring full compatibility between PPP arrangements and State Aid Rules. Provision of
grant financing must be matched to the real need for grants. In particular care must be taken
that grants do not provide an unfair assistance to construction or operation thereby
constituting unacceptable State Aid under the EU’s interpretation.
Defining the right level of grant contribution. A particular concern of the European
Commission is to ensure that its grants closely match real needs. This is not only to ensure
financial efficiency but also that the maximum use is made of limited funds. A further
concern is to achieve an effective balance between the desire to facilitate project realisation
and, in the public’s benefit, to limit the private sector’s ability to achieve undue profit from
grants. This requires careful calculation of actual financing requirements to achieve project
viability. Consideration also needs to be given to avoiding the possibility that grants
constitute incompatible state aid.
Selection of the most suitable PPP type. PPP arrangements should not be entered into
merely for the sake of undertaking a PPP project. A detailed review of the costs and benefits
of private sector involvement versus public alternatives must be undertaken to ensure that a
PPP enhances the public benefit. The degree of private involvement needs to be carefully
matched to the objectives and needs of the project and the public. Appropriateness, cost, the
ability to effectively implement and manage should be the paramount considerations in
selecting a PPP structure.
Success and constraint factors. The characteristics of projects, partners and implementation
arrangements will create a series of constraints. These must be fully recognised and
integrated. A PPP must be regarded as an active partnership requiring a degree of flexibility
from each side. However the extent of flexibility must also be clearly defined to ensure that
project boundaries are clearly known. The management of public grants imposes transparent
rules on how private sector partners can be selected, how financing can be used and the
benefits which parties can expect from the project, together with performance and quality
requirements. However the European Commission can also play a valuable role in assisting
public beneficiaries to protect the interests of their public.
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Guidelines for Successful Public – Private Partnerships
Timing. Successful PPP design requires that all parties are brought together at an early stage.
This is particularly important for the European Commission which, because of the need to
carefully justify its use of grants, must undertake careful analysis of proposed PPP
arrangements to ensure its objectives are met. Early Commission involvement and sharing of
functions is therefore crucial and preferable if a grant is foreseen. Four situations can be
considered where timing is a crucial issue in relation to grant attribution, namely; where a
PPP exists, where a PPP is already under negotiation but a grant is required to enable it,
where a Commission grant is awarded and a PPP is entered into and finally where a PPP is
desired regardless of a grant. In each situation a Commission grant may be possible but
certain pre-conditions must be met allowing the Commission to satisfy its requirements.
Recognition of European Commission grant financing objectives and the best use of grant
financing. Grant financing, while attractive, carries a number of constraints. Grants have
specific financing objectives, conditionalities and limitations. The project and its’ different
partners must be able to effectively integrate and accept these and manage their
consequences.
Future requirements. PPPs are a developing concept and in some cases have required
substantial reform of legal and financial systems in Member States to make their application
possible. It can be expected that CCs will face similar difficulties in developing further
effective frameworks within which PPPs can operate. This requires possibly actions to
define the role of the public sector, institutional capacity building at all levels including the
allocation of qualified and motivated staff to specialised PPP units, reduction of market risk
through user-oriented strategic approaches and development of private sector investment
facilitation mechanisms. Additionally the ‘paying public’ i.e. the consumer must also be
integrated and given the power to influence PPP design and operation. This ‘bottom up’
influence is crucial to the sustainability of the PPP approach and will require coordination
with NGOs, consumer associations and the public.
These Guidelines aim to highlight some of the important issues that need to be considered
and addressed and will be supplemented with in-country training and further activities to
strengthen implementation capacity.
Relevant authorities in Candidate Countries and Member States have the final responsibility
for deciding on whether to use PPP or other financing vehicles.
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Guidelines for Successful Public – Private Partnerships
INDEX
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Guidelines for Successful Public – Private Partnerships
12
Guidelines for Successful Public – Private Partnerships
PART 1 – SUMMARY
• 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
• PPP is not the only method to deliver project financing and realisation. It does not
provide a ‘miracle’ solution nor a quick fix and should only be used where appropriate
and where it is able to deliver clear advantages and benefits.
• A multitude of PPP structures exist and must be selected according to project type,
needs and sector. There is no single perfect model.
• Each type of PPP has inherent strengths and weaknesses which need to be recognized
and integrated into project design
• Each partner to a PPP has responsibilities. The Public sector must transform it’s role
from a service provider to manager / monitor of private contractors.
• Guaranteeing and enhancing public benefit from PPPs will depend to a large degree on
effective management and monitoring systems
• This Part will address:
• PPP structures
• Suitability of alternative structures
• Requirements of PPP parties
• Success factors for partnerships
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Guidelines for Successful Public – Private Partnerships
programmes and public resources in the CCs. Indeed the Commission has noted3
recipient nations. that “the issues relative to service
concessions and public private partnerships
merit a detailed analysis in order to evaluate
whether specific legislation is required to
permit more effective access to these
arrangements by economic operators and to
guarantee to these operators to rights
afforded by the Treaty”. This is not the
purpose of these Guidelines.
2 WHY PPP
3
COM (2000) 275 final
14
Guidelines for Successful Public – Private Partnerships
15
Guidelines for Successful Public – Private Partnerships
16
Guidelines for Successful Public – Private Partnerships
17
Guidelines for Successful Public – Private Partnerships
Figure 1
Project Procurement Options
Public Private
Responsibility Responsibility
Maintenance Concession
Design-build Design-Build-Operate-Transfer BOOT Concession Asset Capitalization
Design-bid-build Turnkey Delivery Build-Own-Operate-Transfer Divestiture
EU
EU EU
Public Owner/ Public Owner/ EU National Gov't
National Gov't National Gov't Public Owner Private Owner Local Gov't
Operator/ Local Gov't Financier Local Gov't National Gov't
IFI Debt
Local Gov't
Financier IFI Debt IFI Debt Commercial Debt
Commercial Debt Commercial Debt Private Equity
Operator
Engineer Engineer
Contractor Operator
18
Guidelines for Successful Public – Private Partnerships
F
arrangement is defined by individual
Community Legislation governing Further assistance and
operational structures and procurement. clarification on the Commission’s
However the Commission’s Interpretative interpretation can be obtained directly
Communication on Concessions4 suggests from DG Market and DG Competition.
that the principal criteria for distinguishing
concessions from other PPP type structures
is the extent of risk transfer to the private 3.1 Opportunities for Private
party. This criteria will then also allow each Involvement in Traditionally
type of PPP to be defined and related to the Procured Projects
relevant legislation and methods for
selecting private parties. While the choice Traditionally, governments in most CCs
of PPP structures is limitless in terms of have relied on public procurement to
financial and legal forms, the Commission is develop their infrastructure systems. With
of the view that all PPPs can be defined in this approach designated government
relation to the rules governing the choice of agencies, such as a ministry or public
private partners and the selection and authority are vested with responsibility for
application of public procurement developing certain types of infrastructure.
procedures. As a result PPPs, whether for These agencies typically elaborate master
works and / or services, are: plans prioritizing needs and then arrange the
financing, design, and construction of
• Covered under the detailed provisions of individual projects. Once a project is
Public Procurement Directives completed it is then operated and maintained
• Covered by the rules and principles of by the agency, together with the other assets
the Treaty as set out in the Interpretative under its care.
Communication and jurisprudence.
Under the traditional public procurement
While it is not possible at this stage to define model, government agencies can utilize the
all possible types of PPPs according to the services of the private sector for design and
application of public procurement of construction, with the award of individual
concession rules, it is extremely important contracts made on a competitive basis.5
for PPP sponsors to develop a detailed However, private sector participation usually
understanding of the Commission’s does not extend beyond these functions.
perspective and to correctly categorise their There are a number of ways in which greater
choice of PPP structure before entering into private sector participation can be
contractual arrangements. introduced as depicted in figure 2.
The following sections present various Three approaches for outsourcing former
forms of PPP relationships moving from public functions to the private sector are
minimal to maximal private sector described below. These mechanisms present
involvement. These definitions are based on opportunities for the private sector to
internationally recognized nomenclature but participate in varying degrees in the
unlike a ‘legalistic’ definition of PPP or maintenance, operation and management of
procurement derived from the Procurement infrastructure improvements.
Directives, these are based on the extent of
risk and responsibility transfer to the private
party. 5
In certain cases in CCs design and construction
functions may have been fulfilled by publicly owned
4
JOCE C/121 of 29 April 2000 companies, or directly by agency staff.
19
Guidelines for Successful Public – Private Partnerships
Figure 2
Private Participation
Options with Traditional
Public Sector Procurement
Traditional
Public Sector
Procurement with
Outsourcing
Public Owner/
Operator/ Leasee
Financier
Operator Contractor /
Operator
Engineer Contractor
Public Sector
Private Sector
20
Guidelines for Successful Public – Private Partnerships
Leases provide a means for private firms to 3.2 Integrated Project Development
purchase the income streams generated by and Operation Opportunities
publicly owned assets in exchange for a
fixed lease payment and the obligation to The functions described above involve
operate and maintain the assets. Lease instances where limited responsibilities
transactions are different from operations normally assumed by the public sector are
and management contracts in that they passed to private companies. However, the
transfer commercial risk to the private sector functions involved are at once discrete and
partner, as the lessor’s ability to derive a relatively isolated – a fact which limits the
profit is linked with its ability to reduce potential benefits that the owner can derive
operating costs, while still meeting from its partnership with the private sector.
designated service levels. Integrated partnerships involve transferring
responsibility for the design, construction,
Leases are similar to operations and and operation of a single facility or group of
management contracts in that the assets to a private sector partner. This
responsibility for capital improvements and project delivery approach is practiced by
network expansion remains with the public several governments around the world and is
sector owner. However, in certain cases the known by a number of different names,
lessor may be responsible for specified types including “turnkey” procurement and the
of repairs and rehabilitation. Under the right “build-operate-transfer” (BOT) system.
conditions, private companies entering into
lease agreements might also make targeted
21
Guidelines for Successful Public – Private Partnerships
D e s ig n - B u i l d - O p e r a t e - T r a n s f e r
T u r n k e y D e li v e r y
B u ild - O p e r a t e -
T ra n s fe re (B O T )
IS P A
P u b lic O w n e r / N a tio n a l G o v 't
F in a n c ie r L o c a l G o v 't
IF I D e b t
C o m m e rc ia l D e b t
C o n tra c to r O p e ra to r
E n g in e e r
22
Guidelines for Successful Public – Private Partnerships
Portugal is considered a reference on how coordinated efforts can develop an economy. In particular experience of project
financing show the benefits of public and private partnerships as for example the financing of the Vasco de Gama Bridge
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Guidelines for Successful Public – Private Partnerships
Maintenance Concession
BOOT Concession
Asset Capitalization
B uild-Own-Operate-Transfer
Divestiture
D e sig n -B u ild -
F in a n c e -O p e ra te Build-Own-Operate
(D B F O ) C o n c e ssio n (BOO)
ISPA
P u b lic O w n e r National Gov't
Local Gov't
ISPA
National Gov't
Private Owner Local Gov't
IFI Debt
Commercial Debt
Private Equity
P riv a te
IFI Debt
C o n c e s s io n a ire
Com m ercial Debt
Private Equity
Contractor Operator
C o n tra c to r O p e ra to r
Engineer
E n g in e e r
24
Guidelines for Successful Public – Private Partnerships
The Commission is currently reviewing its certain cases a divestiture can also be
definition and approach to concessions given accomplished by making shares in the
the interest shown in their application in the company available for purchase on the
Member States. This is addressed in greater national stock market. A complete
detail in Part 2 particularly with respect to divestiture is similar to a concession in
safeguarding open market access and fair certain ways, as it gives the private investor
competition; complete control over investment in, and the
operation and maintenance of whatever
Oversight of the award, implementation, and assets the company possesses. However,
operation of PPP concessions is a complex unlike concessions, divestiture also gives the
task. As such, it is often common practice private sector ownership of the assets
for governments to establish dedicated, themselves, and that ownership is
stand-alone state agencies or special purpose permanent. As such, the government
vehicles (SPV) with the sole responsibility relinquishes further control with a
of overseeing PPP projects. Implementation divestiture approach, maintaining only a
agencies are likely to require staff with regulatory role, protecting consumers from
sophisticated financial and legal experience monopolistic pricing and, in some cases,
that goes beyond that of many public perhaps requiring a minimum maintenance
infrastructure owners. This is particularly and investment regimen.
important for CCs where the infrastructure
investment market is still considered risky Divestiture is likely to be particularly
due in part to incomplete legislative and sensitive when it involves assets of national
institutional structures, let alone the lack of significance, such as a water resources or
comprehensive experience in project highway networks. In addition to
financing, structuring and implementation. ideological impediments, there may well
also be constitutional and legislative issues
to be overcome. However, in cases where
3.3.2 Private Divestiture local managerial capabilities are strong and
where there are local investors who may be
Private divestiture involves the sale of assets interested in supporting such a venture,
or shares of a state-owned entity to the divestiture may provide a way to achieve
private sector. Divestitures can be private sector efficiency gains while keeping
approached in many different ways, and can control over the assets – and the revenues
be either partial or complete. Divestiture is they generate – within the country. This has
also often an integral part of the proven an effective strategy with the
transformation of state-owned enterprises in privatization of former state motorway
CCs and can be used as a vehicle to transfer authorities in Portugal and Italy, for
the ownership of assets from the central example, or water resources in Slovenia and
government to local governments and / or to Estonia.
private utility companies. The following
discussion on divesture addresses the sale of
assets to private investors only. 3.3.2.2 Partial Private Divestiture
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Guidelines for Successful Public – Private Partnerships
F
private sectors is blended. A partial
divestiture is an excellent way for the public Considerable experience has been
sector to attract private capital and gained in Member States with the
encouraging improvements in operational different PPP forms and in a broad
and management efficiency, while also range of sectors. This experience can
protecting the public consumers as well as be accessed directly from the Member
assets of national significance. The State PPP units details of which can be
individual arrangements for sharing found in the reference section.
responsibility for management and
investment decisions depend on the division
of assets, as well as the sharing of costs. 4.1 Suitability to Transport Projects
Therefore, they would need to be established
on an individual basis. It is likely that the Some of the most important issues that will
public sector would transfer as much of the influence the selection of a preferred form
costs as possible to its private partner. of PPP for projects in the transport sector are
However, in order for a partial divestiture to the size and scope of the project, the ability
be attractive to private investors there would to apply user tolls and the extent of risk
have to be a reasonable scope for making a transfer required. Major and minor roads
fair profit on its investment. schemes or mass transit systems are well
suited to traditional design and build
contracts, as operating costs in a typical
4 THE SUITABILITY AND scheme are low when compared to the
EFFECTIVENESS OF capital costs of construction.
ALTERNATIVE PPP Traditional procurement contracts are
STRUCTURES essentially an extension of the existing
conventional approach, endeavouring to
transfer design and construction risk to the
• Each PPP structure has strengths private sector through fixed price contracts.
and weaknesses which must be In such instances responsibility for
recognized and integrated maintaining the infrastructure will remain
• PPP does not provide a ‘quick fix’ within the Public sector. In some instances,
and should be applied only where the construction of, particularly, a major
suitable and when clear benefits and road scheme may be funded in part or in
advantages can be demonstrated whole by user tolls. For example, bridges
• PPP structures must be adapted to and tunnels are particularly suited to user
sectoral and project context tolling where there is a clear benefit to be
• Desired impacts and benefits will gained from choosing the tolled route over a
influence PPP selection and design different alternative route. In such
circumstances, the public sector must decide
whether to transfer responsibility for
Table 1 summarises the advantages and
financing the project and collecting tolls to
disadvantages of the four main groupings of
the private sector contractor.
