PwC PPP report

Delivering the PPP promise*A review of PPP issues and activity*connectedthinking

ContentsExecutive Summary 3Introduction 71 Public procurement models – setting PPPs in contextTraditional public procurement 11What are PPPs? 122 Advantages and disadvantages of using PPPsWhy use PPPs? 13Key reasons for using PPP procurement 17The challenges of using PPPs and their mitigation 273 Review of PPP activityReview of PPPs by country 35Review of legislative and institutional position 45Review of EU involvement and support for PPPs 48Review of activity in key PPP markets outside Europe 544 Recurring PPP issues and solutionsLegislative impediments to transport PPPs 59Accounting issues and the balance sheet treatment of PPP transactions 60Procurement and State Aid issues 62Affordability issues 63The speed and cost of PPP procurement 64Building a PPP Centre of Excellence 65The sharing of refinancing benefits 665 Recommendations and conclusions 69AppendicesA: Review and progress update: Developing Public Private Partnerships inNew Europe and The trans-European Transport Network: from aspiration to reality 72B: EIB funded PPP projects by country and sector 76C: Summary of PPP projects co-financed by the Cohesion Fund, Structural Funds or ISPA 78Glossary of terms 79Contacts 80Cover picture: Millau Bridge, France, procured by the public sector, advised by PwC, as a PPP

“Sustained investment in infrastructure – especially transportinfrastructure – is vital if Europe is to maintain its competitivenessagainst rapidly growing emerging economies.”Rt Hon Alistair Darling MP, UK Secretary of State for Transport at the 2005 PPP Transport Summit

Executive SummaryPPPs in context – publicprocurement models andthe need for investmentThe ‘infrastructure gap’, and its negativeimpact on economic growth, jobcreation and social cohesion in Europe,has been recognised for many years.Across Europe, the need to improveinfrastructure, particularly in thetransport sector, is seen as a necessarycondition to successful economicgrowth. However, governments havelimited financial resources to devote toincreased capital expenditure forimproving public services and facerestrictions on their ability to raise debt,in particular due to adherence to theprinciples of economic convergenceand fiscal restraint enshrined in theMaastricht Treaty.In order to bridge the growing gap betweenthe cost of the infrastructure needed and theresources available, and to ensure that theinfrastructure is delivered as efficiently andcost-effectively as possible, the key questionis how to deliver cost-efficient investment.In this context, Public Private Partnerships(“PPPs”) are a growing element of publicsector procurement across Europe.Advantages andDisadvantages ofusing PPPsPPP procurement is only one of severaloptions for procuring infrastructure.Consideration must be given as to whethera project is suited to a PPP structure, andwhether there is strong political support fora PPP solution.The principal reason for using PPPs is that,where the project is suitable, they can deliverbetter value for money than the alternatives.All arguments for and against PPPs must beconsidered within the context of thatoverriding objective.3

Key advantages for usingPPP procurement:• PPPs make projects affordable• PPPs maximise the use of private sector skills• Under PPPs, the private sector takeslife cycle cost risk• With PPPs, risks are allocated to the partybest able to manage or absorb eachparticular risk• PPPs deliver budgetary certainty• PPPs force the public sector to focus onoutputs and benefits from the start• With PPPs, the quality of service has to bemaintained for the life of the PPP• The public sector only pays when servicesare delivered• PPPs encourage the development ofspecialist skills, such as life cycle costing• PPPs allow the injection of private sectorcapital• PPP transactions can be off balance sheetKey challenges in usingPPP procurement:• Does sufficient private sector expertiseexist to warrant the PPP approach?• Does the public sector have sufficientcapacity and skills to adopt the PPPapproach?• It is not always possible to transferlife cycle cost risk• PPPs do not achieve absolute risk transfer• PPPs imply a loss of management controlby the public sector• PPP procurement can be lengthy and costly• The private sector has a higher cost offinance• PPPs are long-term relatively inflexiblestructuresCurrent PPP activityacross Europe andselected major marketsThe PPP approach is increasingly beingadopted to deliver new investment ininfrastructure. Many countries initially developPPPs in the transport sector and later extendtheir use to other sectors, such as education,health, energy, water and waste treatment,once the value for money benefits are provenand public sector expertise is established.Geographically, the PPP market has remainedconcentrated. While there is evidence tosuggest that the PPP concept is becomingmore established across Europe with the UKmarket reaching a good level of maturity andstrong deal flow in the pipeline for Spain,Portugal, Italy and Germany, the global spreadof PPPs has been slower than many marketparticipants had hoped.Figure 4 on page 36, shows an updatedSummary of PPPs by country and sector forthe European market. Figure 10 on page 54,shows this activity for selected internationalmarkets where there is concentrated PPPactivity.Solving recurring issuesThe use of PPPs raises a number of complexissues and choices, the solutions to which areoften project or country specific. However,there are a number of fundamental issuesraised time and again across a wide spectrumof PPPs.Legal impediments and uncertainties regardingPPPs affect both the public and private sector.Accounting issues and balance sheettreatment provide further uncertainties whichmust be addressed from the outset of aproject. Procurement and State Aid,affordability, and speed and costs of a PPPprocurement, can all benefit from the sharingof experience and best-practice acrosscountries as well as within countries.4

RecommendationsPPPs are complex and recurring issues continue to hinder their development.Given the potential which PPPs have for the delivery of essential publicservices we make the following recommendations:■ Build national PPP Centres of Excellence■ Balance Sheet treatment should not drive the decision to undertake a PPP■ Develop shadow private sector bid models at the outset■ Streamline speed and cost of procurement■ Share refinancing benefits■ The EU Commission should provide guidance on PPPs for thepublic sector which includes guidance on procurement procedures■ Create an EU Knowledge UnitConclusionThe modernisation of public services andinfrastructure is a promise governments havemade to their citizens. We believe that PublicPrivate Partnerships offer a viable alternative totraditional procurement methods and we wouldlike to see the public and private sectors doingmore business together. Delivering the PPPpromise means delivering solutions that fundnew roads, improve rail services, modernisehospitals, and build new schools and socialhousing, more quickly and efficiently, so thattogether we can close the service andinfrastructure gap that currently exists withinand across Europe.5

“Efficient use of PPP schemes in delivering necessary transportinvestments can help ease the pressure on public finances anddeficits as well as contribute to more stable economic growth andincreased transparency of public spending; by maximising thevalue of public money, more can be built and operated with givenamounts of public resources.”Zoltan Kazatsay, Deputy Director General, DG TREN, European Commission at the2005 PPP Transport Summit

IntroductionThe ‘infrastructure gap’ in Europe hasbeen recognised for many years and itsnegative impact on economic growth,job creation and social cohesion is feltacross every country within the region.However, governments have limitedfinancial resources to devote toincreased capital expenditure andimproving public services, and they facerestrictions (including those of theMaastricht Treaty) on their ability to raisedebt. Although a number of EU-levelinitiatives and funds have beenintroduced to address the investmentdeficit and stimulate growth, theiroverall impact has been limited.In 1996, it was estimated that €400 billionwould be needed by 2010 to deliver theproposed trans-European multi-modal transportnetwork, generally referred to as TEN-T.The fourteen priority projects identified wouldrequire €125 billion over the same period.The 2001 Commission White Paper, A Time toDecide, 1 proposed a programme of 60 measuresand an action plan aimed at prioritisingsubstantial improvements in the quality andefficiency of transport in Europe. This includedrevising the trans-European network guidelinesin order to eliminate bottlenecks.By 2003, little progress had been made andthe investment need had increased. It wasrecognised that renewed efforts would berequired to deliver the proposed investmentin 75,200km of roads, 78,000km of rail,330 airports, 270 international sea ports and210 inland ports as well as the trafficmanagement systems, navigation and userinformation systems which also form part ofthe TEN-T network. 2 71White Paper: European TransportPolicy for 2010: Time to Decide,COM (2001) 370 final. Available athttp://www.europa.eu.int/comm/energy_transport/en/lb_en.html2“TEN Transport Policy and Projectsin the Future”, Presentation byE. Thielmann, Head of Division,DG TREN, January 2005

At the same time, it was increasinglyrecognised at the EU-level that private sectorinvolvement via a PPP structure could helpdeliver the infrastructure needed. The PPPapproach had been developed in somemember countries since the early 1990s,but EU institutional activity had been limitedto statements and reviews and there wasconsiderable uncertainty regarding the impactof EU legislation on PPPs.While progress has beenmade, the need forinvestment and innovativefunding solutions remainsRecognising the need to promote economicgrowth and improve competitiveness, theMarch 2005 European Council stressed theimportance of infrastructure investment toboost growth and bring greater social andeconomic convergence. They also called onthe European Union and the member countriesto continue their investment efforts and toencourage public-private partnerships. 3EU-level interest in the potential for privatesector involvement in infrastructure provisionis growing especially as the level of investmentrequired to deliver the TEN-T remainssubstantial and the costs of delay continueto grow.This paper – aims andobjectivesEffective transport links are a vital part ofmaintaining an efficient and competitiveeconomy. Governments are lookingincreasingly to PPPs to address thisinvestment need. In October 2005, as part ofits Presidency of the EU, the UK governmenthosted an EU Transport PPP Summit, whereofficials at the most senior levels in transportand finance ministries across Europe andprivate sector firms came together to talkfrankly about what works now – and how toget the best out of working in partnership inthe future.This paper is intended to stimulate the debateby further examining the potential of the PPPmodel for meeting the investment challenge inan efficient, cost-effective way. In particular,a review of PPP activity across Europehighlights examples of best practice anddeveloping trends. Finally, the benefits ofPPPs as well as the main difficulties facingthe public and private sectors are explored,along with practical solutions for delivering aPPP approach.The future looks promising for PPPs but weshould act to build on the discussions andthemes of the EU Transport PPP Summit.3European Council Brussels,22 - 23 March 2005, PresidencyConclusions, 7619/1/05 REV18

Report StructureThis paper is divided into five further sections:■■■■■Public Procurement Models – Setting PPPs in contextAdvantages and disadvantages of using PPPsReview of PPP activity across EuropeRecurring PPP issues and solutionsRecommendations and conclusions – streamliningthe procurement processAuthorsWe hope you find this paper useful and we welcome debate and comments.Our contact details are given at the back of this publication.Paul DaviesPartner, PricewaterhouseCoopersKathryn EusticePricewaterhouseCoopersNovember 20059

1Public procurementmodels – settingPPPs in contextTraditional publicprocurementThe ‘infrastructure gap’, and itsnegative impact on economic growth,job creation and social cohesion inEurope, has been recognised for manyyears. Across Europe, the need toimprove infrastructure particularly in thetransport sector, is seen as a necessarycondition to successful economicgrowth. However, governments havelimited financial resources to devote toincreased capital expenditure andimproving public services and facerestrictions on their ability to raise debt,in particular due to adherence to theprinciples of economic convergenceand fiscal restraint enshrined in theMaastricht Treaty.In order to bridge the growing gap betweenthe cost of the infrastructure needed and theresources available, and to ensure that theinfrastructure is delivered as efficiently andcost-effectively as possible, the key questionis how to deliver cost-efficient investment.In this context, Public Private Partnerships(“PPPs”) are a growing element of publicsector procurement across Europe.11

But while public sector bodies across Europeincreasingly choose to adopt some form ofPPP to develop transport infrastructure,conventional procurement models are stillimportant and may be more appropriate formany projects. Even in the UK, where there issignificant recourse to PPPs, 85% of publicinvestment is delivered through conventionalforms of procurement. 4It is therefore important to understand thetraditional public procurement approach incontrast to the PPP model. While there is nouniversal definition of traditional procurement,characteristics might include:• The public sector procures assets, notservices, from the private sector.• Assets are input-specified; the public sectorcarries out design prior to procurement.• The private sector is responsible fordelivering assets, not for their long-termperformance beyond standard warrantyperiods.• The project management of procurementtypically remain with the public sector,including the risk of successfully integratingmultiple works contracts.What are PPPs?The term “public-private partnership” (“PPP”)has been in general use since the 1990s.However, there is no widely agreed, singledefinition or model of a PPP.The term “PPP” covers a range of differentstructures where the private sector delivers apublic project or service. Concession-basedtransport and utilities projects have existedin EU member countries for many years,particularly in France, Italy and Spain,with revenues derived from payments byend-users, e.g. road tolls. The UK’s PrivateFinance Initiative (“PFI”) expanded thisconcept to a broader range of publicinfrastructure and combined it with theintroduction of services being paid for by thepublic sector rather than the end-users.The use of PPPs has now spread to most EUmember countries and depending on thecountry and the politics of the time, the termcan cover a spectrum of models. These rangefrom relatively short term managementcontracts (with little or no capital expenditure),through concession contracts (which mayencompass the design and build of substantialcapital assets along with the provision of arange of services and the financing of theentire construction and operation), to jointventures and partial privatisations where thereis a sharing of ownership between the publicand private sectors. 5The key contrast between PPPs and traditionalprocurement is that with PPPs the privatesector returns are linked to service outcomesand performance of the asset over the contractlife. The private sector service provider isresponsible not just for asset delivery, but foroverall project management andimplementation, and successful operation forseveral years thereafter.The timing of payments by the public sector tothe private sector for the assets and servicesdelivered is therefore dramatically different,as illustrated in Figure 1.4PFI: Meeting the InvestmentChallenge, HM Treasury, 20035Developing Public PrivatePartnerships in New Europe, May 2004.Available on the PwC website athttp://www.pwc.com/extweb/service.nsf/docid/A2F9309C016FAADD80256EA6004F516C12

Figure 1: Contrasting public sector payment profilesof traditional and PPP procurement modelsTraditional Government procurementPayment profile can be depicted as follows:CostOverruns• Capital and operatingcosts are paid for by thepublic sector, who takethe risk of cost overrunsand late delivery.EstimatedCapitalCostRunning cost overrunsEstimated running costsYears 5 10 15 20ConstructionphaseOperation andMaintenance phasePPP procurementPayment profile for the public sectorNopaymentsuntilfacilitiesreadyPayment based on usagePayment based on availability• The public sector onlypays over the long termas services are delivered.The private sector fundsitself using a large portionof debt plus shareholderequity. The returns ontheir equity will dependon the quality of services.Years 5 10 15 20ConstructionphaseOperationphaseSource: PricewaterhouseCoopers13

Recent PPP DefinitionsAt present, the EU does not have an officialdefinition of a PPP. The Commission’s 2004Green Paper on Public-Private Partnershipsreferred to PPPs as “forms of cooperationbetween the public and private sectors for thefunding, construction, renovation, managementor maintenance of an infrastructure or theprovision of a service.” 6Box 1 gives a summary of some recentdefinitions.Box 1 PPP DefinitionsPPPs are aimed at increasing the efficiencyof infrastructure projects by means of along-term collaboration between the publicsector and private business. A holisticapproach which extends over the entirelifecycle is important here.Source: German PPP Task Force, German Transport,Construction and Housing Ministry (Bundesministerium fürVerkehr, Bauen and Wohnen)The term public-private partnership (“PPP”)is not defined at Community level. Ingeneral, the term refers to forms ofcooperation between public authorities andthe world of business which aim to ensurethe funding, construction, renovation,management and maintenance of aninfrastructure of the provision of a service.Source: Green Paper on Public-Private Partnerships andCommunity Law on Public Contracts and Concessionspresented by the European Commission, April 2004Standard & Poor’s definition of a PPP is anymedium-to-long term relationship betweenthe public and private sectors, involving thesharing of risks and rewards of multisectorskills, expertise and finance to deliverdesired policy outcomes.Source: Standard & Poor’s PPP Credit Survey 2005PPPs are long-term partnerships to deliverassets and services underpinningpublic services and community outcomes.Optimal structuring links privatesector profitability to sustained performanceover the long-term, yieldingrobust and attractive cash-flows forinvestors in return for deliveringbetter value for money to the taxpayer.Source: John Laing plc‘Public-Private Partnership’ is a generic termfor the relationships formed between theprivate sector and public bodies often withthe aim of introducing private sectorresources and/or expertise in order to helpprovide and deliver public sector assets andservices. The term PPP is, thus, used todescribe a wide variety of workingarrangements from loose, informal andstrategic partnerships, to design buildfinance and operate (DBFO) type servicecontracts and formal joint venturecompanies.Source: European Investment Bank, The EIB’s role inPublic-Private Partnerships, July 20046Paragraph 1, Green Paper on Public-Private Partnerships and CommunityLaw on Public Contracts andConcessions, COM (2004) 327 final14

PPP CharacteristicsDifferent types of PPPs tend to share somecommon characteristics. These includecontracting between the public and privatesectors for the delivery of services, ofteninvolving infrastructure development andmanagement, where risks are shared betweenthe parties. Risks are allocated to the partywhich is best able to manage them, i.e. reducetheir impact and/or absorb their consequences.Appropriate risk allocation should thereforeminimise the cost of risks. The need to utiliseprivate sector management and experience,and not only the capability of raising finance,is also key.Payments under PPPs tend to be based onoutputs, often for the availability of services orthe infrastructure. There may be contractualannual payments from governments to supportinadequate revenues on projects involvingdirect user charging, such as road tolls orrail fares.PPPs are not a way of avoiding payment forcapital projects; rather they allow public sectorbodies to spread payments for large projectsover their useful life, usually over 20 to 30years, but they differ from debt obligations aspayment is only made when services aredelivered.The Commission’s Green Paper considers PPPprojects to be characterised by:• Relatively long relationships, involvingcooperation between the public partner andthe private partner on different aspects of aplanned project.• Funding structures that combine private andpublic funds.• The operator playing an important role ateach stage in the project (design,completion, implementation, funding).• The public partner concentrating on definingthe objectives to be attained.• The distribution of risks between the publicsector partner and the private sector partner.Similarly, for the purpose of a recent evaluationreport on projects financed by the EIB, 7 theevaluators agreed a set of PPP characteristicswith the EIB’s operational directorates, namely,a PPP should:• Involve a clearly defined project.• Involve the sharing of risks with the privatesector.• Be based on a contractual relationship whichis limited in time.• Have a clear separation between the publicsector and the borrower, i.e. there should bea private-sector party raising project-financebased debt.“Private sector expertise andexperience has always been utilisedin public sector procurement, but,where in traditional procurement,private companies built and thenwalked away, PFI seeks to ensurethat the private sector takesresponsibility for the quality ofdesign and construction itundertakes, and for long termmaintenance on an asset, so thatvalue-for-money is achieved.”Source: HM Treasury (UK) July 2003.7Evaluation of PPP projects financedby the EIB, Operations Evaluation,EIB, March 2005. Available athttp://www.eib.org/publications/publication.asp?publ=20715

“Procurement programmes that are perceived by the marketto be efficient, well supported politically and adequatelycommunicated to the wider community will be rewarded by adepth of competitive interest that will deliver value for moneyand a highly competitive cost of capital.”Andy Friend, Chief Executive, John Laing plc at the 2005 PPP Transport

2Advantages anddisadvantages ofusing PPPsWhy use PPPs?It is important that any public sectorauthority understands that PPPprocurement is only one of severaloptions for procuring infrastructure.Consideration must be given as towhether a project is suited to a PPPstructure, and whether there is strongpolitical support for a PPP solution.The principal reason for using PPPs is that,where the project is suitable, they can deliverbetter value for money than the alternatives.All arguments for and against PPPs mustbe considered within the context of thatoverriding objective.This section summarises the key argumentsfor PPPs and then considers some of thedifficulties associated with, and objections to,PPP procurement.“PPPs make additional projectsaffordable. By attracting privatesector finance for schemes suitedto the PPP model, limited publicsector funds can be directed todeliver other non-PPP projects”Julie O’Neill, Secretary General of the Irish Departmentof Transport at the 2005 PPP Transport SummitKey reasons for usingPPP procurementPPPs make projects affordableUnder PPPs, the private sector finances theconstruction of the project and is repaid by aservice charge from the authority over time orby revenues from the project, or a combinationof the two. So in circumstances when thepublic authority does not want to, or cannot,increase its direct levels of borrowing, PPPsmake projects affordable.Figure 2 shows the profile of a classic PPProad project, which is financed by way ofavailability payments from government, ratherthan tolls from users. The annual payment tobe made by the public sector authority isshown by the blue line on the graph.The yellow line represents the upfront paymentwhich would otherwise have to be made tomeet the capital costs of the project (on theincorrect assumption that the public sector’scapital and operating costs would equal that ofthe PFI contractor – whereas generalexperience suggests public out-turn costsprove to be higher). Under PPPs, governmentswill pay the annual payment line, and then onlyif services are being successfully delivered.With traditional procurement, the public sectorpays both the capital and operatingexpenditure and is fully at risk for the actualout-turn cost.17

Figure 2: Profile of a PPP TransactionRoad Transaction Revenues/Costs£000s100,00080,000AnnualPayment60,00040,000OperatingCosts20,00001 5 9 13 17 21 25 29 33YearCapitalCostsNote that the blue line includes the privatesector’s cost of finance, whereas in traditionalprocurement this cost is not typically shown atthe project level.This PPP payment profile delivers two keybenefits:• The project may become affordable withinannual authority budgets.• Payments by the public sector more closelymatch the user benefits of a project as theyare delivered; this is particularly so fortransport projects, where user benefits growover time.A project may also become affordable becauseout-turn cost is fixed and uncertain downsidesare avoided.Because individual projects become moreaffordable, the public sector can afford toprocure a greater number of projects inaggregate, financed over a realistic long-termperiod. Authorities are not constrained fromtaking the long-term view because of shorttermbudgetary and fiscal constraints.Of course, these benefits would also supportan argument for an authority to simply borrowon a long-term basis, rather than using PPPs.So affordability cannot in itself be a driver tochoose PPPs, but is one beneficial factor toconsider. Notwithstanding this, however, manyauthorities do not have the direct power toborrow, but can enter into long term contractsfor the delivery of services. For them,PPPs are a pragmatic solution to overcomea legal impediment.In addition, in cases such as airport terminals,enhancement of port facilities and toll roads,the future revenues of the project could enablethe private sector to finance the majority oreven all of a project without recourse to publicsector support, further improving theaffordability of the project to the public sector.It must be acknowledged that differentMember States regard the potentialaffordability benefit of PPPs differently.Some believe that there is little differencebetween the affordability of the procurementmethods; the public sector either has to pay aPPP contractor over the long term or raisefinance itself to finance a traditionalprocurement, which it then repays over thelong term, making a project equally affordable.For others, affordability is critical indetermining the attractiveness of PPPs.This may be particularly true of local orregional authorities, who lack the capacity toborrow, but can afford long-term annualpayments under a PPP scheme.PPPs make projects affordable but also createfiscal rigidity at the same time because of theirlong-term commitments. Governments mustconsider to what extent PPPs lock in publicspending and reduce the fiscal flexibility offuture generations.18

Box 2 N4/N6 Kinnegad-Kilcock Motorway, IrelandWorking within affordability constraintsThe N4/N6 project involved a 39km stretchof road, including 35km of new construction,from Dublin to the northwest of Ireland.This was the first PPP road project signedas part of the €52 billion 2000 – 2006National Development Plan and the thirdPPP scheme to close in Ireland.The EuroLink Consortium, comprising Cintraand SIAC and financed by Banco BilbaoVizcaya Argentaria, Banco Santander CentralHispano and the European Investment Bank,arranged a €235 million project financingpackage for the 30-year design-buildfinance-operate(DBFO) real toll scheme.This included an EIB guarantee facility of€85 million after two years of operation.The contract was awarded in March 2003and the 3 1 ⁄2 year construction period beganin May 2003.Upfront capital costs on the project wereestimated at €320 million, and totalinvestment over the life of the concession isput at €400 million. Before procuring theproject, the National Roads Authority (NRA)set a maximum €170 million subsidy limit(with €70 million relating to land purchase)which would supplement the hard tollpayments during the project’s constructionand operational phases, thereby ensuringthat the project was affordable to the NRA.Budgetary certainty was also assured.The final contract apportioned real toll riskto the concessionaires, so the greater partof the affordability risk has been transferredto the private sector. Cost overruns, forinstance, would have to be funded bylenders and repaid from tolls. There are noguarantees against competing toll-freeroutes and there is no compensationpayable on termination. In spite of therelatively aggressive risk transfer to theprivate sector, the project has beencompetitively priced.Source: PricewaterhouseCoopers/Dealogic ProjectWarePPPs maximise the use of privatesector skillsUnder traditional procurement, the privatesector is responsible for delivering an asset totime and budget. In contrast, PPPs require theprivate sector to:• Deliver assets on time and budget.• Ensure that those assets deliver the servicelevels required by the public sector.• Project manage the overall delivery of theproject.• Ensure that the individual assets and otherelements of the project that have beenprocured work together to successfullydeliver services. Particularly in the rail sector,such “systems integration risk”, whichinvolves ensuring signal systems, rollingstock and track work seamlessly together,is a key project risk.• Maintain and refurbish assets on an effectivebasis, so that services are deliveredcontinuously at satisfactory levels overthe long-term.PPPs therefore offer significant opportunitiesto benefit from private sector skills to a fargreater degree because of these additionalrequirements.In considering whether to use PPPs, publicsector authorities should also look at their owntrack record of project delivery. Have projectsbeen delivered on time and on budget?Has systems integration risk been properlymanaged? Have effective project managementskills been introduced? Does the public sectorhave the skills and resources to manage andmaintain the assets effectively after theiracceptance from the private sector contractor?Public sector authorities often do not havein-house capability to deliver projects andmaintain them over lengthy periods; this islargely by design, not by omission. They mayonly procure projects infrequently andtherefore lack the necessary skills and trainingto implement projects, and therefore have noneed to retain such a capacity in-house.Therefore, more extensive use of the privatesector throughout a project’s life gives bestvalue, as the private sector parties have thatexperience and are repeatedly deliveringprojects internationally.19

