The impact of PPPs contracting on Portugals fiscal position and what can be done about it

Presentation at the 4th Annual OECD Symposium on PPP Working Party of Senior Budget Officials (SBO)

Professor Ricardo Ferreira Reis

Introduction
Portugals current Public Finances situation. The Portuguese experience with PPPs. PPPs in the Memorandum of Understanding with

the EU/ECB/IMF (The Troika)

The future of PPPs in Portugal: What solutions? The OPPP at the University: Our mission, organization and work.

Public Finances in Portugal

Public Finances in Portugal: current situation

Significant increase in public spending not followed by economic growth Permanent deficits around 5% before 2008 financial crisis After 2008, fast fiscal deterioration High levels of public debt with an increase in the interest rates Unsustainable fiscal situation

Public Finances in Portugal

That have produce significant public deficits
-2.0% 1996 -3.0% 1997 1998 1999 2000 2001 -2.7% -2.9% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -2.9% -3.0% -3.4% -4.3% -4.1% -3.1% -3.6% -4.0% -4.5%

-3.4% -3.5% -4.0% -4.5% -5.0% % of the GDP

-6.0%

-5.9%

-5.9%

-7.0%

-7.3%
-8.0% Maastricht benchmark official deficit -9.0% deficit with no one off ops troika objectives -10.2% -9.0% -9.8%

-10.0%

-11.0%

Sources: adapted from the Parliaments National Budget Technical Unit (UTAO) report, INE data, the 2012 National Budget, and Ministry of Finance reports and OPPP estimates

Public Finances in Portugal

That lead to a substantial increase in the public debt
120.0

110.5
110.0 101.9 100.0 90.0 80.0 93.3 83.0

106.8 105.0

101.8

70.0
59.2 60.0 50.0 40.0 61.7 58.3 54.4 50.4 49.6 48.7 51.0 53.7 55.1 56.5

63.9

62.7

65.3

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: INE (Portuguese Statistics Bureau), forecasts from 2012 onwards taken from the Portuguese Government official forecasts

Public Finances in Portugal

Pro-cyclical deficits, with significant decrease in revenues and increase in automatic stabilizers No particular concern with public debt, focus has been mainly on deficit

Election cycle does not help either, but has consistently enhanced transparency
Precarious fiscal consolidation recurrently lead to off budget public spending solutions

The PPP Experience in Portugal

The PPP Experience in Portugal

Intensive use of PPP to close the infrastructure gap

Portugal lead PPP projects when measure by the size of the GDP
Off-budget temptation, and not Value for Money, was the main reason to choose PPP instead of traditional procurement Affordability issued due to the high level of future payments.

The PPP Experience in Portugal

Number of Projects (PPP and Concessions)
120 111 100

New Projects

Accumulated 39

56

59

63

69

77
69

81

13

13 6

19

21

22

27 17 3 4 6 0 2001 19 4 2006 11 9

2 1997

1 1998

12

1995

1996

1999

2000

2002

2003

2004

2005

2007

2008

2009

2010

Source: Adapted from Ministry of Finance PPP reports

The PPP Experience in Portugal

Total Investment
30,000
Health 1% Ports 4% Environment 19% Transports 45%

25,000

20,000

15,000

Energy 31%

10,000

5,000

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Acumulated Capex Year Capex

Source: Adapted from Ministry of Finance PPP reports

The PPP Experience in Portugal

N1 worldwide in PPP investment (measure as % of GDP)
12.0% 10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

Source: Andreas Kappeler and Mathieu Nemoz, public-private partnerships in europe before and during the recent financial crisis, Economic and Financial Report 2010/04 July 2010, EIB.

The PPP Experience in Portugal

Annual Payments in Million
in M 2,000

Net Charges 1,500

Total Charges

1,000

500

2019

2011

2012

2013

2014

2015

2016

2017

2018

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

Source: Adapted from National Budget 2012

2040

The PPP Experience in Portugal

NPV in % of GDP Sector Data R= 6%

NPV YTM 2008 - YTM 2011 4% 13% 12.1 6.0 0.6 1.8 0.2
14.7 8.6

Roads

Gross payments Net payments Trains Gross payments Health Gross payments Security Gross payments
TOTAL Gross payments Net payments