PPP relationships. It also provides
suggested sectoral applications which are
Different types of PPP contracts are already
further discussed below. The selection of a
being implemented in Europe. Toll
suitable PPP arrangement is a complex task
motorway concession contracts are suitable
and must be based on individual project
where the private sector contractor will
characteristics and needs (this is discussed
finance a major road scheme, collect user
further in Part 5).
tolls and bear the risk associated with traffic
26
Guidelines for Successful Public – Private Partnerships
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28
the risks associated with operating
4.2 Suitability to Water Projects increasingly complex treatment processes,
without having had a role in the design of
Public Private Partnerships have existed in those processes.
the international water sector for a number
of years. For example, private sector
concessions for the development and 4.3 Suitability to Waste Projects
operation of water supply and treatment
plants have been common place in France More recently, the use of PPPs has been
for at least forty years, leading to the stimulated in sectors where there has been
growth of the large and diversified French a significant increase in the burden of
private sector utility companies. The traditional public sector responsibilities
European Union Drinking Water Directive and this is particularly true with regard to
and the Urban Waste Water Directive have the disposal of municipal waste.
resulted in a substantial change in public Increasingly, for economic and
sector responsibility within the water environmental reasons, public authorities
industry. In order to meet the requirements are reducing their reliance on landfill
of the Directives, many countries will have which has been the traditional means of
to invest substantial amounts of capital in disposing of waste. New methods of waste
new water supply and waste water disposal such as waste to energy schemes
treatment facilities. As a result, countries and recycling plants require substantial
that have not yet involved the private investment and specialised technical
sector in water supply or waste water know-how.
treatment, are now considering the
potential to make use of private sector The considerations that will shape the
skills and finance to satisfy the selection of a preferred form of PPP are
requirements of the Directives. similar to those for the transport and water
sectors and include the size and scope of
The considerations that will shape the the project (including operational content),
selection of a preferred form of PPP for the ability to apply user charging and the
projects in the water sector are similar to extent of risk transfer required. Projects in
those in the transport sector and include the waste sector are likely to be very suited
the size and scope of the project (including to the more developed forms of PPP where
its operational content), the ability to apply a significant amount of operating risk can
user charging and the extent of risk be transferred to the private sector. In
transfer required. addition, under a Concession contract, the
private sector can be asked to finance the
The construction of water supply or waste project, collect user charges (in accordance
water networks under PPP arrangements is with the Polluter Pays principle) and
likely to be linked to the level of accept the risk associated with waste
information available on the extent, volumes. This is now being widely
composition and performance of existing applied in the UK.
networks. If information is not sufficient
traditional procurement arrangements may Table 2 summarizes the ability of the PPP
be more suitable. On the other hand, water structures to meet a range of desirable
supply and waste water facilities are likely performance indicators. The various PPP
to be very suited to BOT and DBFO structures are arrayed in increasing order
contracts. They may also be suited to of private participation from top to bottom
Concession contracts where there is an on the table. It can be seen that as private
opportunity to introduce user charging. sector participation increases, so too does
However, water supply and waste water the potential for achieving a wide variety
facilities are considered to be less suited to of infrastructure goals. However, it also
traditional procurement design and build needs to be recognized that greater private
contracts as the public sector would retain sector participation in infrastructure
29
development also brings with it increased complicated when Commission grant
implementation constraints, particularly funding is involved.
when private investment is involved.
These constraints may well become further
Table 2
The Effectiveness of Alternative PPP structures
Improved Enhanced Enhanced Life Accelerated Leveraging Implement
Service Operational Risk Cycle Implement of Public ation
Efficiency Sharing Costing ation Funds Constraints
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
30
5 REQUIREMENTS OF partners to make a reasonable profit in
exchange for improving service and
THE PPP PARTNERS efficiency, leveraging its own financial
resources, expediting project
implementation. Beneficiary governments
• PPP requires active participation of all may also be concerned about the overall
partners ease of implementation when using
• All partners must recognize and outside or donor funds to support
address the objectives and partnership projects.
characteristics of each other
It is also important to recognize that the
Commission introduces its own set of
It is important to recognize that the requirement attached to its financing. In
different participants in PPP projects have such cases, the improvements afforded by
distinct goals and requirements that must the project will have to meet European
be met in order for them to be able to standards and also provide other societal
participate in an effective partnership. benefits which may not always be easy to
While certain goals are complimentary; quantify in economic terms. Like
others are not, and as the number of beneficiary governments, the Commission
players increases, so too will the is eager to achieve gains in efficiency and
complexity of establishing a fair playing leverage existing financial resources, but
ground for the various participants. as a donor of grant funds it is also
interested in avoiding unfair private sector
Table 3 identifies the different players that profit levels, as well as maintaining
may be involved in partnership projects transparency in the award of all contracts.
and arrays their likely requirements when Furthermore, the Commission also seeks
operating under the partnership structures to protect its grants by maintaining some
discussed earlier. Predictably, as the level control of the funds after they have been
of private sector participation increases, so released to the beneficiary.
do the number of participants and the
requirements of all partners, public and Finally, partnerships involving private
private alike. investment are also likely to require loans
For private sector participants, the first and guarantees provided by international
requirement for any type of involvement is financial institutions (IFIs), such as the
the potential to derive a reasonable profit. EIB (see box) and commercial banks.
In addition, in return for greater risk Such institutions will require rigorous and
exposure, the private sector will also conservative financial analysis in
require the potential for commensurate exchange for their participation. They will
increases in profit potential. Similarly, also need clear proof regarding the
before committing its own capital in the certainty of outside and State funding, as
development of projects, it will require well any equity contributions to be made
clear legal and regulatory structures, and by the private sector. Lenders will also
will want to see the potential for future need proof of the technical ability of the
economic growth, together with private operator, as well as the beneficiary
reasonable levels of political support and government’s ability to oversee the
stability. implementation and operation of the
project. In addition, lenders will require
While the public sector supports efficiency that clear regulatory and legal structures be
improvements, the private sector’s in place to govern investment partnerships,
motivation for profit introduces conflicts and they will also be interested in the
of interest with beneficiary governments, general stability of the political
which are committed to promoting equity environment in the beneficiary nation. It
and maximizing the well being of their should be recognized that as regular
citizens. However, governments are participants in PPP infrastructure
generally willing to allow their private partnerships, IFIs and commercial banks
31
are well versed in the potential pitfalls and before their participation can be assured.
in turn have developed comprehensive Examples of the different requirements of
financial modeling and due diligence the parties in various PPP arrangements
practices that will have to be satisfied are set out in table 3.
The EIB (European Investment Bank) has supported the development of about 100
PPPs to-date in most EU countries for a total amount of signed loans over EUR 15
billion. On the basis of its multi-sectoral know-how, geographical spread and PPP-
deal making experience, EIB is well positioned to assist both public authorities and
private investors in the CEEC to successfully implement PPP projects. In doing so,
it seeks to provide significant added value to all interested parties by sharing its
experience, applying best practice and offering long-term funding on attractive
terms. In this way, the Bank not only aims to bring about the successful financing of
PPPs but also to ensure value-for–money to the public sector as a whole.
32
Guidelines for Successful Public – Private Partnerships
33
finance the needed improvements. The
6 ACHIEVING establishment of a reasonable tariff level is
a delicate task at best and involves close
SUCCESSFUL interplay between expected utilisations
PARTNERSHIPS7 levels, public acceptability, market
conditions, and government support.
• Successful implementation depends
on recognition of partner’s Efficient organization and streamlined
objectives decision making are also critical to the
• PPPs require careful consideration ability of beneficiary governments to
of control and management systems launch successful PPP projects. One of
through project agreements the most effective steps beneficiary
governments can take to support
What are the necessary elements to successful infrastructure partnerships is the
achieve successful partnerships in the establishment of special-purpose
infrastructure arena? First, it is essential to authorities charged with overseeing their
recognize exactly what a partnership is. A implementation. Such authorities usually
partnership is an agreement between two work with consultants to organize and
or more parties to work together towards a execute planning and feasibility studies,
common goal. Partners share joint rights conceptual design work, and in many
and joint responsibilities, and when these cases establish financial demand model.
are not met partnerships do not work. Special purpose authorities can assume
Partnerships require the will of all parties responsibility for liaison with all parties,
involved to work together. They also rely as well other government departments.
on clear and carefully crafted agreements Often these agencies also negotiate with
defining the rights and obligations of the development banks and other potential
parties involved and establish a framework funders. Once individual projects have
for responding to new situations as they been identified, the authority procures
arise. Concession agreements must also them on behalf of the government and then
be tailored to the laws and regulations oversees their construction and operation.
governing the award. As such, it is While the presence of a development
essential for governments to develop clear authority can never guarantee success, it
legal and regulatory formats that identify does streamline and organize government
the various steps in the process, together involvement, helps develop government
with rights and obligations of all involved. expertise, and encourage consistent policy.
In CCs, as has been the experience in
Member States, this may well involve the Successful concessions rely on a series of
promulgation of new laws. checks and balances. A well-crafted
agreement uses checks and balances to
Similarly, effective user fee policies are create co-dependence and transparency,
also essential components of the while enabling all the parties involved to
partnership process. In certain cases achieve their goals. Without the
utility fees may have been subsidized in participation of any one of these actors it
the past and infrastructure PPPs may be would not be possible to develop these
undertaken in conjunction with the projects on a partnership basis. This
liberalization of tariffs. If this is the case, reality forces all of the participants to be
proposed tariff structures will require receptive to the needs of its fellow partners
careful review in terms of their overall and to work together towards a joint
affordability, their ability to gain public solution and work through new issues as
and political support, and their ability to they arise. This dynamic may be further
reinforced when IFIs are involved.
7
This section draws on Achieving Public-
Private Partnership in the Transport Sector, Partnership is achieved by providing
Benjamin G. Perez, Diebold Institute for credibility for the private partner risking
Public Policy Studies: New York City, 2002. its money and legitimacy for the
34
government sponsoring the project.
Legitimacy is achieved by ensuring that
partnership projects meet the needs of the
paying public, produce desired
additionalities, and reinforce wider
financing goals. It is also achieved by
rewarding for the successful negotiation of
risk and providing the private partner with
a reasonable return on its investment.
However, if the rewards are too high then
that legitimacy is undermined. Legitimacy
is also undermined when investors are
more interested in the profits derived from
lucrative construction contracts rather than
the successful operation of a concession
itself once it is built. As an independent
grantor, the Commission can be used to
foster credible and legitimate relationships
between beneficiary government and
private investment partners, both through Toll Station on Hungarian Motorway
its direct participation and through the
objectives and conditionalities attached to Successful implementation of motorway toll schemes
depends not only on demand for services but effective
grants. partnering of all parties, comprehensive project
agreements and a commitment to project success
Achieving partnership also requires strong
political support. Traditionally when there
has consensus that an infrastructure project
should be built, governments have
allocated the necessary resources to
procure it themselves. When governments
look to the private sector for funding this
may be a signal of lackluster support.
However, because of the risks involved,
the un-conventionality of the approach and
the need to maintain legitimacy,
partnership projects are likely to require
stronger political and government support.
Moreover, as risks and challenges
increase, so to must the government’s
support and commitment. In addition to
providing financial resources, the
Commission can play an important role in
maintaining critical government support
for PPP projects in beneficiary nations.
35
PART 2 LEGAL AND REGULATORY STRUCTURES
PART 2 - Summary
• PPP are defined and governed by a complex interaction of national and municipal
legislation and regulation and project contractual documents
• Commission grants and the accession process add the EU Acquis Communitaire and
grant conditionalities to the legal environment
• While cooperation with the private sector is welcomed the Commission must fulfill
its objective of safeguarding the public interest and the correct use of funds. This
implies contractual and implementation conditionalities
• The legal situation in CC’s is still evolving therefore full legal due diligence and
careful contract design are crucial for all parties
• An effective and sustainable institutional structure is essential for promoting and
fostering successful PPPs
• This Part will address:
• The legal hierarchy
• National legislative and regulatory issues
• Project contractual issues
• Procurement specific issues
• Institutional requirements
36
• Respect of competition rules in accounted for both in terms of risk
awarding the investment contracts; generation and effective PPP management.
• Respect of conditions of the
concession (service to consumers, Bearing this in mind two checklists can be
maintenance, etc.); developed to ensure national and project
• Absence of disproportionate level issues are effectively identified and
remuneration on capital. addressed.
Body of EU Acquis
National Legislation
Including (amongst others):
Public Health Environmental
Transport Procurement
Public Finance Labour
Contract Tax / Accounting
37
viability or distort advantages to be
3 NATIONAL gained
2. to consider the need for restructuring
REGULATORY AND of current operators ahead of a PPP
LEGISLATIVE ISSUES with respect to their legal status and
the flexibility of their mandate and
• Successful PPPs depend on the articles of association
effectiveness of the national and 3. to identify the need for and design
municipal legislative and regulatory sector specific regulation making
structures private sector participation possible
• Legal due diligence is required to and effective including the
define the constraints to PPP development of institutional structures
implementation and to define project to oversee and regulate private
scope operators
• EU Directives must be integrated 4. to identify which regulations need to
be incorporated into PPP contracts, to
The effectiveness and impact of a PPP identify their impact and to identify if
depends, to a large extend, on the safeguards against regulatory risk need
regulatory mechanisms used to influence to be included
and guide the parties and in particular the
private sector decision making process. While the accession process and exposure
Because of these critical interactions it is to Commission financing has meant the
preferable to ensure the development of development of certain statutory and
effective legislative and regulatory regulatory structures to accommodate the
provisions before developing PPP Acquis, these are not necessarily sufficient
relationships. In this area the or appropriate for a PPP relationship. It
Commission, can provide valuable policy should be noted that all Member States
contributions particularly in the current have had to, or are undertaking legislative
situation of regulatory transition associated reform to ensure their ability to use PPP
with the accession process and reform of arrangements. The Commission also is
legal and operating structures in the CCs. undertaking review of its approach
towards PPPs as demonstrated by the
The analysis of a national and sectoral Commission Interpretative
regulatory framework has four main Communication on Concessions Under
purposes: Community Law (2000/C 121/02) and its
desire to reform procurement procedures.
1. to identify elements that could impede In particular the following issues must be
private sector participation, affect investigated:
38
National legislative structures will not often the case that reform or
always be conducive to PPP arrangements, privatisation will impose an operator
but certain methods can be adopted to or partner, which has not been selected
facilitate their introduction, including: on a competitive basis nor perhaps
identified at the project design stage
• choosing a private sector arrangement • the potential change in legal status and
that reduces risks associated with the rights and obligations of parties. This
deficiencies of the legislative includes consideration of potential
structure, for example using a fee changes in the ownership of assets
based management contract for • the extent and effectiveness of public
distribution or BOTs for bulk supply, sector oversight and monitoring
if collection performance or regulations and systems in ensuring
requirements for providing subsidised compliance with contract conditions
services pose unacceptable revenue
risk to the private partner
• choosing a private partner best able to 4 PROJECT
manage legislative / regulatory risk,
for example in the case of adverse
CONTRACTUAL ISSUES
foreign currency or profit repatriation
rules then contracting local companies • Contracts will define the
may be more viable parameters of the PPP relationship
• incorporate explicit safeguards in and limit the activities of all
contracts parties.
• encourage the development of • Contracts need to provide
effective regulatory and watchdog sufficient flexibility and control to
mechanisms ensure objectives of all parties are
met and that differences can be
Experience has shown that early resolved to the benefit of the
development of conducive and consistent project
national legislative and regulatory • Keeping things simple is often
structures greatly facilitates the more effective than being over
identification, development and prescriptive
implementation of PPPs. A particular • The Commission will directly
requirement is to establish the roles and influence the design of contractual
responsibilities of all parties and ensure documents despite the fact that it is
that effective systems are in place to not a party to individual project
regulate and monitor PPPs to derive the contracts
desired value for money and necessary
transparency in implementation.
When designing and evaluating PPP A PPP will involve numerous parties and
projects particular attention needs to be therefore a corresponding number of
given to the integration of the uncertainties contractual arrangements. While the
caused by an evolving national legislative nomenclature may change, the main
and regulatory structure and the reform contractual documents include:
process affecting many of the CCs, as for
example the privatisation of utility • Project Agreement – this is the main
operators. Focus should be placed legal document setting out the rights
particularly on: and obligations of the Contracting
Authority and the Contractor. Many
• the impact of legislation on the ability model contracts exist but changes will
to guarantee open and fair competition need to be made to account for
particularly with respect to the national and project specific
selection of utility operators. It is requirements.
39
• Performance Specifications – these • Direct Agreements – these regulate the
will include all of the technical, relationship between the Contracting
financial and service requirements of Authority and outside funders
the Contracting Authority and must be including the Commission through the
specifically referred to in the Project Financing Memorandum.
Agreement as constituting an integral
part and defining the parties Other contractual documents of
obligations in relation to them. importance include; construction and
operating contracts and financial security
• Collateral Warranties – these provide and guarantee arrangements. It is crucial
for direct links between the that these documents are prepared in a
Contracting Authority and the transparent manner and that clauses are
individual sub-contractors appointed fully understood by concerned parties.
by the Contractor. Their main purpose
is to give the Contracting Authority The following discussion is meant to
the benefit of an independent provide a brief understanding of the issues
obligation in relation to the work which contracting parties will be
carried out by sub-contractors. They negotiating . This section is not designed
will also allow for step-in rights. to provide a model contract.