Under PPPs, the private sectortakes life cycle cost riskPPPs require the private sector to compete todeliver services over the long-term at the mosteconomically advantageous price. The publicsector is not interested in simply procuring thecheapest upfront capital expenditure, as withtraditional procurement where the privatesector is indifferent to higher maintenancecosts thereafter. With PPPs, the public sectoris looking to achieve the best value over thelife of the asset and project.As a result, the private sector focus has beento design and implement projects with a viewto their long-term cost to the taxpayer ratherthan the immediate capital spend. Where PPPshave been used extensively, there isconsiderable evidence of increasing skills inthe private sector to analyse and provide forlife cycle costs and to design accordingly.Under PPPs the private sector is designingand pricing to absorb life cycle risks, thereforeits pricing at first sight will look moreexpensive than traditional procurement.However, under traditional procurement, thepublic sector retains project management andlife cycle risks, which will not be reflected inthe immediate pricing received from acontractor. For instance, if the public sectorwere managing a rail project with separateprices for rail, signalling and rolling stockcontracts, none of those prices individuallywould include a price for the systemsintegration risk. But if those assets do notwork well together, the public sector will findthemselves facing significant extra costs tocomplete the project successfully.With PPPs, risks are allocated tothe party best able to manage orabsorb each particular riskPPPs are designed so that risks are allocatedto the party which is best able to managethem. Where the private sector bodies havethe necessary long-term project skills and thepublic sector does not, it follows that the risksassociated with project delivery should betransferred to the private sector. In so doing,the public sector should obtain best valuebecause those with the greatest and mostrelevant expertise will be best able to manageor absorb the risks, thereby pricing them moreeconomically and minimising the costs.However, both the public sector authoritiesand the private sector operators should takecare not to promote or accept inappropriaterisk transfer. In the context of competitivebidding in particular, there may be anincreased tendency to overestimate futuredemand in order to demonstrate projectviability. Projects delivered on the basis of thisprivate sector “Optimism Bias” may bringshort-term benefit to bidders, but are unlikelyto be viable over the long-term as key risksrelating to forecast demand levels may not beallocated to the party best able to manage orabsorb them. For example, there are examplesof tram PPPs that were rendered unaffordableand unworkable by inappropriate patronagerisk transfer.“The previous method used by the[Highways] Agency for procuringconstruction and maintenance of theroad was to let contracts for separatetasks…. There was insufficientincentive for the parties to collaborateto maximise overall value for money forthe Agency, especially in terms ofwhole life costs and quality…. Theassumptions on which the contractorsgave fixed rates often led to numerousclaims…. A National Audit Officereport stated an average increase of28% between tender and out-turnprice, based on a sample of 42 roadconstruction contracts.Design-Build-Finance-Operate(the Highways Agency term for itsavailability payment based PPPprogramme) contracts haveaccelerated the introduction of costefficiencies, innovative techniques andwhole life cost analysis into the designand construction of road schemes andthe operation of roads.Source: “DBFO – Value in Roads” A Case Study on the firsteight Road Contracts by the Highways Agency.20

Box 3Amsterdam – Belgian Border High Speed Rail Link Project –Infrastructure, The NetherlandsAllocating risks appropriatelyThe project is one of the original 14 priorityTEN-T projects and is the final phase ofthe major Paris-Cologne-Brussels-Amsterdam-London high speed rail network.The €4.5 billion HSL Zuid project (based on2004 prices) involves the construction of a100km high speed rail line connectingAmsterdam and Rotterdam with theBelgium / Netherlands border. The newhigh-speed rail lines are for passengerrail transport only and are designed forspeeds of up to 300km/h.The HSL Zuid project comprises four setsof contracts, two of which are structured asPPPs. The project consists of separatecomponents for the civil substructure,the rail systems infrastructure, trainoperations, station areas and in addition theBelgian section of the line.These separate components resulted inmultiple interfaces between the variousparties and one of the biggest challengeshas been managing these interfaces.The Dutch Government wanted to limit thecomplexity of the sub projects by groupingsimilar types of risks and thus retained therelated interface risks between the variouscontractual arrangements as it was best ableto manage them, functioning as the centralcounterpart.The winning infrastructure consortium –Infraspeed BV – is responsible for the€1.32 billion project to design, build,finance and maintain the railway trackand associated systems until 2030. Thepayment mechanism is based on availabilitypayments with deductions for nonavailability,unsatisfactory asset conditionand possession. Isolating the infrastructureconsortium from traffic risk resulted in anefficient tender procedure and competitivefinancing conditions. The availability-basedperformance regime passes the constructionrisk to the consortium, i.e. the party bestable to manage that particular risk, andincentivises them to achieve high availability.The HSL Zuid PPP is expected to achievea 5% cost reduction compared withtraditional procurement.Commercial operation of the southern partof the HSL line is expected on1 October 2006 while commercialoperation of the entire HSL line is expectedon 1 April 2007.Source: PricewaterhouseCoopers21

PPPs deliver budgetary certaintyAt the financial close of a transaction, thefuture cost of a PPP project is known; thepublic sector will receive known outputs forknown costs. This is in contrast to traditionalprocurement where the costs of projectcompletion and future maintenance of theassets are uncertain and remain theresponsibility of the public sector.However, PPPs do not provide absolutebudgetary certainty. Typically PPP paymentsby the public sector are subject to indexationand possibly periodic reviews, where thecost of delivering the underlying services isre-examined and payments are formulaicallyadjusted. In addition, some PPPs may besubject to service variations which may leadto additional costs.Box 4 Spencer Street Station Redevelopment Project, MelbourneBudgetary certainty achievedThe AU$700 / €430 million redevelopment ofMelbourne’s Spencer Street Station wasimplemented under the State Government’sPartnerships Victoria policy. The new AU$350/ €215 million transport interchange facility inthe heart of Victoria’s capital city willaccommodate interstate, regional andmetropolitan rail and bus services and willhave the capacity to handle 30,000commuters per hour during peak periods.The complex will also include a shoppingplaza, a supermarket, offices, apartments anda hotel at a further cost of AU$350 million /€215 million.The Civic Nexus consortium was selected inJuly 2002 for the design, construction, financeand long-term maintenance, and operation ofthe interchange facility. ABN AMRO Australiahold a 100% equity stake in Civic Nexus andother consortium members include LeightonContractors Pty Limited (construction),Honeywell Limited (maintenance), and DarylJackson and Nicholas Grimshaw (designarchitects). Funding arranged in 2002 includedan AU$135 million (€84 million) 30-yearinflation linked bond, an AU$158 million (€99million) 12-year nominal bullet bond and anAU$81 million (€50 million) equity. A thirdbond tranche was issued in April 2003 forUS$74 million.The PPP had a number of innovativefeatures, including risk transfer based on asingle package of railway accommodationand systems upgrade, plus commercialdevelopment. The work was planned in sucha way that full train services could continueto operate from the station throughout theredevelopment and the preferred bidder wasresponsible for negotiating access with thethird-party privatized rail operators at arm’slength from the public sector sponsor body.A further key feature of the proposal was aninnovative and iconic roof design.A number of risks which had beentransferred to the private sectorsubsequently materialised. The privatesector had to deal with the effects ofworksite agreements not being favourableto the constructor, with roof constructionproving difficult and expensive, withcomplicated access issues for the railoperators, and with escalating raw materialcosts (especially steel prices).Although the Victorian Government choseto step in to help the consortium negotiateadditional access to the station, as thepublic sector had passed the risks to theprivate sector, the public sector has not hadto meet extra payments. The Government’srole has been one of facilitation. As a resultof the risks materialising, the mainconstruction contractor, Leighton, haswritten off AU$110 million (€69 million)and the project has been delayed byapproximately 12 months. AU$640 million(€430 million) was wiped off Leighton’smarket capitalization at the time of thewrite-off announcement.The station is due for completion by theend of December 2005.Source: PricewaterhouseCoopers / Dealogic ProjectWare22

PPPs deliver value for moneyThis is an assertion that needs to bequestioned with every transaction. It isprobable that the PPP approach will delivervalue for money: where a PPP project is usingprivate sector skills across a number ofdisciplines; where the public sector trackrecord of project implementation is poor;where bidders are competing to provide thebest services over the life of the assets; andwhere risks are allocated to the party best ableto manage or absorb them.“An increasing body of evidencehas shown that the better riskmanagement of PFI results in agreater proportion of assets beingdelivered on time and to budget.”Source: HM Treasury Value for Money AssessmentGuide August 2004The key findings of HM Treasury’sresearch into 61 PFI projects were:• 89 per cent of [PFI] projects weredelivered on time or early;• 77 per cent of public sectormanagers stated that theirprojects were meeting theirinitial expectations, i.e. theoverall performance of theprivate sector partner wasmatching up to expectationsat the time of contract close.In determining the benefits of a PPPapproach, it has been recognised that thepublic sector should not focus simply onfinancial comparisons to the exclusion of widerqualitative considerations. While it is importantto consider PPP costs against notional pricesof a traditionally procured project (“the publicsector comparator”), the procuring authorityshould first consider the qualitative factors thatwould suggest whether a PPP or alternativeapproach would potentially offer the bestsolution. Qualitative considerations couldinclude whether there is a developed privatesector skill base in the sector underconsideration; how private sector projectmanagement skills contrast to public sectorin-house capability; and whether there areconditions for strong competition betweenPPP bidders.The public sector only pays whenservices are deliveredUsually, any PPP payments by the publicauthority only commence when projectservices begin to be delivered. If projects arelate, the authority will not pay and therefore thetaxpayer does not bear the cost. The level ofpayment made by the authority will relate tothe quality of services provided and will reducein some sort of relation to a reduction inservices being delivered. The private sectorcontractor has a direct financial interest inensuring that the asset is delivered on timeand the required service levels are provided.A study in 1999 by the UK NationalAudit Office found that only 30%of non-PFI major constructionprojects were delivered on time andonly 27% were within budget,whereas the NAO’s report on PFIconstruction performance showedthat over 70% of PFI projects weredelivered on time, and noconstruction cost overruns wereborne by the public sector.This record reflects a number ofweaknesses that have besetpublic procurement in the past.In particular, the full costs ofprojects have not been calculatedaccurately beforehand, riskmanagement procedures have notbeen implemented, and therehave been insufficient incentives,for management or organisationwide,to ensure that projects aredriven forward successfully.Source: HM Treasury “PFI: Meeting the InvestmentChallenge” July 200323

Box 5 N31 Leeuwarden – Drachten Motorway, The NetherlandsSignificant value for money throughimproved availability and lower costs tothe public sectorThe N31 road is located in the north of theNetherlands. The circa €110 million PPPproject involved upgrading the single laneroad in each direction to a dual lanemotorway and designing and building anaqueduct and a bridge. In addition, the PPPprovided for the financing and maintenanceof this new infrastructure and the existingdual lane motorway link for 15 years aftercompletion.A PPP structure was chosen so that theDutch Highways Agency (Rijkswaterstaat)could gain experience of the Design-Build-Finance-Manage (DBFM) procurement routeand assess whether a PPP could delivervalue for money. The PPP approach alsomade the project affordable – the DBFMcontract was about 13% below theGovernment’s budget – and helped toensure that the project was not delayed forbudgetary reasons.The N31 PPP reached financial close inDecember 2003 and was structured withseveral types of payment: a pre-availabilitypayment for the availability of the existingroad; an intermediate availability paymentonce the motorway had been widened;a non-recurring payment of €40 milliononce all the infrastructure had beencompleted; and availability paymentsthroughout the 15-year project term.The winning Waldwei.com consortiumcomprised Dura Vermeer, Ballast NedamInfra and Royal BAM Groep. Their bid wassome 30% below the PSC, in part due tomaintenance efficiencies. A recent evaluationassessed that the PPP provided not onlyimproved availability but also 20% financialsavings, even after a 10% adjustment foraggressive bidding by the private sectorconsortium. The Public Sector Comparatorwas found helpful in analysing andunderstanding the value realised by thisPPP project.The success of the N31 project hascontributed to the further use of PPPs todeliver road infrastructure projects. The PPPapproach must now be considered fortransport infrastructure projects over €112.5million. A standard contract for DBFM roadshas been launched and several PPP roadprojects have been announced.Source: PricewaterhouseCoopers / Dealogic ProjectWareBox 6 The London Underground Limited Public Private Partnership, UKIn the LUL PPP, the private sectorinfrastructure companies (“Infracos”) do nottake passenger revenue risk, but are paid anannual payment directly related to theservices delivered to passengers.The Infracos are paid predominately inrelation to their performance under three keyoutput based measures:• Availability: a measure of the day-to-dayreliability of the trains, signalling, track andstation equipment• Capability: a measure of the passenger’stypical journey time from entering thestation to their destination• Ambience: a measure of the condition andcleanliness of trains and stationsThe level of deduction from the agreedannual payments an Infraco might face forpoor performance is directly related to thecost to passengers of wasted time imposedon them. In this way the interests of theInfracos, public sector and passengers arealigned.While the payment regime of the PPPis a good example of incentive alignment,it is also an example of the difficulties ofprocurement when there is no politicalconsensus surrounding the use of a PPPstructure. The need for strong politicalsupport to make PPP procurement effectiveis examined further in Section 4.Source: PricewaterhouseCoopers24

PPPs force the public sectorto focus on outputs and benefitsfrom the startPPPs rely on developing a detailed outputspecification and therefore they change thefundamental nature of the public sectorprocurement:• The primary focus of the public sectorbecomes which services it wants delivered,not the means by which those services aredelivered. The public sector’s expertiseshould therefore be focused on servicelevels, and not detailed design, for which thepublic sector often does not have thenecessary in-house skills, or is simply notset up to carry out in-house.• PPP output specifications are fixed forlengthy periods, therefore it becomes criticalthat the service levels are set correctly at theoutset. This leads to an even greater focuson defining service levels at the beginning ofa project than has historically been the case.This might necessitate tough choicesbetween the ideal service levels an authoritymight want and what is actually affordable –choices that under traditional procurementare often hidden or avoided until too late inthe process, leading to projects that are farmore expensive than originally envisaged.• Defining service levels in detail at the outsetminimises or removes the need for “changeorders”, i.e. changes to the output orspecification of assets during theprocurement, which is a large contributor tocost overruns with traditional procurement.“For Highways Agency employees,the introduction of the DBFO [PPP]programme has resulted in theirrole changing from procuring thedesign and construction of ascheme, to compiling the outputspecification for the road service,reviewing the bidders’ proposals forthe design and, following contractexecution, monitoringperformance.”Source: “DBFO – Value in Roads” A Case Study on thefirst eight DBFO Road Contracts by the Highways AgencyThis focus on output levels is a key reasonwhy PPPs prove to be better value for money.They create a focus on costs and benefits anda discipline to the budgeting of a project, andact as a catalyst for tough political decisions,which are otherwise avoided at the outset,leading to high levels of cost overrun.With PPPs, the quality of servicehas to be maintained for the lifeof the PPPThe quality of service under a PPP is specifiedat the outset and is not expected to declinethroughout the life of the PPP. The pricecommitted to by the private sector is tomaintain those standards throughout. Thisobligation contrasts starkly with traditionalprocurement, where asset condition and henceservice levels will often decline significantly asthe asset becomes older.“Evidence to date suggests PFI isappropriate where there are majorand complex capital projects withsignificant ongoing maintenancerequirements. Here the privatesector can offer projectmanagement skills, more innovativedesign and risk managementexpertise that can bring substantialbenefits. Where it is effective, PFIhelps ensure that desired servicestandards are maintained, that newservices start on time and facilitiesare completed on budget, and thatthe assets built are of sufficientquality to remain of high standardthroughout their life.”Source: HM Treasury “PFI: Meeting the InvestmentChallenge” July 2003Development of specialist skillsThe implementation of PPP programmes and theacceleration of projects that this has broughtabout, has led to significant opportunities for theprivate sector. A large number of companieshave created specialist PPP units and haveinvested in the expertise and understanding ofthe PPP market and pricing of deals on a wholelife cost basis. PPPs have created beneficialeconomic investment opportunities across aspectrum of public sector areas and haveencouraged the development of a facilitiesmanagement sector capability, skilled inoperating and maintaining new facilities.Investment in PPPs is not without risk; there arealready a number of PPP projects where theprivate sector sponsors or sub-contractors havehad to make substantial additional contributionsto ensure the successful delivery of a project, atno cost to the public sector. However, the vastmajority of projects have shown delivery on timeand budget and the private sector parties havebeen rewarded accordingly. The public andprivate sector incentives are aligned, and theprivate sector makes good profits for deliveringgood services.25

PPPs encourage the injection ofprivate sector capitalSince 1994, the private sector has investedaround US$260 billion in PPPs across theglobe, mainly in Europe, Australia andCanada. 8 Therefore, it is clear that PPPs allowaccess to a large pool of additional funds, bothequity and debt finance. The benefit of privatesector capital is not restricted to the simpleavailability of cash, but also entails all of thebenefits of private sector investment:• Lenders impose strict due diligencerequirements on the deal, to some extentdoing the public sector’s work for them.They will, for instance, appoint technical duediligence consultants to ensure all costingsare robust, that revenue forecasts arerealistic and that reserves for maintenanceand refurbishment of projects are prudent.• Lenders will require regular informationupdates to spot and forestall potentialproblems through preventative action,should any difficulties be forecast.• Equity controls on a project company are thesame as for general private sectorcompanies. Under-performing management,for instance, will be quickly identified andreplaced or supplemented.• The payment structure of PPPs means thatlender and equity returns can only beguaranteed if the project is successfullycompleted and operates satisfactorily.Incentives are therefore clearly aligned withthose of the public sector.These controls and incentives are less clear cutand much less evident in public sector managedprojects. Consequently, cost overruns andtechnical difficulties tend to be discovered laterin the project, even in construction itself whenthey are harder to resolve.“There is a large and growingappetite for PPP projects acrossEurope. Well structured projects,both large and small, will benefit.Michael Dinham, Head of Infrastructure Finance andAdvisory, ING (London)”PPP transactions can be offbalance sheetUnder Eurostat guidance or local accountingrules, many PPP transactions can be classifiedas off the public sector’s balance sheet.This means the authority will only account forthe annual payments it makes to the PPPcompany, and not for the assets and liabilities ofthe project, including its debt. The off balancesheet treatment of PPPs is attractive in so far aslong-term obligations under PPPs do not appearunder governments’ overall budgets. Annualgovernment budgets show instead the annualpayments for the services received, therebyhelping to keep government deficits within thereference value of 3% of GDP, as per theStability and Growth Pact adopted in 1997 tostrengthen the Maastricht Treaty provisions. 9An on balance sheet approach effectively forcesthe procuring authority to have sufficient cashallocated to the entire concession’s charges atcontract signature.Although an important driver for PPP use inmany countries, the off balance sheet treatmentshould not be the only reason to adopt the PPPapproach. For a project to be off balance sheet,the majority of risks of the transaction will havebeen transferred to the private sector. However,the public sector must reconcile two conflictingobjectives: the desire to transfer risk to theprivate sector so that the project-related assetsand debt are not consolidated in thegovernment’s balance sheet and the desire toensure the most appropriate risk transfer whichminimises the cost to the public sector. As aresult, in some cases achieving an off balancesheet classification could jeopardise obtainingoptimal risk transfer and best value for money.The balance sheet treatment of PPPtransactions is considered in more detail inSection 4.“PPP arrangements work best wherethere is an explicit policy commitmentby national governments to involvethe private sector, a clear long-termpolitical will, a high-qualitypartnership, transparency, clearlyspecified financial guarantees and anestablished, stable legalenvironment.”Zoltan Kazatsay, Deputy Director General,DG TREN, European Commission at the2005 PPP Transport Summit8Source: Dealogic ProjectWare searchresults for period 1 January 1994 –30 September 2005 for all countries.9Resolution of the European Councilon the Stability and Growth Pact,Amsterdam, 17 June 1997 (97/C236/01). Available athttp://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=31997Y0802(01)&model=guichett26