10.0 5.2 0.5 1.6 0.2

12.2 7.4

5.8 3.4 0.2 1.1 0.1

7.3 4.9

2011 GDP: 171 billion

The PPP Experience in Portugal: 7 main reasons for concern

1. High levels of investment in a short period of time. 2. Deficit on structure and management skills. 3. Poor public management during bidder process: PSC only after 2006 the

The PPP Experience in Portugal: 7 main reasons for concern

4. PPP focus only as off-budget operation. 5. Poor budget assumptions. control of financial

6. Incorrect risk valuation and allocation.

7. PPP renegotiations have systematically increased the payments for public

PPPs in the Memorandum of Understanding with The Troika

PPPs in the MoU with The Troika

15 references in 8 paragraphs

3 lines of actions:
RE-BUDGETING (3.3 e 3.13.i) MONITORING (3.11, 3.18, 3.19, 3.20 e 3.21) RE-ASSESSING (3.17 e 3.19)

PPPs in the MoU with The Troika

Troika PPP Guidelines

1. Avoid engaging in new PPPs before the assessment of the current ones are reviewed and the legal and institutional framework is created
2. Consider the possibility of renegotiation of the existing PPPs with the purpose of reducing State payments.

The future of PPP in Portugal: What solutions?

The future of PPP in Portugal: What solutions?

Buying Back existing contracts (2nd wave: 7 former shadow toll roads already in service)
Assumptions:
Future payments until 2031 net of O&M expenses Present value of net future payments at 15% discount rate (average current CAPM): M 3 500. Government funds this amount (about 2% of GDP) at 6% interest from the Troika and uses it to acquire total asset (debt + equity)

The future of PPP in Portugal: What solutions?

Buying Back existing contracts
(2nd wave: 7 former shadow toll roads already in service) Consequences:
Liquidity injection into the banks (debt payment) and into construction companies (equity purchase) Eliminating renegotiation risk Arbitrage opportunity between current 15% CAPM and 6% interest rate on public debt (Troika assistance terms) allows for a yearly saving of up to M400 Increasing Eurostat official public debt by 2 p.p., while decreasing off balance debt by 5.2 p.p.

The future of PPP in Portugal: What solutions?

in M 800 700

600

500

400

300

200

100

2017

Annuity

Savings

2031

2012

2013

2014

2015

2016

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

The future of PPP in Portugal: What solutions? Other projects

Railways:
3 existing contracts:
Fertagus is performing well MST under renegotiation High speed rail suspended

Energy:
Natural Gas Supply:
No public payments

Hidrical Powerplants
Payments forwarded to consumerselectricity bill

Health:
Clinical services in 3 hospitals:
Recent experiences (opened in 2009, to soon to evaluate)

Other roads:
1st wave:
Tolled roads

Risk sharing seems to be better done

3rd wave:
Under construction Solution could be equity purchase

Construction of several units:

Performing well

The OPPP: Our mission, organization and work.

Catolica Lisbon School of Business and Economics (CLSBE)

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Mission: to provide a continuous link between the academic world and companies, offering consulting services in the areas of economics and management to private, public and social institutions.
These services are mainly driven by the aplication, to real world situations, of several research topics conducted by CLSBE faculty.
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The OPPP
Created in 2009, the Public-Private Partnerships Observatory (OPPP) is an independent, not for profit, research driven organization, based in CLSBE
The Observatory develops a systematic approach to PPPs in Portugal, providing rigorous analytical information to its members, and keeping them also informed about relevant market developments.
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The OPPP
Currently (October 2011) the OPPP has 30 paying members, among public entities and regulators, private contractors and concessionaries, banking and finance institutions, consulting companies and law firms.
The independence of the OPPP is promoted by the balance in the composition of its membership base: every category of players in the PPPs contract is always well represented.
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The OPPP
This balanced diversity of members also adds to the expertise, knowledge base, and networking of the OPPP, turning it into the perfect forum for open, frank and insightful discussion on PPPs in the country.
Each member pays a yearly fee and gets first hand access to all the research produced internally and participates in the discussions and events organized by the OPPP. The fees are used exclusively to cover the research activities of the Observatory. 13

Research Projects at OPPP

PPP risk assessment methodology (2008-2009) Portuguese PPP risk assessment and Regressions analysis (since 2009)

Public Sector Comparator (2010)

Renegotiation and Refinancing (2011-2012)

Corporate Governance (2012-2013)

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