Heading Detail
General provisions of the agreement • Legislative approaches
• Governing law
• Conclusion of the project agreement
Organisation of the concessionaire • Legal form
• Capital
• Applicable accounting standards
Project site, access and easement • Ownership of project assets
• Land acquisition for the purposes of the project
• Easement and transit arrangements
Financial arrangements • Financial obligations of the concessionaire
• Tariff setting and tariff control, including
o concessionaire’s authority to collect tariffs
o tariff control methods, ie rate-of-return method, price-cap method
o policy considerations on tariff control
• Financial obligations of the contracting authority, including
o direct payments
o purchase commitments
Security interests • security interests in physical assets
• security interests in intangible assets
• security interests in trade receivables
• security interests in the project company
Assignment of the concession
Transfer of controlling interest in the project
company
Construction works • review and approval of construction plans
• variation of project terms
• monitoring powers of the contracting authority
• guarantee period
Operation of infrastructure • performance standards
• extension of services
• continuity of services
• equal treatment of customers or users
• interconnection and access to infrastructure networks
• disclosure requirements
• enforcement powers of the concessionaire
General contractual arrangements • subcontracting
• liability with respect to users and third parties
• performance guarantees and insurance
• changes in conditions
• exempting impediments, force majeur
• breach and remedies
40
F
ISPA Financing Memorandum in
Substantial work has been which the grant conditions may be
carried out by a number of changed if substantial changes to the
organisations to develop model status of the project occur within the
contract forms. The bibliography first 5 years. This covers in particular
provides a number of contact points. the transfer of assets from the public to
In all cases it must be remembered the private sector and hence a
that generic documents must be significant change in the financial
adapted to the characteristics of the conditions of the project.
actual situation
Additionally it is crucial that the
Commission be involved early on in the
Although the Commission will not be a project preparation process to ensure that it
direct party to a contract between project is able to identify its requirements and
beneficiaries and the private sector, integrate them into the project design
funding being supplied directly to a process.
National Authority, interaction with the
Commission and the ISPA regulations are,
currently, such that approval of an ISPA 5 PROCURING THE
grant will be conditional on satisfactory
arrangements being made to safeguard
PRIVATE CONTRACTOR
Commission interests. While the
Commission recognises the continuing • Procurement conditionalities of
evolution of the PPP concept and the need grant providers often represent
for a degree of flexibility; to safeguard its the main cause for project
interests, scrutiny of contractual collapse
documents should aim to: • A degree of flexibility is required
but the Commission’s objectives
• safeguard the public interest. under procurement policy need
Commission sponsored projects must to be respected
be designed to provide effective public • Procurement options will change
services and contractual arrangements with accession
should guarantee the continuation of
services in a manner which addresses The field of procurement is often the one
the public’s need. with the greatest scope for conflict and
• ensure contract fairness. The contract PPP relationship failure, particularly if
needs to produce conditions of public bodies and IFIs with separate
‘fairness’ amongst the parties which procurement procedures are involved.
includes an equal distribution risks and This is notably the case of the Commission
benefits. In particular price setting which requires the adoption of specific
mechanisms need to be transparent procurement procedures for the use of its
and equitable, the private sector grants but which are not necessarily best
should not benefit from unreasonable suited to complex multi-party PPP
profits, as a result of the grant arrangements. While these Guidelines
contribution, and dispute resolution treat the specific situation of Commission
needs to be effective. grants, some procurement issues are
• promote effective regulation and common to all funding institutions.
monitoring. This is an overriding Particular attention also needs to be given
requirement to ensure that contract to the adoption of the correct Community
terms are respected and the interests of procurement and contracting regime with
all parties maintained. reference to differentiation between
• ensure contractual flexibility to meet concession and public procurement
changed circumstances. This is approaches.
covered particularly by Article 8 of the
41
This situation is further affected by the • they prohibit extensive informal
evolving legal and regulatory state in CC’s consultation and communication
which leads to uncertainty both in how to between the parties (which is essential
structure procurement procedures and who to the development of partnerships);
is responsible for what. The implications • they are focused on lowest price
of the accession process will lend greater whereas PPPs may also target other
clarity to public procurement once CCs are factors;
obliged to adopt the EU Procurement • they force tender specifications to be
Directives. However until such a time the complete and therefore leave little
development of PPPs (using Commission room for variations.
grants) must be adapted to the current
procurement regulations and national Several procurement alternatives are being
legislation. developed8 which have minimum criteria
based on:
Above all it is necessary to remember that
the PPP process aims to attract private • tender specifications which state the
sector finance and know-how and, in order desired end goal but leave the bidders
to maximise the benefits of PPPs, to to propose solutions;
include this at the earliest possible stage of • strict performance criteria and
a project. In this respect traditional monitoring systems which bind
procurement rules present a conflict as the contractors to their bids;
private sector, to compensate for early • compensation for private sector
involvement, will require assurances or a participation in bids to those not
privileged position in the implementation selected;
stage. This creates public sector concern • provisions to renegotiate contract
based on the arguments that: terms over the contract life.
• any alternative procurement Until such time as the Commission
procedures will leave the public sector develops a unified approach, the selection
open to allegations of corruption, lack of procurement procedures with particular
of transparency or unfair competition; reference to the selection of private
• the regulatory environment does not contractors, must be based on a clear
allow procurement other than that separation of contracts which are covered
based on competitive bidding; by the ‘specific’ provisions of the public
• the public sector does not want to be procurement Directives and those covered
forced into an early relationship when by the rules and principles of the Treaty
all technical and financial parameters (as defined by the recent Interpretative
are not know; Communication on Concessions).
• the private sector may derive
unreasonable profits. 5.1 Choice of Procurement Procedure
42
considered. According to the ISPA
Manual “Commission sources of finance
can be integrated into private financing
schemes…… Their integration must,
however, not restrict the procurement of
works, services or supplies during project
implementation.”
43
must be procured, according to the Contracting Authority in order to share the
Practical Guide, using Open or Restricted risk associated with the tender process. It
Procurement Procedures (according to is believed that this should be considered
tender type and amount). only for very large projects where
substantial conceptual work is required by
It is argued that the Open and Restricted Tenderers. However Tenderers should be
tender procedures limit the development of given a measure of intellectual property
PPPs in two ways: protection, in that the materials developed
in their tenders will not be exploited by
• The prospect of competitive tendering, any other party.
and hence the cost and uncertainty of
contract award, reduces the incentive The argument that Open and Restricted
to the private sector to participate. tender procedures limit the ability to seek
• The requirement of Open and private sector innovations is valid if the
Restricted procedures is to provide a requirement to provide completely
fully specified project output against specified projects at the tender stage is
which tenderers compete, principally absolute. This limits competition to the
on price. It is argued that this limits financial considerations. However a
the ability to seek innovative solutions number of important innovations are
based on a private sector approach and possible, within the procedures, to
potential efficiency gains that this overcome this but require a preliminary
would entail. identification of what the important
desired values and benefits of the PPP
The first argument is valid to a degree but relationship are. Possible innovations,
can be qualified with respect to the type of including:
PPP relationship targeted. Indeed it is rare
to have a situation where some form of • If the project must meet certain
competitive tendering is not involved and technical standards (including EU
is usually only found where a PPP project standards) which limit the possibility
is being promoted by a private sector for substantial technical innovations to
party. The uncertainty surrounding be gained, the real value of a PPP will
competitive tendering can be managed by lie in financial considerations
providing up-front information on the including cost structures, the degree of
scale of the tender, the scope of evaluation service provision and how risks are
criteria and performance requirements. priced and managed. This therefore
This can provide an effective guidance to assumes that a fully technically
companies on whether tendering is in their specified project will be evaluated
interest. (after technical compliance)
principally on the financial offer. In
In order to avoid a too limited number of other words this will entail evaluation
Tenderers, a degree of market sounding of, amongst others:
and informal consultation can be • How costs are structured
undertaken in order to ensure that the • In the case of concession type
planned tender and project will attract contracts, how revenues are
sufficient interest. Should this not be the structured
case, this should in itself be an important • How risks are priced
indicator for project design and appraisal • What is the value of the private
and may require a re-assessment of project sector contribution and
parameters. requirement of additional
financing (including ISPA grant)
It has been suggested10 that the cost of
tendering, particularly for large complex This in effect requires a detailed value
projects, could be partially covered by for money assessment including some
10
Notably by the UNDP PPPUE
44
form of financial comparator. These supplies and services necessary to
are discussed further in Part 3. carry them out;
• Supplies - this category covers the
• If there is the potential for both procurement of products whether
technical and financial innovation and financed through purchase, lease,
value added from the private sector it rental or hire purchase, including the
is recommended to allow Tenderers to supply, delivery, installation and
submit Variant Solutions. This operation of equipment and
requires that they submit a tender machinery; and
meeting the original conditions and a • Services - this category covers the
tender which proposes their alternative provision of services including
approach. It should be noted however engineering, architectural and other
that the evaluation of variant solutions professional services. It specifically
must comply with strict guidelines and includes sewage and refuse disposal
should be against a set of minimum services, sanitation and similar
standards required by the project. services.
In both cases the emphasis is to remain Each Directive has contract value
within the boundaries of existing thresholds and prohibits the splitting of
procedures but to develop more contracts to circumvent these. It should be
comprehensive evaluation techniques that noted that some uncertainty has existed as
in effect allow Tenderers some flexibility to the categorisation of projects into works
and the project to harness private sector or services. The main interpretation
innovations and efficiencies. offered by the Commission and European
Court of Justice is that if works are
5.1.2 Post Accession Phase incidental to the services provided then the
Service Directive is applicable. Incidental
On adoption of the European Acquis the can be defined with respect to the main
procurement process is governed by a object of the contract or the predominant
series of Directives. The first step entails value of the component. It is suggested,
deciding which Procurement Directives based on jurisprudence, that the European
are applicable. Current Directives and Court of Justice favours the latter
their amendments, relate to four regimes: definition.
45
for pre-qualification and may tender if a derogation permitted by the Directives
successfully pre-qualified. and as a consequence the onus will be on
the Contracting Authority to show that the
• Negotiated Procedure – which is circumstances justifying its use apply.
similar to the restricted procedure but Additionally Contracting Authorities using
opens the possibility for post-tender the negotiated procedure or any other non
negotiations on contract specifications. specified procedure will need to
This procedure can also be used for demonstrate that the rules and principles of
the selection of concession contracts. the Treaty have been respected.
Internationally, the main drivers behind
The open procedure is generally not the use of the negotiated procedure have
considered suitable for PPP due to scale been the ability to:
and complexity issues. Generally if a
contract is a works or services concession, • secure the best value for money;
or alternatively falls within the Utilities • secure the optimum allocation of risk;
Directive, the negotiated procedure is • encourage innovative solutions; and
available but subject to the provisions of • reduce tender or bid costs.
the Treaty of Rome and national
regulations. In all other instances a The practical reasons why the negotiated
decision between restricted and negotiated procedure is favoured for PPP projects are
procedures must be made. clear. Indeed, the European Commission
has recognised the difficulties associated
The Works and Services Directives with using the restricted procedure. In a
respectively set out specific circumstances Communication of 1998 the European
in which the negotiated procedure can be Commission stated that:
used and go on to state that "in all other
cases, the Contracting Authority shall "especially in the case of particularly
award their public works (services) complex contracts in areas that are
contracts by the open procedure or by the constantly changing, such as high
restricted procedure". Whilst there are a technology, purchasers are aware of their
number of grounds set out in the needs but do not know in advance what is
Directives for commencing a procurement the best technical solution for satisfying
using the negotiated procedure, there are those needs.
only two potentially relevant bases for Discussion of the contract and dialogue
commencing a procurement with the between the purchasers and suppliers are
negotiated procedure in the context of a therefore necessary in such cases. But the
PPP. standard procedures laid down by the
traditional Directives leave very little
The first is "in exceptional cases, when the scope for discussion during the award of
nature of the works (services) or the risks contracts and are therefore regarded as
attaching thereto do not permit prior lacking in flexibility in situations of this
overall pricing". The second applies only type".
in the context of the Services Directive
"when the nature of the services to be If a negotiated procedure is permitted the
procured is such that contract Contracting Authority must ensure that the
specifications cannot be established with following principles are clearly adhered to:
sufficient precision to permit the award of
the contract by selecting the best tender • equality of treatment – this applies
according to the rules governing open or throughout the procurement process to
restricted procedures". It should be noted the conclusion of a contract and
that the validity of such cases only applies therefore places limitations on the
within the strict scope of the Directives. extent of possible negotiations.
• transparency – notably in the
The European Court of Justice has stated definition of procedures and
that the use of the negotiated procedure is
46
publication of tenders in the Official rewards they represent. Some of the risks
Journal or adequate alternatives. which may be difficult to specify in
• proportionality advance in contract terms are:
47
formalistic and, where complied with Such units and the public sector in general,
strictly, can lead to malfunctioning in the have a key role to play in creating trust
award of contracts. To that end, it has which in turn allows a reduction in risk
published a draft proposal for a European and therefore cost, but importantly also the
Parliament and Council Directive to development of effective and sustainable
amend the Classic Directives proposing partnerships. Trust must include the open
amendments with a view to making exchange of information, the possibility to
procedures more flexible. Additionally the have non-conflictual dispute resolution
Commission has made proposals to and respect for the objectives of all parties.
modify the classic Directives.
Trust also implies a strong level of
political commitment which must be
6 INSTITUTIONAL developed, sustained and communicated
by the necessary institutional structures.
STRUCTURES To this end, experience has shown the
value in identifying a ‘political champion’
Effective legal, regulatory and contractual of PPPs able to provide an effective link
conditions are crucial to PPP success but between political priorities and
can only exist if supported by an efficient institutional structures. Political support
institutional structure which both should be realistic and practical about
facilitates PPP development and provides what PPP can achieve and how it is to be
clear boundaries to protect the interests of implemented. There will be occasions
all parties. Most Member States have where projects must be stopped (and
realised that PPP development requires indeed the public sector must play an
major institutional changes not least active role in identifying these situations),
because the role and responsibilities of the but likewise a reasoned approach is
public sector change from direct service required to identify when projects present
provision to management and monitoring. greater long term interest as opposed to
However a further role is sponsor and short term political gain. This requires
developer of the PPP concept. To this end institutional structures able and willing to
several Member States developed effectively negotiate with the private
specialised PPP task forces. sector. This includes taking the necessary
time to correctly structure deals and where
Two principal models of intervention necessary to show willingness to
exist. The decentralised approach, as renegotiate contracts to enhance benefits
adopted by France, places responsibility at fairly for all parties.
the regional level and within the concerned
line Ministries. Other countries, such as An institutional framework is required to
the UK and Ireland, have selected a more allow the public sector to change from
centralise approach by creating one being a direct service provider to an
dedicated national PPP unit. In both cases independent regulator, manager and
countries have realised the importance of monitor. Additionally it must provide the
sourcing high calibre experts to create a role of project promoter. All functions
nucleus able to drive the process. At the require an in-depth understanding of the
beginning such units focus particularly on motives of the private sector and therefore
developing capability, required legal and how a balance a can be achieved between
regulatory structures, market interest and these and the objective of safeguarding the
pilot projects in order to test and publics’ interest. Sustainable success of
demonstrate the value of PPPs. As PPPs can be enhanced by including civil
experience is gained the role of such units society in the monitoring / oversight
changes to focus on assisting the selection structures. Implementation of PPPs as an
of PPP opportunities, counselling, alternative financing and service provision
ensuring value for money, investor model must be seen to provide and
attraction and above all maintaining demonstrate value for money and quality
political support. service provision. The public, as paying
48
consumers, are therefore a critical produce electricity to be sold onto the National
Grid.
barometer of performance and suitability
of PPP implementation and should be 'Profit making'
integrated into the monitoring process.
This implies that PPPs are influenced both Campaigner Eric Wedge, 59, from the group
"Hull Against the Incinerator", told BBC News
from the top down but also from the Online: "People need to be aware about the
bottom up. lack of consultation which goes into these
profit-making projects.
“Incinerator protesters march "We want them to meet us on the Guild Hall
again” steps on Saturday... we have collected 25,000
signatures, which is the largest petition ever
got up in the city of Hull."
Academic studies
Hull City Council - Protestors claim councillors Mr Carr said: "The UK Department of Health
have not consulted them carried out a seven-year study into 14 million
people and 72 incinerators, and found that if
A campaign is underway to prevent the there was any cancer risk from incinerators it
construction of a waste incinerator in the was so small that it wasn't measurable.
centre of Hull.
"The level of emissions that would be
Hull City Council and East Riding of Yorkshire
produced are equivalent to the levels of
Council have signed a 25-year contract
dioxins in urban soils.
allowing the Waste Recycling Group (WRG) to
burn 165,000 tonnes of rubbish a year in the
The dioxins released on bonfire night are
new incinerator.
equivalent to that released from all the UK's
incinerators in one year."
Hundreds of protestors who are concerned
about the alledged health risks associated with
In August, 400 people attended a protest
incinerators are marching to the city council
March against the incinerator proposals, and
buildings to object to the plan.
demonstrators entered Hull City Council
wearing gas masks.
WRG insists that the incinerator, proposed for
Stoneferry in Hull, would be perfectly safe.