The challenges of usingPPPs and their mitigationAny public sector authority considering PPPsmust also understand that there may besituations when they should exercise caution.Once the public sector authority has chosen touse a PPP, there may be significant difficultiesto overcome. While there will be some caseswhere the difficulties and costs will overshadowthe perceived benefits of PPPs, there will beother instances when the benefits will outweighthe difficulties.Before pursuing a PPP approach,the public sector authority shouldconsider the following issues:Does sufficient private sector expertiseexist to warrant the PPP approach?For PPPs to be attractive, the private sectormust have the necessary expertise. Privatesector players must be:• Able to provide a more efficient and effectiveservice. For example, if there is an incumbentpublic sector operator, the private sectorshould have proven additional managementskills to realise service improvements andefficiency gains.• Sufficiently numerous, with enough potentialprivate sector bidders to allow for an effectivecompetition.• Experienced in pricing life cycle costs in theparticular field.• Experienced enough to allow them to manageand absorb the particular risks of the project,country or sector in which the PPP isproposed, thereby reducing the likelihood thatlarge risk premia are included in their prices.Where a public sector authority proposes aprogramme of PPPs, for instance a roadbuilding programme, any lack of expertise at theoutset might be of lesser concern, because aprogramme of PPPs would encourage theprivate sector to develop expertise, and attractmarket entrants from other countries or sectors.Does the public sector havesufficient capacity and skills to adoptthe PPP approach?The degree to which the public sector possessthe capacity, capability and skill level forsuccessful PPP procurement differs markedlyacross Europe and between different entitieswithin governments. The precedents on whichnew deals must be based and the legalframework within which PPPs must becompleted also vary. While these are also issuesfor traditional procurement, the complexity ofPPPs accentuates them.In order to enjoy the benefits of PPPs asoutlined earlier in this Section, the public sectorprocuring authority must have, or be able todevelop, the requisite capability to assess anddeliver value for money, both at the initial stagewhen considering how particular services shouldbe procured and formulating projectspecifications, and also during the biddingBox 7 Jubilee Line Extension, London UndergroundDelays and cost overruns caused bylimited public sector capability inmanaging large, multi-discipline projectsThe Jubilee line extension was an exampleof traditional procurement, whereby LondonUnderground Limited directly procured theextension through an in-house projectmanager, the Jubilee line extension projectteam. The project was two years late and£1.4 billion over budget. A report by Arupidentified key reasons for the projectmismanagement.“The public sector Jubilee Line ExtensionProject (“JLEP”) team competently handledthe difficult early stages of construction ofthe heavy infrastructure works, but did nothave the strength and experience ofmanagement that was needed for the latermulti-discipline stage. The processes set upfor management and control were alsoswamped by the sheer scope of the project.This was not helped by the strategy that hadbeen adopted; to divide all the works intodiscrete contract packages leaving manydifficult interfaces to be managed by JLEPthat would better have been handled by alead contractor.There was a significant increase in theestimated final costs of the majorconstruction contracts. This arose fromvariations to the scope of the works onwhich the contractors tendered. The totalvalue of this change amounted to 70% ofthe initial value of the works… and theadministration of this overwhelmed the costmanagement process, turning it into a“catch up” monitoring process rather thanthe advance control process it was intendedto be.”Source: The Jubilee Line Extension Report by Ove ArupPartnership Limited27

process, to ensure that bids prove to be bettervalue than public procurement alternatives.The government also needs to understandwhether it is making the right choice betweena PPP or traditional procurement approach.It is not always possible to transferlife cycle cost riskA key benefit of PPPs is the transfer of lifecycle cost risk to the party most competent tomanage it. This means the private sectorpricing, for which they are at risk, is not just forthe delivery of an asset, but for the cost ofrunning and maintaining that asset andproviding related services during the life of thePPP contract. The PPP competition is notabout achieving the lowest cost of an asset atthe outset but the lowest price of services overthe long term. And to ensure that the publicsector gets best value, it transfers that lifecycle cost risk to the private sector, who thenare empowered to manage and maintain thoseassets to ensure services are delivered for theprice for which they are at risk.If life cycle risk were not transferred to theprivate sector, then bidders could promise lifecycle benefit, but the public sector would retainthe risk that these benefits would be deliveredso a key objective of PPPs is to ensure this riskhas been effectively transferred.But there are examples of where that objectivecannot be met. For instance, where the assetsbeing procured cannot be separated or arepart of a far wider network, such as theupgrade of part of a rail line, transferring lifecycle risks to a PPP operator may not befeasible. As the assets in question areintegrated into a wider network which istypically maintained by a public or privateutility, then the private sector bidder cannottake life cycle risks and the incumbent utilitywill carry out maintenance more costeffectively. Therefore, it can be seen that lifecycle risk transfer is difficult where assetscannot be separated from a wider asset basethat is maintained by a third party.In these circumstances, the public sectorauthority could consider whether the scope ofthe PPP project could be widened toencompass not only the upgrade in question,but also to take over the operation of theexisting assets, so that the network can beoperated as an integrated whole. Thisapproach is appropriate where the currentoperations and services are not being run asefficiently as possible and could benefit fromprivate sector management, alongside theupgrade itself. As an alternative, considerationhas been given to a Design Build FinanceTransfer model (DBFT) in the UK, wherecompleted assets would be passed over to theincumbent operator.PPPs do not achieve absoluterisk transferPPPs are typically constructed using highlygeared Special Purpose Vehicle (“SPV”)companies. Typically with high levels of debtand relatively low levels of equity, they areunable to absorb unlimited risk.Project companies are structured to absorb areasonable level of adverse changes, consistentwith raising bank finance. But exceptionaladverse events may test this capital structure.For this reason, it cannot be guaranteed thatan SPV will not run into financial difficulties.An SPV’s financial robustness is typicallyunderpinned through a series of fixed pricesub-contracts, but these contracts have certainlimitations in terms of risk transfer and liquidateddamages payable by sub-contracts on default.There are circumstances, therefore, where theprivate sector might fail to deliver servicesadequately and the public sector will have tostep into a failing project to ensure the project issuccessfully completed.In extremes, therefore, the public sector couldbe left with a partially completed project orassets that fail to deliver the required servicelevels unless there is material additionalexpenditure. So, when particular risks aretransferred, that risk transfer is not absolute,and in the event of extreme project failure,incomplete or underperforming assets couldrevert to the Government.To date there have been few examples of thisoccurring, although there have been examplesof PPP restructurings to achieve differentoverall objectives (e.g. moving from real tolls toan availability-based road scheme). In thecases where difficulties have arisen, to protecttheir initial investments the shareholders andfinanciers have normally sorted out theproblem at no, or minimal, cost to theprocuring authority, in order to protect theirinitial investments.Note that with PPPs, the public sector shouldnot attempt to transfer all risks, but only thosethe private sector is best placed to manage.Certain risks such as force majeure/acts ofGod, general risks, general inflation anddemographics or GDP impacts on a project,are arguably more in the control of the publicsector, so it should be at risk for the impact oftheir occurrence. Recent experiences on lightrail schemes have also dampened the privatesector’s appetite for revenue risks.28

The public sector must recognisethe disadvantages of PPPs if theyadopt a PPP approach:PPPs imply a loss of managementcontrol by the public sectorUnder PPPs, management control of outputs ispassed to the private sector. As long as theprivate sector are delivering the specifiedservices, the public sector’s ability to intervenein the management of the project and themeans by which services are delivered isstrictly limited. Although change mechanismsare an integral part of PPP project agreementsand the public sector may still intervene, allrelevant parties must agree any changes to thecontract and these may involve a considerableincrease of costs to the public sector. Thispassing of responsibility is wholly deliberate,and has a key benefit that the operation ofPPP projects is shielded from regular politicalor administrative interference that are acommon cause of cost overruns and delays.Limiting the public sector’s powers ofintervention also has the benefit of improvingcost efficiency overall. It is transparent thatchanges to the project can be costly so thepublic sector is forced to consider the costimplications when deciding whether thesechanges are absolutely necessary.This does mean, however, that:• The public sector has no day-to-day controlover the management of public sectorservices.• The public sector’s ability to manage orchange a project to co-ordinate with widerpublic sector services is limited.• Where the public sector has a degree ofexpertise within a particular sector, thisexpertise will not be used, unless it istransferred to the contractor at the outset,which commonly happens.Box 8 M6 Érd (near Budapest) –Dunaújváros Motorway, Hungary – Quick procurement processThe €455 million project relates to a 22-yearDesign-Build-Finance-Operate concessionfor the M6 motorway between Érd andDunaújváros in Hungary. The procurementtimetable of less than eleven months(between tender launch and financial close)shows that the procurement process neednot be long and drawn out.The tender process was launched by theMinistry of Economy and Transport on the31st January 2004 and four consortiasubmitted expressions of interest by the 4thMay 2004. On the 17th June 2004 the threeshort listed consortia were requested tosubmit a detailed offer by the 19th July2004. The preferred bidder was chosen onthe 9th August 2004, with whom theconcession agreement was signed on the2nd October 2004. Financial close wasreached on the 20th December 2004.Construction of the 59 km motorway beganin late 2004 and commissioning of the roadis scheduled for May 2006.A number of factors helped achieve thisambitious timetable:• The experience of the Governmentrepresentatives gained through therestructuring of the M5 concession roadthe year before in 2003;• The use of professional advisors; and• The appetite of the private sector for PPPprojects in Central and Eastern Europe.The winning M6 Duna consortium comprisesBilfinger Berger BOT GmbH, PorrInfrastruktur GmbH, Swietelsky InternationalBaugesellschaft GmbH. The PPP structureis based on an availability paymentmechanism. 10% of the project is financedfrom equity and the bank financing includesa €411 million term loan, a €22.3 millionequity bridge loan, a €20.7 million VATfacility and a €1 million working capital loan.Financing is provided by the HungarianForeign Trade Bank (BayerischeLandesbank), Kereskedelmi és Hitelbank(KBC), Bayerische Landesbank,Commerzbank AG, KBC Finance Irelandand Kreditanstalt für Wiederaufbau.Source: PricewaterhouseCoopers / Dealogic ProjectWare• A clear commitment from the HungarianGovernment and the Ministry of Economyand Transport to conclude the transactionbefore the end of 2004;29

PPP procurement can be lengthyand costlyPPPs rely on having a well structured anddetailed output specification prior to thecommencement of bidding. While this hasclear benefits in achieving affordable and bestvalue projects, the overall procurementtimetable from inception to financial close maybe relatively long and costly.The experience of PPP procurementtimetables, however, differs across Europe,with some regions achieving timetablescompetitive with traditional procurementalternatives.It should also be noted that hasty procurementusing traditional means can lead to a poorlydefined project at the outset, resulting in costand time overruns during projectimplementation. In these circumstances thebenefits of faster procurement become illusory.As at October 2005, a number of EU membercountries have transposed the new EUprocurement directive into national legislation.However, it is too early to comment on theimpact of the new competitive dialogue onprocurement costs and times. All EU membercountries must adopt the directive by the31st January 2006, and therefore its full impactmay not be felt until later in 2006.This issue is explored more fully in Section 4.The private sector has a highercost of financeThe private sector’s weighted cost of finance,both debt and equity together, is typicallybetween 1% and 3% higher than the publicsector’s cost of debt on a non risk-adjustedbasis. This cost of finance increases the overallcost of a PPP relative to traditional procurement,unless cost efficiencies delivered by the privatesector outweigh this incremental cost.There are, however, a number of competingarguments to consider. First, argumentsjustifying the higher cost of finance:• The private sector’s cost of finance reflectsthe specific risks of the project. Its costreflects the mix of debt and equity finance,with the latter being required to absorb manyof the project’s risks. It can be argued that“The tender process must be astransparent as it possibly can be,with clear bid evaluation criteria setout and made known to bidders inadvance, with an open andcomprehensive debrief tounsuccessful bidders.”Gerhard Becher, Chairman of the ExecutiveManagement, Bilfinger Berger BOT GmbH at the 2005PPP Transport SummitBox 9 Millau Viaduct, FranceQuick project procurement and deliveryThe Millau suspension bridge spanning theTarn River in the south of France wasinaugurated on the 14th December 2004.It is one of the longest and highest bridgesof its kind in the world, at 2.46km long and270m above the Tarn River with a totalheight of 343m to the top of the pylons.The bridge was designed by UK architectLord Norman Foster and built by the Frenchcontractor Eiffage in less than three years.The circa €394 million PPP-type projectinvolved the construction of a 2.46km tolledsection of the A75 Millau Viaduct motorwaybetween Clermont-Ferrand and Beziers.The formal bid process for this design-buildfinance-operateproject was launched early2000, on the basis of a real toll stand-aloneconcession following the French standardapproach of “Délégation de ServicesPublics”. The preferred bidder wasannounced in March 2001 and theconcession agreement was signed only afew weeks later in May 2001 with Eiffage SA.Construction began in December 2001 andwas completed in May 2004. The projectcommenced operations on the 16thDecember 2004, only four years after thelaunch of the public tender.The Millau project is not only an example ofthe private sector delivering a project ontime but also of structuring the project toachieve optimal risk transfer withoutsignificant cost to the public sector. Bidderswere allowed to propose the length of theconcession period, with the aim ofminimising the Net Present Value ofgovernment payments and toll receipts.The bid was awarded on the basis of a75-year concession with no governmentsupport. Demand risk was transferredentirely to the private operator, based onEiffage’s traffic and toll assumptions.Source: PricewaterhouseCoopers/Dealogic ProjectWare30

this incremental cost of finance is simply theexplicit recognition of the inherent risks of thatproject. In contrast, the public sector’s cost offinance is the overall rate at which thatauthority can borrow funds, i.e. debt only notequity, and therefore does not reflect the risksof the project. To the extent that those risksoccur, there is no equity to absorb thoserisks, rather the public sector has to findfurther funds or take on further borrowingsto finance completion of that project.• Focusing on the relative cost of financemisses the fundamental point of usingPPP procurement. PPPs are designed toensure that projects are delivered in the mosteffective way over their life and the privatesector is incentivised to deliver projects ontime and budget. The use of private financeimposes greater discipline on a project than iscommon in public sector teams. The costefficiencies PPPs deliver should outweigh anyincremental finance costs in these cases.Box 10 Procurement of Transport PPPs in SpainPPP procurement can be quick andsuccessfulSpain has a long history of PPPs. The firstlaw regulating the private development of tollroads dates back to the second half of the19th century. During the 19th century, bridgesand a number of railways were also developedby private investors. Between 1967 and 1976,15 toll road concessions covering 1,500 kmwere awarded to private developers.In recent years, the Spanish publicauthorities have been successful indeveloping PPPs. The 1972 concession lawgoverning road PPPs was superseded in2003 by a new concession law whichprovides a strong regulatory framework forPPPs across all sectors. There is strongcompetition between private sectoroperators and project procurement anddelivery is achieved in record timeframes.In spite of criticisms over subjective awardcriteria and the lack of international privatesector sponsors, the Spanish model providesboth public sector authorities and privatesector operators with a reasonable risk share,a firm and clear legal framework and a quickand economic procurement process –bidding costs in Spain are on average a tenthof those in the UK for similar projects andfinal award takes place in a fifth of the time.The average timescales of designing andprocuring a PPP project in Spain can befound in Figure 3.In order to achieve these timescales, theprocuring authority must complete a numberof tasks prior to launching the process.These include developing the preliminarydesign and undertaking an environmentalimpact assessment, a financial feasibilitystudy and EIB consultation – this pre-bidconsultation helps ensure the “bankability”of the contract framework without lengthynegotiations between the public and privatesector partners and the financiers.This approach has been successful indelivering 22 road PPP projects with a valueof more than €6 billion between 1998 and2003; 13 of these projects are in operation.Source: CintraFigure 3: Timescales for designing & procuring a PPP project in SpainWhat Who WhenPreliminary Study & Grantor 8 - 10 monthsEnvironmental Impact Assessment1st Public Information Process Grantor 1 + 1 - 3 monthsEIA approval & development of Grantor 4 monthsBasic DesignBasic Design Approval Grantor 1 month2nd Public Information Process Grantor 1 + 2 monthsTender document preparation Grantor 2 monthsApproval & Announcement Grantor 1 monthTender Period Bidder 3 - 4 monthsTender Evaluation & Awarding Grantor 2 - 4 monthsConcession Co. incorporation Bidder 2 monthsDetailed Design Bidder 2 monthsLand Acquisition Bidder/Grantor 3 monthsGround breaking33-40 months31

Box 11Edmonton Ring Road (Anthony Henday Drive SE), Alberta, CanadaClear public sector goals andprogressive procurement process leadsto fast closure while maximisingcompetitionThe Edmonton Ring Road was the first majortransport PPP project to close in Canada.It involves the construction of approximately11km of four and six-lane divided motorwaywith auxiliary lanes, crossroads, propertyaccess roads, five interchanges, and24 separate bridge structures. The winningconsortium will also be responsible for theoperation and maintenance of other sectionsof the ring road.The total value of the 33 year DBFO PPP isestimated at C$493 million in net presentvalue terms, including C$365 million ofupfront investment in the construction of theAnthony Henday Drive South East.Alberta Infrastructure and Transportation(AIT) signed the contract with the winningconsortium, Access Roads Edmonton Ltd(AREL) led by ABN AMRO Canada, inJanuary 2005, just 17 months after the initialRequest for Qualification was issued.The procurement process was designed toeliminate the need to negotiate with theselected preferred bidder, thereby allowinga strict transaction timetable.The procurement process was progressivewith the three pre-qualified biddershaving to complete a highway design stageand indicative pricing and financing planstage before entering the final pricing andfinancing plan stage. Committed finance wasobtained by all bidders by the final pricingand financial plan stage. In parallel, the draftproject agreement was discussed withbidders, updated and finalised with sufficienttime for them to finalise their proposals.Other factors contributing to the fasterclosure were AIT’s clear goals from theoutset with respect to the level of risktransfer and the underlying paymentmechanism. The Province preferred to usean availability-based mechanism thatincorporated operating and maintenancestandards tried and tested in existingcontracts.No payments will be made to the consortiumuntil the road is deemed traffic-worthy.However, a federal contribution of C$75million is payable over the 33 monthconstruction period based on a proportion ofactual costs incurred.The road is expected to open inOctober 2007.Source: PricewaterhouseCoopersAnd second, opposing arguments queryingthe cost of finance:• It can be argued that the public sectorauthority’s cost of debt finance is theappropriate rate, because that authorityundertakes a portfolio of projects andtherefore its borrowing rate should reflectthe lower risk of this portfolio, not the risksof a particular project.• The private sector finance costs contain apremium for the risks of entering long-termcontracts with the public sector, which thepublic sector clearly would not incur if itfunds projects itself.The correct answer perhaps lies betweenthese competing considerations. Privatefinance costs will be higher than public, so thekey question is whether their cost efficientmanagement will outweigh that incrementalcost. The public sector also needs to considerhow much higher private finance costs can be.If too large a premium is put on project risks orpublic sector interfaces, for instance, value formoney will be significantly eroded.32

PPPs are long-term relativelyinflexible structuresThe cost benefits derived from setting relativelyrigid output specifications for the life of a PPPhave to be weighed against the relativeinflexibility that such long-term outputspecifications imply. In many areas of publicservices, long-term planning and spending areappropriate. The degree to which servicesneed to change and expenditure needs to beflexible are relatively limited and there are clearcost benefits from sticking to particular outputlevels and specifications. For instance,transport planning is relatively long term innature, reflecting trends in GDP, growth inconurbation and regional employment overeconomic cycles. Arguably therefore, the levelof frequent change in output specification thatis desirable for a public authority is relativelylimited. However, in several sectors, the needfor a far higher degree of flexibility on the partof the public sector may be appropriate, whichmight make a long-term output specificationapproach difficult or counter productive. Forinstance, in a market that is rapidly developing,such as the secondary healthcare market orthe provision of telecommunications services.In addition, PPPs are procured undercompetition, and the private sector will lookto have as high debt levels as possible, giventhe relative low cost of debt relative to equity.This results in highly-geared and relativelyinflexible PPP companies, where it maybecome difficult to introduce high levels ofchange to the output specifications shouldthis prove desirable.“A key concern with long-term PPPcontracts is the level of flexibilitythat they offer to authorities tomake changes either to the use ofassets or to the level and type ofservices offered. Our surveyfindings do suggest that thisconcern is valid – both in terms ofthe time and administrative burdenof making contract changes andthe costs associated with a singletender action with the existingcontractor.On balance the reduced flexibilityimplied by PPP contracts hasprobably been a benefit during theconstruction phase of projects,forcing better up-front specificationand reducing cost overrunsand delays.During the operational phase of thecontract, the contract inflexibilityhas a negative impact comparedwith conventional procurement.The costs imposed on the authorityby the inflexibility of the contractare likely to vary by sector.In sectors where a larger proportionof final service ‘value added’ isprovided outside of the PPPcontract (e.g. health and education)and where the contract interfacesare more complex (e.g. health) ourexpectation is that the costs willbe greater.”Source: Public Private Partnerships in Scotland,Evaluation of Performance by Cambridge EconomicPolicy Associates Ltd, March 200533

“Countries need to radically improve and modernise their transportnetworks, but often lack budgetary resources and administrativestructures to traditionally design and then procure the infrastructurethey need. Even when EU funds are available, it makes sense to getthe maximum leverage on those funds through project finance topostpone the budgetary impact of capital expenditure.David Azema, Chief Executive, Vinci Concessions at the 2005 PPP Transport Summit”

3Review of PPP activityReview of PPPsby countryAs noted in the Introduction, EU-levelinterest in the potential for private sectorinvolvement in infrastructure provision isgrowing, especially as the level ofinvestment required to deliver the TEN-Tremains substantial and the costs ofdelay continue to grow.In the Financial Perspectives proposed in July2004, the European Commission recognised thesignificant financial requirements of the TEN-Tprojects and proposed allocating €20.69 billionto the trans-European network budget for 2007-2013, 10 up from €4.2 billion for the seven yearsfrom 2000-2006. This is not sufficient to fundthe infrastructure investment required.to the EU average density. 11 The EuropeanInvestment Bank estimates that the totalinvestment needed for upgrading thelong-distance transport system to the levelrequired for full integration of the newmember countries into the Single Marketmay come to at least €90 billion. 12The PPP approach is increasingly beingadopted to deliver new investment ininfrastructure. Many countries initially developPPPs in the transport sector and later extendtheir use to other sectors, such as education,health, energy, water and waste treatment,once the value for money benefits are provenand public sector expertise is established.This section summarises PPP activity acrossEurope, dividing Member States into categoriesof high, medium and low deal activity.10Financial Perspectives 2007-2013,Communication from the Commissionto the Council and the EuropeanParliament, COM (2004) 487 final.Available at http://europa.eu.int/eurlex/en/com/cnc/2004/com2004_0487en01.pdf Proposal for a Regulation ofthe European Parliament and of theCouncil determining the general rulesfor the granting of Communityfinancial aid in the field of the trans-European transport networks andenergy and amending CouncilRegulation (EC) no. 2236/95presented by the Commission, COM(2004) 475 final. Available athttp://europa.eu.int/eurlex/lex/LexUriServ/site/en/com/2004/com2004_0475en01.pdf11Public-private partnerships in new EUmember countries of Central andEastern Europe: An economicanalysis with case studies from thehighway sector, Brenck, Beckers,Heinrich and von Hirschhausen, EIBPapers Volume 10 No. 2, 200512Integrating the New Member States,European Investment Bank,www.eib.orgBeyond the key transport routes identified atthe trans-European level, individual membercountries have national, regional and localtransport infrastructure challenges to meet.In 2005, it was estimated that in order to attainan average EU-15 infrastructure level by 2010,the 8 new EU member countries from EasternEurope would require investment ofapproximately €505 billion in their roads,railways, telecommunication, water treatmentand sewerage, energy and environmentsectors. €81 billion would be required to bringroad and rail modernisation and construction35

Figure 4: Summary of PPPs by country and sectorCentralAccommodationAirportsDefenceHousingHealth & HospitalsITPortsPrisonsHeavy RailwayLight RailwayRoadsSchoolsSports & LeisureWater & Wastewater(incl solid waste)Member StatesAustriaBelgiumDenmarkFinlandFranceGermanyGreeceIrelandItalyLuxembourgNetherlandsNorway (not EU)PortugalSpainSwedenUKNew Member StatesCyprusCzech RepublicEstoniaHungaryLatviaLithuaniaMaltaPolandSlovakiaSloveniaAcceding and Candidate Countries† † †LegendDiscussions ongoingProjects in procurementMany procured projects,some projects closedSubstantial number ofclosed projectsSubstantial number ofclosed projects, majorityof them in operation†Procurement activity in these sectorsrelates to traditional style concessioncontractsBulgaria† †RomaniaTurkeySource: PricewaterhouseCoopers October 200536

High PPP usage: Strong deal flowin parts of EuropeIn 2004 and 2005, around 206 PPP deals worthapproximately US$52 billion/€42 billion wereclosed in the world, of which 152 projects witha value of US$26 billion/€21 billion were inEurope (in this case referring to the EU MemberStates, the EU acceding countries (Bulgariaand Romania), the EU candidate countryTurkey, and Norway). 13 From January 1994 toSeptember 2005, it is estimated that PPP dealswith a value of approximately US$120billion/€100 billion closed across Europe.Of these deals, two thirds closed in the UK,with the other PPP hotspots of Spain andPortugal accounting for 9-10% each. 14When compared to the PricewaterhouseCoopersSurvey published in May 2004, 15 there has beena notable increase in PPP deals, both inprocurement and closed, in Germany, Spain,Italy and Hungary; in particular, school projectsin Germany and projects in the health andwater/wastewater sectors in Spain.Geographically, the PPP market has remainedconcentrated. According to a recent Standard& Poor’s report, 16 the global spread of PPPsmarks a much slower trend than many marketparticipants had hoped. While the UK markethas reached a good level of maturity andcontinues to grow in all sectors, activity in 2004remained below expectations. However, there isstrong deal flow in the pipeline for Spain,Portugal, France, Italy and Germany whichsuggests that the PPP concept is becomingmore established across Europe. 17 This isconfirmed by industry figures and evidencefrom PricewaterhouseCoopers offices acrossEurope.The UK showed substantially more PPP activitythan the rest of Europe with 118 deals closed in2004 and 2005, with the next most active PPPmarket – Spain – closing 12 deals during thesame period. 18There are a substantial number of PPP projectsin procurement or announced in other EUmember states. In Italy, just six deals wereclosed in 2004 and 2005, but there are at least18 further projects in procurement and anestimated 40 projects in the pipeline. 19According to a recent survey by the GermanConstruction Industry Association, 18 PPPdeals closed in Germany between autumn 2003and September 2005. It was estimated that afurther 79 projects with a combined capitalexpenditure of circa €4.8 billion are inprocurement or expected in the near future. 20While the UK closed the greatest number ofPPP deals in 2000-2005, if PPP activity isconsidered as a percentage of GDP, Portugalhas the greatest involvement with PPP relativeto its GDP, and countries such as Ireland,Hungary and Greece also show the impact oftheir major schemes. See Figure 5.Figure 5: Average 2000-2005 PPP activity as a percentage of mean GDP%1.413Source: Dealogic ProjectWare14Source: Dealogic ProjectWare15Figure 3 Summary of PPPs bycountry and sector, Developing PublicPrivate Partnerships in New Europe,PricewaterhouseCoopers, May 200416A Global Survey of PPPs: NewLegislation Sets Context for Growth,Public Private Partnerships GlobalCredit Survey 2005, Standard &Poor’s, May 200517A Global Survey of PPPs: NewLegislation Sets Context for Growth,Public Private Partnerships GlobalCredit Survey 2005, Standard &Poor’s, May 200518Source: Dealogic ProjectWare19Source: Dealogic ProjectWare (dealsclosed and in procurement),PricewaterhouseCoopers (projectsannounced)20Source: Hauptverband der DeutschenBauindustrie, 20051.21.00.80.60.40.80.0PortugalUKIrelandHungaryGreeceItalyPolandSpainAustriaFranceThe NetherlandsBelgiumGermanyNorwayFinlandDenmarkSource: PwC data; includes deals in procurement. Figures represent investment value, not annual payment.37

Below are listed key areas of activity forcountries within the strong deal flow category.IrelandThe transport and water and waste sectorshave seen the most activity to date withinIreland, with the most deals closed and inprocurement. In particular, there have beenfour road PPP projects closed in the past fiveyears with a further six in procurement,including the €400m N6 Galway to Ballinasloeroad PPP contract. 21In autumn 2005, the Irish Governmentannounced an expansion of the role of theNational Development Finance Agency tofacilitate the establishment of a new Centre ofExpertise which will be responsible for theprocurement of all new PPP projects in thecentral government area (with the exception ofroad and rail). The Government has alsoannounced a series of new PPP projects in thecourts/prisons, health and education sectorsand has set specific targets for projectsfinanced through PPPs. By 2008, PPPinvestment should amount to almost €5 billion,comprising a target of €3.6 billion in totalpublic funding for PPPs and a target of €1.3billion for PPPs funded by user charges overthe same period. 22ItalyDue to the high levels of public debt and thesignificant infrastructure investment need inItaly in the past, there has been growingrecourse to PPPs. To date, 20 PPP projects inthe transport sector have closed or are inprocurement and just under 30 further projectsin the road and rail sectors have beenannounced. 23 PPP structures are also beingused in the health, central accommodation andwater sectors.The Italian PPP taskforce (Unità tecnica per laFinanza di Progetto (UFP)) was establishedunder legislation in 1999 and began operationsin July 2000. It provides expertise andassistance to public administrations inidentifying projects capable of attractingprivate sector investment and in tenderingthose projects. The Legge Obiettivio (Law443/2001) enacted in December 2001emphasises infrastructure development ofnational strategic interest. In 2002, Law166/2002 was enacted, introducing severalamendments to the Merloni Law governingpublic works. The amendments were designedto encourage private sector participation in theconstruction and operation of publicinfrastructure facilities. In particular, the 30 yearmaximum concession period and the 50%maximum level of public sector grants andsubsidies have been abolished.PortugalThere has been considerable PPP activity inPortugal with limited resources and EU budgetrestrictions being key factors in the adoption ofPPPs. In particular, Portugal has used the PPPapproach extensively in the transport andwater/waste sectors; approximately 20transport infrastructure projects have closedover the last five years or are in procurement. 24A new Socialist Government was elected inFebruary 2005. Recently, the Governmenthas announced a €25 billion investmentprogramme including €8.3 billion inthe transport sector, of which some€5.3 billion of PPP transport relatedprojects. A PPP structure is being consideredfor new road concessions and potentially forpart of the planned High Speed Rail network.SpainIn December 2004, the Spanish Public WorksMinistry (Ministerio de Fomento) presented thedraft of an ambitious infrastructure andtransport plan for 2005-2020 (Plan Estratégicode Infraestructuras y Transporte (PEIT)) whichforecasts a total investment of €214 billionover the 15-year period. 25 Increasedparticipation of the private sector is envisagedthrough PPP (Asociación Público-Privada)structures which are expected to account foralmost 20% of the total investment.21Source: PricewaterhouseCoopers22Observations by the Central PPPUnit, Department of Finance ofIreland on COM (2004) 327 final:Green Paper on Public-PrivatePartnerships and Community Law onPublic Contracts and Concessions23Source: PricewaterhouseCoopers24Source: PricewaterhouseCoopers /Dealogic ProjectWare25Plan Estratégico de Infraestructuras yTransporte is available athttp://peit.cedex.es/38

Figure 6: Number of operational PFI facilities in the UK700600500Number of Facilities40030020010001997 1998 1999 2000 2001 2002 2003EducationAccommodation & LA adminLaw and OrderWasteHealthEmergency ServicesOtherHousingIT/TelecomsDefenceUtilitiesUrbanRegenerationSource: HM TreasuryIn addition to the planned use of PPPs to helpdeliver the central government’s PEIT, thegovernments of the Autonomous Communities(Comunidades Autónomas) are driving theadoption of PPP structures to deliver a widerange of infrastructure projects, with plannedand actual activity in the transport, water andaccommodation sectors.United KingdomThe UK continues to widen its use of PPPsacross a number of sectors. According to UKTreasury figures, over 450 deals with a value ofmore than £34 billion (approx. €50 billion) weresigned between 1999 and 2004. A number ofbig ticket schemes are being procured suchas the widening of the M25 (circa £2.0 billion/€3 billion), Ministry of Defence MilitaryAccommodation (circa £2.5 billion/€4 billion)and a number of large hospitals. But equallysignificant has been the growing use of PPPs,sometimes on a grouped-together basis, toprocure smaller facilities such as the BuildingSchools for the Future programme with anestimated capital investment of £2.2 billion(€3.25 billion) to be shared between the first2005-06 wave of 180 schools and the NationalHealth Service’s Local Improvement FinanceTrusts programme, with about 51 projects, ofwhich approximately 36 projects have closed.There are a large number of operationalfacilities that have been delivered using thePFI structure as seen in Figure 6.However in spite of this considerable activity,PPPs represent a relatively small proportion ofpublic sector investment in public services asseen in Figure 7.39

Figure 7: Funding Sources for Total Investment in Public Servicesin the UK60504030201001990-911991-921992-931993-941994-951995-96Investment (£bn)1996-971997-981998-991999-002000-012001-022002-032003-042004-052005-06PSNI Depreciation Asset sales PFI/PPPSource: Budget 2003. PFI figures are for deals signed to date and report capital investment expectedunder signed contracts in the year that investment takes place.Medium Usage: Slow historicuptake but increasing projects inprocurementFranceApproximately 10 transport PPP projects havebeen closed over the last five years or are inprocurement in France. 26 The majority of theprojects currently being tendered are beingprocured through the ‘competitive dialogue’which is described in more detail in Section 4.A PPP “Ordonnance” (edict) of June 2004 wasratified by the French parliament in December2004, thereby creating a new form ofcontractual relationship (“Contrat dePartenariat”) between the public and privatesectors. Therefore, in view of this new clearerlegal framework as well as ongoing budgetconstraints and efficiency requirements,recourse to PPPs may increase in the future.Particular interest has been shown in thehealth and prison sectors, with a major PPPprogramme for 18 prisons with a totalexpected investment of €1 billion, currentlyunder procurement. A €5 billion hospitalrenovation programme, “Hôpital 2007,” hasbeen launched, of which a substantial part isexpected to be procured using a PPP model.Over 15 units with a total value of almost€1 billion are already under procurement usingPPP-like structures and approximately12 further projects have been announced.Moreover, the central government estimatesthat some €19 billion of investment could beallocated to PPP projects in the nextthree years. 27Reports suggest that only a fraction of theplanned PPP investment will be fundedon the basis of genuine project lending atstandard PPP-type margins. The bulk ofthe external debt will be lent at lower publicsector/municipal risk margins under theso-called “cession creance”. Under thisarrangement, lenders will be exposed to realperformance risk during construction and willprice their debt accordingly with or withoutsponsor guarantees. Once construction hasbeen completed satisfactorily, a part of theavailability payment corresponding to apercentage of the construction cost (typicallyrepresenting 50% - 80% of such payments)can be fixed by the public authority,i.e. it is not exposed to performance-relatedrisk. This portion will benefit fromlower public sector or municipal debt costs.The payment balance will continue to besubject to performance-related deductions.GermanyThere is widespread acceptance of PPPsacross the political spectrum in Germany.A backlog of capital expenditure in the publicsector and budget constraints at all levels ofgovernment (local, state and federal), togetherwith a greater focus on efficiency has created26Source:PricewaterhouseCoopers/DealogicProjectWare27A Global Survey of PPPs: NewLegislation Sets Context for Growth,Public Private Partnerships GlobalCredit Survey 2005, Standard &Poor’s, May 200540

28PPP for the Public BuildingConstruction Sector in Germany,PricewaterhouseCoopers, August200329Greece 2010 – StrategicDevelopment Plan for TransportInfrastructure, May 2003, GreekMinistry of National Economy30PricewaterhouseCoopers/DealogicProjectWare31PricewaterhouseCoopers/DealogicProjectWarean increasingly dynamic market for PPPs.In light of political support at all three levelsof government and the size of the economy,the German PPP market may become one ofthe biggest.Since the publication of a study on the benefitsas well as the legal and institutionalimpediments of PPPs, completed for theFederal Ministry of Transport, Building andHousing in August 2003, 28 18 PPP-styletransactions have closed. PPP activity hascentred on schools, public administrationbuildings as well as roads. Two real toll roadprojects are operational and following thesuccessful launch of the Heavy Goods VehicleToll in early 2005, two A-Model road projectsare in tender and an additional three projectshave been announced. The A-Model roadsprojects comprise the widening of existingfederal motorways and the operation of thosestretches by a private concessionaire based ona 30-year contract. In return, the privatepartner receives an upfront grant and a shareof the HGV toll collected on the specificsections of motorway.GreeceThere has been growing PPP activity inGreece, in particular in the transport sector.Analysis conducted in the context of theStrategic Development Plan for TransportInfrastructure – Greece 2010 29 identified thepriority transport axes for the developmentof the country’s basic road network.Their development is combined with majorinvestment projects in points of access (ports,airports) and secondary transport networks.Three large-scale transport PPP projects havebeen completed and are operational, withsmaller projects delivering undergroundparking, leisure, and cultural facilities via aform of PPP.A new programme for expanding andimproving the quality of the Greek motorwaynetwork was announced in 2001. There areseven motorway projects included in theprogramme which, according to currentexpectations, will be delivered using PPPs.The Thessaloniki submerged tunnel PPP,expected to cost approximately €370 million,and the Maliakos – Klidi motorway PPP,expected cost approximately €450 million,are currently in procurement. The other fiveprojects, with a combined total expected cost of€3.15 billion, will be tendered in the near future.In the absence of a specific PPP law, acts ofparliament ratified the use of PPPs in the majorprojects mentioned above. In September 2005,a PPP Bill was ratified by the GreekParliament. The Bill establishes a PPP TaskForce within the Ministry of Economy andFinance and sets out PPP tendering andnegotiation procedures. The Bill is aimed atsmall to medium-sized projects with amaximum construction value of up to €200million.HungaryGiven the need to physically integrate theeconomy into the EU, the majority of the sixPPP deals that have closed in Hungary relateto road infrastructure projects. Furtherinvestment in PPPs is expected across anumber of sectors, including prisons, light railand education. 30 In September 2005, acontract was signed for a PPP accommodationproject involving the construction of a newbuilding for Budapest’s Corvinus University.The expansion of Corvinus University is part ofthe Education Ministry’s Hungarian UniversitasProgramme that will see the construction ofnew dormitories, the refurbishment of existingones, the construction of educationalinfrastructure, and the renovation of existingfacilities. The programme’s anticipated PPPinvestments until 2008 have an estimatedvalue of €715 million.The NetherlandsA PPP Knowledge Centre was establishedwithin the Ministry of Finance in 1999 and isstaffed by experts from commerce andindustry as well as government civil servants.Its remit is to disseminate PPP experience,to design clear and effective rules forcollaboration between the governmentagencies and the private sector, to suggestappropriate projects for PPPs and to produceregular reports and studies on the results ofPPPs. As the agency responsible forinfrastructure (the Rijkswaterstaat) and theGovernment Buildings Agency becomeincreasingly familiar with PPP projects, it islikely that the PPP Knowledge Centre willfocus on developing PPPs in other sectorssuch as education and healthcare.PPP activity is increasing in the Netherlandswith five PPP deals closed: 31 two road projects,one rail, one waste water and one schoolsproject. A number of large projects are inprocurement such as the €190 millionrefurbishment of the Ministry of Financebuilding as well as the circa €1 billion secondCoentunnel project. Furthermore, a numberof other projects have been announced,in particular in the roads and centralaccommodation sectors. From January 2005,a PPP approach must be considered fortransport infrastructure projects over €112.5million. In April 2005, the Dutch Council of41

Ministers announced that a PPP approachmust be considered for every nationalgovernment accommodation project requiringan investment of more than €25m.PolandThe Polish authorities have made limited useof PPPs. Their use has been restricted to theroad and waste management sectors.For instance, phase 1 of the A1 motorwayPPP project in Poland was signed in July 2005.The PPP has a 35-year term and is basedpredominantly on guaranteed availabilitypayments from the Polish Roads Authoritytopped up by shadow toll revenue dependingon traffic volume. Completion of phase 1 isscheduled for 2008 and a request forproposals for phase 2 – a 60 km extension tothe city of Torun at the southern end of themotorway – was issued on the 8th July 2005.Discussions are also ongoing in the health andsports and leisure sectors. In particular, thereis growing interest among hospitals and localauthorities in the PPP model for the delivery ofhealthcare projects.There is a perception in Poland that PPPs are,by their nature, complicated and expensive toprocure. The relevant PPP departments withinthe Ministries of Infrastructure and Economyare preparing standardised tender documents,PSCs, guidelines, regulations to facilitate thepurchase of land and other measures to helpresolve this issue.In August 2005, the Polish President signedan Act on PPP. The Act, which came into forceon the 1st October 2005, eliminates doubletaxation and introduces more flexibleregulations regarding public contracts so thatlong-term budgetary commitments can bemade and state funds may be used in PPPs.Typical investments to be carried out underthe PPP regulations would include constructionof sewage systems and waste dumps.Low Usage: Limited recourse to thePPP model but growing interestAustriaAs of October 2005, only the Electronic TollCollection System PPP project had beensigned in Austria. There are two road PPPdeals in the pipeline. Bids for the €725 millionOstregion PPP roads programme weresubmitted in September 2005 and theMotorway and Highways Authority(Autobahnen- und SchnellstrassenFinanzierungs-Aktiengesellschaft (ASFiNAG)) isexpected to select a preferred bidder in 2006.Invitations to Tender were also issued inSeptember 2005 to consortia bidding for thefirst A-model PPP road in Austria, the A8 fromBubesheim to Augsburg West in Bavaria.Discussions are ongoing in other sectors, forinstance health, education and centralaccommodation.BelgiumAs of October 2005, only two PPP projects hadreached financial close in the previous fiveyears. 32 The first transport PPPs are currently inprocurement with one road, one rail and oneregional airport project under discussion.Further road and rail projects have beenannounced but adoption of the PPP approachhas been slow in the transport sector.Bulgaria (Acceding Country)In 2000 the Municipality of Sofia signed thefirst ever water and wastewater concession inCEE, involving $150 million investment over a25 year term. There has also been PPP activityin the transport sector in Bulgaria. In 2004, theBulgarian Government closed a toll motorwayPPP deal for one of the two major highwayswhich cross the country from the West to theEast. If this first project is a success anddelivers the expected benefits, additional PPPprojects are expected for other major roads.An international operator has taken overthe airports in the two largest towns on theBlack Sea coast under a 35-year concessionarrangement with an estimated value of€1.5 billion over the concession term.The Bulgarian Government is also consideringconcession arrangements for some smallerairports and for river and sea ports.Czech RepublicTo date, there has been no PPP activity in theCzech Republic. However, pilot projects arebeing tendered including the modernisation ofthe Prague Airport Link and a DBFO contractfor accommodation and parking at Prague’sMilitary Hospital. The Czech Government alsoannounced their approval in August 2005 forfour additional pilot PPP projects submittedby the Transport and Justice Ministries.The projects include a section of the D3motorway from Tabor to Bosilec in southernBohemia, the DBFO of new court buildingswith an estimated total capital value of €27million in Usti nad Labem and Karlovy Vary,northern Bohemia, and the DBFO contract fora €37 million maximum-security prison.32Source: PricewaterhouseCoopers42

A PPP Centrum, reporting to the CzechMinistry of Finance, was established in July2004 to speed up the necessary amendmentsto the legal framework and practicalprocedures relating to PPPs. The PPP Centrumcurrently acts as a knowledge centre to sharebest practice and experience with other publicsector bodies, including central and regionalauthorities.In August 2005 the Czech Governmentapproved the PPP Concession Law whichchanged public procurement, public propertyand budgetary rules, allowing the pilotschemes to proceed in late 2005.DenmarkThere has been little PPP activity in Denmarkto date. However, the Danish GovernmentPPP Unit has been assessing the potential forusing PPPs and some projects are in thepipeline. A preferred bidder was appointed inSeptember 2005 to design, build, finance andmaintain the new Vildbjerg School in the townof Trehøje, the first municipal-level school PPPproject in Denmark. The National Archivescentral accommodation project will be put totender in early 2006. Approval has beengranted for a road PPP project involving theconstruction of a new motorway betweenSonderborg and the E45 in the Danish countyof South Jutland; a tender for the €135m roadproject is expected in 2006.EstoniaThe first PPP project in Estonia is expected toclose in the near future in the housing sector.Some modest activity is seen elsewhere withat least one local municipality preparing aschool PPP. A number of other municipalprojects have followed models similar to PPPs,however, the partner was Government ownedand there was no competitive tender process.Discussions on the use of PPPs have beenongoing in the defence, light rail and schoolssectors which have been led primarily by localrather than central government. However,adoption of the PPP model is likely to remainslow, particularly for transport infrastructure,because attention has been focused on the EUCohesion Fund rather than the need to seekalternative financing structures. There hasbeen no combination of EU Cohesion monieswith private finance to date, but their potentialuse is under consideration for future projects.FinlandThere has been little recourse to PPPs inFinland. In the transport sector, only one roadPPP project has closed with another – the E18Muurlla-Lugge PPP – in procurement andexpected to close in late 2005. The Ministry ofTransport has been the most active indeveloping PPP structures and once the valuefor money and efficiency aspects of the currentPPP project have been assessed, there ispotential for the PPP market to develop further.There is no dedicated PPP unit in Finland.LatviaPPPs have not yet been used in Latvia butdiscussions are ongoing in a number ofsectors including roads, schools, health,accommodation, waste and water. The Latviangovernment is currently working on a roadsfinancing model with a road project the mostlikely major PPP to enter into procurement inthe near future. The Ministry of Economy iscurrently coordinating efforts to draftcomprehensive legislation and undertake otherinitiatives to encourage more widespread useof PPPs. The Latvian Investment andDevelopment Agency, which reports to theMinistry of Economy, is responsible forexploring PPP opportunities, providinginformation to municipalities and privateinvestors and initial consulting on theevaluation of project ideas. The Agency hasrecently sponsored feasibility studies for fivepotential pilot PPP projects.LithuaniaIn May 2005 a PPP Unit was established withinthe Ministry of Finance. The PPP Unit isdeveloping the PPP concept for the Lithuanianmarket and is expected to report to theGovernment by the end of 2005. Although setup within the Ministry of Finance, the PPP Unitwill also manage and co-ordinate the PPPactivities of other Ministries and municipalities.The combined heat and power systems ofseveral Lithuanian cities are operated by theprivate sector under concession-typeagreements. There have been no true PPPtypeprojects but discussions or feasibilitystudies are ongoing with regard to heavy andlight rail schemes, schools and health projects.The Ministry of Transport and Communicationsis examining whether part of the Rail Balticaproject may be delivered using a PPP model.In addition, the Vilnius municipality isundertaking feasibility studies for the Vilniustram system as well as the renovation of itsschools and multi-treatment health centres.43

LuxembourgExcept for an IT infrastructure project, therehas been no PPP activity in Luxembourg.As Luxembourg generates budget surpluses,investments are still financed directly by thepublic sector. Therefore, it can be seen thatwhere budgetary and fiscal pressures areabsent, there is less of a political imperative tofind alternatives to conventional procurementof capital assets.MaltaThere has been little PPP activity in Malta,except for PPP-type projects relating to roadlandscaping and lighting, homes for the elderlyand a Public Registry search facility. However,there is growing interest in this method ofprocuring public services. Four projects wereannounced recently including the constructionof schools, a regional sports complex andimproved facilities at heritage sites. Thefeasibility of other projects in the health androads sectors is also being considered. Theestablishment of a PPP Unit within the FinanceMinistry in March 2005 will help create acentral core of government expertise andassistance for other ministries.Norway (non-EU)PPP activity has been low. In recent yearsVegvesen, the Norwegian roads directorate,has tendered out three pilot road PPP projects.Two of these, the E39 (Klett to Bardshaug) andE39 (Lyngdal to Flekkefjord) have already beenawarded and the first PPP road, the €140million E39 scheme, opened to traffic inSeptember 2005 two months ahead ofschedule. The third pilot, the €250 million E18(Grimstad to Kristiansand), has threeshortlisted consortia with a preferred bidderexpected in 2005-2006.A decision on the future use of PPPs in theroad sector is expected once an evaluation ofthe pilots’ value for money has beenundertaken. The evaluation of the first pilotfound that there had been considerableefficiency gains, while there had been lessconclusive evidence regarding value formoney. A railway PPP project was cancelledprior to procurement due to a perceived lack ofvalue for money.The PPP model was being considered in othersectors, in particular defence support functionswhere ongoing overspends and inefficienciesneed to be addressed. However, the key driverbehind PPP development in the rest of Europe– budgetary and fiscal limitations – is absent inNorway and the election of a new Labour PartyGovernment in September 2005 may impacton the future use of PPPs.Romania (Acceding Country)There has been little PPP activity in Romaniato date although three motorway PPPs havebeen put to tender. The Romanian Governmenthas also established the Central Unit forCoordination of the Public-Private PartnershipActivities within the Managing Authority forInfrastructure (Ministry of Public Finance). ThisPPP Central Unit focuses on developing policyto promote and deliver PPP projects as well assharing best practice and experience withcentral and local authorities.SloveniaThere has been little PPP activity in Slovenia todate with one exception in the water sector asa €43 million water treatment plant has beenbuilt in the municipality of Maribor and iscurrently operating under a PPP arrangement. 33The Government which took up office inOctober 2004 has shown an interest indeveloping PPPs in Slovenia. The Ministry ofFinance organised a PPP conference inLjubljana in April 2005 in conjunction with theBritish Embassy and International FinancialBox 12 Galileo – The first pan-European PPPFollowing an initial study by PwC in 2001,the Galileo Joint Undertaking (“GJU”), whichis a joint venture between the EuropeanCommission and the European SpaceAgency, undertook to procure this €3.6bnsatellite navigation project as a PPP.The successful consortium will beresponsible not only for the design,procurement, launch and implementationof the satellite constellation as well as itsmid-term renewal, but for its operationthroughout the concession life and for thedevelopment of markets for Galileonavigation applications in industry sectorssuch as:• Aviation;• Maritime;• Road-tolling;• Oil Exploration; and• Personal CommunicationsIt is proposed the winning consortium willbe paid by way of an availability chargedependent on meeting pre-determinedperformance criteria and coupled with clearincentives on all parties to develop itsmarket successfully.Source: PricewaterhouseCoopers33Source: PricewaterhouseCoopers44

Services London. The Minister of Finance hasalso announced their commitment toestablishing a PPP unit.Other EU Member StatesPPP activity has been limited elsewhere inEurope. In Cyprus, the first PPP contract wassigned in July 2005 for the €500 milliondevelopment and management of theinternational airports at Larnaka and Paphos.There are port and road PPP projects in thepipeline. In Sweden a light rail PPP closed in1996 however there has been no subsequentPPP activity.There have been no reported PPP projects inSlovakia. In August 2005, the SlovakGovernment gave its approval to proceed witha pilot road PPP project. The scheme consistsof part of the D1 Motorway which by-passesthe town of Zilina. A tender for the pilotscheme is expected in November 2005.Turkey (non-EU)A law adopted in 1994 allows private sectorcompanies to engage in PPP projects acrossall sectors, including all the transport modes.To date, only airports have been subject toPPP-type arrangements. While the operatingrights of a number of ports have beentransferred to the private sector, they are notclassic PPP arrangements.European UnionA key element of the EU’s TEN-T initiative isthe procurement of the GALILEO globalsatellite navigation system. Expected tobecome fully operational in 2009, this projectrepresents a major breakthrough indemonstrating how the PPP approached canbe applied, and can deliver results, beyond thebuilding of traditional infrastructure.Review of legislative andinstitutional positionWith greater use of the PPP model, more andmore countries are establishing dedicatedPPP units and/or proposing specific legislativemeasures to assist PPP procurement.The section below reviews the most recentdevelopments across Europe, in particular,an updated Summary of PPP institutionaland legislative development by country isshown in Figure 8.Figure 8: Summary of PPP institutional developmentPPPUnitPPPLawPPPUnitPPPLawMember StatesNew Member StatesAustria ▲▲▲ –Cyprus ▲▲ –Belgium ▲ ■■Czech Republic ▲▲ ■■Denmark ▲▲ –Estonia – ■Finland – ■Hungary ▲▲ ■France ▲▲ ■■Latvia ▲▲ ■■Germany ▲▲ –Lithuania ▲▲ ■KeyGreece ▲ ■■Malta ▲▲ –▲▲ ▲▲▲▲Need for PPP unitidentified and some actiontaken (or only a regionalPPP unit existing)PPP unit in progress (orexisting but in a purelyconsultative capacity)PPP unit existing (activelyinvolved in PPP promotion)Ireland ▲▲▲ ■■■Italy ▲▲ ■Luxembourg – –Netherlands ▲▲▲ –Norway (not EU) ▲ –Poland ▲▲ ■■■Slovakia – –Slovenia ▲ ■Acceding and Candidate CountriesBulgaria ▲ ■■■ ■■ ■ ■Legislation being proposedComprehensive legislationbeing drafted / somesector specific legislationin placeComprehensive legislationin placePortugal ▲▲ ■■Spain – ■■■Sweden – –UK ▲▲▲ –Romania ▲▲ ■■Turkey ▲ ■■■Source: PricewaterhouseCoopers October 200545