'Highest standards'
49
PART 3 FINANCIAL AND ECONOMIC IMPLICATIONS OF PPP
PART 3 - Summary
2 FINANCIAL
1 INTRODUCTION IMPLICATIONS OF RISK
The primary focus of this Part is to address • Risks are directly translated into
the financial and economic implications of financial implications
PPP relationships. It will focus primarily
• Risk should be transferred to the
on three areas, being:
party best able to manage it in the
most cost effective manner
• The financial implications of risk in a
• Risk should not be transferred for
PPP relationship
the sake of doing so
• Ensuring value for money from a PPP
at the design and evaluation stages
• The optimization of grant A risk is defined as any factor, event or
contributions. influence that threatens the successful
completion of a project in terms of time,
It is not intended to explain the different cost or quality. A key principle of PPPs is
techniques of financial and economic that risk should be allocated to the party
analysis which are well known and best able to manage it. The effective
integrated into accepted project allocation of risk has a direct financial
preparation processes. Instead this Part impact on the project as it will result in
will present additional issues to include in lower overall project costs and will
the analysis of projects which are therefore provide enhanced value for
characteristic of PPP relationships. money if compared to traditional
procurement methods.
50
sector will influence the overall cost of the regarding usage and revenue levels must
project to the public sector as all risk will be made. While these calculations are
be associated with a price premium. usually intended to be conservative,
Therefore the objective must be to achieve overstatements are not uncommon.
cost effective risk transfer not simply risk Moreover, unforeseen future events can
allocation for its own sake. also have dramatic impacts, such as the oil
shocks of the 1970s, which were a major
The objectives of risk transfer include: factor in the failure of the three private
concessions in France.
• To reduce long term cost of a project
by allocating risk to the party best able Traffic risks are also amplified in CCs,
to manage it in a most cost effective where assumptions regarding economic
manner growth and automobile ownership take on
• To provide incentives to the contractor greater importance. Moreover, in
to deliver projects on time, to required countries, where automobile ownership
standard and within the budget and income levels are lower, and motorists
• To improve the quality of service and often opt to drive on slower parallel routes
increase revenue through more rather than paying expensive tolls.11
efficient operation
• To provide a more consistent and For road projects, the adequate level traffic
predictable profile of expenditure risks to be transferred to the private sector
should be carefully analysed. Shadow toll
The following discussions address risk or availability payment mechanisms
categories and allocation. should be considered instead of real
tolling, which usually does not yield
enough revenue to cover a significant
2.1 Revenue Risk percentage of investment costs.
51
2.2 Choice of Private Sector Partner concession contract is actually signed.
Construction delays also have detrimental
Inherent risk is associated with forming a effects on capital costs. While some
partnership with unknown partners. This delays can be minimized through careful
is accentuated through a public construction management, they still have
procurement process which does not the potential to arise. Other external
facilitate extended negotiation periods factors, such as timely delivery of right-of-
allowing a degree of knowledge and way, for example, are more difficult to
confidence to be established. The manage. External forces such as inflation,
principle risks are that the private party economic policy, embargoes, and political
proves insufficiently competent and / or is conflicts also have the potential to have
not able to deliver the services to the initial dramatic affects on capital costs.
specifications. This can be because of a Construction risk is nearly always
badly researched tender or because tenders assigned to the private party, which in turn
were designed to win the contract in the is likely to include strong incentives for
hope of recovering costs at a later stage. on-time completion of works in its
In both instances the tender evaluation construction contract.
must aim to identify such situations.
52
France in the 1970’s, for example, when an infrastructure partnership. IFIs and
the government reneged on its multilateral organizations such as the
commitment to allow private Commission can use their influence to
concessionaires to set toll rates. This help to counter political risk. Bilateral
factor was critical to the demise of three agencies such as export-import banks have
out of the four private motorway operators also been known to provide political risk
in France. More recently a lawsuit guarantees to private concessionaires from
sponsored by the Hungary Automobile aligned countries.
Club was successful in its charge that the
service on the M1/M5 Motorway was not
commensurate with the high tolls charged, 2.7 Environmental / Archeological
and the court of first insistence ordered a Risk
50 percent reduction in toll prices.12 This
decision lead to an immediate suspension Infrastructure projects have the potential to
of disbursements by the European Bank provoke environmental concern, and
for Reconstruction and Development and governments and citizen groups are
delayed construction for seven months. becoming increasingly vigilant in their
efforts to mitigate potential impacts.
These risks are more common than many Unforeseen environmental issues can
project finance proponents like to admit.
They can have substantial effects on
existing concession agreements, and also
weaken interest in future projects.
Regulatory risk is exacerbated in countries
where new and untested laws govern PPP
projects, which is often the case in CCs.
Such risks can be expected to be greatest
in countries with comparatively little
experience in project finance.
Public protest can severely disrupt project
implementation. However constructive public
participation should be encouraged to optimize design,
2.6 Political Risk minimize protest and enhance public oversight.
Assessments of the inherent strength and increase capital costs considerably and
stability of local political institutions are result in serious delays. Environmental
common in the investment field and are risk is usually assumed by the private
reflected in bond ratings prepared by party. For this reasons, most would-be
internationally recognized rating agencies. investors undertake thorough
As political risk increases, so does the cost environmental assessments and identify
of obtaining financing. The long duration likely mitigation programs before entering
of most concession agreements and the into a concession agreement.
common aversion to user fee increases,
make PPP projects especially susceptible
to political risk. This is exacerbated when 2.8 Latent Defect Risk
new governments oversee unpopular
projects instigated by previous It is now increasingly common for
administrations. Political risks are often governments to provide contractors /
assumed by host governments, but such an concessionaires with the right to pre-
assignment can prove less than optimal in existing infrastructure systems as a way to
the face of lackluster political support for help finance the construction of new
infrastructure. In many cases, new
12
John D. Crothers, “Project financing of toll projects may also involve upgrading and
motorways in central and Eastern Europe: a expanding existing systems. In exchange,
signpost for transition?” Law in Transition, concessionaires usually assume
Spring 1997, pp. 6-11.
53
responsibility for the maintenance of these delivery of value for money. Publicly
facilities for the duration of their contracts. procured and operated projects provide the
While seemingly attractive, this tax paying public with the ability to
mechanism can be costly for control the quality through votes and
concessionaires if the facilities they inherit taxes. The introduction of private
have unknown structural faults. The risk operators may reduce this control if
of encountering unpleasant surprises can effective control or oversight systems are
be minimized when thorough and well- not developed. Along with the
documented inspections of the facilities to development of an effective public sector
be transferred are completed before management and monitoring capability it
concession contracts are formalized. is necessary to promote the development
of consumer “watchdog” associations and
allow for public consultation. This not
2.9 Public Acceptance Risk only creates a direct link with the private
operator but also develops a strong sense
Infrastructure projects have the potential to of consumer ownership or participation in
provoke vociferous protests among local PPP projects.
communities; a fact which can prove fatal
to private concessions. There are several
notable examples of public acceptance risk 2.11 Hidden Protectionism
in Europe. The Lyon Périphérique Nord
concession was ultimately canceled due to Infrastructure provision is generally
wide spread public opposition, boycotts, perceived to be within the domain of the
and protests aimed at the project’s high public sector, and the public can be
toll levels. Controversy has also skeptical when private actors are involved.
surrounded routing of the A2 Motorway Such skepticism can be exacerbated when
through greater Warsaw in Poland, and investors are from an outside and more
public protests to toll increases in Lisbon affluent country and have the potential to
associated with the new Vasco da Gama make a profit on their investment. When
Bridge concession brought traffic to a halt such a reaction occurs among the
on Portugal’s most heavily traveled populace, it can also have repercussions in
roadway link, while images of the angry the political arena, making it more difficult
protests were broadcast around the world. for foreign investors and their host
The government quickly acquiesced to the governments to resolve conflicts. Foreign
protestors’ wishes, reduced the tolls, and investors would be negligent if they
paid the concessionaire the difference ignored this issue, and should investigate
using public funds. One protestor in the the experiences of other outside investors
UK stopped construction on the Newbury in the countries where they are considering
Bypass single-handedly by lying in a doing business. It can be argued, for
hand-dug tunnel under the construction example, that this dynamic had negative
site for five days. These experiences repercussions on the now defunct M1/M15
demonstrate the very real threat that public motorway concession in Hungary. This
acceptance risk can pose. Prudent risk is borne by the concessionaire and it is
investors need to make careful best countered by consistent government
assessments of the approvals required for support. It is however ironic to note the
their projects, as well as public sentiment often inconsistent approach of public
towards the projects before deciding to bodies to foreign participation.
invest. Particularly there is often less objection to
arrangements developed through direct
agreements than when public procurement
2.10 Sustainability Risk is involved. It is through the latter that
nationality and foreign participation most
A principle objective of the public sector often becomes an issue.
is to protect the public interest and ensure
54
Detailed methodology to analyse risk is PPPs should only be adopted as a
presented in Part 5. It is important to note procurement and implementation option if
here that although the full quantification of they are reasonably expected to deliver
all risk facilitates analysis it is not always enhanced value for money over traditional
possible, effective nor desirable. Risk methods. Value for Money Assessment
quantification often involves complicated (VFM) is therefore crucial to deciding the
and costly models based on questionable suitability of a PPP, in general, and the
assumptions. This is particularly the case suitability of a particular project design.
where data is not complete or risks do not Additionally, as discussed in Part 2, given
have a direct impact. In such cases the certain restrictions on procurement
cost of risk quantification and the likely procedures, the evaluation stage of a
value / accuracy of data should be matched tender becomes crucial in deciding which
against the importance and likelihood of tenderer is able to offer the best solution,
the risk occurring. As such it is which is a function of value for money
recommended to firstly undertake a provided.
qualitative assessment of risk focusing on
impact and likelihood of occurrence. This
should permit the prioritization of risks 3.1 Factors Determining Value for
and hence the quantification of the most Money
important ones. Part 5 discussed some
common analytical methodologies. Factors determining value for money will
obviously vary from project to project and
The allocation of risk should reflect the between sectors. Generally, however, PPP
specific characteristics of the project and will generate value improvements in a
the strengths of each party. However the number of areas including:
cost of risk transfer must not be neglected
as, given the nature of PPPs, the • Reduced life cycle costs
achievement of value for money will often • Better allocation of risk
depend on the level and cost of risk • Faster implementation
transferred to the private sector. It is also • Improved service quality
good practice to investigate the extent of
• Generation of additional revenue
risk transfer (and the financial
implications) in other associated contracts.
A recent survey commissioned by the UK
Given the interdependence between
Treasury Taskforce on PPP identified that from
project components and contracts it is a public sector perspective, there are 6 key
likely that a significant transfer in a drivers of value for money in PPP projects
separate component can have a financial including: risk transfer, long term nature of
impact on others and hence should be contracts, the use of output based specification,
identified and accounted for. competition, performance measurement and
incentives and private sector management
skills.
3 ENSURING VALUE FOR The average percentage saving in net present
MONEY IN A PPP cost terms of using PPPs was estimated at 17%
over the contract duration.
• PPPs should be used only if they
provide better value for money
than traditional methods 3.2 Assessing Value for Money
• Value for money assessment Potential
techniques are complicated and
require quality data and should Value for money (VFM) generation
be used after careful reflection potential should be investigated with
• However value for money must particular reference to:
be a primary objective in
maintaining the public interest
55
• The scope of the project including the and, on projects that involve public
balance between asset provision and money, through a value for money
service delivery assessment of the costs and benefits of the
• The potential for cost effective risk preferred PPP tender.
transfer particularly with respect to
demand and residual value risk The nature of the value for money
• The scope for user charges, third party assessment undertaken at the end of the
revenues and alternative asset usage procurement process depends on whether
that might reduce project costs the PPP project is financially free
standing, generates the majority of its
Traditionally this type of information is revenues from third parties, or is reliant on
gathered from market analysis and public finance. The nature of the value for
reference to previous projects and money assessment for each type of project
historical data. However if these sources is summarised below.
prove insufficient or substantial concerns
exist it may be necessary to undertake a
shadow bid. This can be done in one of 3.3.1 Financially Free-Standing Projects
two ways:
• Estimating the cost savings required – Financially free-standing projects require
this involves adding the additional the Contractor to recover all costs through
costs of a PPP approach (including the charges on the final users of the service.
cost of private finance, profit margins, The public sector plays a facilitating role
tendering costs and the cost of public but no public money is involved. It is
sector regulation) to a financial therefore the responsibility of the
comparator (defined as the comparison Contractor to determine whether the
of the cost of the preferred PPP tender project is commercially viable and suitable
with the cost of delivering the project for investment.
through traditional public sector
procurement methods) and then The Contracting Authority should satisfy
making a valued judgement on the itself through project appraisal that a
potential of the private sector to Concession contract is the preferred form
eliminate these additional costs of PPP for the project, and that the
• Actual Bid – this involves developing application of user charges is appropriate.
an actual bid for the PPP project and The Contracting Authority should
comparing it to the estimated cost of determine its preferred approach to the
traditional public sector procurement setting of user charges, and develop a
costs. payment mechanism that will deliver
government policy, the objectives of the
It should be noted that the above concerns project and protect the public interest.
assessment for the potential of a PPP to Value for money is achieved through the
generate value for money. Actual competitive tendering process which is
assessment can only take place at the end based on the economically most
of the procurement stage but should be advantageous offer principle.
done before the conclusion of contractual
arrangements.
3.3.2 Concession Contracts with Public
Grants
3.3 Parameters for the Final VFM
Assessment The issues set out above for financially
free-standing projects also apply to those
The achievement of value for money in a projects where the public sector provides
Public Private Partnership procurement is, grant financing and / or subventions but
in part, evidenced through effective the revenues come principally from user
competition between potential suppliers
56
charges (ie the public sector is a minority but their value to government and the
funder). wider public is significant. Examples
include speed of project delivery,
However, such projects do involve the quality of service, and security of
investment of public money and there is supply.
therefore a need to ensure that the project
represents the best use of the public funds.
For this reason the benefit gained from 3.4.1 Parameters Required for the
applying the funds to the PPP project Monetary Comparison
should be compared with the benefit
gained from applying them to an The monetary comparison could take one
alternative project that would otherwise of four forms depending on the
not proceed. Policy priorities will be an characteristics of the project The four
important consideration in this regard. forms of monetary comparison can be
Public subvention could take a number of summarised as follows:
forms, including capital grant and revenue
support. • Financial Comparator - involving a
comparison of the cost of the preferred
3.3.3 Projects where the Public Sector is PPP tender with the cost of delivering
the Main Financial Contributor the project (to the standards set out in
the initial output specification)
In the case of projects where the public through traditional public sector
sector is the sole or main funder a detailed procurement;
value for money assessment is • Best available alternative - for projects
recommended at the end of the where the cost of traditional public
procurement. The assessment should sector procurement is difficult to
compare the costs and benefits (in determine, the cost of the preferred
monetary and non-monetary terms) of the PPP tender should be compared with
preferred PPP tender with the costs and the best available alternative costing;
benefits of traditional procurement, or • Price benchmarks - involving a
under certain circumstances, with other comparison of the preferred PPP
comparable measures. tender with reliable, comparable and
independent price benchmarks or unit
costs (for example, standard costs per
3.4 Elements of the Value for Money volume); and
Assessment • Comparable PPP projects - involving a
comparison of the preferred PPP
A value for money assessment comprises tender with the cost of other
two key elements: comparable existing PPP projects.
57
discounted cashflow analysis. In practice, discounted cashflow analysis and over a
if the preferred PPP option results in the range of applicable discount rates. The
transfer to the private sector of all services Net Present Value (NPV) of the public
included in the preferred option arising sector project is compared with the NPV
from the Project Appraisal, then the of the PPP option. If the difference in
differences between the Financial NPVs is positive then the PPP alternative
Comparator and the preferred option will is considered attractive. A further
be limited. refinement entails making the cash flow
calculations stochastic through the use of
The Comparator is based on a hypothetical ranges instead of mean values and the
project contract in which the public sector application of Monte Carlo analysis. The
undertakes all functions (design, build result is a probability distribution of the
operate etc) based on actual costs incurred NPV of the PPP option as compared to the
on similar projects. It should include all public procurement option. This
risks and the value of any assets to made distribution would also indicate the
available to the project. Care needs to be possible spread in the output and again a
taken to avoid double accounting positive value means the PPP is the more
particularly with respect to public sector attractive option.
costs that would not be part of a PPP
contract. A suggested layout of the model is
provided below:
The costs expressed in the assessment
should be presented in real terms in a
58
3.4.3 Best Available Alternative monetary terms, but their value to
government and the wider public is
Ideally, the Financial Comparator should significant. Examples include speed of
be based on the same services and service project delivery, quality of service,
levels as the preferred PPP option. security of supply and equity issues such
However, for projects where there is no as the accessibility of services.
track record of public sector procurement, Consequently, the monetary comparison
the cost of the public sector providing the should not be approached as a pass fail
service levels defined in the output test, and should be complemented with a
specification may be difficult to determine value for money assessment of the costs
and subject to a high level of uncertainty. and benefits of the preferred tender in non-
monetary terms.