LegislationThe March 2005 ECOFIN Council Conclusionson national contributions to the EuropeanInitiative for Growth noted that many countrieshad made efforts to develop the mobilisationof private resources in infrastructure financing,notably through improving the frameworkconditions for PPPs. 34The lack of a uniform PPP definition creates achallenge in developing PPP legislation, as anumber of Member States are discovering.If a narrow definition is taken, this can resultin legislation which only applies to a restrictedrange of project types or structures, which maybe of limited practical value.A number of governments across Europe haveadopted PPP-related legislation including:• The 2004 PPP “Ordonnance” created a newform of contractual relationship (“Contrat dePartenariat”) between the public and privatesectors in France. This allows for the classicDBFO project finance model with a privateparty or consortium, under which thecontractor will be paid over time by thecontracting public body. The contractlegislation is also designed to improvesecurity for those lenders with ownershiprights over the assets involved.• In September 2005, the Greek Parliamentvoted to adopt a PPP Bill governing projectsor services to be delivered using a PPP. Thelaw establishes a Special Secretariat forPPPs and defines parameters for a numberof PPP-related issues, including tenderingand negotiation procedures, tax, financialand accounting issues, securitisation issues,arbitration proceedings. The law will apply toprojects up to a value of €200 million.• In August 2005, the Polish President signeda PPP Act, which eliminates double taxationand introduces more flexible regulationsregarding public contracts. The new lawremoves restrictions on long-term budgetarycommitments and on the use of state fundsin PPPs. The new law should allow for thegrowth of PPPs in Poland.• The Ministry of Finance in Portugal, togetherwith the relevant Minister in charge of theproject, has responsibility for controlling andsupervising PPPs under a PPP Law enactedin April 2003. The Law also led to theadoption of Public Sector Comparator andValue for Money concepts and imposesspecific requirements to ensure thatPPP-based projects are approved only ifthey involve a significant and effectivetransfer of risk. The law is intended tocomplement existing sector legislation andapplies to all central and regionalgovernment projects.• New concessions legislation was introducedin Spain in 2003, updating the former legalframework and allowing for the delivery of abroader type of public infrastructure servicethrough PPPs.• The Merloni Law (Law 109/1994) providesthe general regulatory framework for theprocurement of public works in Italy. It’sreform in 2002 and the enactment of theLegge Obiettivo (Law 443/2001), setting outthe process for the development of keyinfrastructure projects, prompted further PPPdevelopment.Imminent legislation:• In December 2004, a law governing PPPcontracts and concessions was passed inRomania (Law no. 528/2004) modifyingexisting government ordinances. Under theterms of this law, the Ministry of PublicFinance assumed responsibility forelaborating secondary legislation for thePPP law. The Romanian authoritiesdiscussed the draft secondary legislationwith the European Commission in October2005. A comprehensive procurement Act isexpected to enter into force in early 2006.Legal impediments to PPPs are consideredfurther in Section 4.347148/05 Note from the Council of theEuropean Union to the EuropeanCouncil, 8 March 200546

Institutional Support for PPPs isgrowing within EuropeanGovernmentsWhile there is no central PPP unit at theEU-level, more and more Member Stategovernments are establishing PPP unitscentrally or within individual ministries.Across Europe, it can be seen that theMinistries of Finance (or equivalent) arepivotal to the use of PPPs.Developments in this area include:• A Federal PPP Competence Centre openedwithin the German Transport, Constructionand Housing Ministry (Bundesministerium fürVerkehr, Bauen and Wohnen) in July 2004and there are six Task Forces/CompetenceCentres or PPP Working Groups at theregional state – Land-level. The structure issummarised in Figure 9.• A PPP Centrum, reporting to the CzechMinistry of Finance, was established in July2004 to assist with updating the legalframework and practical procedures relatingto PPPs. The PPP Centrum currently acts asa knowledge centre to share best practiceand experience with other public sectorbodies, including central and regionalauthorities.• The French Finance Minister recentlyannounced the creation of a PPP Unit.The committee will consist of severalministers, or their representatives, from arange of sectors including finance, transport,health, home affairs and defence.Organisations affected by the Contrats dePartenariat (see above) will also berepresented.Figure 9: German PPP Task ForceFederal PPP network of excellenceSteering Committee PPP in public building construction engineeringChair: PSts Grossmann, BMVBWPPP-working groupPPP Task ForcePilotprojectsFundamentalsCoordinationPublicrelations andknowledgetransferFederal-Stateexpert committeesPPP centres of excellenceEU, Federal States andmunicipalitiesPPPcentres of excellencein other sectorsThe Federal PPP Task Force was establishedwithin the German Transport, Constructionand Housing Ministry (Bundesministerium fürVerkehr, Bauen and Wohnen) in July 2004.It is responsible for supporting pilot projects,coordinating work and performing publicrelations and knowledge transfer activities atthe federal-level.PPP projects are selected following expertrecommendations and in agreement with theSteering Committee on the basis of achecklist and set criteria. The SteeringCommittee, established in 2002 is formedof representatives from the FederalGovernment, Federal States andmunicipalities and from the construction andbanking sectors. The Committee, under theChairmanship of the Parliamentary StateSecretary of the Federal Transport,Construction and Housing Ministry, aims topromote improvements in the overall PPPenvironment and the creation of a networkof expertise.The centres of excellence in the Federalstates are actively promoting PPPs. FederalStates are primarily involved in prison andadministrative accommodation projects.Source: Bundesministerium für Verkehr, Bau- undWohnungswesen47

• A PPP unit established in the HungarianMinistry of Economics and Transport acts asa central knowledge centre for all otherministries. The unit also has the function ofanalysing and commenting on the PPPproposals of the other ministries before theyare submitted for central approval. Thefuture role may change following a recentchange in Minister and Secretary of State.The Ministry of Finance is also becomingmore active in the PPP area.• A Central PPP Unit has been established inthe Irish Department of Finance. Its principalrole is to provide guidance on best practicein the appraisal and procurement of PPPprojects with a particular focus onestablishing and providing value for money.The Irish Government has also establishedthe National Development Finance Agency toadvise public sector bodies on the financingof all capital projects, including PPPs, andwhere appropriate, to provide financing.• A PPP taskforce was established in theTreasury Department of the Italian Ministryof Economy and Finance in 2000. It isresponsible for providing PPP-relatedexpertise and assistance to publicadministrations.• The Latvian Investment and DevelopmentAgency, which reports to the Ministry ofEconomy, is responsible for exploring PPPopportunities, providing information tomunicipalities and private investors andinitial consulting on the evaluation ofproject ideas.• While there is no PPP institution in Poland,PPP units have been established in theMinistries of Infrastructure and Economy aswell as the General Directorate for Roadsand Motorways.• In Portugal, Parpública, a public companyresponsible for State participation in privateentities, has recently assumed a PPPconsultancy role for central and regionalgovernment.• The PPP unit within the UK Treasury is wellestablished,providing detailed guidance andsupport to other Government departmentsprocuring services using the PPP model.Partnerships UK (PUK) was formed in 2000as a public private partnership, with amajority stake held by the private sector.PUK offers a mix of public and private sectorcommercial expertise to help public bodiesdeliver PPP solutions and majorinfrastructure programmes.• In Turkey, a number of Governmentministries and authorities may becomeinvolved in the PPP process. The 1994 PPPlaw sets out that the procedures governingthe model, the specifications required fromthe undertaking companies, scope ofcontracts, pricing and other related issueswill be prepared with the cooperation of theMinistries of Finance, Construction andInfrastructure, Energy and Natural Resourcesas well as the State Planning Organization,State Treasury and State Office ofInternational Trade. The approval of theCouncil of Ministers will then be sought.State-owned enterprises seekinginvestments and services through a PPPmust apply to the Higher Board of Planning.A review of EUinvolvement andsupport for PPPsThe EU’s support for PPPs manifests itselfacross a number of EU bodies and initiatives.This section lists them here so that it is clearwhat activity is being undertaken at the EUlevel. However at this stage, there is a lack ofclarity as to the degree of coordinationbetween institutional developments, EU bodiesand initiatives and whether this should andcould be improved through some form ofcoordinating body. The issue of establishing anEU PPP Knowledge Unit is addressed furtherin Section 4.Role of EU bodiesDifferent sections of the EU institutions haveplayed a role in the development, promotionand implementation of PPPs to date. Thesemainly comprise various Directorates-General(DGs) of the European Commission, theEuropean Investment Bank (EIB) and ad hocorganisations or committees which havestudied and reported on aspects of PPPs.The Commission DGs with particular roles inregard to PPPs include:• Internal Market – DG Internal Market isresponsible for both the wider publicprocurement laws of the EU, which impacton how PPPs can be developed andprocured, and issued the Green Paper onPPPs reviewed below.• Transport and Energy – DG TREN hasresponsibility for the TENs programme.This has been the most active areaconsidering PPP within an EU context.Since 2004, DG TREN has operated aninformal PPP Exchange Group which bringstogether officials from other DGs, the EIBand PPP units or centres of excellence from48

35Guidelines for Successful Public –Private Partnerships, DG REGIO,March 2003. Available on theEuropean Commission website athttp://europa.eu.int/comm/regional_policy/sources/docgener/guides/ppp_en.pdf36Resource Book on PPP CaseStudies, DG REGIO, June 2004.Available on the EuropeanCommission website athttp://europa.eu.int/comm/regional_policy/sources/docgener/guides/pppresourcebook.pdf37EIB overview informed by The EIB’sRole in Public-Private Partnerships(PPPs) paper published by the EIB,July 2004. Available athttp://www.eib.org/publications/publication.asp?publ=189a number of Member States. The Group hasbeen discussing particular issues on how touse PPPs to promote European transportinfrastructure in general and TEN-T projectsin particular. DG TREN is also the sponsoringDG for the Commission’s own substantialPPP project, the Galileo satellite navigationproject.• Regional Policy – DG REGIO is responsiblefor the operation of the Structural andCohesion Funds of the EU. There has beenconsiderable interest in how PPP structuresand approaches can be used alongside EUregional funding arrangements to further thedevelopment of European infrastructure andservices. In March 2003, DG REGIOpublished its Guidelines for SuccessfulPublic-Private Partnerships 35 followed by itsResource Book on PPP Case Studies inJune 2004. 36 The 2003 Guidelines did notattempt to provide a complete methodologyor to define policy but rather to guidepractitioners through a set of key issuesaffecting the development of successful PPPschemes. The Guidelines focused on fourkey topics:• ensuring open market access and faircompetition;• protecting the public interest and maximisingvalue added to citizens;• defining the optimal level of grant financingboth to realise a viable and sustainableproject but also to avoid any opportunity forwindfall profits (or losses) from grants;• assessing the most effective type of PPP fora given project with the appropriateparameters: balanced distribution of risks,appropriate duration, clarity ofresponsibilities within the various regulatoryenvironments.The Resource Book aimed to highlight thekey lessons learnt by member countries.There are relatively few examples of projectswhere EU and private funding has beencombined. This area is considered in greaterdetail below (see Use of EU funds in PPPs).• Economic and Financial AffairsDG ECFIN is responsible for ensuring thesmooth functioning of the Economic andMonetary Union, including the monitoring ofpublic finances and economic performance.As such, DG ECFIN monitors MemberStates’ compliance with the provisions of theStability and Growth Pact. The Director-General of DG ECFIN is a member of theBoard of Directors of the EIB, representingthe Commission.The European Investment Bank 37The EIB is the only EU institution which hassubstantial practical experience of PPPprojects and their procurement. The EIB hasplayed a major role in the development of theEuropean infrastructure and PPP financingmarkets and has contributed towardsdeveloping good industry practice.The European Council in October 2003 invitedthe Commission and the EIB to explore howbest to mobilise public and private sectorfinancing support of the Growth Initiative and togive further consideration as to how to assistthe development of PPPs. The EIB’s proposalsfocused on the provision of substantialadditional resources, in particular for the TENs,while respecting the EIB’s underlying principles.The EIB’s principle of providingcomplementarity with other funders (bothcommercial banks and the capital markets) ismaintained in PPP structures. Many EIB loansto PPP projects are either bank guaranteed ormonoline insured either to maturity, or withrelease once the project has a proven operatingrecord. However, the EIB is also able to lend toPPP projects without third party creditenhancements, where the project is importantin the context of its overall policy objectives.Eligibility for EIB funding is based on theunderlying project contributing to one or moreof the EIB’s objectives, not the fact that it is aPPP. The PPP structure has proved anacceptable one for the EIB to support and asAppendix A shows, the EIB has been a majorprovider of debt finance to European PPPprojects for many years. By mid-June 2005,the EIB had signed loans to the value of€19.5 billion for PPP operations.The EIB is now lending to PPP projects inAustria, Belgium, Denmark, France, Greece,Germany, Ireland, Italy, Netherlands, Poland,Portugal, Spain,and the UK as well as in non-Member States, e.g. China and South Africa.Most projects are in the transport sector.The EIB has increasingly been involved inassisting the Commission with a number ofdevelopments and initiatives such as theEuropean Guarantee Instrument (see below).It was represented on the Task Force lookingat the accounting treatment for PPPs and isrepresented on the Informal PPP ExchangeGroup for TENs (see DG TREN above). The EIBis also used by the EU to provide expertadvice regarding individual projects, such asthe renegotiation of grant applications wherePPPs are involved. However, the EIB’s functionis to act as the lending bank for the EU and itsrole is not in itself to develop policy.49

EurostatEurostat is the statistical authority of the EUand is the institution responsible, amongstother things, for the European System ofAccounts (ESA95). An important part ofEurostat’s mission is to ensure consistency ofgovernment statistics in all Member Statesensuring that deficit and debt figures are fullycomparable between them.Eurostat sets the rules which EU MemberState Governments have to follow in theirpreparation and submission of economic andfinancial statistics to the EU. These apply to allMember States and are also relevant toprospective Member States. Within the PPParena, the balance sheet treatment of PPPshas been a particular area of concern.Further information on the accountingtreatment for PPPs is included in Section 4.EU-level Working Groups andRecent InitiativesThe most recent EU-level initiatives andworking groups include:• In March 2005, the European Commissionannounced that the EU could guarantee partof the debt of priority cross-border transportinfrastructure projects to stimulate privateinvestment in TEN projects. The guaranteewould have a budget of €1 billion, which theCommission consider enough to coverover €20 billion of debt. According to theCommission, the loan guarantee would applyin particular to the private sector throughPPPs such as the Lyon-Turin link or theBerlin to Verona High-Speed-Link.• A draft report by the Dutch Ministry ofFinance in December 2004 identified certainaspects of TEN-T funding from the EU thatmade it difficult to adopt a PPP approach inthe delivery of projects. 38 In particular, thereport recommended that the Commissionshould look at TEN-T finance and inparticularly the incompatibility of the largeupfront capital grant payments available andthe need for availability payments over thelonger-term under PPP arrangements.In March 2005, the Commission set up ajoint Commission – Member State workinggroup to examine in more detail the TEN-Tand other EU grants available for transportinfrastructure investment. The workinggroup, a subset of the Informal PPPExchange Group above, compriserepresentatives from six Member States (theUK, Netherlands, Hungary, Italy, Poland andPortugal), the Commission (DGs TREN,ECFIN and REGIO) and the EIB. This groupintends to propose (among others)amendments to the most relevant financialBox 13Athens International Airport – Combining EU funds with private financeThis €2.6 billion project involved thedevelopment of the new Athens InternationalAirport at Spata and provides an examplewhere private sector funds have been usedwith EU grants to deliver infrastructureinvestment in Cohesion countries.The Greek Authorities and the EuropeanCommission had agreed within the frameworkof the Community Support Framework 1994 -1999 (CSF II) to maximise private sectorpartnerships in the development of transportrelatedinfrastructure. The new AthensInternational Airport project consisted of a30-year BOOT concession which receivedEU grants amounting to approximately€250 million or 11% of the project cost.An EIB loan of €997 million supportedapproximately 45% of the initial project cost.The Hellenic Republic and a privateconsortium created a private company,Athens International Airport SA, to own andoperate the airport for a period of 30 years.A grant from the Hellenic Republic amountedto €150 million and share capital amountedto €134 million, additional project financingcame from commercial loans. A consortiumled by Hochtief and also comprising ABBand TKT Krantz GmbH, undertook theconstruction project. Subcontractors,of which 80% were Greek companies,carried out 70% of the construction work.Work included the construction of a runwayand taxiway systems for handling up to 65aircraft movements per hour. The airport hasan existing capacity for 16 million passengersand 220,000 tonnes of cargo a year,increasing to 50 million passengers a yearafter development. Construction wascompleted in September 2000 after 51 monthsand after 5 months of testing, the airportopened to the public on 28 March 2001.Source: PricewaterhouseCoopers38The impact of TENs co-financing andsubsidy conditions on projects, andproposals for reform, Dutch Ministryof Finance, December 200450

39Conclusions of the June 2004seminar on “Wider Europe forTransport” available athttp://europa.eu.int/comm/ten/transport/2005_03_31_tent_consultation/doc/conclusions_santiago_de_compostela_en.pdf40Report on the Pricing of TolledHighways in Europe, Group on Fiscaland Financial Aspects of Transport,European Conference of MinistersTransport, February 2005,CEMT/CS/FIFA (2005) 241Developing Public PrivatePartnerships in New Europe, May2004. Available on the PwC website athttp://www.pwc.com/extweb/service.nsf/docid/A2F9309C016FAADD80256EA6004F516C42Developing Public PrivatePartnerships in New Europe, May2004. Available on the PwC website athttp://www.pwc.com/extweb/service.nsf/docid/A2F9309C016FAADD80256EA6004F516C43Green Paper on Public-PrivatePartnerships and Community Law onPublic Contracts and Concessions,COM (2004) 327 final44Article 29 of Directive 2004/18/ECadded the competitive dialogueprocedure to the public procurementroutes availableTENs regulations to increase grant timingflexibility and to better combine grants andprivate finance.• Following a ministerial seminar on WiderEurope for Transport in Santiago deCompostela on 7-8 June 2004, 39 a high levelgroup has been established to look into theextension of the major trans-Europeantransport axes to neighbouring countries andregions. The ministerial seminar noted thatwhile there are serious difficulties in fundingtransport investments and reliance onnational budgets prevails, innovative fundingsolutions, such as user charges and PPPs,have to be examined.• The European Conference of Ministers ofTransport (ECMT) is based in Paris,co-located with the OECD. The OECD/ECMTJoint Transport Research Centre (JTRC) isundertaking a working group researchproject on Transport InfrastructureInvestment: Funding Future Needs, focusingon innovative funding mechanisms, includingPPPs, and aiming to identify the mostappropriate project design, tendering andcontractual processes and regulatoryframeworks for using such mechanisms.Moreover, the ECMT’s Group on Financialand Fiscal Aspects of Transport completed aconsultancy project on PPPs and pricing ofinfrastructure use in early 2005. 40• In March 2005, the EIB and Partnerships UKheld a conference in London involving thePPP/Private Finance Units from across theEU to discuss PPP issues and exchangeknowledge and experience.Further details on the EUs involvement in PPPscan be found in Section 2 of the PwC paperDeveloping PPPs in New Europe. 41Use of EU funds in PPPsThere are a number of EU grant schemeswhich provide funding for delivering the TEN-Tpriority projects as well as for regionaldevelopment and for strengthening economicand social cohesion. The most relevant to theprovision of infrastructure and governmentservices are: the TEN-T grants, the StructuralFunds and the Cohesion Fund for MemberStates, and PHARE and ISPA for Accessionand Candidate Countries.Projects eligible for EU funding require cofinancingand in the past, the Member Stategovernments have provided most co-finance.However, the concept of using private financeis gaining ground and according to EuropeanCommission data, 23 PPP projects have beenco-financed by the Cohesion Fund, StructuralFunds or IPSA. See Appendix C. Furtherdetails on the EU funds available and their usein PPPs can be found in Section 3 of the PwCpaper Developing PPPs in New Europe. 42Green Paper on PPPs andCommunity Law on PublicContracts and Concessionspresented by the EuropeanCommission, April 2004The Commission presented a Green Paper onPPPs and Community Law on Public Contractsand Concessions in April 2004. 43 The GreenPaper recognised that recourse to PPParrangements to deliver infrastructure projectshad developed during the last decade atMember State level and that greater use ofPPP structures could help bridge theinvestment gap in relation to the plannedtrans-European transport networks. The aim ofthe Green paper was to launch a public debateon whether current rules should be improvedand whether EU-level intervention was neededto give economic operators across Europeimproved access to the available opportunitiesof PPP under conditions of legal certainty andreal competition.The Green Paper focused primarily on theprocurement aspects of PPPs, considering theextent to which Community rules apply whenthe private partner is selected and then for theduration of the contract, with a view toidentifying uncertainties. It also proposed awide set of instruments and tools available toimprove the Community frameworksurrounding PPPs, such as interpretativecommunications and exchange of bestpractice. When considering these issues,the Paper distinguished between PPPs basedon purely contractual links and arrangementsof an institutional nature, involving the jointcooperation between parties in a distinctmixed-capital legal entity.In addition to calling for practical experience ofdifferent aspects of PPPs and procurement,the Commission requested comments on anumber of points, including:• To what extent do parties agree that there isa procurement process well-suited to PPPs,for example is the competitive dialogueprocedure 44 well adapted to the award ofpublic contracts in the context of a purelycontractual PPP.• Whether the Commission should proposenew legislation to cover all contractual PPPsto harmonise award arrangements ofcontracts and concessions.51

• Whether PPPs set up on the initiative of theprivate sector are open and fair for othernon-national operators and how this type ofPPP could be developed further.• Whether execution or tender evaluationpractices have had a discriminatory effecton parties.• To what extent do parties agree that certain“step-in” arrangements – where financialinstitutions reserve the right to replace theproject manager, or to appoint a new manager,if the financial flows generated by the projectfall below a certain level – may reducetransparency and equality of treatment.• Whether aspects of the contractualframework of PPPs required additionalclarification at the EU level.• Whether more detailed rules were requiredon subcontracting.• Whether the Commission should establish anetwork to share knowledge and experienceof PPPs in different member countries and toexchange best practice.Report on the public consultationon the Green Paper on PPPs,May 2005In May 2005, the Commission published areport 4 on the responses to the above GreenPaper with individual contributions (sentelectronically and with no objection) beingpublished in full on the Internet. 45The consultation report highlighted generaltrends in opinion, including:• A large majority of respondents highlighted thepractical problems of applying the competitivedialogue procedure and expressed concernsthat it would increase bidding costs.• There is little appetite for more EU legislationto regulate PPPs.• There is strong support for establishinga European PPP agency, a centre ofknowledge / resources and documentationcentre or an observatory.• Many stakeholders considered that the rulesof the EU’s requirement for co-financing underEC regional policy impede PPP development.• There is little support for EU-level initiativeson the contractual framework for PPPs andin the area of sub-contracting.Box 14 Responses to the Green Paper on PPPsLegislation“We are much in favour of specific legislationthat would cover all contractual PPPs,including concessions. This is mostly due tothe fact that we believe that there is a needfor stable, homogeneous legal environmentwithin the European Union. In our opinion,this would help reducing project cost as aneffect of decreased legal risks and byattracting more bidders. The differences inprocedures for the award of concessionsand PPPs in general among the EUcountries do not guarantee genuinecompetition.”Republic of Poland, The Ministry of Infrastructure,Department for Infrastructure, Financing and European Funds,PPP Division“The flexibility that drives innovation affordedat present would be hindered if allcontractual PPPs were subject to identicalaward rules. The need for distinctionbetween contracts and concessioncontracts is essential”UK Government“We advocate that no EU directive should bedesigned for PPPs at the present time.”Portuguese Foreign Office, Directorate-Generalof European Affairs“Since PPPs are hard to be defined and varygreatly across Europe, a purely legislativeapproach from the Commission is notsufficient. The Forum suggests a provision ofEU guidelines to the Member States onPPPs since there are significant levels ofuncertainty on how EU legislation applies toPPP. This uncertainty adds to the overallfinancial risks of undertaking such projects.The risks apply to both the public andprivate sectors, and inevitably result inhigher costs.”European Energy and Transport Forum“We believe that unless the EU is able toadequately define PPPs, and to achieve abroad consensus in the market that thisdefinition is appropriate, it would not be rightfor the Commission to proceed with alegislative approach.”Response to the Green Paper from PricewaterhouseCoopers45Report on the Public Consultation onthe Green Paper on Public-PrivatePartnerships and Community Law onPublic Contracts and Concessions,SEC (2005) 629. Responses available athttp://www.europa.eu.int/comm/internal_market/publicprocurement/ppp_en.htm#consultation52

“The Federal Government does not believethat additional legislation is necessary.This applies not only to service concessionsbut also to contractual PPPs. It would bevery difficult to implement a legislativeframework at the Community level as thereis no firm PPP definition and PPPs take verydifferent forms.”Federal Government of GermanyCompetitive Dialogue“In our opinion, competitive dialogue is anextremely useful tool that will allow outputbasedprocurement, thus improving value formoney offered by PPPs. However, we alsothink that the procurement procedure itselfwill become much longer and therefore moreexpensive. It will also require moresupervision to ensure the equality oftreatment of the bidders.”Republic of Poland, The Ministry of Infrastructure,Department for Infrastructure, Financing and European Funds,PPP Division“The current European legislation offers,in the opinion of the Dutch government,enough opportunities to realise a PPP. TheDutch government holds the opinion that thecompetitive dialogue will result in a positivecontribution to the realisation of a PPP.”Observations by the Dutch Government(English summary version)“Our belief is that competitive dialogue is notparticularly well adapted to the procurementof PPPs. While there may be some instancesin which it is appropriate, in many cases theuse of competitive dialogue would notsatisfy the needs of the public procurementauthority to undertake an efficient andeffective procurement.”Response to the Green Paper from PricewaterhouseCoopers“It is the French Government’s opinion thatthe competitive dialogue procedure shouldonly be used for its intended purpose, i.e.when the public authority considers that acompetition between private sector partnersis needed to define the appropriate solutionsfor its requirements. On the other hand, thenegotiated procedure should continue to bethe rule for concessions, where discussionson the contract terms are more importantthan defining solutions to be implemented,given that in most cases the public sectorbody is able to define how its requirementsshould be met.”French GovernmentBarriers“We have not identified specific measuresor practices that act as barriers to theintroduction of PPPs at the European level.The complexity of PPPs as a means ofprocurement does, of course, present aseries of challenges in terms of the skillsand knowledge of the public sector, theinteraction of various public policies,and the capacity of the private sector.”Observations by the Central PPP Unit, Departmentof Finance of IrelandPPP Knowledge Centre“Sharing of knowledge and experience ofsuccessful structures between differentnational circumstances would be a positivestep in furthering development of PPPs indifferent member states.”UK Government“We would sincerely welcome theestablishment of an EU PPP Observatory, witha small information office (for collecting anddiffusing information on PPPs) and a networkof research institutes, PPP units and PPPpartners.”Portuguese Foreign Office, Directorate-General ofEuropean Affairs46Communication from the Commissionto the European Parliament,theCouncil, the European Economic andSocial Committee and the Committeeof the Regions on Public-PrivatePartnerships and Community Law onPublic Procurement andConcessions, COM (2005) 569 final• Lender step-in rights are consideredessential to raising debt and not seen asa barrier to open and fair competition.While these were the general trends,there were a range of opinions expressedas demonstrated in the selection of viewsquoted in Box 14.In November 2005, the Commission issued aCommunication 46 on the policy conclusionsfrom the PPP Green Paper consultation.The Commission stated that it would in principlewelcome the establishment of a European PPPExpertise Centre. It concluded that the award ofconcessions and institutionalised PPPs wouldrequire follow-up initiatives at the EU-level.However, it does not envisage introducing newlegislation to make all contractual PPPssubject to identical award arrangements ortaking Community action on other specificaspects of PPPs.Further analysis will be undertaken on thepossible EU-level initiatives during 2006 and theCommission expects to clarify the provisionsgoverning the Competitive Dialogue by meansof an explanatory document in the future.53

Review of activityin key PPP marketsoutside EuropeThe need for sustained infrastructureinvestment is also keenly felt outside Europe.Budgets are constrained and governments areunder pressure to achieve improved value formoney and efficiency when delivering publiccapital assets and services. Interest in thepotential for private sector involvement ininfrastructure provision is growing at all levelsof government – national, state/provincial andlocal – responsible for public service delivery.As in Europe, many countries initially developPPPs in the transport sector. The health andeducation sectors follow closely, seeking totake advantage of private sector finance andskills to deliver much-needed socialinfrastructure.As noted above, around 206 PPP deals worthapproximately US$52 billion/€42 billion wereclosed in the world in 2004 and 2005, of which54 were outside Europe with an estimatedvalue US$26 billion/€21 billion. 47 So it can beseen that while the non-European marketsclosed significantly fewer projects, the level ofinvestment to be delivered via PPP structuresis similar to Europe.As Figure 10 shows, the most active PPPmarkets have been Australia, Canada andJapan, in particular in the roads, health,education and water and wastewater sectors.This section summarises PPP activity in keymarkets outside Europe (in alphabetical order).AustraliaPPPs in Australia have been used to delivereconomic infrastructure such as toll-roads,with the private sector taking full market risk,and social infrastructure such as hospitals,prisons and schools, which are basedprincipally on payments for availability and KeyPerformance Indicators. The largest toll-roadhas been the AU$2.5 billion Mitcham toFrankston scheme, known as EastLink, whichincludes the building of around 40km ofmotorway in Melbourne. Others during2004-2005 include the AU$1.5 billion WesternSydney Orbital, the AU$640 million Cross CityTunnel and the AU$800 million Lane CoveTunnel, both in Sydney. The flagship socialinfrastructure schemes have been the A$250mBrisbane Southbank Education and TrainingPrecinct and the $A350m Victoria’s RoyalWomen’s Hospital PPP deals, closed in June2005. As in the UK, a number of PPPs areoperational, for instance the Victoria CountyCourt, Casey Hospital and NSW Schools.Figure 10: Summary of PPPs by country and sectorCentralAccommodationAirportsDefenceHousingHealth & HospitalsITPortsPrisonsHeavy RailwayLight RailwayRoadsSchoolsSports & LeisureWater & Wastewater(incl solid waste)CountryAustraliaCanadaJapanMexicoSingaporeSouth AfricaUnited StatesLegendDiscussions ongoingProjects in procurementMany procured projects,some projects closedSubstantial number ofclosed projectsSubstantial number ofclosed projects, majorityof them in operationSource: PricewaterhouseCoopers October 200547Source: Dealogic ProjectWare54

48Canadian Public-Private Partnershipfinancing gaining traction despitelabor opposition, Standards & Poor’s,October 200549Partnerships British Columbia 2002 –2003 Annual ReportFull adoption of the PPP model variesconsiderably across jurisdictions. Victoria andNew South Wales (NSW) are at the forefront.Queensland, Western Australia and theNorthern Territories have each completed onePPP. The Federal Government and otherjurisdictions all have PPP policies in place butas yet have not completed a project. However,the Prime Minister, John Howard, recentlyannounced that all major federal projects willbe considered for private sector involvementso there should be additional PPPopportunities and a clearer focus in the future.In all jurisdictions except for theCommonwealth and Queensland governments,the state’s Treasury manages PPP policy andguidance and has some oversight of projects.The Department of Finance and Administrationcontrols the policy for the Federal Governmentand the Director General’s Office forQueensland. There are no general lawsgoverning PPP procurement. Policies andguidelines have been developed by stategovernments – broadly based on PartnershipsVictoria’s PPP policy and guidelines, althoughthere are material variations between thestates on matters such as fair valuecompensation on termination, change in lawand change of control provisions. Two of thestandard market criticisms are that policyneeds to be implemented more consistently toreduce bid costs, and that most of the states,with the exception of Victoria where thePremier and the Treasurer have both beenvocal in support of well structured PPPs,would benefit from more determined politicalleadership and advocacy. The National Councilfor PPPs, a forum for coordination betweenFederal and state ministers and officials, wasset up in mid 2004 as part of the move towardsa more consistent approach across the country.Financial structures largely follow internationalmodels, but beneath this familiar pattern areuniquely Australian features. In particular,Australia is the home of the so-called ABNmodel, which for a period in 2001-2003 sawmost deals won by investment bank ledconsortia who took most or all of the equity,specified the terms on which subcontractorswould participate and underwrote the debt;and bond finance rather than bank fundedmost of the early deals.Overall the market is at an interesting stage.2004 and 2005 have seen the closure ofenough deal and the creation of enough dealflow to give Australia critical mass to match itsfinancial sophistication. But there are someunderlying instabilities in the market. 2006-2007 will show whether this becomes thesecond most important market in the world orwhether that hour goes to the US or Eurozone.CanadaAfter a lengthy development process, the PPPmodel is gaining ground in Canada. Theprovinces of Alberta, Ontario and BritishColumbia have been the most activesupporters of the PPP framework while interestin Quebec is also growing.British Columbia has seen the most activityhaving successfully closed eight transactionssince mid-2004, 48 including the RichmondAirport Vancouver Rapid Transit and the Sea toSky Highway. Activity has been driven by theneed to expand social infrastructure withinbudget constraints. In June 2002, the provinceestablished Partnerships British Columbia(PBC), created to provide “public agencieswith expert advice and support to explore and,where supported by a sound business case, toimplement P3s (PPPs) and other innovativeapproaches to provide public infrastructureand services”. 49In Ontario, like in British Columbia, interest hasbeen driven by provincial budget constraintsand growing social and economicinfrastructure needs. The State is establishingthe Ontario Infrastructure Projects Corporationwhich will provide public sector transactionguidance for projects approved under theprovince’s Alternative Financing andProcurement (AFP) approach. The AFP modelcovers a broad spectrum of procurementapproaches, including a re-branding of PPPs,but also some elements of more traditionalprocurement methods. According to a recentreport by Standard & Poor’s, about C$2.3billion of a C$30 billion 5-year infrastructurespending programme will be undertaken underOntario’s AFP approach. 50There has been little PPP activity in Alberta,with only the Edmonton Ring Road andCalgary Court House procured using themodel. Future activity is likely to centre oneducation and transport infrastructure.Although no PPP projects have closed inQuebec to date, the PPP model has becomemore established in the past few years.The PPP unit – Agence des partenariatspublic-privé – was established in December2004 to advise the provincial government onPPP issues, in particular with respect toprocurement and contracting. Threeaccommodation/real estate projects are inprocurement including the construction of anew concert hall for the Montreal SymphonyOrchestra and the replacement of the MontrealOlympic Stadium roof. And two majorroad/bridge projects in the Montreal region willbe put to tender shortly (A-25, A-30).55

To date, Canada can be seen as two distinctmarkets, east and west. In Western Canada(dominated by BC) the market has beendeveloping with nine deals closed in the last18 months. However, each transaction seemsto follow a unique procurement process withlimited use of precedent or convergence ofterms. Eastern Canada in contrast has seenlimited political support, although theestablishment of PPP agencies in both Ontarioand Quebec may kick start the market. Thechallenge over the next year or two from agovernment perspective will be for theProvinces to maintain the level of politicalsupport for PPP in light of an improving fiscalposition, and to achieve critical mass byharmonising procurement processes,maintaining deal flow and improving theconsistency of terms.JapanThere has been significant PPP activity inJapan across a number of sectors, includingcentral accommodation, education, health,water and waste management and recreationalfacilities. The first prison deal is currently inprocurement and there is a strong deal flow inother sectors. For instance airports there arethree separate PFI projects at the new HanedaInternational Airport currently being put tomarket: the passenger terminal, cargo terminaland apron. The passenger terminal project willbe close to $1 billion in value.While Japan’s budget deficit was the initialdriver for activity, the PPP market is expectedto grow as more public authorities seek to takeadvantage of the substantial value for moneybenefits generated by PPP projects. A PPPPromotion Law was passed in 1999 andfacilitated the adoption of the PPP approach.A PPP Unit sits within the Japanese CabinetOffice and is responsible for promoting PPPs.There are principally three models for projects:free-standing, joint-venture, and serviceprovisionstructure, where the public sectorpays for the asset and service with a classicperformance related payment stream. The lastcategory dominates the market. A uniquefeature of the Japanese PFI is that theownership of the asset tends to be transferredto the public sector at completion. This iscalled BTO, and represents more than half ofthe Japanese PFI deals to date, primarilybecause BTO offers better VFM given thatpublic sector is free from taxes whereas underPFI the awarding authorities need to pay forthe taxes which will be levied to the privatesector.The financial structure is similar to UK models.In the service-provision PFI projects, thegearing is about 90/10 or 95/5. In free-standingPFI projects, the gearing is around 70/30 to80/20, depending on the demand risk. Targetequity returns are low by internationalstandards. To date, debt has been provided inthe form of senior loans and subordinatedloans. The major players of the senior debtmarket are Japanese and foreign banks,leasing companies and insurers.MexicoMexico has experience of the public andprivate sectors working together underconcession agreements in the airport, rail andwater/wastewater sectors and in arrangementscloser to the PFI/PPP model in the health,prisons, education and roads sectors.PFI activity started formally in 2004 when fourpilot projects were developed: two roads, onehospital and one university. The US$70 millionIrapuato-La Piedad road, funded mainly byavailability-based payments, reached financialclose in 2005. Four road concessions with anestimated value of US$497 million weregranted recently and a US$600 million light railconcession was granted in Mexico City inAugust 2005. In October 2005, there were fourPFI road projects in procurement.There are additional projects in the pipeline inthe health and education sectors and theopportunities to use PPPs in the prisons sectorare being assessed.At the federal level, regulations describing thePPP procurement process have been issuedand some states have passed PPP laws oradapted existing legislation. While thePresident’s Office and the Ministry of Financeactively promote PPPs in Mexico, theMinistries of Finance and Public Worksapprove projects.SingaporeSingapore is a small island state with excellentinfrastructure – the recent introduction of PPPinto government procurement is focused on theneed to achieve better Value for Money ratherthan accelerate infrastructure investment.The Ministry of Finance (MoF) published the“PPP Handbook” in October 2004, providinggeneral guidance on PPP procurement, anddictating that all government infrastructureprojects in excess of $50million should beassessed for PPP. In addition, the MoF havecreated a PPP Advisory Council whose aim isto creates awareness of PPP, draft PPP policyand provide guidance on PPP matters.50Canadian Public-Private Partnershipfinancing gaining traction despitelabor opposition, Standards & Poor’s,October 200556

The Council also oversees the progress ofmajor PPP projects and facilitates resolution ofinter-agency issues. MoF is working closelywith procurer-agencies for each of theupcoming PPP projects with a view tostandardising procurement policy and guidingthe procuring agencies in the selection ofadvisors. A further role played by MOF is tofacilitate any changes that are required to theregulatory framework under which differentGovernment Agencies operate. As PPPprocurement is adopted across more Ministriesor their Statutory Boards, so the frameworkgoverning each agency will develop.A number of key sectors have been identifiedby MOF as suitable for PPP – these includesports and leisure, water treatment, educationand health facilities, expressways, governmentbuildings and large IT infrastructure deals. TwoPPP projects have closed in Singapore to date:the Hyflux Desalination Plant and NEWater UluPandan. The most recent PPP projects tocome to market are: the 5th IncineratorProject, the Singapore Sports and LeisureInfrastructure PPP, the National University ofSingapore (NUS) 6,000 bed hostel, theDefence Science and Technology Agency’sBasic Wing Course fighter training jets, and thePPP procurement of a new campus for theInstitute of Technical Education (ITE).Singapore’s procurement pipeline is strong.The Ministry of Finance are firmly behind theuse of PPP in government procurement,creating the necessary government ownershipof the programme. With the momentum thathas been gained on both water transactions,the 5th Incinerator Project, the Sports HubPPP and NUS and ITE.South AfricaSouth Africa has been actively using PPPstructures since around 2000. All levels ofgovernment – National, Provincial andMunicipal – have participated in PPPs with12 deals signed to date and another 56, ateither the feasibility stage or in procurement.Projects have come to market from a variety ofsectors and have ranged from the more usualaccommodation, prison and health projects tothe more unusual ones such as eco-tourismand the design, build and operation of anAntarctic supply ship.PPP activity and deal flow is supervised by aPPP Unit established within the NationalTreasury and governed by a robust legalframework. A PPP manual has been issued toassist all participants and a standardised set ofprovisions forms the basis of transactions.An important feature of South African PPPprojects is the importance of Black EconomicEmpowerment (BEE). All qualifying biddersmust meet minimum levels of BEE in terms ofequity, management and subcontractorsupport, and BEE scoring forms an importantpart of bid evaluation.Beyond South Africa, PPP activity has recentlystarted to develop as an alternativeprocurement strategy in other parts ofsouthern Africa, for instance Botswana.The necessary legal and regulatoryenvironment, as well as institutional support iscurrently being established. In the meantimetwo pilot office accommodation projects forgovernment departments are now inprocurement. In addition, the Southern AfricanDevelopment Community has completed afeasibility study to develop a new headquartersbuilding as a PPP in Gaborone, Botswana.United StatesUntil recently, the US PPP market was limitedto a handful of projects primarily structured totake advantage of US tax-exempt financingwhich has limited or excluded equityparticipation. However, the market, particularlyin the transport sector, has changedsignificantly in the past 18 months. Thesuccessful sale of the Chicago Skyway to aconsortium including Maquarie and Cintra forUS$1.8 billion in late 2004, the ComprehensiveDevelopment Agreement award toCintra/Zachry for the Trans-Texas Corridor inearly 2005, and the sale of the DullesGreenway to Maquarie in mid 2005, amongothers, has generated considerable interest intransport PPPs across the United States.Oregon, Georgia, New Jersey, New York,Virginia and many others are now taking aserious look at PPPs and launching PPPprogrammes.As in other emerging PPP markets, attentionhas initially focused on road and railinfrastructure development. Tight statebudgets and the opportunity to generate fundseither through selling an asset or transferringthe costs of building and operating the assetto the private sector are key drivers behindPPP development in the US. Political supportis growing as PPPs will allow the federal andstate governments to fund infrastructuredevelopment without relying solely on the taxbase. In addition, states increasingly recognisethat involving the private sector and accessingprivate sector finance will enable them to buildan asset or develop infrastructure significantlyfaster than depending only on traditionalprocurement routes and funding sources.57

4Recurring PPP issuesand solutionsThe use of PPPs raises a number ofcomplex issues and choices, thesolutions to which are often projector country specific. However, thereare a number of fundamental issuesraised time and again across a widespectrum of PPPs. This sectionhighlights a number of these issuesand summarises our recommendedsolutions to address them.Legislative impedimentsto transport PPPsSource: Freshfields Bruckhaus DeringerLegal impediments and uncertaintiesregarding PPPs affect both the public and theprivate sector. Lack of an adequate legalframework is a factor the Rating Agencies takeinto account for their country ratings and willaffect market appetite to bid for or financeprojects in the country concerned.Examples are:• national law imposes complex requirementsfor tendering sub-contracts (e.g. Germany).• changes to the membership of a biddingconsortium are not legally admissible (e.g.Germany).• uncertainties exist about the interpretation ofEU procurement law in the national courts(e.g. Germany in relation to the boundarybetween a services concession as opposedto a works concession).• national law restricts the availability of thenegotiated procedure (e.g. France).• national law restricts the creation or transferof security over assets used in the provisionof public services (e.g. Belgium).• step in rights are not available (e.g. Poland).• national law places restrictions on thepayment of compensation that can beoffered to shareholders or lenders, andon giving indemnities (e.g. Belgium).• there is a lack of broad national enablinglegislation (e.g. Czech Republic).• restrictions are imposed on the ability ofregional or local governments to contract(e.g. Czech Republic).• it is difficult to structure projects which areco-financed from the EU’s Structural andCohesion Funds as PPPs (recently accededStates).• public finance law restricts long-termbudgetary commitments (e.g. Poland).• PPP contracts extend beyond the periodfor which funds can be budgeted(EU Commission).Some countries have taken significant steps tostrengthen or clarify national law to provide aframework for PPP procurement. Examples arethe new PPP law and laws facilitating securitystructures for PPP projects in France, and theF-Model and A-Model structures for PPPprojects in the German road sector and thePPP Acceleration Law passed in Germany inJuly 2005.59

Box 15Summary of Eurostat guidance on accounting treatment for PPPsEurostat recommends that the assetsinvolved in a PPP should be classified asnon-government assets, and therefore berecorded off the balance sheet of thegovernment, if both of the followingconditions are met:1 the private partner bears the constructionrisk; and2 the private partner bears at least one ofeither availability or demand risk.The three key risks are:1 construction risk – where a government’sobligation to start making regularpayments to a private partner withouttaking into account the effective state ofthe assets would be evidence that thegovernment bears the majority of the risks;2 availability risk – a government will beassumed not to bear availability risk if it isentitled to reduce significantly its periodicpayments, “like any ‘normal customer’could require in a normal contract”; and3 demand risk – a government will beassumed to bear this risk where it isobliged to ensure a given level ofpayment to the partner, independently ofthe effective level of demand expressedby the final user, rendering irrelevant thefluctuations in level of demand on thepartner’s profitability.It is acknowledged that in some cases,where risk analysis does not provide a clearoutcome, additional elements in thepartnership contract should also be takeninto consideration. These could include: thenature of the partners, the importance ofgovernment financing, the effects ofgovernment guarantees, or provisionsrelating to the final allocation of the assets.Source: EurostatGovernments are also seeking private sectorhelp to identify legislative uncertainties andimpediments to PPP and to develop bestpractice for the future. The Germangovernment’s federal PPP competence centrehas commissioned reports from the privatesector to assist in future development.PricewaterhouseCoopers has supplied reportson tax issues and on the use of public sectorcomparators. Freshfields Bruckhaus Deringerhas supplied a report on the legal aspects.We recommend that nationalgovernments continue to work toidentify and eliminate legaluncertainties and impediments toPPP. Information sharing betweenEU countries on these issues couldbe facilitated by an EU knowledgeunit. In addition, the private sectorcan and should also contributeactively to this work.Accounting issues and theBalance Sheet treatmentof PPP transactionsAccounting issuesFor some time there had been considerableuncertainty as to what the accounting andstatistical rules relating to PPPs were in an EUcontext, with some Member States having theirown specific rules but with no central guidanceor rules relating to PPPs. In 2001, Eurostatissued broad guidelines on the evaluation ofthe public sector budget and debt impact ofvarious types of project financing mechanisms.Following the rapid increase in the use of PPPstructures, the Committee on Monetary,Financial and Balance of Payments Statistics(CMFB) and Eurostat published a news releasein February 2004 outlining a new set of rules forthe accounting treatment of PPPs. 51 Furtherguidance was included in a specific chapter onPPPs in Eurostat’s ESA95 Manual onGovernment Debt and Deficit published inAugust 2004. 52 The ESA95 version of theEuropean System of Integrated EconomicAccounts (ESA) establishes the conceptualframework to obtain reliable and comparablestatistics for evaluating national accounts data.51Committee on Monetary, Financialand Balance of Payments Statistics(CMFB) and Eurostat news release(STAT/04/18) February 200452ESA95 Manual on Government Debtand Deficit – Long term contractsbetween government units and nongovernmentpartners (Public-PrivatePartnerships) (Part IV), 30 August2004. Available athttp://epp.eurostat.cec.eu.int/cache/ITY_OFFPUB/KS-BE-04-004/EN/KS-BE-04-004-EN.PDF60