In such circumstances, the Financial
Comparator should be based on the best The costs and benefits of the preferred
available alternative costing, which will tender may be usefully compared with the
most likely relate to the provision of costs and benefits of traditional
services to a lower or alternative standard. procurement in non-monetary terms
The best available alternative may relate to through the use of impact statements or a
the cost of current provision. weighting and scoring matrix.
59
incentive to optimise the amount they The overriding consideration must be to
request. Additionally in the specific case match grants to real project needs thereby
of the ISPA application process introduces avoiding the potential for a “Ferrari
a certain element of rigidity in that the syndrome” in which over ambitious
grant amount is determined at the project designs are financed and implemented.
design and application stage and is The ISPA Programme currently bases the
approved before procurement. This calculation of a grant on the revenue
together with procurement procedures that generating capacity of the project with
do not facilitate price negotiations make it regard to an equitable tariff policy, no
difficult to adapt grants to real unreasonable profits to the private party
requirements unless an effective and the maximisation of co-financing
negotiation phase is foreseen. opportunities. A Discounted Cashflow
Analysis is used to assess the projects’
Grant financing has two principal impacts, ability to generate revenue to cover costs
namely: without a grant and specifically what, if
• an immediate impact on project any, percentage of capital costs can be
financial viability by reducing costs covered. The grant represents the
(or increasing revenues) ‘financing gap’ between forecasted
• an impact on Local Authority (ie revenue generation and required revenue
Municipal) budgets by reducing generation.
demand on funds and allowing budget
transfers to other requirements An alternative has been to calculate the
• an impact on the private sector Internal Rate of Return if this is below an
contractor’s perception of project acceptable level then the grant
viability contribution should represent that amount
required to raise the IRR to an acceptable
Assessing the level of required grant level.
financing is complex and must give regard
to the objectives of and impact on each of Both approaches are well known.
the parties in a PPP, not simply ‘the However both represent a certain number
project’ itself. A basic principle should be of difficulties not least of which is the
to provide grants only up to that amount definition of an acceptable IRR and the
which allows the project to be realised and level of affordability to sustain required
operated in a sustainable manner. This user charges and tariffs.
assumes that a range of financing options
are considered for realisation and that the Alternative methods include:
project is considered over its useful
financial life. • the Commission has also made a
distinction between project types and
has assigned fixed rates of grant
assistance to each. This obviously
provides no incentive to optimise
grants or undertake financial
engineering
60
beneficiary to finance debt. As a as a general, not selective measure) and
result grants are set to a level which where the public is charged for the
allows realisation of the project but services, any financial compensation from
assumes that the first priority of state resources for the provision of such
financial engineering will be to services could be interpreted as
assume the maximum [efficient] level constituting state aid. The precise limits of
of debt. In this approach soft loan this restriction are still being defined by
investment funds have often been case law and awaiting a final ruling by the
successfully used which blend Court of Justice. The Commission has
commercial loans and grants to however published a recent report13 which
provide soft loans thereby promoting suggests that state aid rules are not
debt financing but nevertheless breached (that is, any state aid is
reducing the overall debt burden. compatible) as long as grant contributions
are correctly calculated and only serve to
• greater emphasis can be placed on allow the operator to function and provide
determining more accurate estimations the services in a situation of "economic
of the IRR and ability to pay. Both, equilibrium". This would seem to support
currently, suffer from a lack of the absolute need to ensure both that, no
consistent and reliable data in the CCs unjustifiable excess profit is created by
which makes benchmarking the grant financing and that the project could
figures very difficult. This is a result not operate viably without the grant
both of insufficient availability of data contribution. Additionally any
and inconsistencies in analysis as is renegotiation of grant contributions with
often witnessed in project appraisal private operators would need to follow the
work. This situation can be expected same logic. This situation is still evolving
to improve with greater experience of and the expect decision from the Court
project implementation and Justice will need to be integrated into
application of user charges, however future grant design.
for the moment greater expenditure on
project financial analysis would seem In all cases the prime objective of the
to be the only alternative. Commission in protecting the public
interest, should be to optimise the grant
• a facility that is not sufficiently allocation in such a manner that the project
exploited at this time, due to restrictive is realised, is financially viable,
procurement procedures, is to allow sustainable and generates the maximum
the private sector Tenderers define the social benefit but which also limits
required level of grant assistance. [resulting] private sector profits to
This is a useful benchmark where reasonable levels. This can be represented
flexibility is given to Tenderers to graphically in the following diagram.
suggest their optimum approach and
where they are encouraged, through
the tender conditions, to minimise
their demand for grant financing.
61
Trade–off Private Sector Profit – Social Benefit
Real Impact of
New Operational
Asset (With Grant) 3
X Effect of Re-Negotiation
4
Y 5
Impact of 2
Associating
Private Expertise
/ Capital
1
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PART 4 INTEGRATING GRANT FINANCING AND PPP
CHARACTERISTICS
PART 4 – Summary
• Grant financing has strengths and weaknesses which must be integrated into the
project.
• Grants should be used when required and matched to actual project needs
• Grants can be delivered in a number of methods depending on required impacts
• Grants have a strong conditionalities which may limit their application
• The ability to use grants in a PPP depends on the ability to meet conditionalities or
provide sufficient safeguards to protect the Commission’s interests
• The length of concession contracts is of particular interest to the Commission and
must correspond to the spirit of the Procurement Directives
• This Part will address:
• Justifications for grant financing
• European Commission financing characteristics
• Length of concessions
63
commercially orientated forms of risks and therefore project cost. Grants
financing and hence PPP relationships. can be used directly to finance risk
These developments has been augmented coverage or used as a guarantee
by the trend of privatisation in utility mechanism. However the presence of the
service provision and the increased grant giving body and the willingness to
availability and application of private commit public funds, additionally provides
finance. These developments have forced the private sector with a certain assurance
a review of how grants are best used and regarding the seriousness of the project
particularly how the advantages of free and sponsors.
funds can best contribute to an overall
financial package. The above two strengths are associated
with the ‘leveraging’ effect of grants
Deriving the maximum benefit from grant meaning that the availability of grants is
financing requires an identification of their usually conditional upon or enhances the
relative strengths and weaknesses. The availability of co-financing or is a
following discussion presents a number of facilitator to identifying other sources of
these but it should be borne in mind that, funding. In this case grants have an
as with Commission funds, grants usually important and complimentary role to play
have conditionalities attached which do in PPPs as both tools aim to increase the
not necessarily relate to market (ie value and volume of financing.
financial) necessities and therefore such an
analysis must go wider than a simple cost As stated above, conditionalities are
– benefit analysis of financing instruments. usually attached to grants which are often
wider than financial conditions. This can
The most commonly cited advantage of have the advantage of accounting for or
grants is the ability to finance projects realising socio-economic externalities
which would / could not otherwise be particularly if these impinge on project
financed by commercial sources alone. viability and grants pay for them.
This is most often the case with ‘social’
infrastructure which does not usually However grant financing also has a
provide sufficient financial viability for number of weaknesses which must be
commercial financing. This argument is recognised if they are to be successfully
valid provided that the investment costs integrated into PPP’s. Most importantly
together with operational and maintenance grants, in themselves, provide little
costs are included and therefore that the incentive to efficiency enhancements
investment is sustainable over its useful usually associated with the pressures of
(financial) life and provides a real social commercial financing. Additionally the
benefit. availability of free funds can cause a
degree of dependency and ‘crowding out’
The use of grants is, arguably, most of alternative sources. This has been seen
valuable in co-financing applications in the CC’s where a, natural, reaction has
where its objective is to increase the been to focus on free grants and national
financial viability of a project to a level funds before considering other sources to
allowing the application of commercial the point of delaying investments or
financing. This leveraging function entails refusing to consider alternative financial
the use of grants to reduce the overall cost sources.
of the project or to enhance the value of
the revenue stream. It is in this field that A common complaint has also been the
grants can be applied most intelligently to difficulty and cost of implementing grants
derive the maximum benefit and different which are usually subject to more lengthy
methods of doing so are presented later. and bureaucratic procedures. This has
made their integration into commercial
The presence of grants, and by association financing packages difficult. However it
a public or international body, often also must be remembered that grants are
assists in reducing certain types of project usually public funds and therefore imply
64
stringent public accountability permanent arrangement due to the
requirements. introduction of inefficiencies.
• Financing the public sector’s
contribution in-kind.
2.1 Determining the Form of Grant • Assisting the financing of the public
Assistance sector’s financial incentives to the
private sector.
Grant financing usually focuses on the
provision of services, supplies and works Additionally the restrictions placed on
for the realisation of physical grant financing by the potential to
infrastructure. They therefore intervene contravene State Aid rules as discussed in
directly on the capital costs side of a Part 3 chapter 4 must be integrated.
project by reducing costs and / or
enhancing revenue streams. In all cases it is crucial to assess the real
need for grants and to optimise the grant
Grant financing can be used in a number amount relative to this. While grants have
of different ways with the objective of many positive contributions, the negative
optimising their impact. This objective is impacts of grants on a project and public
driven in part by the fact that the financing should not be forgotten.
availability of grants is often limited, as is
the case of the Commission budget relative
to overall financing needs, and that grants 3 COMMISSION
should not be seen as an alternative to FINANCING
other sources of financing but rather as a
constituent part of a financing package. CHARACTERISTICS
As a result project designers must ask the
question ‘where, and in what form, will a • Grant conditionalities influence
grant have the most impact relative to the the entire project cycle but are
needs of the project’ and ‘how much designed primarily to safeguard
funding should the grant provide’ (this is the public interest and guarantee
treated in Part 3). the correct use of funds
• Of particular concern is the
Alternative applications of grants include development of PPP
(but are not limited to) the following: relationships and procurement
and hence at what stage the
• Provision of regular, subsidy, Commission becomes involved
payments to operational costs. This
can be particularly useful in the first
years of operation when cashflow is The ISPA objectives and implementation
still developing but is not sufficient to procedures are a good example of the
cover all costs, particularly the cost of conditionalities often attached to grants.
capital. Although focus is placed on technical and
• Coverage of financial costs. This can financial viability and sustainability
include: criteria, nevertheless grant recipients must
• Reducing the cost of borrowing by also fulfill numerous wider conditions.
effectively ‘softening’ loans The recognition of their implications is
• Providing loan guarantees crucial to the successful integration of
• Financing risk elements Grants into PPP’s.
• Subsidising taxation payments
• Covering exchange rate losses ISPA has been designed as an instrument
• Subsidising revenue flows. This is to assist the development and realisation of
particularly useful if a policy objective environmental and transport infrastructure
is to keep user charges low. However with the specific recognition that it
this should not be considered a operates in economies which do not have
65
the financial means or investment climates become less tenable if ISPA grants present
to finance them themselves. It should be a smaller minority of total funds.
noted however that it was not designed to The main characteristics, over and above
undertake the financing of these the technical and financial project
investments itself and indeed insists both characteristics, defining ISPA financing
on co-financing and encourages the (and hence potential cooperation with
possibility of using a diverse range of private sector partners) include the need
funding sources and mechanisms. for a project to enter into a defined list of
financing objectives and priorities, the
It is also important to note that the adoption of financing rules and
Commission is not directly a contractual Commission approved procurement
partner with the project beneficiary but procedures and ex-ante control of
instead channels its funds through a implementation. Additionally the
national structure which is responsible for Commission has certain needs which must
ensuring that the conditions of financing be met in all projects including;
are respected. There is however an transparency in implementation
important difference with other EU funds particularly with respect to procurement,
in that ISPA [currently] maintains ex ante early involvement, clear demonstration of
control over implementation. This results public benefit and value for money
in a situation in which while ISPA is not including that grants are not unfairly
directly [contractually] related to the benefiting the private sector and evidence
project implementers it nevertheless that European standards are adopted in
exercises an enormous influence on the design criteria. The factors influencing a
design and implementation of the project. Commission grant to a PPP can be
While ISPA provides majority financing summarised in the following diagram.
this situation can be justified but would
RESPECT OF
PROTECTING COMMISSION – STATE AID
THE PUBLIC PPP REGULATIONS
INTEREST INTERACTION
EFFICIENT GRANT
ALLOCATIONS
66
These influences derive from the • Re-negotiation of contracts should
principles of the European Union as be undertaken where required to
enshrined in the Treaty and Acquis and re-balance contracts
from the objectives associated with • Implementation of PPP should not
Commission grant financing. They can be diminish focus on and
summarised as: responsibility for social
consequences including
• Ensuring Open Market Access – this employment and socio-economic
includes: development
• Fair and open participation of
parties receiving equality of • Defining the optimal level of grant
treatment financing – this includes:
• Application of transparent public • Grants to be matched to real needs
procurement procedures • Maximise use of limited funds
• Application of the Public • Do not distort market operation
Procurement Directives • Maximise leverage potential of
grants
• Adherence to the principles governing • PPP are not to be treated as an
State Aid – this includes: accounting tool to move public
• Ensuring there is no over- expenditure ‘of balance sheet’.
compensation for services
rendered
• Grants matched to real needs 3.1 Managing the Commission – PPP
Relationship
• Protection of the public’s interest –
this includes: PPP relationships function when the
• Ensuring PPPs and grants deliver concept of a partnership between parties is
quality of service fully recognised. This requires both joint
• Value for money must be cooperation and an understanding and
demonstrated integration of the aims and objectives of
• Public participation in the all parties. As such if the characteristics of
oversight function should be one party are not addressed the partnership
included for sustainability is unlikely to proceed effectively. This
• Windfall profits to contractors interdependency can be demonstrated by a
must be avoided tripod whereby if one leg is removed the
structure collapses:
The Project
67
This section will deal with the problematic included in simple PPP relationships. This
of integrating Commission objectives and has raised the issues of:
conditionalities into a PPP relationship
(the following section will address the • how will or was the private party
specific issue of how to structure a grant). selected and is this in-line with EU
It is assumed that the problematic of procurement Directives and
integration lies in operating with the procurement policy and hence
private sector as the Commission already acceptable
has experience of joint or co-financing • what will be the impact of grants on
with other IFI’s. Commission exposure to the private sector financial balance
cooperation with the Private Sector will • is the continued viability and
change with the increasing pace of sustainability of the investment
privatisation of utility operators and the guaranteed
need to rely on private funding sources to • will the EU’s standards be fulfilled
complement limited public funds. As a • who will retain ownership of assets
result the Commission is already facing • is public benefit assured
the existence of both local and foreign
private operators. Although their The main issues can be summarized as
intervention is predominately in the form follows:
of service contracts, the Commission is
nevertheless increasingly finding itself
It should be noted that these issues are allowing the effective integration of
usually raised at the beginning of a project Commission grants into the PPP process
but also during project implementation focusing particularly on changes to
particularly with the current trend of contractual terms between parties, for
privatisation. Methods must be developed ISPA notably through the Financing
68
Memorandum; and changes to selection markets it is questionable whether
and procurement procedures. This greater attention should be paid to the
requires recognition of the fact that as the size of grants in relation to possible
complexity of PPP relationships increases, commercial financing which in turn is
the Commission may find itself no longer relative to the debt capacity of the
in the position of majority financier and project and the beneficiary. Attention
therefore imposing its current should be placed to avoid crowding
conditionalities may create inefficient out commercial / alternative financing
barriers to project realisation. sources. Related is the issue of
Additionally, as discussed in the following whether grants could not also be used
section, the use of grants may also change to directly finance the application of
in terms of what is financed thereby commercial loans to project
further removing the Commission from implementation.
physical project implementation. • increasingly projects are faced with
changing circumstances in terms of
In order to define such methods, each of ownership, privatisation, project
the 4 categories of PPP relationships conditions. It is obviously the
(defined in Part 1) will be analysed in Commission’s interest to maintain the
terms of changes required to ensure: value of conditionalities it imposes.
The Financing Memorandum, Article
• that no undue financial benefit accrues 8, makes provision for changed
to the private sector as a result of grant circumstances during the first 5 years
financing of the project. With increasing private
• that there are clear justifications for sector participation it is however
the application of grants in particular important to ensure that potential
with respect to demonstrating value benefits from changed circumstances
for money are not lost.