The ESA95 guidance provides that assetsinvolved in a PPP can be considered asnon-government assets“only if there is strong evidence that thepartner is bearing most of the risk attachedto the specific partnership”.This follows the ‘substance over form’approach that has been used by a number ofgovernments in developing their ownaccounting regulations for PPPs. The ESA95chapter on PPPs states that PPP assetsshould be classified off-balance sheet forgovernment if both of the following risks aremet:• The partner bears the construction risks.• The partner bears at least one of eitheravailability risk or demand risk.Box 15 provides further information on this issue.Therefore, the EU rules regarding theaccounting treatment of PPPs in nationalaccounts are less restrictive than manygovernments and industry commentatorspreviously feared. However, it is worth notingthat ESA95 covers government accountingonly from an EU statistical standpoint.There is no requirement that nationalaccounting standards (including specific publicsector rules) should follow ESA95. ManyMember States have their own public sectorrules for PPPs which provide more oneroustests, while other Member States do not yethave clear public sector rules for PPPs.There is therefore still some degree ofuncertainty in this area. It is also worth notingthat International Accounting Standardscovering this area are currently being drafted.Balance Sheet TreatmentAt the heart of a PPP lies the transfer of risk inthe project to the private sector. Depending onthe accounting standard applicable to thepublic sector authority in question, as well asthe nature of the risks being transferred, thereis an opportunity for a large number of PPPs tobe off balance sheet for the public sectorauthority. This means that the assets of theproject and the related liabilities do not appearon the authority’s balance sheet nor scoreagainst the overall national debt of the country.In our view, the balance sheet treatment of atransaction is only an indication of the risktransfer involved. It focuses on only a narrowset of risks, and therefore many transactionsare accounted for on balance sheet eventhough optimal risk transfer to the privatesector has been achieved.Many transactions involve the upgrade andrefurbishment of existing assets as well as thedevelopment of new facilities, with the assetstogether forming an integral whole. As a result,the risk share of the PPP transaction itselfwould have to be sufficiently large not only toget the immediate assets of the transaction offbalance sheet, but all the related historicassets whose value may be considerably largerthan the transaction under consideration.This could only be achieved with high levelsof risk transfer, probably way beyond theoptimal level.“It is important to note that, simplybecause a PFI asset is reported ondepartmental or authority balancesheets, that does not mean thatthere has been no effective sharingof risks with the private sector, orthat the PFI project has securedvalue-for-money gains by doing so.The appropriate sharing of risks in aPFI project, leading to their bettermanagement, is an importantsource of its value for moneybenefits. However, the accountingtreatment of PFI assets dependsonly on a subset of the risksinvolved in a project, in particularthe risks of ownership.”Source: HM Treasury “PFI: Meeting the InvestmentChallenge” July 2003For these reasons, balance sheet treatmentshould not, in our opinion, be a key driver forundertaking a PPP. Indeed, to remove thoseobligations from the public sector’s balancesheet entirely would arguably understate thepublic sector’s likely future payments. It is clearthat when the private sector enters a PPPcontract, it has every intention of delivering therequired services and therefore will receive theservice payments from the public sector as due.From the private sector’s viewpoint, they wouldconsider it unlikely that the payments fromgovernment would not pay off the majority offinance raised, both debt and equity. In addition,in the majority of PPPs, the terminationarrangements should the project end earlynormally include a “fair value” provision,whereby the private sector would be paid a sumequal to the assets it has delivered. While this61

may not equal the full value of future payments,it is likely that it would be a very highpercentage of those payments. So in mostcircumstances the public sector is going to payout all or the vast majority of its future servicepayments. Not to disclose these obligations insome way in national accounts could be arguedas being an understatement of the authority’soverall future obligations.This reality has been recognised clearly in theUK. Already 57% of PPP transactions in theUK have been classified on the Government’sbalance sheet. This is because the UK has notused Eurostat but rather UK accountingconventions, where off balance sheetclassification is more difficult to achieve.62While a PPP’s ability to be classifiedas off balance sheet is a clearbenefit to a number of public sectorauthorities, the balance sheettreatment of a transaction shouldnot be the sole determinant ofwhether a PPP solution is the bestform of procurement. Irrespective ofits balance sheet treatment, werecommend that public sectorauthorities consider disclosing theirfuture obligations under PPParrangements.Procurement and StateAid issuesSource: Freshfields Bruckhaus DeringerTransport PPPs take many forms. Some areworks or services (or, rarely, supply) contracts,some are works or services concessions andsome take the form of a joint venture. Differentprocurement rules apply to different forms ofPPP. This can make it difficult for the publicsector to be sure it is satisfying applicablerequirements. And in some member statesbudgetary laws impose additional restrictionson the use of flexible procurement procedures(e.g. the negotiated procedure).In contrast to the new competitive dialogueprocedure, to date the “negotiated procedure”with prior publication of a contract notice (nowprovided for in Article 30 of the new publicsector procurement directive and Article 40 ofthe new utilities directive) has been used forthe procurement of many transport PPPs.It can be used in cases where the nature of theworks or services (or under the new directivesupplies) or the risks involved do not permitprior overall pricing by all parties. It has beenfrequently used for PPPs, before theintroduction of the new competitive dialogueprocedure.The negotiated procedure allows some flexibilityto adjust the PPP arrangements post tender tomeet the concerns of lenders. However, therehas been controversy over its use in somerelatively commoditised PPP sectors in the pastand the availability of the new “competitivedialogue” procedure may lead to a morerestrictive approach to its use in future.The Commission’s new competitive dialogueprocedure (Article 29 of the new public sectorprocurement directive) is intended to be welladapted for many PPPs. The procedureinvolves a dialogue with candidates selectedvia a prequalification process. The dialoguecontinues with all bidders until the publicsector can identify the solution or solutionswhich meet its needs. All private sectorparticipants then tender on the basis of theidentified solutions. This process raises anumber of issues:• strictly, the dialogue only applies for works,services and supply contracts, and then onlyfor “particularly complex contracts”. It is notclear whether all PPPs would be considered“particularly complex contracts”. There is noprovision for the competitive dialogueprocedure to be used in the utilities sector,presumably because the negotiatedprocedure with prior publication of acontract notice is freely available to utilities;• it is expected that the competitive dialogueprocedure will involve substantial costsbecause all bidders are kept in thecompetition for longer. This will be an issuefor private sector participants unless thepublic sector agrees to meet/contribute tobid costs;• many PPPs are highly leveraged and lenderstake a close interest in the PPParrangements. Because of cost concerns,lenders may be unwilling to conduct duediligence during the early stages of thecompetitive dialogue. When they do conductdue diligence at a later stage they may askfor comfort by way of adjustments to thePPP arrangements;“Early experience of the competitivedialogue (in France and elsewhere)is more encouraging than somehad feared. It is quite flexible inpractice, and well advised publicauthorities are trying to overcomethe market’s concerns. Sharingbest practice will be key to itseffective use in future.”Sally Roe, Partner, Freshfields Bruckhaus Deringer

• therefore lenders’ approach of conductingdue diligence at a late stage may give rise toproblems. The public sector’s ability tonegotiate after bids have been submitted isvery limited in the competitive dialogueprocedure. It is not yet clear whether therewill be sufficient flexibility to accommodateconcerns raised by lenders at a late stage;• one possibility is that the use of thecompetitive dialogue procedure will leadlenders to conduct due diligence earlier inthe process. Public sector willingness tocontribute to bid costs may be an issue here.Where there are doubts about the procurementprocedure that should be used, or wherethere have been material adjustments to thePPP arrangements post preferred bidder,it may be difficult to demonstrate that PPParrangements do not involve State Aid –or, where they do, that the aid can be justifiedon public service grounds.Guidance on PPPs for the publicsector should include guidance onprocurement procedures. In ourview, until the competitive dialogueis proven as a PPP procurementroute, such guidance should includeguidance on the availability and useof the negotiated procedure as analternative. The EU should giveclarity over any State aidimplications of post preferredbidder adjustments needed tosatisfy lender requirements.Affordability issuesBecause the public sector pays for PPPs overthe contract term rather than for assets at thetime of commissioning, PPP procurementmakes projects affordable and therefore canaccelerate the number of projects that can bebrought about.So, if a project is too grand in its scope andservice level aspirations, it may ultimatelyprove unaffordable. The private sectorcontractor does have the ability to contourthe payments it receives from government,for instance, reducing them in the early yearsto make a project affordable within currentshorter term spending limits. But this wouldlead to higher payments being required in lateryears to compensate.Public sector authorities should not embark ona PPP if it is clearly not going to be affordable:• If this were clear upfront, the project wouldlack credibility in the market and a strongcompetition would not be forthcoming.• If bids proved to be unaffordable oncereceived, given unrealistic forecasts, theprocuring authority would have to undertakea costly and time-consuming round of bidreiteration as bidders are asked to fit withinaffordability levels.• If a project has to be changed materiallyafter the appointment of a preferred bidderto meet affordability caps, this risks aprocurement challenge from thedisappointed bidder and may also raiseState Aid issues, if the structure of theoriginal transaction were changed materially.• If bids prove a project is unaffordable, it willforce difficult political decisions, for instancedownscaling the size of the project, whichwould be best made earlier so that either theproject procurement would not have beenstarted, or significant time and resourceswould not have been wasted on pricing thewrong project.To minimise these risks, public sectorauthorities should model a prospective shadowprivate sector bid, including life cycle costsand their cost of finance, prior to commencingthe project’s procurement.A shadow private sector bid modelshould be produced prior to startingthe procurement so that theauthority has a realistic view of theaffordability of the project.However, there are limits to the private sector’sability to smooth costs, driven ultimately by theoverall costs of the scheme in question.Included in the overall costs is the privatesector’s cost of finance (both debt and equity).The cost of the project and the cost of theprivate sector’s finance together set a floor tothe level of service payments from thegovernment in each year of the PPP.63

The speed and cost ofPPP procurementThere is a shared view across the public andprivate sectors that the cost and speed of PPPprocurement could be lowered and improved.On lengthier deals, there are examples of bidcosts equalling 3-4% of the value of the capitalexpenditure of that project. In addition, there iscertainly an unquantifiable loss to the publicsector of the delay in many projects that slowPPP procurement brings about.The speed of procurement of projects variesacross Europe. We have seen procurementperiods in excess of 24 months and in somecases between three and five years. Thosewith successive rounds of bids reducingbidders from four to two, then to a best andfinal offer and perhaps further bids thereafter,are likely to be lengthy processes.The competitive dialogue is being transposedinto national legislation in 2005-2006. Itsimpact on the speed and cost of procurementremains to be seen.There are several measures that can be takento reduce the time to procure and its relatedcost:• Ensuring the private sector receives welldefinedoutput specifications and contractswith proven, optimal risk share allocation,right from the start of the procurementprocess.• Ensuring that the public sector has realisticaffordability expectations and can avoid bidreiterations.• Delaying lender involvement, in some casesuntil preferred bidder stage, so that duediligence and negotiations are held in aconcentrated period rather than effectivelytwice over.• Using standardised documentation and riskshare proposals to avoid negotiating largeparts of the transaction when clearprecedents exist. For example in the UK,all PFI contracts must comply with the termsand conditions set out in the latest versionof the “Standardisation of PFI Contracts”document (SoPC3), developed by the UKTreasury with the private sector. 53 All projectspecificderogations must be approved bythe UK Treasury. The SoPC3 aims to providea common understanding of the main risks,consistency of approach and pricing andreduced procurement times and costs.It provides standard terms for previouslycontentious issues, such as the definitionand application of force majeure,compensation on termination by the publicauthority or contractor, dispute resolutionand authority step-in, refinancing gains.• At the outset of each transaction, criticallyassessing the number of bidders andbidding rounds that the project requires.• Setting clear (and sufficiently flexible)rules for the competition at the outset andsticking to them. This will minimise the riskof delays through legal challenge to theprocurement process.• Understanding that “the best is the enemyof the good”. In many deals, the parties keepnegotiating to try to get the very best deal.This process can take several months.Often the parties lack the experience tounderstand when an acceptable deal hasbeen reached and that closing the dealrather than continuing negotiation is ineveryone’s best interest. This is a difficultdecision to make, given how public theoversight and subsequent audit of PPP dealscan be. Therefore procuring authorities mightbenefit from a degree of central governmentexperience and guidance in this area, sothey can understand better when a deal issufficiently acceptable to proceed tofinancial close.In summary we recommend thepublic authority critically assessesthe number of bidders and bidrounds necessary for a particularproject. It is often better to reachfinancial close on a good dealrather than negotiate ad nauseamfor the best deal. A degree ofcentral government guidance toprocuring authorities might helpsuch sensible decisions be made.53The SoPC3 is available on the UKTreasury web site at: http://www.hmtreasury.gov.uk./documents/public_private_partnerships/key_documents/ppp_keydocs_index.cfm64

Building a PPP Centreof ExcellenceCountries that have established a centralPPP unit, for instance within their ministryof finance, have undoubtedly benefited fromthis investment PPP units offer:• Knowledge base – a central source whichcan disseminate details of successful deals,precedents and good procurement practices.• Guidance – a unit can give guidance onparticular risk issues, contract forms, orapproaches to procurement and also act asa sounding board from the private sector fortheir preferred approaches on risk issuesand other procurement matters.• Standardisation – a unit can encourage orimpose a standardised approach to speedup deals and avoid discussion in areaswhere the market has already determined aprecedent.• Deal experience – a unit can give experienceof transactions, structures, market playersand financier requirements to individualprocuring authorities.• Approval of acceptable deals – a unit maybe able to advise authorities when a deal issufficiently attractive for financial close totake place.We consider it would be helpful to have asimilar unit providing an EU-wide service sothat successful precedents can be easilyshared between member states and privatesector parties. Section 3 described theincreasing level of PPP activity and initiativesacross Europe. A central EU unit could ensurethese separate activities are as co-ordinated oraware of each others’ successes as possible.This unit would not have the authority toimpose particular risk share structures or dealprecedents on member states, but certainlywould be able to give guidance anddemonstrate international precedents toprevent member states reinventing the wheelon particular risk issues that have already beenaddressed successfully elsewhere in Europe.It would be difficult, however, to try anddetermine a Europe-wide PPP structure andstandardised terms, given PPP structuresdepend on precedents within a particularcountry, the level of PPP market developmentis different in each state and country riskfactors will affect what is possible in each state.There is clear value in having acentral unit giving guidance andpolicy on PPP issues within eachEU country. Developing an EUknowledge unit would also be veryeffective, but it should only attemptto give guidance and demonstrateprecedents, not impose a commonEU-wide approach.65

The sharing ofrefinancing benefitsAt financial close of a PPP transaction,the private sector company’s debt and equitystructure reflects the future risks of the projectand in particular the higher risks that existat the outset of the project, namely theconstruction and implementation phase.Once a project is successfully implemented,the original finance pricing tends to look highfor the remainder of the project, as its risks arelower. In these circumstances, the need forequity is reduced and the private sectorshareholder has an opportunity to refinance,both lowering its cost of debt as the risks havebeen reduced and possibly increasing debtlevels to finance dividends to shareholdersearlier than originally anticipated.Such refinancing benefits are not a newphenomenon of PPPs. They are a typicalmethod of financial engineering used in allprojects once the riskier initial phase has beencompleted.A key political question is whether or notgovernments should look to share in suchrefinancing benefits. There are a number ofopposing arguments:If a project underperforms, the privatesector endures the loss. Therefore,governments should not share in thefinancial gains should a project bedelivered on time and budget.Otherwise governments only share upside,not risk (except the risk that a PPPcompany fails entirely).Governments should share some of therefinancing gain particularly when it is fargreater than anticipated. With many PPPs,equity is injected very late in theimplementation phase, which means thatan early refinancing might lead toextremely high levels of equity returns, wayabove normal expectations.If governments take a share of refinancinggains, then the upside of a particularproject will be reduced. To compensate forthis, equity investors would increase theoriginal rate of return they require in PPPprojects.Where the public sector has asked for ashare in refinancing gains, there is noevidence that the equity rate of returnrequirements of the private sector haveincreased. Indeed, competition has pushedequity returns in the opposite direction.With no evidence of increased equityprices, the public sector can thereforeenjoy some refinancing gains withoutadversely affecting equity pricing.If the government takes any material sharein refinancing gains, the incentive on theprivate sector to refinance will be lost andtherefore neither party will enjoy thereduction in finance costs that otherwisewould have been obtained.This is an argument for ensuring the publicsector share is not excessive, but it does notinvalidate the case for a share at some level.66

There is no one correct answer as to theright level of refinancing share the publicsector should take, if any. Clearly the greatershare it takes, the less incentive there will beto refinance, so the opportunity for bothparties to benefit might be lost. The standardrefinancing share in the UK of 50% eachsounds, in principle, an equitable sharingarrangement. However, it is not yet proventhat this level is always sufficient to provideadequate incentive for the private sector torefinance.Some public authorities have givenconsideration as to whether they should receiveany share in the gains on the sale of equitystakes in PPP projects. Similar arguments forand against to those above can be made; butfor equity the ramifications of an incorrect policywould be more severe, as restrictions on equitysales could lead to a very big disincentive toinvestors and therefore a significant reduction incapital available to the PPP market. Authoritiesneed to consider whether they require theoriginal shareholders in a project to remain asshareholders for an initial specified period toensure access to the expertise they deliver,limiting the short term ability of shareholders tosell their equity stakes.In our view the market can accept adegree of debt refinancing sharing,without there being an adverseeffect on the equity rate of returnrequired by PPP investors. Thepublic sector must ensure that it isnot disincentivising the market bydemanding too onerous arefinancing share or attempting totake a share in equity sales, thatcould lead to a drying up ofavailable PPP capital.67

“At a European level, we need to ensure that we capturethe lessons learned from one project and hand them onto the next, across European boundaries.”Rt Hon Alistair Darling MP, UK Secretary of State for Transport at the2005 PPP Transport Summit

5Recommendationsand ConclusionsThe investment challenge faced bygovernments in the modernisation ofpublic infrastructure and servicescontinues as a focus for Europeanagendas. The political and publiccontroversy of past years has lessenedand PPPs are now more generallyaccepted as a viable means ofprocuring and delivering this requiredmodernisation and they are beingincreasingly adopted. There is strongdeal flow in a significant number ofcountries within Europe, increasinguptake in project procurement incountries where activity has previouslybeen low, and increasing interest in PPPmodels across the rest of the region.And more and more countries areestablishing dedicated PPP units orenacting legislation to assist instreamlining the procurement process.However, PPPs are complex andrecurring issues continue to hinder theirdevelopment. Given the potential whichPPPs have for the delivery of theseessential public services we believe it isvital to share experiences, look atprecedents for the market, and findresolutions to key impediments, thusenabling the advancement of PPPsacross Europe.69

We make the following recommendations for streamlining theprocurement process:■ Build national PPP Centres of ExcellenceWhile an EU Knowledge Unit would be effective in promoting the use ofPPP approaches, it should not impose a common EU-wide approach.There is clear value in having a central unit giving guidance and policy onPPP issues within each EU country. Countries that have established acentral PPP unit have benefited from this investment as PPP units alsooffer deal experience and can promote standardisation.■ Balance Sheet treatment should not be a key driverfor undertaking a PPPThe balance sheet treatment of a transaction should not determinewhether a PPP solution is the best form of procurement. Irrespective ofits balance sheet treatment, we recommend that public sector authoritiesdisclose their future obligations under PPP arrangements.■ The EU Commission should provide guidance onPPPs for the public sector which includes guidanceon procurement proceduresUntil competitive dialogue is proven as a PPP procurement route (and themajority of consultation responses suggest that competitive dialogue isill-suited to PPP procurement), such guidance should include guidance onthe availability and use of negotiated procedure. The EU Commissionshould also clarify its position on the State Aid implications of postpreferredbidder adjustments to satisfy lenders.■ Shadow private sector bid modelPublic sector authorities should model a prospective shadow private sectorbid, including life cycle costs and costs of finance, prior to startingprocurement so that the authority has a realistic view of the project’saffordability.■ Streamline speed and cost of procurementThe public authority should critically assess the number of bidders and bidrounds necessary for a particular project. It is often better to reach financialclose on a good deal rather than endlessly delay a project for the sakeof a “best deal”.70

■ Create an EU Knowledge UnitNational governments should continue to work to identify and eliminatelegal uncertainties and impediments to PPPs. However, the creation ofan EU Knowledge Unit would facilitate sharing of information andbest-practice between EU countries. It could also give guidance anddemonstrate international precedents for delivering projects so thatMember States have the benefit of the rest of Europe’s experience.The private sector should actively contribute to this Unit’s work.■ Sharing refinancing benefitsWe believe there should be a degree of debt refinancing sharing betweenthe public and private sectors. However, the public sector must ensure thatit does not disincentivise the market with an inequitable share of therefinancing, and we do not recommend any material sharing in equity salesproceeds as this could lead to a drying up of available PPP capital.ConclusionThe modernisation of public services and infrastructure is a promise governmentshave made to their citizens. We believe that Public Private Partnerships offer aviable alternative to traditional procurement methods and we would like to seethe public and private sectors doing more business together. Delivering the PPPpromise means delivering solutions that fund new roads, improve rail services,modernise hospitals, and build new schools and social housing, more quickly andefficiently, so that together we can close the service and infrastructure gap thatcurrently exists within and across Europe.71

Appendix ADeveloping PPPs across Europe and the trans-Europeantransport networksThe ‘infrastructure gap’ in Europe has beenrecognised for many years. Central to theEuropean Commission’s efforts to improveinfrastructure investment and encouragegrowth have been the Trans-EuropeanNetworks (TENs or TEN-T) programme as wellas the Cohesion and Structural Fundsprogrammes. The concept of TENs emergedtowards the end of the 1980s, as it becameclear that the realisation of the Single Marketwould require a modern and efficientinfrastructure to enable free movement forgoods, persons and services. CouncilRegulation 2236/95/EC of 18 September 1995laid down the general rules for Communityfinancial assistance for the TENs. The followingyear, the European Parliament and the Councilset out the general principals of the TENs,broad areas for action and nominated fourteenpriority projects in their decision 1692/96/EC of23 July 1996.By 2003, little progress had been made andthe investment need had increased. A HighLevel Group led by Karel van Miert,commissioned to assess the delivery of theTEN-T programme, estimated that the totalcost of all trans-European transport network(TEN-T) projects would be more than €600billion. 54 It was clear that renewed efforts wouldbe required to deliver the 75,200 km of roads,78,000 km of rail, 330 airports, 270international sea ports and 210 inland ports aswell as the traffic management systems,navigation and user information systems whichalso form part of the TEN-T network. 55 At thesame time, it was increasingly recognised atthe EU-level that private sector involvement viaa PPP structure could help deliver theinfrastructure needed.In 1996, it was estimated that €400 billionwould be needed by 2010 to deliver theproposed trans-European multi-modaltransport network, generally referred to asTEN-T. The fourteen priority projects identifiedwould require €125 billion over the same period.54European Commission (2003) Highlevel group on the Trans-EuropeanTransport Network, chaired by KarelVan Miert (also referred to as the ‘VanMiert Report’)55“TEN Transport Policy and Projects inthe Future”, Presentation by E.Thielmann, Head of Division, DGTREN, January 200572