• that there is transparency and fairness
in selection and procurement
procedures 3.1.2 BOT Projects
• that the Commission is able to benefit
from an early involvement in project The pertinent feature of this group of PPP
design and implementation relationships is that while ownership of
• that effective monitoring systems and assets and responsibility for funding
procedures are available management remains with a public body,
the assets have a private operator who
derives financial returns from their
3.1.1 Traditional Public Sector operation and hence (direct or indirect)
Procurement charging of users. As a result the concerns
of undue financial gain and value for
This basic type of PPP relationship money are particularly relevant.
essentially involves service contracting for
well defined tasks with ownership of While the procurement process can
assets and the management of financing essentially remain the same, the advantage
remaining in public hands. As such there of these relationships is gained through the
should be no conflict with current ISPA grouping of contracting, engineering and
regulations and indeed the Commission is operational functions to derive life cycle
already commonly involved in these cost benefits. The real issue therefore
relationships. becomes one of how to design
procurement and particularly evaluation,
Two issues remain outstanding: procedures to ensure that all efficiencies of
the BOT approach are captured. Part 2
• given the increased private sector demonstrated that given the restrictions of
interest in providing services in CC the current ISPA procedures, some
69
flexibility can nevertheless be introduced financial projections prove better than
either by allowing variant solutions in initially forecasted.
tenders and / or by placing more emphasis
on evaluation techniques which identify The monitoring function is particularly
the full range of costs and benefits. important in this relationship as the public
body changes from being an operator to a
This approach allows project beneficiary manager and must therefore develop
to organise a tender which takes advantage adequate monitoring and oversight
of life cycle cost benefits resulting from capabilities to ensure that the contractor
the tender competition while also delivers against contract specification.
respecting the need for presenting full The existence of these capabilities would
technical specifications. This would allows the Commission to ensure its value
assume that the Commission is satisfied for money, public benefit and monitoring
with: requirements. Two further functions can
be introduced. The Commission should be
• Technical and financial performance present at the evaluation of the private
criteria contractor to ensure the fairness of the
• Evaluation methodology and criteria procedure against specifications.
• A minimum number of participants in Additionally the current role of ISPA
the tendering process supervising engineer could be transformed
• Adequate transparency and openness to an independent monitor of the BOT
in the procedures. contract until such time as the national
monitoring structures are able to
To further ensure that the project meets effectively adopt this function.
implementation criteria, the Commission
should play an active role in the A number of further issues have been
development of the evaluation criteria raised as a result of recent experiences,
(which in itself is a useful analytical tool these include:
for project design).
• The need to investigate the ownership
Given the time difference between grant structure of all assets and whether
approval and project implementation, such transfer of assets is envisaged in any
evaluation criteria will also better define part of the infrastructure chain. This is
the need for grant financing. It is therefore important as ownership or leasing
recommended that the results of the arrangements of one piece of related
evaluation process be integrated into the infrastructure can cross – subsidies the
Financing Memorandum and the grant operations of a private concessionaire
adjusted accordingly. This could provide and can therefore impact on the
a mechanism to more accurately match financial conditions of the project
grant contributions to actual need. • An holistic approach needs to be taken
to the investigation of Municipal
Concerns of undue financial gain to finances both to analyse the overall
private parties can be addressed by debt capacity, ensure that finances are
stipulating the expected financial returns sustainable and that the grant is not
to operations either by defining payments being used as a transfer payment
to contractors or setting maximum user fee • The selection of private
charges. Indeed it is now common concessionaires prior to the ISPA
practice to limit user charges and build in project remains an important issue.
incentives for additional profits to be Justification for selection should be
raised through efficiency gains thereby assisted if local authorities respect the
reducing the burden on fees. This should spirit of EU Procurement Directives
be supported by flexibility in the FM to and make specific reference to the
reduce overall grant contributions should requirements of the Treaty of Rome in
their selection. This is not always the
70
case and the Commission may be techniques, notably the application of a
required to undertake a separate public / financial comparator at project
analysis of the arrangements and the design and procurement evaluation.
value for money provided by the
concessionaire. It is therefore Additional issues include:
advisable to include the Commission
at an early stage of any procedures if a • Undue profit concerns can be
grant is to be applied for. addressed by setting financial return
guidelines in the tender specifications
and limiting the extent of user fees
3.1.3 DBFO and Concession although this may be difficult in
Agreements concession arrangements where the
private party assumes majority
The comments relative to BOT financing. As with BOT schemes
relationships are also relevant for DBFO opportunities for additional profit
and concessions as the public sector should be included as incentives for
entrusts operations to a private party but efficiency gains.
additionally the financing responsibility is • Value for money must be addressed
shared in that the private concessionaire through the minimum performance
brings an equity participation and / or criteria and standards to be
privately identified financing sources. implemented.
Asset ownership however remains • Transparency is addressed through the
(ultimately) with the public sector. Given selection procedure, agreed upon
the high degree of interest in concession beforehand with the Commission and
contracts in the Member States, the through the application of a public
Commission is currently investigating comparator to assess the bids.
these to ensure there are no possibilities • Effective monitoring systems are
for infringing competition and market particularly crucial as the public sector
rules. It’s Interpretative Communication is normally further removed from
sets out its argumentation as discussed in operations than under BOT schemes.
Part 2. The FM must include provisions for
changing the terms of the grant in
A DBFO must demonstrate the ability to relation to the regular findings of the
make sufficient financial returns to monitoring process. This ensures that
warrant private financing in a qualified an additional performance guarantee is
risk environment. This raises the question placed on the private party.
of the best role for grant financing being
either in the realisation of infrastructure or
F
the realisation / facilitation / leveraging of
a financing package (see next section). As a general rule, Municipalities
wishing to integrate ISPA financing
Even more so than with BOT schemes, into a proposed PPP are advised to
there are efficiencies to be gained by include the Commission at the
ensuring that funds are pooled and earliest possible stage to ensure that
managed by the concessionaire. Because conditionalities can be fully
of the implied derogation of responsibility integrated with minimal disruption to
an even greater degree of preparation is the project.
required with particular attention to the
definition of performance criteria which
will both ensure that conditionalities are
met but which do not stifle private sector
initiatives to enhance efficiencies. The
answer to this apparent contradiction may
lie in the use of more effective evaluation
71
4 LENGTH OF overcome, in part, by increased efforts
to publicise the purpose and
CONCESSIONS organisation of tenders and to ensure
greater openness and transparency in
• The length of contracts is of procedures. This should also include
major concern to the highlighting cases of private sector
Commission in its desire to corruption. It is therefore argued that
achieve open and fair a perception of fairness will create
competition greater interest in concession tenders
and facilitate their organisation on a
An issue which impacts both on private more regular basis.
sector participation in projects and the
Commission’s ability to approve PPP • As a general rule the lower the amount
arrangements is the duration of concession of risk assumed by the private party
agreements. Private operators will and the lower their financial
naturally aim to maximise the length of contribution, the shorter should be the
concessions to safeguard their cashflow concession period.
and the viability of their investment. The
Commission on the other hand aims to • A common tool is to impose a
promote open competition and fair market maximum cap on user charges but to
access, reduce the possibility of support the concessionaires cashflow
monopolies and ensure the public benefit. with subsidies (or shadow charges).
These objectives would suggest shorter While this does not promote the
concession agreements. implementation of effective tariff
systems or the polluter pays principle
These issues have been addressed recently it does allow social considerations to
by the Commission in its Interpretative be integrated into the financial
Communication on Concessions Under implications of concession duration.
Community Law (2000/C 121/02) which
results from the growth of concession • Another common tool is to separate
arrangements in the EU Member States the concessionaires revenue stream
and the potential for conflict with fair between user charges and an incentive
competition / open market Directives. payment relate to cost savings realised
through increases in operational
A number of considerations can be taken efficiency. This allows greater
into account when designing concession justification for longer concessions
agreements both when the Commission is because the concessionaire is
directly or indirectly involved, including: incentivised to take a long term
operational approach to meet his
• At the tender evaluation stage there revenue targets.
must firstly be a clear demonstration
of value for money from a concession • Several countries, particularly in the
arrangement which should be a solid waste sector, have taken the
priority factor in approving it. It is approach that where the former public
argued that currently not enough effort utility has been privatised and has
is placed in identifying value for been awarded the first concession, the
money and where further efficiency period of the first concession should
gains or cost savings can be achieved. be very short (in the region of 5 years
maximum) to reflect the fact that there
• A common complaint of the private has been an unfair competitive
sector concerns the perception of advantage and that the concessionaire
fairness of concession tenders. In probably received the concession at a
other words is the tender fair enough very low price. This gives sufficient
to warrant the investment in time for the private sector to analyse
developing a tender. This can be
72
the concession and prepare for the
next tender and for the former public
utility to restructure itself sufficiently
to compete in a fair market.
73
PART 5 PPP CONCEPTION, PLANNING & IMPLEMENTATION
PART 5 – Summary
• PPP project require careful design, effective support structures and a good
understanding between partners
• Previous Parts have discussed thematic issues. This Part presents a guide for the
development of PPP projects with a grant financing element
• Particular focus is placed on addressing 8 key PPP issues, namely:
o What are the objectives of grant financing and what is their best use
o Selection of the most suitable PPP type
o Success and constraint factors
o Ensuring open market access and competition
o Timing – including when the Commission should be involved
o Defining the right level of grant contribution
o Protecting the public’s interest
o Future requirements
• This Part will address:
• Project identification
• Project appraisal
• Design & agreement
• Procurement
• Implementation
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to develop and implement PPP –
2 PRACTICAL integrate private sector expertise if
required
CONSIDERATIONS
• PPPs must demonstrate additional
value for money over and above
The development of a successful PPP traditional procurement systems and
requires attention to a large variety of must be designed to maximise benefits
issues. As PPP is a developing concept to all parties according to their
the first stage must be to create a objectives
supporting institutional structure able to • All parties must recognise and
develop, guide and manage PPPs on behalf understand their objectives. The
of the public sector. This will entail the public sector has wider concerns than
development of supporting national and the private sector who will not deliver
local legislation and regulations enabling “free gifts” through the PPP process
PPPs, the development of institutional
• Effective institutional and regulatory
capabilities and importantly the creation of
structures must be developed to
effective management and oversight
manage and monitor PPPs. The Public
structures.
sector should be clear that some
control must be given to the private
Practical issues associated with PPP
sector
development include the following:
• The paying public should be integrated
into the monitoring / oversight
• selection of the most suitable PPP
function
structure for the local setting and
• Trust must be established between all
project characteristics
parties if a partnership is to be created
• developing systems and structures
which reduce complexity and
The following roadmap can be envisaged
wherever standardise the approach
to the development of an effective
• ensuring that the structures are enabling framework for PPP
manageable both in terms of size and implementation. This is followed by the
complexity critical path to practical PPP development
• ensuring that a full understanding of which forms the basis of this chapter.
the timing is achieved
• the public sector should be realistic
about the skills and experience it has
75
Guidelines For Successful Public – Private Partnerships
Requirements
• Legal context • Desired gains • Needs assessment • Integration of PPP • Open and • Effective
• Institutional • Obstacles and • Risk allocation into design transparent implmentation
capacity constraints • PPP components • Procurement process structures
• National policy • Private sector • Budgeting procedure • Detailed • Effective working
• Integration of interest • Expectations of a selection & design recordings relationship
projects into EU • True cost of PPP • Funders
harmonisation and services requirements
priority funding • Cost and benefits • Financial and
strategies of PPP socio-economic
appraisal
76
of institutional strengthening and ensuring
3 IS A PPP FEASIBLE - the effective development of PPPs.
IDENTIFICATION The objective of this phase is to assess
whether a PPP approach is suitable for a
• Effective PPP development requires particular project. The responsibility for
effective regulatory and strategic this assessment and final decision should
structures to be in place lie with the National Authority as project
• The suitability of a PPP approach to beneficiary and project sponsor (for
project realisation should firstly be convenience in this Part the term “National
assessed given the capability and Authority” is assumed to imply the
capacity of the public sector to relevant national body responsible for
implement PPPs and derive benefit identifying, developing and implementing
• Suitability of PPP approach includes PPPs whether this be on a national or local
whether there is sufficient private level). However the private sector will
sector interest and whether PPP is the need to be considered in that a basis for
best delivery method viable PPP relationships is that the private
sector finds an interest in the project.
Prior to the decision process a number of Additionally the Commission as a
preconditions must exist within national / promoter of the PPP approach has a
local authorities as defined in the valuable role to play in encouraging this
Preliminary Preparation Stage. These assessment, which is still often neglected
include: in CC’s.
• Identification of who is responsible for The potential for applying PPPs will
PPP and who has authority and reflect local authority policy, expectations
responsibility including for ultimate and openness to cooperating with the
decision making and regulation. private sector. This in turn will determine
• Developing (whether in-house or the criteria to be applied and to their
accessing externally) the necessary respective weightings. This first stage will
expertise to design, tender, evaluate, assess the desirability and suitability of
implement and monitor PPP. procuring a project as a PPP. Essential
• Establishing policies to guide decision questions that must be asked include:
making including ensuring that the
necessary legal and regulatory • What are the potential obstacles and
structures are in place to allow PPP. constraints to PPP opportunities
• Establishing procedures that enables • Would the private sector be interested
the effective evaluation and delivery in the opportunities
of PPP services. • Is PPP the best method to deliver the
• Developing a policy for PPP in current required services / infrastructure
and future services in order to
introduce a coherent planning process
which encourages early identification 3.1 Obstacles and Constraints
of PPP opportunities.
• Integrating projects into EU Potential PPPs can be hindered by several
harmonisation and priority funding constraints and obstacles which must be
strategies. considered by National Authorities. The
main ones include:
The Commission has a valuable role to
play in this process particularly in aspects
77
FACTOR COMMENT
Local and national • Does the policy environment favour PPP application and
government policy the different components required for a PPP
• Is PPP consistent with other government policies ie land
use, social policies etc
Extent of legislative • Is there a or sufficient legislative authority for entering
authority into PPPs
• Is there sufficient legislation to support the management
and supervisory role of the public sector in a PPP
• Are there sufficient authorisations and what are the limits
to enter into debt agreements
Taxation framework • What is the tax status of a PPP
• What are the possibilities to offer tax exemptions to
private parties
Reporting and accounting • How are PPPs treated in national authority accounts
requirements • What are public disclosure requirements
Financial issues • Can private sector financing compete with public
financing
• What is the effective cost of borrowing
• Is the project financial self sufficient or can become so
• What financial support mechanisms are available
Technical and organisational • Is there sufficient data to allow design and preparation
issues • Can competitive tendering be assured
• What quality control mechanisms exist
Political and social • Is the national authority regarded as creditworthy
considerations • Is there strong political commitment to the PPP approach
• Will a PPP be socially acceptable
Ability to integrate different • Will a PPP be acceptable to existing sources of financing
forms of funding ie Commission and what factors are likely to have to be
integrated into designs ie procurement rules
3.2 Private Sector Interest the principal that the party best able to
manage a risk should adopt it, it should
The private sector will be interested in also be remembered that the degree of risk
some projects more than others based not transfer to the private sector will determine
only on purely financial considerations. the extent of return required by the private
National authorities have a major role to sector.
play in adding to the value of a project.
Generally the private sector will give Various market factors will need to be
priority to projects which demonstrate: analysed including existing and future
demand. Various techniques are used to
• Sufficient demand determine financial viability but at this
• Revenue generating and development stage a simple cash flow analysis may be
potential sufficient to determine whether private
• Strong viability interest is possible.
• Strong political commitment
• Meet internal development criteria
3.3 Is PPP the Best Delivery Method
A crucial issue, which must be addressed
by the national authority, is the Crucial to the selection process of a PPP is
management of risk. While considering whether it will provide value for money
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and above all additional value than project characteristics and public
traditional public procurement methods. perception of the need for PPP. It is
Two considerations are important: however important that the selection of an
appropriate PPP form be undertaken at an
• The national authority should establish early stage to facilitate effective project
the true cost of providing a service design and achieve early buy-in of the
with the purpose of benchmarking or parties.
shadow biding potential private costs
• The benefits and costs should be Part 1 presented the main types of PPP
systematically analysed considering relationships with their respective
both quantifiable and non quantifiable advantages and disadvantages. Selection
items of the most appropriate type will require,
as a minimum, consideration of the
The factors determining value for money following items.
will change between projects. A number
of common methods for PPPs to generate
better value for money exist including: 4.1 Needs Assessment
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From the standpoint of the national
authority, there are several political risks There are also a number of other risks
that need to be addressed. These include: inherent with infrastructure or service
delivery projects that need to be analyzed
• loss of control in the provision of and understood by both public and
infrastructure or in the delivery of a private sector partners. Examples include
service risk associated with:
• potential reduced service quality for
service users
4.3 Components of Service Delivery • Financing - Who can secure the most
to Include in Public Private competitive financing?
Partnerships
• Ownership - Who should own the
The national authority must decide which facility or service? Do the benefits of
components of a servicing initiative are public ownership outweigh the
best addressed through a PPP and which benefits of private ownership?
are best kept in the public domaine.
Consideration should be given to the • Operations and maintenance - Who
following questions: is in the position to operate the service
cheaper and more efficiently? Will the
• Project design - Can the private inclusion of operations or maintenance
sector bring more innovation and as part of the public private
efficiency to the design process than partnership enhance the original
the public sector? This is an important objectives of the national authority?
consideration. The objective should
be to develop designs that provide • Marketing - Who would do a better
value for money and lower overall job promoting the use of the service?
life-cycle costs of the project, not only
the capital cost. Many of the components of service
delivery are logically bundled together,
• Procurement and construction - such as design-construction, ownership-
Who can secure goods and services financing, and operations and
required for the project or servicing maintenance. It is important to consider
initiative most quickly and bundling to determine whether combining
competitively? Who is in the best various components leads to greater value
position to construct the facility? for money than providing individual
components. The choice of which
components of service delivery should be
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provided will determine the form of PPP improve in their proposals. Again, if
to be used. In selecting the preferred form, the proposal comes in at a higher cost
it is always important for the national than proposed by the national
authority to confirm that the approach is authority, the expectation is that the
consistent with the overall national and private partner will provide an
local policies relating particularly to: improvement in quality of
infrastructure or service for users.
• ownership of services and facilities
• impact on local government staff and • It will determine if the national
public sector employees authority can afford to be involved. If
• risk management it cannot build a much-needed project
• financial policies (e.g., debt) on its own, assistance from the private
• economic development sector may be required.
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4.5 Basic Conditions Expected in a design analysis relative to PPP
Partnership relationships and will not treat basic
project technical and financial design.
The basic conditions expected in a Sequential steps will be considered,
partnership must be included in the future including:
tender document. They will form one of
the building blocks on which bidders will • completion of project design relative
build their submissions. The national to PPP structure selected, including:
authority should consider the following o technical performance standards
aspects of the proposed PPP and establish o financial assessment to ensure
their requirements: viability
o design of future contract forms
• preferred length of the partnership
• ownership of assets during and after • selection and design of tendering
the partnership process, including:
• treatment of public employees who o type of tender process
may be displaced by the partnership o tender procedures
• performance specifications, standards o evaluation procedures
and expectations, including the roles o negotiation procedures
and responsibilities of both partners o contract award procedures
• how both partners’ performance will
be measured • implementation conditions, including:
• a definition of an “adequate rate of o monitoring and oversight
return” conditions
o redress and re-negotiation
• profit and cost sharing provisions
• performance bond requirements
• integrating the Commission,
including:
It is important for the national authority to
o consultation and approval
keep in mind that these conditions are not
requirements
set in stone. Rather, they are subject to
change in the negotiation process with the
The majority of these tasks should be
preferred partner. These conditions
completed by the National Authorities.
provide an indication to prospective
However it is considered crucial that the
partners of what the national authority is
Commission be consulted and included in
seeking in the partnership arrangement.
the process as it is at this stage that the
grant eligibility criteria need to be
integrated into the project and that the
5 PPP DESIGN & future approval of projects is pre-
AGREEMENT determined.
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• is the private sector able to deliver the section is based on the presentation of risk
technical standards set for the project in Part 3. Risk assessment is based on
• is the private sector in a position to three steps:
introduce technical innovations and
improvements for the project Risk Identification
• what tender process is best able to
provide the technical standards (see The principal risks will have already been
following section on procurement identified during the preliminary stages
process design) and can be categorized as described in Part
• what are the minimum technical 3.
standards to be used for tender
evaluation and performance A common error in risk identification is to
monitoring inadvertently duplicate risk. For example
• how will performance monitoring be to risk of failure to deliver a service may
undertaken not be independent of other risks such as
• what are the operation and process design deficiency or of inadequate
maintenance arrangements including resourcing or skill levels. Risks may be
upgrading and emergency service inter-related and have a common result.
provision
Risk Assessment
• assessment of the probability of occurrence – this is a subjective indication of how likely the risk is
to occur, classified, for example, into high, medium and low probability as demonstrated in the
following table:
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Assessment of the Probability of Occurrence
The probability and impact of each risk can be combines in a single matrix to provide a measure of the
qualitative value of each risk as follows:
Probability
H M L
H 1 1 2
Impact
M 1 2 3
L 2 3 3
This method allows a qualitative assessment and indication of the most important risks that are likely to
require quantification
Risk quantification will express the potential impact of a risk in financial terms and will allow the
identification of a cost effective risk allocation and management strategy. This is also required to
permit the functioning of comparative analysis during the evaluation process. As discussed above the
time and effort devoted to risk quantification should reflect:
A number of methods exist to quantify risk involving increasingly rigorous analysis as presented in the
following table:
Risk Quantification Approaches
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Risk Allocation Authority or the Contractor is best able to
manage the risk, or whether the risk should
The guiding principle of risk allocation is be shared. In considering the most
that risk should be allocated to the party appropriate allocation of risk, the
best able to manage it. However, there following issues should be taken into
may be cases where the price charged by a account:
Contractor for taking on a exceeds the
value to the Contracting Authority of • the capacity of the Contracting
transferring the risk. Cost effective Authority to manage the risk and its
allocation of risk between a Contracting ability to control it;
Authority and the Contractor will result in • the capacity of private sector
lower costs of construction and operation contractors to manage the risk and
for infrastructure projects, and will provide their ability to control it; and
enhanced value for money when compared • the preferred allocation of risk, given
to traditional procurement. However, if any public interest issues.
risks are transferred inappropriately to the
appointed Contractor, value for money The preliminary allocation of risk should
will decline as the premium demanded by reflect the specific characteristics of the
the Contractor for managing the risk will project and the underlying strengths and
outweigh the benefit to the Contracting capacities of each party. The degree of
Authority. risk transfer to the private sector will vary
on a project by project basis and will be
At the design stage, the price charged by a informed by the precedent reviews and
Contractor for taking on a risk will not be analysis and the selected PPP relationship
known. The risk assessment should as demonstrated by the following table.
therefore focus on determining, in
principle, whether the Contracting
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One of the areas in which risk transfer is participants in a PPP, it is also significant
most problematic is statutory process. As for the public perspective. If the project is
a general rule, the Contracting Authority is financially non-viable and has to be
best placed to manage the statutory abandoned or significantly amended,
process by virtue of its legislative basis, attaining the social objectives of the public
experience and resources. In general, sector may be compromised. The winners
private sector parties internationally have and losers in financial terms are also an
indicated an unwillingness to accept issue for both sectors. Significant
planning risk, especially in the roads redistribution of financial wealth may be
sector, identifying the following seen as socially unacceptable, or may
difficulties: prompt active lobbying to amend or
abandon a proposal. Each of these is a
• a lack of familiarity with the statutory public as well as a private concern, for
processes and procedures; example, if a road PPP may seriously
• uncertainty regarding the cost and undermine the financial health of railway
timescale of such processes and their operators. Finally, the involvement of the
ability to manage this; private sector boosts substantially the
• the reluctance of funders to finance the importance of understanding and
costs and risks associated with the responding to the risk profile of a project,
statutory process; and but again is not solely a private sector
• the need for price adjustment and/or concern.
negotiation to cater for changes arising
during the statutory process. Financial Viability
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• Minimisation of refinancing risk. • perform continuous monitoring of
project’s financial viability, involving
Distribution of Revenues an interactive process with the public
sector.
Another very important further dimension
that is of concern to many private sector Assessment of Risk
companies is the timing of the cash flows
deriving from a project. While this is in Risk assessment was presented in the
part a reflection of aversion to risk it is previous section. In this section only the
also a legitimate additional concern that, issues necessary for the financial analysis
where a project is very large relative to the are highlighted. Generally when
financial base of the company undertaking considering an investment under
it, the company may literally run out of conditions of risk, investors will require a
money before the inward cash flows from higher rate of return to compensate them
the project start to materialise. The for taking on that risk. In financial
company’s capacity to borrow may not be appraisal terms this is undertaken by using
enough to bridge the gap between a risk-adjusted rate which adds a risk
expenditure and revenue generation. premium on the discount rate that would
be required to take on the investment with
In project financing it is the future cash zero risk to take account of the riskiness of
flow that is the basis for raising private the investment under consideration.
finance. Project financial appraisal
should therefore be thought of as a Practical methods for incorporating risks
continuous process that takes place in the financial investment analysis of PPP
throughout the early stages of a project projects include the following:
right from the emergence of the need for
the project and up to the point when the • reducing the minimum payback
decision to sanction or abandon the project period;
is made. • raising the required rate of return of
the project investment;
While it should be stressed that it would • adjusting cash flows for the cost of
not normally be the public sector’s risk reduction; and
responsibility to undertake this continuous • adjusting cash flows to reflect the
monitoring of a project’s financial specific impact of a particular risk.
viability, it is in the public sector’s interest
to ensure that private sector partners are The allocation of residual risk in PPP
doing so and to create an environment in projects is primarily the role of the
which, should potential problems be promoter. In choosing the appropriate
identified, early discussion and resolution policy for risk transfer the promoter must
can take place. At the early stages of a consider the basic rules for risk allocation
project it is important that the significant as already presented previously. An issue
risks are identified and their effect on the could arise that needs to be treated with
project considered. Thus good caution: if risks are likely to occur in the
management of a project by the private early years of the project, then the
sector should: remaining period is relative “risk free”.
Thus, it must be appropriate to reduce the
• achieve the triple constraints of risk premium paid to the private sector
specification, budget and schedule; (either as Government finance or through
• be able to manage the liquidity (cash user charges), to avoid accumulation of
flow) of a project, and not consider unnecessary profit by the private sector. A
only long-term profitability; solution to this could be the introduction
• involved in a continuous assessment of of two types of discount rates: one for the
project risks; “risk period” and the other (being lower)
for the “risk-free period”.
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Care also should be exercised by the environmental projects will often
public sector not to undertake risks that include an element of ‘social service
will be ultimately a burden to the taxpayer provision’ in the sense that they
in real terms. Hence, it might be more provide services to non profitable
appropriate for the public sector to forego areas. PPP arrangements must ensure
some revenues than make actual payments. service coverage is maintained and
On the other hand, the charging of the user that an equitable balance is achieved
by the private sector to cover possible between profitable services and social
risks, must be done in such a manner to service provision
observe the marginal cost principle for
pricing, and of course to avoid the possible Socio-economic appraisal should be
non-accepted loss of forecasted traffic undertaken from the perspective that the
volumes, caused by increases in user Commission’s main objective is to protect
charges above the level the user is willing and enhance public benefit. Therefore
to pay. There are mechanisms to socio-economic appraisal needs to clearly
safeguard this: in most cases, in the define what impact the grant will have,
agreements the public sector sets upper how it can be measured and verified. It
limits for the user charges (tools), during also needs to identify the risks and
the period of concession and presents institutional weaknesses which may hinder
detailed guidelines how they will be the maximization of public benefit thereby
updated in the future. facilitating the development of effective
monitoring systems and public oversight /
“watchdog” institutions to work with the
5.1.3 Socio-Economic Appraisal private sector.
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particularly the case with PPP allow the private sector to present options
arrangements going beyond simple service based essentially on reinforcing evaluation
and works provision. This issue is further methodology and making use of variant
elaborated on in the following section. solutions.
This section will describe the different • The scope and nature of the project
procurement systems available to a PPP • The degree of risk transfer proposed
relationship. It should be noted that at this • The degree of precedent available to
stage the Commission must be fully support the choice
integrated not only because of the • The role and influence of third party
procurement conditionalities attached to a funders (in particular the Commission)
Commission grant but also in an effort to
comply with EU Procurement Directives. In BOT type arrangements there is both
ample precedent for successful restricted
As set out in Part 2 it is anticipated that procurement and there is usually sufficient
there is scope for conflict between the project definition in technical scope and
current Commission procurement costing.
regulations and achieving the maximum
benefit from a PPP relationship. However In the case of more complex DBFO type
it should be noted that the Commission of concessions, the national authority will
regulations do not absolutely preclude the normally seek maximum / optimal risk
adoption of alternative procurement transfer. Use of the restricted procedure
systems provided that certain minimum may lead to the pricing of projects based
conditions are maintained and that the on private sector costs of equity and debt
Commission is involved at an early stage without sufficient scope for innovation and
of the design and decision making process. an efficient allocation of risk to the private
This section applies to procurement sector. The argumentation for using more
relative to an ISPA grant. In the case of sophisticated evaluation techniques and /
procurement by the national / local or variant solutions includes:
authority in advance of an ISPA grant (but
related to the ISPA project) it is • Ability to secure the best value for
recommended that the Commission money.
strongly recommends the adoption of • Ability to optimize risk allocation
either EU Procurement Directives or as a • Encouragement of innovative
minimum the conditions of theTreaty of solutions.
Rome. This is to ensure that there is no • Generally lower tender or bid costs.
scope for a conflict of interest with an
ISPA grant. The key to tender process selection lies in
the degree to which it is possible to define
Part 2 identifies two types of procurement the project. The greater the definition of
processes currently allowed in the pre- the project, the greater the case for using a
accession phase. suited to different types restricted process.
of PPP relationships. While the Open and
Restricted Procedures do not pose any
particular difficulties for basic PPPs
involving only private sector service,
works or supply procurement, they may be
limiting for more complex approaches. As
a result Part 2 proposed several methods to
introduce a greater degree of flexibility to
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6 IMPLEMENTATION period of active monitoring to the life of
the concession (if feasible) and to
CONDITIONS associate non-compliance or non
performance issues with a disbursement of
• A degree of flexibility is required funds (ie approval of the interim payment)
throughout implementation or indeed repayment of the grant. In this
corresponding to the different way the Commission maintains effective
needs of all parties control over the use of grant funds but
• However project structures need links this control to the function which the
to be sufficiently robust to allow national authorities must undertake.
effective monitoring and to
ensure that the public interest is The remainder of this section is dedicated
guaranteed to practical contract and performance
management issues.
As discussed in Part 4 the Commission
through its principle of ex-ante control,
has a major direct and indirect role to play 6.1 Contract Management
in the implementation of projects both
from the perspective of implementation The implementation of any public sector
monitoring and in creating the required infrastructure project requires a significant
institutional structures to facilitate level of proactive management of the
implementation. Indeed effective interface between the National Authority
implementation structures are a pre- and the Contractor in order to ensure that
condition to the allocation of grants. the service is provided in accordance with
the precise requirements set out in the
PPP relationships will require changes to Project Agreement and Output
the implementation systems associated Specification. In a conventional project,
with classical grant financed projects. project management covers the procedures
This is primarily because the role and and organization needed to take a project
responsibilities of the parties change with through the planning, design, procurement
increased private sector involvement. The and construction stages before handing it
most important of these is the over to operational staff to deliver the
transformation of the public sector role service. In the context of a PPP project,
from operator to a management and two separate management processes must
regulatory function. This requires both the be considered:
development of effective regulatory
systems and monitoring practices. This • Project management - dealing with the
entails a strengthening of national development of a project up to and
legislative, regulatory and institutional including award of contract, generally
capacities to provide an effective along the lines of conventional project
framework for PPPs. management, but with additional
expertise reflecting the changed nature
It is further suggested that the role of ISPA of the process; and
Consultant Engineer be developed to
establish an independent monitoring • Contract management - describing the
function allowing the monitoring of procedures and organisation required
projects beyond the current construction to ensure that the appropriate service
phase. Indeed as PPP relationships is provided from the date of contract
become more complex the value for award to the end of the operating
money and correct use of grants issues period.
extend in duration to include operations
over the period of the concession. In a PPP project that involves a transfer of
Therefore in order to facilitate the operating activity to the private sector,
approval of the Commission for grant contract management extends throughout
financing it is proposed to extend the
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the term of the contract. The overall loss of value for money. Effective
objective of contract management is to performance monitoring and management
ensure the actual delivery of a service that of the risk transfer element of the contract
represents value for money and typical is critical from the point of view of service
contract management responsibilities delivery and value for money. Where
include the ongoing monitoring of monitoring shows under-performance by
performance, the management of change, the Contractor, the contract manager must
the authorisation of payments and the ensure that the obligations of the
maintenance of records and reporting. Contractor under the terms of the Project
Contract management responsibilities may Agreement are properly enforced. The
also include the discharge of statutory onus on Contracting Authorities in relation
duties in relation to reporting to National to the effective management of PPP
Authorities. contracts will be critical to ensuring
satisfactory long-term service delivery and
6.1.1 Performance Management risk transfer. Performance monitoring will
involve a variety of significant tasks.
Performance management forms part of These tasks are usually set out in the
the contract management function and Project Agreement and are likely to
relates to the monitoring of service include:
delivery and the assessment of
performance relative to the standards • the review and analysis of
defined in the Output Specification. Since measurements of specified parameters
payment for services will be based upon carried out by the Contractor relating
the achievement of specific objectives, this to load conditions and the performance
is a critical matter that will determine of a facility;
whether or not the Contractor is in • the review of quality control and
compliance with the contract terms and quality assurance procedures to ensure
therefore the amount of payment due. that quality systems are in place and
effective;
The transfer of risk in the Project • the independent monitoring by the
Agreement must be confirmed on an Contracting Authority to verify that
ongoing basis by the performance the monitoring undertaken by the
monitoring carried out. This will ensure Contractor is accurate and valid; and
that the level of service required by the • the independent calibration of
Output Specification is delivered and if a measurement equipment used in the
compliance failure is identified, this will delivery of the service to verify its
be reflected both in payment penalties and accuracy.
in an obligation on the Contractor to
remedy the default. It follows that any Key issues arising in relation to the
failure to implement effective performance contract and performance management of
monitoring arrangements may result in PPP projects will include:
performance risk reverting to the
Contracting Authority with a consequent
• the identification of the skills and expertise required to effectively manage the implementation of a PPP
project and to ensure that these resources are put in place early in the process;
• the ability to ensure effective and non-reversible transfer of risk;
• the impact on Contracting Authorities of PPP projects in terms of the availability and long-term retention of
the expertise and resources needed for contract management;
• the procedures for reviewing PPP projects, especially in the pilot phase, with a view to learning lessons as
experience is gained; and
• the nature of the ongoing relationship between the Contracting Authority and the project funders including the
Commission. In a project involving private finance the funders will also have a long term role in ensuring
that the service is delivered satisfactorily and that the payment stream is secure.