56The trans-European transportnetwork from aspiration to reality,January 2004. Available on the PwCwebsite athttp://www.pwc.com/extweb/pwcpublications.nsf/docid/EB1D7379BFE0838380256E29004DB47657“EU Transport Policy: towards globalgrowth and sustainable mobility”,speech by Loyola de Palacio, formerCommissioner for Energy andTransport, September 200358European Commission (2003) Highlevel group on the Trans-EuropeanTransport Network, chaired by KarelVan Miert (also referred to as the ‘VanMiert Report’)59A European Initiative for Growth:Investing in Networks and Knowledgefor Growth and Jobs, Final Report tothe European Council, COM (2003)690 final. Available athttp://europa.eu.int/eurlex/lex/LexUriServ/site/en/com/2003/com2003_0690en01.pdfIn 2004, PwC published two papers thatexamined the issues of delivering the TEN-Tinfrastructure and leveraging private sectorfunds and expertise via PPP structures:• “The trans-European Transport Network:from aspiration to reality” discusses theissues and requirements for the delivery ofthe TEN-T network. PwC maintains thatsuccessful implementation is crucial to theEU’s social cohesion and to realising thebenefits of a single market and that theCommission should be enabled to take aleading role in stimulating investment andleveraging funding from every possiblesource.• In “Developing Public Private Partnerships inNew Europe”, PwC maintains that the EUshould adopt a more structured,comprehensive approach to thedevelopment of PPPs. This will assistMember States to take full advantage ofalternative approaches to procurement,which are essential for tackling infrastructurechallenges across Europe. “DevelopingPublic Private Partnerships in New Europe”argues that while prime responsibility forPPP policies lies with Member States, thereis an important role the EU must play in thedevelopment and procurement of PPPs.The trans-Europeantransport network: fromaspiration to reality(February 2004) 56Review and progress updateIn 2003, the European Commissioner forEnergy and Transport admitted that financingthe trans-European network had provedchallenging. By September 2003, only 20% ofthe projects identified in the 1996 guidelineshad been completed. 57A High Level Group led by Karel van Miert wascommissioned to draw up a revised list ofpriority projects. The 29 priority projects wereexpected to require funding of around €235billion between 2003 and 2020 (Decision884/2004/EC). More than €110 billion of thisrelated to the original 14 priority projects.Overall, it was estimated that the total cost ofall trans-European transport network (TEN-T)projects would be more than €600 billion. 58The extended list took full account of theplanned enlargement of the EU to 25 memberstates from 1 May 2004.The van Miert High Level Group’srecommendations were subsequently includedin the European Initiative for Growth, 59launched by the December 2003 EuropeanCouncil in Brussels as an important step in theimplementation of the Union’s Lisbon Agendato improve competitiveness, employment andthe enlarged Union’s growth potential. TheInitiative called on the EU member countrygovernments to take action in two broadareas: the trans-European networks (TENs)including transport, telecommunications andenergy; and innovation, research anddevelopment.The investment requirements were in starkcontrast to the EU TENs budget line whichtotalled only €4.2 billion for the 2000-2006financial perspective. With an average of€16 billion contributions each year frommember countries and estimated EU fundingof only €2.5 billion, the network would take 30years to complete.In light of the continued under-investment andreports and proposals emerging from the HighLevel Group and the Commission, PwCprepared a paper on the key issues thatneeded addressing to increase the rate ofprogress and some recommended solutions.ChallengesThe key challenges identified:• There had been a tendency to deliver TEN-Tprojects that were relatively simple andwhich focused on meeting domesticrequirements.• No form of cost-benefit analysis had beenapplied when selecting the original priorityprojects. The cost-benefit analysisundertaken for individual projectstraditionally focuses on national costs andbenefits rather than taking a wider EUperspective.• Cross-border projects had been particularlyaffected by delays, reflecting the lack ofconvergence between adjacent countries’political and commercial interests andbetween the investment burden andbenefits.• Private sector funding had largely beenlimited to government guaranteed bonds.• The Commission had been unable to helpdeliver projects by contributing significantfunds as EU rules limit spending from theTENs budget to 10% (Council Regulation2236/95) of a project’s overall cost, therebylimiting the funding available.73

PwC Recommendations to realisethe EU-wide benefits from theTEN-T priority projects more quicklyincluded:Leadership from Commission levelThe Commission should champion a clearlydefined implementation plan and methodology.Both the public and private sectors need toco-ordinate their efforts by prioritising projectsusing objective criteria. Pilot projects might beused to create a proven framework forsubsequent projects.Maximising the use of funding available atCommission levelThe Commission should be given the ability tomake commitments from more than onebudget period. The Commission should allowits funds to be used for “availability payments”as well as capital grants, which would allowassets to be procured through a PPP structure.Measuring EU-wide benefitsEU-wide costs and benefits should beevaluated in appraising investment options.Where the Commission is unable to fund allprojects delivering EU-wide benefits, the abilityto assess the amount of benefit per € investedby the Commission would provide a basis forprioritising its commitments.Leveraging in private sector financeThe private sector must be considered as asource of funds, possibly through PPPs.Efficiencies and risk transfer generallycompensate for the higher rate of returnpayable on debt and equity provided by theprivate sector compared to the cost ofborrowing by the public sector.• In March 2005, the Commission set up ajoint Commission – Member State workinggroup to examine in more detail the TEN-Tand other EU grants available for transportinfrastructure investment. The workinggroup, a subset of the Informal PPPExchange Group run by DG TREN,is currently considering what action isneeded and possible in order to increasegrant timing flexibility and to better combinegrants and private finance.• In April 2005, the Commission announced itsintention to appoint five coordinators for themain projects included in the Trans EuropeanNetwork (TEN) programme:• Karel van Miert:Berlin – Verona – Palermo corridor• Loyola de Palacio:Lyon – Ljubljana – Budapest link• Etienne Davignon:Lisbon – Tours HSL• Peter Balazs:Paris – Strasbourg – Vienna –Bratislava rail link• Pavel Telicka:‘Baltic’ rail link from Warsaw to HelsinkiWhile this would suggest a growingmomentum behind the TEN-T priority projectsand an increasing consideration of the PPPapproach, combined with greater leadershipfrom the Commission, there are still greateropportunities for project prioritisation andgreater use of PPPs.Progress Update• By the end of 2003, only three 60 of thefourteen priority projects identified in 1994had been completed.• EU-wide benefits are now included in theappraisal criteria for TEN-T support and EUaid may reach up to 20% of the totalinvestment cost for projects of cross-borderEuropean interest which contribute to theintegration of the internal market 6160Proposal for a Regulation of theEuropean Parliament and of theCouncil determining the general rulesfor the granting of Communityfinancial aid in the field of the trans-European transport networks andenergy and amending CouncilRegulation (EC) no. 2236/95presented by the Commission, COM(2004) 475 final. Available athttp://europa.eu.int/eurlex/lex/LexUriServ/site/en/com/2004/com2004_0475en01.pdf61Regulation EC 807/2004 of theEuropean Parliament and of theCouncil amending Council RegulationEC 2236/95 laying down general rulesfor the granting of Communityfinancial aid in the field of trans-European networks. Available athttp://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexplus!prod!DocNumber&lg=en&type_doc=Regulation&an_doc=2004&nu_doc=80774

62Developing Public Private Partnershipsin New Europe, May 2004. Availableon the PwC website athttp://www.pwc.com/extweb/service.nsf/docid/A2F9309C016FAADD80256EA6004F516C63Communications from theCommission Feasibility report onEU loan guarantee instrument forTEN-Transport projects, COM (2005)75 final and Concept for the design ofan EU loan guarantee instrument forTEN-Transport projects, COM (2005)76 final. Commission Staff WorkingPaper SEC (2005) 323Developing Public PrivatePartnerships in NewEurope (May 2004) 62Review and Progress UpdateThe May 2004 enlargement of the EuropeanUnion increased the EU population by 20%,the surface area by 23%, but the EU GDP byless than 5%. Approximately 25% of the totalEU population live in areas where GDP percapita is lower than 75% of the Communityaverage. The challenge of bringing the quantityand quality of the infrastructure of the newmember countries up to the EU average isconsiderable. The paper identified andanalysed some of the major issues relevant tothe development of PPPs across the enlargedEU. In particular, it considered the effectswhich the actions, and inactions, of the EUand its institutions have on the development ofPPPs in Europe and the ability of governmentsto use private finance as a means of cofinancingEU grant-funded projects.Key Issues• Poor understanding of the PPP approach atEU-level so PPP investment opportunitiesare not exploited.• Lack of institutional capacity in manymember countries which impedes thedevelopment, procurement andimplementation of the PPP approach.• Uncertainty as to how current EU legislation,rules and procedures interact with PPPs.• The EU has advocated the use of PPPsin the transport sector and as co-financingfor EU-grant funded projects. However,there are few examples of projects whichcombine EU grant funding with privatefinance. Uncertainty as to how such projectsshould be procured; additional complexityof combining PPP procurement requirementswith the grant requirements; and the lackof precedents and support, have affectedthis area.PwC Recommendations included:EU PPP Group The Commission should set upa cross-EU PPP Group, supported by a smallCentral Unit, to improve knowledge andunderstanding of PPPs at EU level, as well asto disseminate best practice.Capacity building, information and trainingThe Commission should fund institutionalcapacity building and knowledge for PPPswithin member countries, includingcomparative studies on the actual benefits ofPPPs, practical training and secondmentsbetween PPP units of member countries.EU approach to PPP development The EUshould seek to interpret and clarify the waythat existing (and future) rules and regulationsinteract with PPP procurements and theirdevelopment.Co-financing EU grants The EU shouldaddress the issues involved in combining EUfunding and grant requirements with privatesector finance and PPP approaches.Progress Update• A formal PPP Group or Central PPP Unit hasyet to be established.• The Commission’s Green Paper on PPPsand Community Law on Public Contractsand Concessions presented by the EuropeanCommission in April 2004 sought to showthe extent to which Community rules applyto the phase of selection of the privatepartner and the subsequent phase, and toanalyse the extent to which the Communityframework is suited to PPPs.• While discussions on the issue of EU fundingof capacity building and knowledgedissemination in member countries continue,there have been examples of direct bilateralcooperation between countries. For example,an official from North Rhine Westphalia tookup a short-term placement at PartnershipsUK, formed in 2000 as a PPP between the UKGovernment and Treasury and the privatesector to provide a centre of PPP expertise tothe public sector as well as support toindividual PPP transactions and programmes.• Discussions around the private sectorco-financing of EU grants continue.A working group is currently reviewing theTEN-T financial regulations and expects topropose changes to the current regulationsduring the UK Presidency of the EU.• An EU loan guarantee instrument for TEN-Tprojects was announced in March 2005 bythe Commission which will guarantee part ofthe debt of priority cross-border transportinfrastructure projects. 6375

Appendix BEIB funded PPP projects by country and sector(total projects funded to 8 June 2005)AmountCountry Date Project Name Sector (€million)Austria 2003 Grazer Fracht Terminal (PPP) A&B Transport 40.0Austria 2004 Europass LKW Maut PPP Transport 47.6Denmark 1990-1996 Great Belt Link 2 A Transport 2,498.2Denmark 1998-2001 Oresund Link Transport 1,042.5Germany 1997 Elbe Tunnel Fourth TubeHamburg A B 2 C Transport 355.5Germany 1999-2000 Engelbergbasistunnel PPP A B Transport 172.4Germany 2002 Warnowquerung Rostock A Transport 104.9Germany 1999-2001 Weser Tunnel A B Transport 98.2Greece 1996-1998 Athens International Airport Transport 465.0Greece 1999-2000 New Athens International Airport D E Transport 534.3Greece 1996-2002 Essi Motorway Transport 1,027.4Greece 2000-2003 Rion-Antirion Bridge A B C Transport 370.0Ireland 2003 M4 PPP Toll Motorway Transport 78.0Ireland 2004 M1 Dundalk PPP Motorway (Ireland) Transport 65.0Ireland 2004 M8 Fermoy PPP Toll Motorway Transport 64.5Ireland 2003 Irish Schools PPP Health, Education 38.3Ireland 2003 National Maritime College PPP Health, Education 29.2Italy 2005 Oespitale Di Mestre Health, Education 70.0Italy 2004 Acqua Di Arezzo Water, Sewerage 44.0Netherlands 2001 HSL Zuid PPP Transport 400.0Netherlands 2004 N31 Motorway PPP Transport 25.0Netherlands 2003 Delfland PPP Wastewater Treatment Water, Sewerage 125.0Norway 2004 E39 Motorway PPP Transport 74.9Portugal 1999 Chaves Motorway Transport 450.0Portugal 2000 Costa De Prata Motorway Transport 190.0Portugal 1998-2000 Leiria Motorway Transport 208.9Portugal 2001 Scut Algarve Transport 130.0Portugal 1999 Scut Beira Interior A Transport 358.3Portugal 2001 Scut Beira Litoral/Beira Alta Transport 470.0Portugal 2002 Scut Grande Porto Transport 300.0Portugal 2000 Scut Interior Norte Transport 324.3Portugal 1995 Sd Tejo Rd Bridge(BEI/ED)(PTE)(DEM1) (PTE2) Transport 305.9Portugal 2004 Litoral Centro Motorway Transport 263.9Portugal 1999 Aguas De Santa Maria Da Feira Water, Sewerage 80.076

AmountCountry Date Project Name Sector (€million)Spain 2001 Autopista Leon Astorga Transport 42.0Spain 2000-2003 Autopista M-45 A&B Transport 149.3Spain 2001 Autopistas A6 Y Avila Transport 100.0Spain 2000 Autovia Del Noroeste – Murcia A Transport 12.5Spain 2002 Autovia Pamplona Logrono (DBFO) Transport 175.0Spain 2004 Metro De Sevilla DBFO-AFI – A Transport 50.0Spain 2000-2002 Metro Sur Madrid (PPP) A B C Transport 1,000.0Spain 2002 Radial 2 De Madrid (DBFO A B (Caja Mad) Transport 120.0Spain 2003 Radial 4 De Madrid (DBFO) Transport 360.0Spain 2003 Radiales 3 Y 5 De Madrid (DBFO) – A & B Transport 300.0Spain 2001 Tranvia Barcelona Baix Llobregat (DBFO) Transport 136.1Spain 2003 Tranvia Barcelona Glories – Besos DBFO Transport 125.1Spain 1999 Tuneles De Artxanda A Transport 40.0Spain 2002 Aguas De Sevilla (PPP) Water, Sewerage 60.0Spain 2004 Autovia De Los Vinedos Transport 143.0Sweden 1995-2001 Oeresund Link Transport 722.2UK 2000 A13 DBFO Road Transport 150.4UK 2003 A1 DBFO Motorway Transport 167.2UK 1996 A1 – M1 DBFO Road Transport 106.2UK 1996 A1(M) & A 417/419 DBFO Road Transport 131.0UK 2000-2001 AAE European Rail Freight Wagons Transport 135.0UK 1996 Channel Tunnel Rail Link Transport 408.7UK 2003 London Underground PPP (BCV) (SSL) Transport 1,339.2UK 1997 M6 DBFO Road Transport 121.9UK 1998 Porterbrook – NIFT I Securitisation Transport 172.1UK 1992-1995 Second Severn Crossing 2 3 4 Transport 176.1UK 1993-1994 Skye Bridge Transport 16.9UK 1998 Welsh DBFO Roads – A55 Transport 81.2UK 2005 DLR Woolwich Arsenal Extension Transport 147.6UK 2003 Blackburn Hospital PPP Health, Education 72.1UK 2001 Dudley Group of Hospitals PPP Health, Education 113.0UK 2001 Edinburgh Schools PPP Health, Education 58.8UK 1998 Falkirk Schools (Scotland) Health, Education 56.3UK 2000 Glasgow Schools PPP Health, Education 166.1UK 2004 Hbos PPP Framework Loan Health, Education 146.1UK 2001 Kirklees Schools PPP Health, Education 40.4UK 2004 North East London Hospitals PPP Health, Education 141.9UK 2003 Rotherham Schools PPP Health, Education 69.5UK 2000 Sheffield Schools PPP Health, Education 46.5UK 2004 Manchester Hospitals PPP Health, Education 251.2UK 2004 Cornwall Schools PPP Health, Education 34.9UK 2004 NHS Lift Primary Healthcare Health, Education 223.6UK 2005 Newcastle Hospitals PPP Health, Education 167.0UK 2005 North Lanarkshire Schools PPP Health, Education 103.4UK 1998 London Underground Power Energy 187.2UK 2002 Seeboard Powerlink Energy 71.1Total 19,489.077

Appendix CSummary of PPP projects co-financed by theCohesion Fund, Structural Funds or ISPASource: European Commission, October 2005Country Project Name Year Sector Project Value(€) Type of Grant Grant (€)Czech Republic Karvina Sewerage 2000 Environment ISPAGermany Local Airport Kassel-Calden 1991-2003 Transport 7,500,000 340,000Great Britain Actnow, Cornwall 2002-2005 Telecommunication 20,000,000 Structural 8,400,000Fund (ERDF)Great Britain Salford Quays Manchester 1997-2000 Transport 189,000,000 Structural 16,100,000(including Metrolink extension)Fund (ERDF)Great Britain West Lothian College 1999-2001 Education 27,000,000 ERDF 2,800,000– ScotlandGreat Britain Stirling Further 1996- Education 6,000,000 ERDF– Scotland Education CentreGreat Britain North Ayrshire College 1998-2000 Education 13,000,000 ERDF– Scotland Campus, KilwinningGreece Athens International Airport 1976-2001 Transport 2,155,000,000 Cohesion Fund 223,139,000Greece Athens Ring Road 1992-2000 Transport 1,300,000,000 Cohesion Fund N/aIreland Luas Light Rail in Dublin 2000-2006 Transport 1,763,000,000 Structural 150,000,000Fund (ERDF)Ireland Limerick main 1999-2004 Environment Cohesion Fund 107,000,000drainage (stage III)Ireland Cork main drainage (stage III) 2000-2004 Environment 74,000,000 Cohesion Fund 44,700,000Ireland Dublin region 1999-2003 Environment 184,500,000 Cohesion Fund 133,300,000waste water treatmentIreland Dublin region solid waste 2001 – expected Environment Cohesion Fund 6,900,000management infrastructures 2005/6Ireland M1 Drogheda by-pass 1999-2003 Transport 254,000,000 Cohesion Fund 52,180,000Portugal Tagus bridge 1993-1998 Transport 897,000,000 Cohesion Fund 311,000,000Portugal North Concession 1997-1999 Transport 1,400,000,000 170,000,000Poland Poznan EnvironmentPoland Czajki Environment ISPAPoland N19 road Planned for Transport 152,500, 000 ERDF N/a2007 onwardRomania Bucharest Waster Water 2004-ongoing Water and 108,000,000 ISPA 70,395,000Treatment Plant, Stage 1 Wastewater from ISPASlovak Republic Trencin Water System 2000-2004 Water and 7,936,732 ISPA 3,968,366WastewaterSpain Perpignan – Figueras 2004-2009 Transportation 952,000,000and France Rail Concession78

GlossaryAccession Countries The 10 New Member States prior to their accession on 1 May 2004CEECEE Member StatesCentral and Eastern EuropeThe Accession Countries, less Cyprus and MaltaCandidate Countries Bulgaria and RomaniaCMFBCommittee on Monetary, Financial and Balance of PaymentsStatisticsCohesion Fund Countries The four Member States which were eligible for Cohesion Fundingprior to 1 May 2004 – Greece, Portugal and Spain and Ireland up to31 December 2003Competitive Dialogue as defined in Article 1.11 (c) of the Classical Directive TENs:Trans-European NetworksDBFODesign Build Finance and OperateEBRDEuropean Bank for Reconstruction and DevelopmentEIBEuropean Investment BankERDFEuropean Regional Development Fund (part of Structural Funds)ESA95European System of AccountsEU 15The Member States of the EU prior to the accession of the NewMember States on 1 May 2004 - Austria, Belgium, Denmark, Finland,France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands,Portugal, Spain, Sweden, United Kingdom.EurostatThe Statistical Office of the European CommunitiesGalileo projectAn EU sponsored project to develop a satellite radionavigationsystem for civil useGreen PaperEU Consultative document on PPPs and Community Law on PublicProcurement and ConcessionsISPA Instrument for Structural Policies for Pre-Accession (See Appendix B)Member StatesThe 25 member states of the EU – Austria, Belgium, Cyprus, CzechRepublic, Denmark, Estonia, Finland, France, Germany, Greece,Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta,Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden,United Kingdom.Negotiated Procedure as defined in Article 1. 11. (d) of the Classical DirectiveNew Member States The 10 new member countries which joined the EU on 1 May 2004 –Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta,Poland, Slovakia, Slovenia.Open Procedureas defined in Article 1. 11. (a) of the Classical Directive – “Openprocedures means those procedures whereby any interestedeconomic operator may submit a tender”PFIThe Private Finance Initiative – a particular form of PPP in the UKPHARE One of the three pre-accession financial instruments (see Appendix B)PPPRestricted ProcedureState AidTENsPublic Private Partnershipas defined in Article 1. 11. (b) of the Classical Directive – ‘Restrictedprocedure’ means those procedures in which any economic operatormay request to participate and whereby only those economicoperators invited by the contracting authority may submit a tenderas defined in Article 87 of the Treaty establishing theEuropean CommunityTrans-European Networks79

ContactsEuropePaul Davies+44 20 7804 5208paul.davies@uk.pwc.comAustriaBernhard Haider+43 1 501 88-2900bernhard.haider@at.pwc.comLithuaniaVidas Venckus+370 5 239 2300vidas.venckus@lt.pwc.comGlobalTony Poulter+61 2 8266 5937tony.poulter@au.pwc.comCharles Lloyd+44 20 7804 5130charles.lloyd@uk.pwc.comPierre Coindreau+33 1 56 57 60 60pierre.coindreau@fr.pwc.comKathryn Eustice+44 20 7212 4874kathryn.m.eustice@uk.pwc.comBelgiumThomas Tagnit+32 2 710 4303thomas.tagnit@pwc.beBulgariaAlbena Markova+359 2 93 55 200albena.markova@bu.pwc.comCyprusTassos Procopiou+357 225 55000tassos.procopiou@cy.pwc.comLuxembourgLuc Henzig+352 49 48 48 1luc.henzig@lu.pwc.comMaltaJohn L Bonello+356 21 247000john.l.bonello@mt.pwc.comNetherlandsJanko Lindenbergh+31 20 568 6831janko.lindenbergh@nl.pwc.comAustraliaMario D’Elia+61 3 860 3679mario.delia@au.pwc.comCanadaJohn Casola+1 416 815 5135john.casola@ca.pwc.comJapanYumiko Noda+81 3 6266 5664yumiko.noda@jp.pwc.comCzech RepublicMiroslav Singer+420 2 5115 1231miroslav.singe@cz.pwc.comNorwayThomas Frogner+47 23 16 06 39thomas.frogner@no.pwc.comMexicoFrancisco Ibañez+52 55 5263 6085francisco.ibanez@mx.pwc.comDenmarkAnders Madsen+45 39 45 39 45anders.c.madsen@dk.pwc.comPolandOlga Grygier+48 22 523 4685olga.grygier@pl.pwc.comSingaporeAmitava Guharoy+65 6236 3388amitava.guharoy@sg.pwc.comEstoniaTeet Tender+372 614 1892teet.tender@ee.pwc.comPortugalAntonio Rodrigues+351 21 359 9314antonio.rodrigues@pt.pwc.comSouth AfricaMohale Masithela+ 27 11 797 5250mohale.masithela@za.pwc.comFinlandVesa Salmela+ 358 9 6129 1140vesa.salmela@fi.pwc.comRomaniaLilian Iordache+40 21 202 8640lilian.iordache@ro.pwc.comUnited StatesPeter Raymond+1 703 918 3281peter.d.raymond@us.pwc.comFrancePierre Coindreau+33 1 56 57 60 60pierre.coindreau@fr.pwc.comSlovakiaPeter Mitka+420 2 5115 1231peter.mitka@cz.pwc.comGermanyMartin Weber+49 69 9585 5921martin.weber@de.pwc.comSloveniaFrancois D Mattelaer+386 1 475 0100francois.d.mattelaer@si.pwc.comGreeceNicholas Peyiotis+30 210 6874 452nicholas.peyiotis@gr.pwc.comSpainGuillermo Masso+34 91 568 4371guillermo.masso@es.pwc.comHungaryMargaret Dezse+36 1 461 9220margaret.dezse@hg.pwc.comSwedenMats Edvinsson+46 8 555 33 706mats.edvinsson@se.pwc.comIrelandAidan Walsh+353 1 662 6255aidan.walsh@ie.pwc.comSwitzerlandUrs Bolz+41 31 306 8241urs.bolz@ch.pwc.comItalyFabrizio Cigliese+39 06 57 1 7291fabrizio.cigliese@it.pwc.comTurkeyNuran Durmaz+90 212 326 6060nuran.durmaz@tr.pwc.comLatviaArvids Kostomarovs+371 709 4400arvids.kostomarovs@lv.pwc.comUnited KingdomJon Sibson+44 20 7804 8068jon.sibson@uk.pwc.com80

PricewaterhouseCoopersAdvisory Services in Infrastructure,Government & Utilities(www.pwc.com/igu) providesthe world’s leading financial,procurement, tax and accountingservices to both the public andprivate sectors on PPP projects.Voted the Thomson FinancialGlobal Advisor of the Year 2004,our specialist team of over460 professionals in 53 countrieshave acted as lead financialadvisers more than 220 completedprojects, across the range ofindustry sectors, with a totalvalue in excess of US$255 billion.PricewaterhouseCoopers(www.pwc.com) providesindustry-focused assurance,tax and advisory services for publicand private clients. More than120,000 people in 139 countriesconnect their thinking, experienceand solutions to build public trustand enhance value for clients andtheir stakeholders.©2005 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited,each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP.

Your worldsOur people*