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6.1.3 Project Agreement
6.1.2 Principles of Contract and
Performance Management The contract management and
performance monitoring duties associated
The implementation of public sector with a PPP project will be derived
infrastructure projects using the PPP substantially from the terms of the Project
approach is intended to deliver cost Agreement. The Project Agreement will
effective, reliable and timely services at include specific provisions in relation to:
agreed prices and to agreed quality
standards, consistent with legal standards, • Monitoring - provisions on contract
financial probity and management management covering the monitoring
accountability. The success of this process to be undertaken by the Contracting
will be significantly aided by the Authority and the financial
maintenance of a good relationship consequences of under-performance.
between the Contracting Authority and the • Risk management - management of
Contractor. The expertise developed by the risks to be retained by the
the Contractor during the procurement Contracting Authority or which fall to
stage should be maintained through the Contracting Authority for
implementation and operation in order to management due to substandard
ensure consistency of approach and a service delivery by the Contractor.
detailed understanding of the process. In • Change management - provisions in
doing so, care must be taken with regard to relation to change management,
the items set out below: covering items such as technical
developments, changes in law,
• contract management structures should changes in volumes and changes in
be established during the procurement Contracting Authority requirements.
stage in parallel with the project • Under-performance - a Contracting
management function in order to Authority may have to enhance the
ensure a full understanding of how the scale, nature and frequency of its
specifics of the service and the management and monitoring
monitoring systems are reflected in the capability where there is continued
contract documentation. under-performance by a Contractor.
• personnel will require a detailed • Interdependence - some projects may
knowledge of contract documentation be dependent on delivery of certain
in order to provide for continuity in enabling services by the Contracting
achieving effective service delivery. Authority, for example, the operation
of water or drainage networks, the
At the outset, it will be necessary for the delivery of waste, or traffic
Contracting Authority to establish realistic management in a roads network. This
financial and resource budgets to cover the may require organisational interfaces,
costs relating to contract management and information flows and the meeting of
performance monitoring. While key milestone dates or objectives, to
arrangements can be made to have these be included in the Project Agreement.
costs covered by the Contractor, it is
usually considered more satisfactory that Over time, the under resourcing of the
each party bear its own costs in order to contract management function can lead to
avoid any possible conflict of interest. In the inadvertent re-acceptance of risks that
addition, while the PPP approach is have been allocated to a Contractor
designed to allocate risk to the Contractor, through the earlier procurement process.
competent contract management is In this way, the Contracting Authority may
necessary to ensure that this risk transfer is end up with liabilities in respect of asset
effective. condition or service performance not
previously expected or envisaged. Major
difficulties can arise in relation to the
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satisfactory performance of a Contractor performance, all of which must be
under a PPP project where the obligations capable of objective measurement;
of the Contractor are not rigorously
policed and insisted upon by the • Payment arrangements - enforcing
Contracting Authority from the outset. and monitoring the payment
Typical problems that can arise include: mechanism, including the conditions
required for the commencement of
• a failure to ensure quality control of payment and the basis for ongoing
construction may lead to asset defects certification (frequency, measurement
in the long term; basis, variations, and specific
• a failure to maintain plant and conditions);
equipment may similarly result in
increased liabilities for the Contracting • Financial performance - reviewing
Authority at the end of the contract; the ongoing financial performance and
• a failure to manage the interface position of the Contractor against the
between the Contracting Authority and forecasts set out in the financial model
the Contractor may lead to the blurring and enforcing and monitoring any
of responsibilities or even the transfer arrangements for revenue sharing or
of performance liability. This might profit capping;
occur, for example, if poor
management of the network caused • Monitoring arrangements - involving
unacceptable load conditions at a the defined monitoring obligations of
sewage treatment works; the Contracting Authority and the
• a failure to implement independent Contractor, the provision of facilities
monitoring or equipment calibration for monitoring by the Contracting
may result in a failure to detect Authority, and the procedures for
unsatisfactory performance or an determining compliance;
overpayment for service delivery; and
• a failure to resolve issues or disputes • Security and insurance - monitoring
promptly may lead to more serious compliance with specific conditions in
conflict and a loss of control of the relation to insurance policies,
contract. indemnities, tax clearance
certification, safety procedures and
systems;
6.1.4 Relationship Management
• Management of interactions -
In practice a flexible but controlled range managing all of the interfaces between
of contacts may be required to manage the operations of the Contractor and
effectively the day to day delivery of the those of the Contracting Authority.
required services. It will be important to These interfaces may cover network
ensure that such arrangements are properly management issues, the effects of new
managed so as not to confuse the planning and development and the
respective contractual responsibilities of regulation of existing development
each party. Underlying these (for example, waste collection and
arrangements will be specific provisions in discharge licenses);
the Project Agreement to be administered
by the contract management team, • Dispute resolution - providing
covering all aspects of service delivery and mechanisms for problem solving and
payment. These will include: dispute resolution where and when
appropriate;
• Output Specifications - establishing
the required levels of performance and • Compliance - setting out the
the associated information arrangements for dealing with non
requirements for judging service compliance by the Contractor
93
including enhanced monitoring, and high quality facility to minimise the
proposals for rectification and risk of operational problems later.
payment deductions;
Equally, the Contracting Authority will not
• Contingency for default - normally interfere in relations between the
arrangements to cover default on the Contractor and its subcontractors.
part of the Contractor or its However, the Contracting Authority will
subcontractors where the continued also wish to be satisfied that the
delivery of the service is at risk, Contractor retains proper control of the
including step-in rights; project and that its contract management
arrangements are generally robust. For
• Change management - implementing these reasons, it is usual to retain a
and managing the procedures and technical adviser during the construction
protocols for dealing with changing stage to monitor and confirm that the
requirements over the life of the Contractor is complying with the Output
project; and Specification and to review the testing and
commissioning process. The level of
• End of contract conditions - dealing resources applied to this task will depend
with maintenance, the condition of the upon the complexity of each individual
assets at the expiry of the contract project but will always be less than in a
period and the ability of the conventional project. Where private sector
Contracting Authority to re-tender for finance is involved, the contract manager
the provision of the service. will also need to liaise closely with the
representatives of the funders, including
sharing of information and joint presence
6.1.5 Quality Monitoring at meetings with the Contractor. It is
important to note that both the Contracting
In a conventional infrastructure project, Authority and the funders have a common
monitoring involves direct sampling, interest in the quality of the asset and the
analysis and compliance determination by required standard of service commencing
the Contracting Authority. In a PPP on time.
project, these quality management
processes will be performed differently in
that the Contractor will be expected to 6.1.6 Dispute Resolution Procedures
provide for performance monitoring and
quality management as part of its role. Formal dispute resolution procedures for
The Contracting Authority will then be the efficient and cost effective
entitled to independently verify the determination of issues arising during the
information produced by these systems as contract should be put in place as an
considered necessary. alternative to legal procedures. The
contract manager must endeavour to
The role of the Contracting Authority will resolve matters in dialogue and discussion
therefore be to audit these systems, with wherever possible. Where this fails and
planned and random spot checks, to ensure more formal dispute resolution procedures
that performance is being measured and are invoked (such as conciliation,
reported reliably, accurately and arbitration and litigation), the contract
comprehensively. Similarly, detailed manager should have comprehensive
approval of drawings or other design records of all relevant issues and be
arrangements may not always be regarded capable of giving evidence and generally
as essential provided the quality assurance supporting the Contracting Authority
system established by the Contractor is throughout the process.
demonstrated to be effective.
Nevertheless, it is in the interest of the
Contracting Authority to ensure a robust
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ANNEX 1. BIBLIOGRAPHY
1. “Public Private Partnership – A Local Government Guide”: Ministry of Municipal
Affairs, British Columbia, Canada, 1999
2. “Public Private Partnerships; Introduction, Handbook, Recommendations and
Conclusions. Private Operations and Financing of TEN’s”: NEI Transport, 2001
3. “Achieving Public Private Partnerships in the Transport Sector”: Diebold Institute
for Public Policy Studies, New York, 2002
4. “Road Projects in Transition Europe”: Transportation Equipment and Infrastructure
Review, Euromoney Publications, 1998
5. “Public Private Partnerships Guidance Note”: Department of the Environment and
Local Government, Ireland, 2000
6. “Law in Transition”: EBRD, Spring 2001
7. “Lending in Central European Countries”: European Investment Bank, 2002
8. “Joint Venture PPP for Urban Environmental Services Project”: UNDP
9. “Project Financing of Toll Motorways in Central and Eastern Europe a Signpost for
Transition?”: John Crothers, Law in Transition, Spring 1997
10. “8th ISPA Management Committee, Working Document 01/ISPA/MC/010’: European
Commission Feb 9 2000
11. “Practical Guide to Phare, ISPA, Sapard Contract Procedures”: European
Commission, 2000
12. “ISPA Manual”: European Commission, DG Regio, July 2001
13. The Financing of Trans-European Transport Networks”: European Commission, DG
Transport, 1997
14. “Fair Payment for Infrastructure Use, A Phased Approach to a Common Transport
Infrastructure Charging Framework in the EU.”: European Commission, White
Paper, COM(1998) 466 Final
15. “Interpretative Communication on Concessions”: European Commission, JOCE
C/121, 29 April 2000
16. Council Directives, 93/37/EEC - Works, 93/36/EEC, - Supplies 92/50/EEC -
Services, 93/38/EEC – Utilities
17. ‘Report to the Seville European Council on the Status of Work on the Guidelines for
State Aid and Services of General Economic Interest”: CMP.A3/AA/D(2002) 293
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ANNEX 2. NOTES FROM THE WORKSHOP
Working session on the draft guidelines: Building a Valuable Approach for PPP-ISPA
projects,
Brussels, 4th July 2002.
The final agenda of the day is annexed with the actual speakers
The high quality presentations were thorough and informative whereby a range of ideas,
incentives, examples and experiences in connection with PPP were shared. A number of
points were raised that reveal a degree of consensus on what exactly preparations for PPP
should involve. The debate and workshop not only contribute to the preparation of the
guidelines, but also the wider debate on the Cohesion Fund and Structural Funds, as well as at
Commission level – enhancing the discussions relating to aspects of PPP and Public
Procurement, Competition and State Aid.
The discussions issues are outlined below. The main points moved between analysis and
more policy-oriented statements and questions. The range of themes included eligibility
in relation to the legislative basis, the need for a regulatory framework, the peculiar of
marginally viable communities in the CEEC and the viability of PPP, as well as the
political and pragmatic sides of PPP.
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Discussion on Key PPP Issues:
• First of all it was expressed that the guidelines have no legal value nor can they be taken
as a blueprint approach to specific. In relation to this a point was raised urging for a
concrete understanding of what form of PPP would be eligible for ISPA finance.
However, it was recognised that there are no detailed rules at present – only general
principles and treaty provisions, which are fundamentally flexible. As stated in art 6 of
the EC Regulation 1267/99 the definition is on “…public equivalent expenditures by
bodies whose activities are undertaken within an administrative or legal framework by
virtue of which they are regarded as equivalent to public bodies”
• The Spanish experience of PPP, which began in 1995 was outlined where PPP accounts
for 25% of total operations in the transport sector. This has led to the building up of a
‘Concessionary Culture’ in Spain - the first country to have PPP in Cohesion Fund
projects. Various speakers agreed on the need for a European regulatory framework as a
way to promote additional investments and to oversee the whole concession business: this
is not a tool, rather a requirement.
• The question of whether PPP is financially suitable for two thirds of the CEEC population
who live in small towns was raised. More specifically, what can be done to aid sewage
treatment in these areas and how is it going to be possible to subsidise this?
• A more pragmatic attitude to PPP is emerging . Returns are reasonable for the private
sector, yet certain areas go less comfortably with PPP – such as services that directly
touch the public on a daily basis. Regulation provides the basis for an ongoing balance
between quality and cost. Accountability and the right of appeal of the regulator is
therefore a useful tool for PPP in terms of range and diversity.
• There is a need to develop momentum and a need to develop early successes. Basic
problems must be resolved at the beginning, otherwise programmes will be overwhelmed:
good selection is essential as to demonstrate achievements on expectations. In the
transport sector, many priority projects have not progressed because they have not been
convinced of their basic viability and there are fundamental doubts – therefore, the issue
to address is what can be done to improve project viability and ensure a sound basis for
PPP?
• Concerning the TENs cross-border projects are an area of legal complexity and may
deter private investors.
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• One speaker underlined the usefulness of PPP for gaps in finance especially in CCs.
There are limits with rules, however, the guidelines are exhaustive. It was pointed out that
state procurement and competition rules should not be understood in terms of ‘eligibility’,
rather compliance with the EU rules as they are laid out. There is a need for seeking the
right balance – changing the situation and ensuring legal stability with an obligation to
ensure the public interest.
• Concerning ‘windfall profits’ - ISPA should ideally increase social benefit – seek a way
to renegotiate down the windfall profit if any. Complex and broad is the role of a public
body that retains responsibility and necessitates control efficiency to monitor to ensure
business in the public interest. Consumers can act as a counterweight and controlling
mechanism within civil society to ensure sustainable delivery of service.
• In the case of the UK: re-financing of a concession already in place to share benefits
disproportional in favour of Government (due to the regulatory framework) but also for
the Private Partner (so to retain its interest).
• The benefits going to the private sector from the UK experience must be built into the
design of the contracts. The nature of discussion should focus on – how to design good
PPP (independent of ISPA) and how to combine PPP and grants? Good projects are the
issue and then PPP is the option. It was again advocated the need for simple guidelines
that should give clarity on the eligibility of projects for the grant and how much would be
given. On the issue of small towns: Phare and EBRD are looking at this issue – the
strategic and structural concerns for delivery that are involved which do not necessarily
involve PPP, since the difficulties involved with a PPP as a regional service provider may
be too great to organise on that level.
• There is an emerging consensus and Member State experience is being built upon where
the ideological debate seems to have now settled. Questions relate to this for the EC and
ISPA; One commentator has emphasized that private sector interest had to be decided
early – and that ISPA has already begun. What practical conclusions from the guidelines
vis à vis projects for the ISPA Committee and the political awareness of this can be
made? With consensus: will ISPA and furthermore Cohesion and Structural funds
projects systematically go hand in hand with PPP?
• The rate of assistance and how this is handled in the bidding process could give rise to the
creation of perverse incentives i.e. with an efficient bidder not as much ISPA grant is
needed so that the city has no incentive. There is a need for concrete guidelines on this
aspect to avoid paradox situations.
• In Candidate Countries and from the business community in Member States – there is a
shared interest to upgrade major infrastructure through these projects. The opportunity to
participate in this is the reason for PPP and for the guidelines which become the basis for
facilitation.
• One concern relates to the upper limit of CCs in absorbing projects. A number of factors
come into play here such as project management in a given sector, period, country and
indeed the macro economic conditions which are all involved.
• The guidelines like a ‘map’ are not to be seen as the solution nor as definite or static
position of the European Commission and they represent a decision to ensure the focus
remains on the public interest.
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3. What next
• The final version of the guidelines after careful incorporation of all comments consistency
checks and final editing will be distributed to selected audiences and available on the
ISPA website at the INFOREGIO.
• Dissemination seminars will be organised in Candidate Countries to enhance the practical
nature of the Guidelines without pre-empting specific decisions on individual projects.
Contribution from the member states would be useful i.e. Designing laws for the
concession or assistance (if required) for the establishment of the task force for PPP.
• Specific task assignments through experts will continue organised by the ISPA
Directorate to analyse specific cases and propose appropriate solutions in line with the
principles enshrined in the guidelines which were re-stated in the closing remarks of the
Director General of DG REGIONAL POLICY Mr Guy Crauser:
• ensuring open market access and equal fair and transparent competition under the public
procurement directive;
• protecting and safeguarding the public interest;
• ensuring compatibility between PPP and State Aid rules;
• defining the right level of grant contribution and the right PPP formula tailored to the
specific circumstances.
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Working Session on the
Draft Commission PPP Guidelines for ISPA
Building a Valuable Approach to PPP
Brussels, Thursday 4 July, 2002
Centre Borschette
Rue Froissart 36
1040 Bruxelles
Agenda
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